On the Wrong Track

By Felix G. Rohatyn

Friday, July 26, 2002; Page A33

I do not recall a period of more generalized gloom in the financial community than the one we are going through now. The crisis of the New York Stock Exchange in the 1970s comes closest.

At that time, the lack of confidence centered around the shaky capital structures of the brokerage houses (also disguised by faulty accounting and incompetent management), the Israeli-Arab wars resulting in an oil embargo and the lengthy bear market that went with it. Today all of these elements are present, but it is the financial integrity of the entire American business community that is suspect, together with its surrounding support system: its boards of directors, its accountants, its investment bankers, its lawyers and the media.

This occurs at a time when we had created our own American brand of popular capitalism, whose broad participation in ownership by Americans was the envy of the world. The $6 trillion of market values that was vaporized by the bursting of the dot-com bubble and by the general decline of the market that followed now affects all Americans, if not directly, then indirectly. The tax increases of state and local governments, together with their layoffs and other service reductions, are just as much a result of these events as are the direct market losses of their pensions and savings funds.

Credit is not a science; it comes from the Latin "credere" meaning "to believe." That is the underpinning of our market system and when that underpinning is damaged, the whole system is in jeopardy. As stock markets give way, credit markets become tighter and credit becomes more expensive, or just unavailable to all but the strongest companies.

This situation is not likely to be reversed quickly. Faith, once broken, takes a long time to repair. This is a reality that is not uniquely confined to the financial system; other, older institutions such as the Catholic Church, are going to be dealing with a similar phenomenon.

This is taking place at a time when our national economy is fundamentally on the wrong track.

As a result of the recession, combined with the revenue losses created by the market declines, the federal budget, which had been in steadily increasing surplus at the end of the 1990s, now faces growing deficits. This is also due to the sharply increased defense spending of the war on terrorism and to the massive 10-year tax cut of the Bush administration.

From being a country with a budget in surplus, a strong currency and a decreasing national debt, we have become a country with a long-term budget deficit, a weakening currency and an increasing national debt. Our huge foreign deficit requires capital inflows of over $1 billion per day; this had been provided regularly by foreigners investing in our markets, attracted by the strength of our economy and our currency. This inflow has now been replaced by capital outflows, depressing the dollar, which may ultimately require significant interest rate increases to maintain stability. This would have a negative impact on economic growth and further depress the financial markets.

Our dependence on foreign oil continues unabated, despite the reality that its sources are not necessarily reliable and that it aggravates considerably our foreign trade deficit. Conservation is a national security imperative, but no administration, Democratic or Republican, is willing to face the country with realistic alternatives to do something about it. (??? What democratic administration) These should include an oil import fee and more stringent mileage standards for cars and SUVs, if domestic politics would ever allow it.

Possibly the most important economic issue facing our country today is the issue of fairness.
The stock market boom, and its inevitable bust, have created wider gaps between wealthy Americans and the rest. The outrageous compensation packages of many corporate managers and the symbols of abuse created by the Enrons, the WorldComs, the Tycos and the Global Crossings have shaken the faith of many Americans in the fairness of our system, and convinced our overseas critics that American-style capitalism and globalization work hand in hand exploiting the less fortunate. This is a particularly bad time for this to occur.

At a time when we are engaged in an open-ended war on terrorism, trying to dampen the Palestinian-Israeli conflict, to head off a potentially catastrophic war between India and Pakistan, and to obtain as much international support as possible for an end to the regime of Saddam Hussein, the moral leadership of America is critically important. Fairness is basic to this moral leadership; at a minimum, this requires curbing the business excesses that have been uncovered and amending the existing tax cut in order to bring greater benefits to lower-income Americans.

I have always been convinced that American democracy rested on a platform of freedom, fairness and the creation of wealth. At a time when we are required to defend our own freedom and that of many others, when we have demonstrated the ability to create more wealth than ever before, the issue of fairness becomes paramount. The impetus to deal with it can come only from our political leadership. Such Republican presidents as Abraham Lincoln and Theodore Roosevelt understood this, as did such Democratic presidents as Woodrow Wilson, Franklin Roosevelt and Harry Truman.

National security is at present our most important issue; it will require real sacrifice on the part of all Americans. Americans will, as always, answer the call, but when it comes, it must be seen to be fair.

The writer, a former managing director of Lazard Freres & Co. LLC, was a governor of the New York Stock Exchange in the 1970s.

© 2002 The Washington Post Company

-- Cherri (whatever@who.cares), July 26, 2002

Answers

Another article from Cherri which I think is right on the button.

-- Peter Errington (petere7@starpower.net), July 26, 2002.

Cherri, good article which raises some compelling points. I'm curious why you inserted a comment (I assume you inserted it) here:

[B]Our dependence on foreign oil continues unabated, despite the reality that its sources are not necessarily reliable and that it aggravates considerably our foreign trade deficit. Conservation is a national security imperative, but no administration, Democratic or Republican, is willing to face the country with realistic alternatives to do something about it. (??? What democratic administration) These should include an oil import fee and more stringent mileage standards for cars and SUVs, if domestic politics would ever allow it.[/B]

The lesson of our dependence is now 30 years old. I seem to remember a few Democratic Administrations during those years. I'm certainly not going to say that the Bush's current admin is the best thing since sliced bread, but I also will not lay the blame for every problem we've EVER had at his doorstep either. Life doesn't happen in 4-year increments, no matter how much the partisans want us to believe it.

Dan V.

-- Jimmy Splinters (jsplinters@earthlink.net), July 26, 2002.

Dan:

The following problem arises. These sort of standards [if they are going to work] can only be set on a nationwide basis. Sure, it makes no sense to drive a 300 hp SUV from Dover to Boston or Kirkland to Redmond. More fuel efficient cars would work there. But more fuel efficient means much less power and less mass. Ever try to haul a trailer full of cattle with a Civic. One exception. Ever move your 30 ft commercial fishing boat to the launch with a Previa. Another exception. These go on and on. Folks who talk about fuel efficiency usually live in cities. Sure, they are in the majority but they are being fed by a small minority who elect a lot of Senators. Big population verses small population thing. You aren't going to solve this with one size fits all legislation. Need something better.

By the way, I prefer small cars. I test drove the Toyota hybrid before I bought a new car. It is virtually useless. That was my opinion. I have a co-worker who is very green; I would put her on the lunatic fringe of the movement. She also tried one. Her comment was, " it isn't transportation, it is a social statement". She bought an Outback.

Best Wishes,,,,,

Z

-- Z1X4Y7 (Z1X4Y7@aol.com), July 26, 2002.

I test drove a Ford Focus. Completely useless.

-- (Ford@builds.crap), July 26, 2002.

Excellent article Cherri. The combination of capitalism, democracy and the freedom to buy what we want pretty much sums the ills described. Hate to go back again to Pogo, but, there it is.

-- Carlos (riffraff@cybertime.net), July 26, 2002.

The combination of capitalism, only corrupt Croney capitalism democracy which allows us t make choices, some of which may be wrong ones and the freedom to buy what we want Yes, we have the freedom to choose. Leadership is in the position to encourage behaviors which would benifit individuals and the country as a whole. It has worked in the past, government encouraging conservation, and the results were benifitial to all. (except perhaps those who benifited financially with less conservation). pretty much sums the ills described.

Does it really describe reality?

-- Cherri (whatever@who.cares), July 27, 2002.

.

-- Cherri (whatever@who.cares), July 27, 2002.

You give our electeds far too much credit. What happens in this country reflects us not them. Bush isn't the poll de jour type of his predecessor but he's getting closer.

Also, be careful with the "encourage behaviors" stuff lest you drown in Clinton bashing.

-- Carlos (riffraff@cybertime.net), July 27, 2002.

When Clinton and his defenders claimed that he really didn't have sex, that gave all of these people in the accounting "profession" the idea that words could mean whatever they chose them to mean. Call a bank loan "profit" (Enron), why not.

Put that in your pipe and smoke it, Z!

-- Peter Errington (petere7@starpower.net), July 27, 2002.

"The combination of capitalism, democracy and the freedom to buy what we want pretty much sums the ills described."

LOL! What the hell are you talking about, and who is Pogo??

-- (you@been.drinking?), July 27, 2002.

Bwahahaha!!

I heard "white men can't jump", but Errorton has proved that wrong!

-- (quite@leap.there), July 27, 2002.