Kurtz Blames Capitalists for Stock Market Collapse, Not the Feds

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