All Fall Down Go Boom

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This
Sunday I happened to be flipping through my friend's copy of the
Sunday Times. The magazine contained a new article by Michael
Lewis, In Defense of the Boom. Feel
free to read it online.
The paper edition includes fun pictures
of dot.com employees slacking off in the work place – surely
an inspiration to all of us reading this right now at work.

Having
liked his writing in the past, I decided to see what he had to say.
On the whole I was pleasantly surprised. Lewis begins the article
by pointing out that Wall Street is not solely to blame for the
stock mania of the late nineties. According to Lewis the boom was
more about investors attempts to get rich quick in new companies.
Wall street was reacting to consumer demand. Later in the article
he makes less compelling arguments to defend to the boom.

One
big point many readers may be familiar with, but not NY Times
readers, is that Wall Street firms are not necessarily to blame
for their clients bad fortunes. A particularly strong example is
Merrill Lynch. They were initially very skeptical of dot-coms prospects.
As Lewis points out – their analysts' reports on Amazon.com
were extremely negative. However Amazon kept going up. Merrill Lynch
customers were missing out on this great speculative bonanza. Merrill
Lynch was forced to hire analysts more in line with customer demand.

None
of this was shrouded in mystery at the time. Analysts were supposed
to promote the companies their colleagues in investment banking
were doing deals with, and brokers were selling shares in. Those
companies that didn't do this lost not just money from investment
banking deals, but regular clients – the investing public. No one
said anything at the time. Now that brokerage clients have lost
money in speculative stocks, everyone is pointing fingers at the
brokerages.

"The
same herd instinct that fueled the boom fuels the bust. And the
bust has created market distortions as bizarre — and maybe more
harmful — as anything associated with the boom."

This
is all good and hopefully instructive to the reading public. Though
smart money might think he's against the tide and won't have an
impact.

Equally
instructive might be the interesting if not peculiar views he has
about the worth of the boom. He makes the excellent point that dot.coms
gave a new entrepreneurial energy to people. It has also produced
companies that are still around.

His
most difficult contention though is that the vast expenditure was
a good thing, and not wasted. He argues that we have some real companies
from the boom and that we'll need the overbuilt fiber eventually.
The problem with this is that Amazon.com might be a great company,
but if it isn't profitable it isn't sustainable. Capitalism, contrary
to Marxist fears and capitalists hopes, doesn't always result in
obscene corporate profits flowing to the capitalists pockets. However
it does result in constantly lowered prices for consumers. Sometimes
businesses even go bankrupt, yet keep cranking out goods. We may
not want to invest in airlines, yet be happy for their existence.
That said – real profits do have to exist – otherwise
the growth process is unsustainable. All the people working in dot.coms
could have been doing something economically productive serving
real customer demand, like driving taxis or selling pot. Similarly
all the under-utilized fiber connectivity that has been built could
have been built over a much longer period. Presumably we now have
machinery and people in that industry that are idle. Certainly Lucent's
giant revenues and employee head count have been free falling. Lewis
does not seem to recognize this.

Lewis
also does not question where this great flood of cash came from.
He assumes that it was a transfer from the deep pockets of investors
to startup companies. However it seems far more likely, given the
great increase in the money supply during the boom, that flood of
cash was fresh fiat money from the Federal Reserve. Much of this
money was also from abroad, where a similar system of fiat money
created by central banks exists. This was money that came into the
hands of financial institutions, thanks to the fed, and was invested
in the stock market. Due to market demand, pretty soon no one at
the San Francisco airport could wave a business plan without being
mobbed by VCs and their company given an IPO the next day. Since
Alan Greenspan was incapable of or unwilling to stop the bull market,
the money kept flooding into stocks on the theory that a greater
fool would buy these inflated stocks or the companies would exceed
the wildest expectations of the market. This was an inflationary
event. As usual a certain segment of society made out like bandits
with the Fed's and foreign infusions of fiat money. Unfortunately
it also distorted the market. The money wasn't real – there weren't
necessarily more real goods or services available. Instead certain
people got a lot dollars from nowhere to buy the same limited pool
of goods, and a lot of valuable time and money was spent on Herman
miller chairs, expensive lunches, and programmers, with nothing
to show for it. While I certainly enjoy writing this in my Herman
Miller chair, expensing nice meals, bossing programmers around,
and generally sponging off of corporations, the process isn't sustainable
if I'm not providing value to clients. Now that the party is over
a lot people are looking to point fingers or wondering what happened.
Unfortunately Lewis is not familiar with this theory, and it would
show the boom as a destructive distorting event rooted in the Fed's
fiat money.

He
does however recognize that what's good for the consumers and workers
isn't necessarily tied to the stock market. The stock market can
get out of hand, and people in that market will tend to get what
they deserve not what they want. It was refreshing to see the New
York Times pointing that out.

November
1, 2002

Anders
Mikkelsen [send him mail]
is a network administrator in New York City.

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