US financial regulation - 17 April 1998
We all know about the official prophets of the Roman world who went off to consult the oracles and then came back from the mountain or the secret place, unrolled a scroll and gravely reported the news to the Emperor.
It so happens that I have this exact scene above my head, behind me, on the wall of my study, a priceless – well not priceless, I bought the original from the artist, one Dana Fradon whom old readers of the New Yorker will recall for his drawings of droll and harmless men with sausage noses – this cartoon, a comic masterpiece, enshrines for me, an attitude typical of the 1980s, when young investment bankers were kings of the universe, until the afternoon of Monday 19 October 1987, when the stock market fell 508 points and Wall Street came reeling back to reality, like a drunk who'd hit a tree.
Mr Fradon's cartoon appeared shortly after Black Monday, when most of us kept our fingers tied together, hoping and praying that we were not plunging into a repeat version of 1929. The cartoon shows a small hall in a Roman palace.
A droopy, rather grim-looking Emperor with a wreath around his head is sitting on his throne and two steps below him stand four senators in their togas. The one in the foreground has the scroll in his hand and he's just consulted it. He's saying, "It's true, Caesar, Rome is declining, but I expect it to pick up in the next quarter".
A quarter is the three-month period that requires a regular report from the treasury, from the stock market, from companies, from the Bureau of Labor Statistics, from everybody who has something to do with the national economy.
I don't believe it's unique to America but this week, at a conference in Washington on the Asian economic crisis, the Americans – represented chiefly by the secretary of the treasury and the chairman of the Federal Reserve – were wishing out loud that the Asian nations, Japan in particular, had similarly strict and open rules of regulating and reporting the figures about their finances. Especially losses and other embarrassments that are, on the contrary in Asia, routinely withheld.
It has come only now into the general knowledge of Americans, perhaps of Europeans too, that for instance, Thailand and South Korea regularly refused to show how much their foreign currency reserves had dwindled, so an investor would not know a conservative broker from a currency-speculating cowboy.
Secretary Rubin got off a memorable phrase which had the advantage, as Dr Henry Kissinger used to say, of being true. The most powerful source of discipline we have around the world, he said, is the power of the markets.
If, in any nation, they are falsely reported or not reported at all, no wonder we're astonished to hear that banks are tumbling all over Asia and big firms in their wake, for the root reason that Wall Street finally crashed in October 1929 – the Everest of the stock market was a mountain of credit or debt on a molehill of actual money.
This Washington summit on the Asian economy is inevitably too complex, too detailed, on a subject, international finance and economics, that is itself an alien form of mysticism to most of us. What every man and woman wants to know, I gather from acting as a listening post, is what's going to happen to you and me. If Japan crashes – and it's giving a reasonably good imitation already – will the quake spread to America and Europe?
Will the doomsday men be right, who predicted that if the Dow Jones industrial average ever went above 9000 and Japan fell, there would be a global depression? Well even competing experts in the same field of international finance agree on one thing. Nobody can be sure of anything.
But when ordinary people say, looking over the simpler facts of the American stock market, when we hear that more than 60% of Americans own stock – more, proportionately, than in 1929 – when average, intelligent investors blandly announce that they expect in the next year their investments to produce anything from 15 to 25% interest, which would have been thought a dream-like, preposterous figure in the sound 6% promise of 1929, what makes the present huge bubble of investment less perishable than that of 1929?
And then, we who were there and white-haired historians who weren't there trot out the usual reassurances. Before 1929, you could buy a dollar stock with the dime in your hand, afterwards you had to meet a high margin, only one of many rules imposed by the government – the setting up of a Securities and Exchange Commission to police investments, for the first time the federal government insured not only brokerage accounts but the smallest bank deposit.
There were many other acts of regulation that have made Wall Street more disciplined than any other stock market on earth. These rules may indeed brace us against the tidal wave that is expected to wash these shores if the Japanese economy collapses.
The only trouble with the theory of history repeating itself and the steps we take to see that it doesn't happen, is that history may trace exactly the same pattern so far, but then deviate by one detail that makes all the difference and makes us decide, yet again, that history is no guide. Hence the stubborn truth which surely goes back to the first wars fought with battering rams, that at the beginning of any new war, the generals are prepared to fight the last one.
Well, all I care to add to this baffling and anxious business of when will the bubble burst, is a new note struck, surprisingly, by an English newspaper. If the worst happens and the response of America and Europe is to do what they did in the 1920s, to set up trade barriers, to go in for protection, if, it says here, if America and Europe do stumble, politicians will be quick to blame the Japanese, but on present evidence, the real blame is more likely to lie either with trade-bashing politicians or with, wait for it, the Federal Reserve, which failed to raise interest rates last year to deflate the stock market bubble.
That final phrase amounts, in this country, almost to an act of blasphemy. Mr Alan Greenspan, the sainted chairman of the Federal Reserve, has been praised routinely, every quarter, for not raising the interest rates and so reining in his chief enemy, inflation. I don't think anyone, I can't think of anyone on Wall Street, who so far has blamed him for not pricking the beautiful, swelling bubble of the stock market.
In the years immediately following the Second Word War, those fountains of wisdom, cab drivers, would say after any disaster – an earthquake, the Yankees losing a baseball game, their sister going down with the flu – they'd say, it's the bomb, you bet your life, it's the bomb.
The dropping of those two atomic bombs, the first on Hiroshima, the second on Nagasaki, was the biggest and the scariest news of the century and, taxi drivers apart, lots of other people had alarming ideas about what the bomb would do to human beings.
I remember a distinguished psychiatrist saying that his patients' dreams were more and more haunted by the bomb and he thought that, for a generation or two or three, we can expect a pandemic of rebellious behaviour among the young, as a desperate escape from the deep fear that was implanted by the bomb.
This is an uncomfortable thought, with more than a grain of truth I think, so we'd better retreat into the current explanation for natural disasters, especially in the weather anywhere, as announced once again by the taxi drivers. El Niño.
El Niño has become a buzzword, like virus or Alzheimers, used far and wide by people who haven't a notion what it means. Well, the fact, which meteorologists keep on explaining over the evening news, is that El Niño, the Christ Child, is so-called because it first appeared on Christmas Eve.
It is a stretch of warm water, a stretch 6,000 miles wide, which rests normally in the Central Pacific, but once every five to seven years, it moves east, off the coast of South America. This huge expanse of warm water develops clusters of thunderstorms and whenever the El Niño centre moves, it violently alters the track of the jetstream winds, which steer storms.
Nobody knows for sure why this happens, but this winter and on into our summer, they – the climatologsts, not the taxi drivers – say the known results will continue. Great droughts and fires in South America and Australia and Africa, drenching rains, mudslides and millions of dollars'-worth of houses sliding into the sea in California.
We've already had more than the promised scores of whirling, murderous tornadoes through the south, turning small towns into matchsticks in two minutes and here in our north-east, the mildest winter on record. From 1 October to the first day of spring, 28 inches of snow is normal. This year we had one half-inch in all.
Which reminds me. I had a call from a London friend this week. He said London was snowing like mad. This was alarming news. I knew he was going off to a Mediterranean island and I imagined him ploughing up to his hips on the way to Heathrow and being told all flights had been cancelled for a week.
About an hour later, my daughter called from Vermont. She'd just had what she called a dribble of six inches of snow, but enough, on a base of 12 feet to keep the skiing going a little longer. Still, I checked with the London meteorological boys and discovered that day of a mad snowfall had deposited a quarter of an inch.
I was much relieved for my friend, and indeed, for all Londoners whom I'd imagined suffering the catastrophe of a lifetime.
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