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