Kurtz Blames Capitalists for Stock Market Collapse, Not the Feds

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Howard
Kurtz of The Washington Post has built up an "inside
the Washington beltway" readership based on poking fun at what
he feels is wrongdoing in government and business. But Washington
is a "company town," and Kurtz is nothing more than a
socialist windbag and apologist for a big, bloated and ever-growing
federal government. Once again, that came through load and clear
in a recent column ("Crime
in the Suites
," June 14, 2002), in which he places the
blame for the stock market collapse on greedy and evil capitalists.

Kurtz
began his indictment of capitalists:

It's
slime city out there. Crooked capitalists everywhere you look.
Remember when American business was widely admired?(Guess you
have to be of a certain age.) Now it's a challenge to keep track
of all the resignations, indictments, guilty pleas, lawsuits,
book-cooking, insider trading, accounting fraud and old-fashioned
chicanery. Even Martha Stewart, the doyenne of domestic bliss,
has been dragged into one investigation. No wonder the business
pages read like a crime blotter. No wonder investors are disgusted
and the market is ailing. No wonder CEO has become a dirty set
of initials. Until March 2000, the stock market was roaring. Then,
after the Nasdaq collapsed, we learned that Wall Street analysts
had been trumpeting stocks they were privately deriding as junk.

Kurtz
goes on to finger Ken Lay and Enron, Arthur Andersen, Merrill Lynch
and its analyst Henry Blodget, Xerox, Global Crossing, Halliburton
and Dick Cheney, Dennis Kozlowski (recently resigned Chairman of
Tyco), and Sam Waksal (formerly of ImClone) and his girlfriend's
mother, the ubiquitous Martha Stewart. He implicitly tars Louis
Rukeyser for having had Alan Bond, a former analyst convicted of
defrauding clients of $50 million, on his old "Wall Street
Week" television show. By mentioning all these names, Kurtz
is implicitly telling us that all these greedy capitalist types
are somehow responsible for all of the losses investors incurred
in the stock market collapse.

While
some of the above-mentioned figures may get prosecuted or subjected
to Soviet-style star chamber proceedings in Congress, Kurtz failed
to mention one group that should be included as unindicted co-conspirators.
And what group is that (regular LRC readers get two seconds to respond
correctly – others may need up to 30 seconds)?

If
you answered federal government officials, you are right!
While these bureaucrats helped enable some of the aforementioned
characters, not a one will be indicted, prosecuted, or even publicly
embarrassed in a Congressional hearing. Exactly who are these feds
and what did they do?

First
and foremost, the big stock market bubble was made possible by government
meddling in the economy, namely an excessively expansive monetary
policy coupled with sky-high taxation and spending. By driving interest
rates down well-below their natural levels, the Federal Reserve
forced savers to channel their money into riskier stocks in an attempt
to earn a decent return on their investments. But this subsidizing
of borrowing and investment led to serious levels of mal-investment,
that is, investment that could never hope to turn a reasonable profit.
Couple this situation with the onset of the millennium, an event
that worried the Fed to no end. In response, it ran the printing
presses overtime, flooding the country with money and helping pump
up stock prices to stratospheric levels. Then, once the millennium
passed, it sharply reigned in the money supply, raising interest
rates and reducing credit availability. Tie this into the heavy
amount of mal-investments that became known under the Fed's suddenly
tighter credit and stock markets began to drop like a rock. At the
same time, sky-high taxes gobble up more than forty percent of income,
making it more difficult for the average consumer to get by and
forcing many to rely on credit to make ends meet. This further exacerbated
the economic slump and pushed stock markets down more. Now, even
artificially low interest rates and easy credit cannot revive a
weak economy or the stock market.

And
who are the co-conspirators in this instance? Why none other than
Alan Greenspan and the rest of the Federal Reserve Open Market Committee
as well as present and past presidents and sufficient members of
Congress who refuse to cut taxes and spending to prudent, Constitutional,
levels. While Greenspan and company might claim that they kept the
economy from turning south, they could just as easily have told
the Congress that taxes and government spending were the real impediment
to growth. Under a gold standard and a balanced and much reduced
federal budget, investors would have a better chance of making a
buck since government policies would no longer be tilted against
them.

Numerous
federal regulatory agencies also come to mind when assessing blame
for the stock market collapse. The Securities and Exchange Commission
(SEC) is the first one, since it cons the public into believing
that it will protect them from losses, thus snookering more people
into putting their money into stocks. Exactly what these SEC people
actually do to make stock and security markets run more efficiently
and honestly is a good question. After all, the SEC was set up by
FDR during the depression to prevent just what happened today; namely
fraudulent income and balance sheets and the touting of bum stocks
and bonds, whether by brokers, security analysts or investment advisers.
In fact, the SEC registers brokers and investment advisers, but
what good is this? All that the SEC really does is to go after those
allegedly breaking the securities laws, and that is after the fact.
While some might claim that the SEC presence deters even more fraud,
that is highly debatable, especially in light of recent events.
If the SEC were abolished, private investors would purchase the
right amount of information/investigative services from the private
sector, or cut back on security purchases, to maximize investment
gains and minimize losses. The SEC's presence actually stifles the
private market from fulfilling a critical information/investigative
function. The unindicted co-conspirators here are the SEC chairman
and commissioners and their allies in various presidential administrations
and the Congress.

A
dishonorable mention ought to go to the Commodity Futures Trading
Commission (CFTC), which supposedly regulates commodity trading,
and the Federal Energy Regulatory Commission (FERC, which rhymes
with jerk). Enron was able to get an exemption from regulation by
the CFTC, and that was to the good, even if Enron collapsed. Why?
Because they were providing a service designed to help smooth out
price fluctuations for consumers and producers. FERC managed to
interfere in the California electricity fiasco and certainly did
not help things. In fact, it probably helped facilitate that State
in stiffing Enron of electricity revenues and thus may have helped
precipitate Enron's ultimate demise. The good news to come out of
this mess is that other firms have gotten involved in trading electricity
and some of the fuels used in electricity production, and that is
all to the good for the consumer. Electricity price fluctuations
will be smoothed out, and this will permit power producers to invest
the right amount to meet future consumer power needs. Still, we
can add the members of the CFTC and FERC, along with numerous other
federal and some state officials, to the list of unindicted federal
co-conspirators.

Unfortunately
for investors, high technology firms do not escape the long arm
of the federal regulator. And this is especially true of telecommunications
firms, which are subject to the decrees of the Federal Communications
Commission (FCC). The Global Crossings of this world would never
have been able to hornswoggle as many investors had not the FCC's
"blessing" been required for entry into the telecommunications
business, whether it be local telephone service, long distance telephone
service, the construction of microwave towers or the laying of fiber
optic cable, cellular telephone service, broadband internet service,
television and radio station licenses, and cable television. Somehow,
many investors seem to think that an FCC approval means that it
must be a good investment.

Then,
too, the FCC – certainly not impervious to political pressures (note
the Jesse Jackson "race" shakedown of several telecommunications
firms during their request for the FCC to approve mergers) – can
make or break a firm for reasons that have nothing to do with customer
service or prices. Add the FCC commissioners, and various members
of Congress and various presidential administrations, that have
diddled with telecommunications law and policy to the lengthening
list of unindicted federal co-conspirators in the stock market crash.

And
last, but not least, a dishonorable mention must go to the federal
Food and Drug Administration (FDA), which may have shafted as many
investors as the FCC while it supposedly protected consumers from
"unsafe drugs." Waiting for the FDA to approve a new drug
for use has certainly given potential consumers and investors loads
of heartburn (increasing the demand for antacid and other heartburn
remedies!!) and often led to roller coaster rides as stock prices
gyrated on rumors of FDA approval or denial for a new drug. In addition,
the lengthy FDA approval process has significantly raised the costs
of developing new pharmaceuticals, as this lengthens the time it
takes to bring a new drug from the laboratory to the market, at
least in the United States. Even with all these delays in approving
drugs, the FDA screws up, most notably in the recent forced withdrawal
of an FDA-approved cholesterol-lowering drug by Bayer after a number
of users died.

On
the other hand, the FDA often prevents good drugs from being used
for different purposes. Until recently, it even prevented aspirin
manufacturers from touting the benefits of aspirin in preventing
heart attacks, even though it was well-known for decades that aspirin
thinned one's blood so that it could more easily get through constricted
arteries.

The
FDA could be easily abolished without harming consumers. Given that
lawyers are always on the lookout to make a big buck by suing manufacturers,
the courts give consumers ample opportunity to seek redress from
any bad drugs that enter the market. Similarly, drug manufacturers
have an incredibly strong incentive to set up their own type of
drug testing organization, to give their products a safety seal
of approval and thus gain some measure of protection from lawsuits.
Under such a regime, more useful drugs would enter the market sooner,
to the benefit of all, including investors.

Blame
for the Waksal/ImClone/Martha Stewart incident – insider dumping
of stock in ImClone after learning that the FDA would disapprove
its drug but before the public was notified – can be partly
laid off on the FDA because of its drug approval and rejection procedures
and the heavy burden they place on smaller drug firms. Thus, FDA
is added to our list of unindicted federal co-conspirators in the
stock market crash.

All
told, it looks like there are more federal unindicted co-conspirators
in the stock market collapse than evil private sector capitalists
listed by Kurtz. And that should not be surprising, given the nature
of the federal government.

Even
if he were presented with the above facts, don't bet that Kurtz
would see the light and recant his anti-capitalist views. In fact,
given the "inside the beltway mentality," I would expect
Kurtz to suggest that investor protection should somehow be included
in Bush's proposed Homeland Security Department. Maybe that suggestion
will appear in one of his future articles.

June
17, 2002

Jim
Grichar (aka Exx-Gman) [send
him mail
] was an economist with the federal government. He writes
to "un-spin" the federal government's attempt to con the
public, whether through its own public relations organs or via the
usual stooges and dupes in the mainstream media.

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