Newsflash: Hauling CEOs Away in Manacles Makes Markets Soar!
This is not a headline from The Onion, the satirical weekly newspaper that prints fake news stories. No, it is the story that was repeated last week by most of the nation’s supposedly serious financial reporters. The opening line of a front-page piece in USA Today is typical: “Watching accused corporate crooks get dragged off in handcuffs persuaded investors Wednesday to start buying stocks again.”
This was part of the Big Lie we’ve been hearing from Wall Street reporters for weeks: that the market is going down because of the corporate scandals, and what will make it go up again is to see a vicious government crackdown. The Dow’s 500-point rally on the same day Congress passed draconian new legislation was seized on as proof of this theory.
The market’s actual performance tells a totally opposite story.
After Sept. 11, the Dow gradually rallied back to the mid-10,000s, about where it had been before the terrorist attacks. But this happened during the Enron scandal. Indeed, the market reached its year-to-date peak in March — just as the Enron hysteria, congressional hearings and all, was at fever pitch. Or take the revelations about WorldCom, the scandal that set the latest legislation in motion. That story broke at the end of June — and had no effect on the market, which trended slightly upward in the following week.
As economist Richard Salsman pointed out to me, the collapse of any one firm is offset by the gains made by its competitors. Energy still needs to be traded, so the contracts that will not be brokered by Enron will be brokered by someone else. That’s why the collapse of a few firms doesn’t usually bring the market down. The only thing that can crash the stock market is something that attacks every company in the economy — something like government intervention.
Anyone who watches the market knows that it doesn’t simply react to events that just happened; the market always tries to anticipate. The market had weeks to watch the new corporate “reform” legislation move unopposed through both houses of Congress, like a train wreck in slow motion.
Also like a train wreck in slow motion, the market showed us its reaction. On July 9, President Bush made a speech on Wall Street endorsing most of the new congressional measures — and demonstrating that there was no one to stand in the way of the most sweeping new financial controls in 70 years. The Dow, which had been hovering in the low 9,000s, dropped 500 points.
A little more than a week later, the bill passed the Senate in a nearly unanimous vote. The Dow slumped to 8,000. Then attention turned to the House, which had earlier voted for relatively mild reforms. House Republicans crumbled, fearing any accusation that they might be friends of Big Business, and accepted most of the harsher Senate measures. By early last week, everyone saw what was coming, and the Dow hit bottom, just above 7,500.
In two weeks, the Dow had lost more than 1,500 points. The market did not falter because the passage of the legislation was uncertain. To the contrary, the more easily the legislation flew through Congress, the more rapidly the market declined. And for good reason: armed by Congress with harsh new penalties and hundreds of new regulators, the SEC has vowed to re-audit all of the nation’s 1,000 largest firms. This kind of witch hunt is likely to cause trouble for every company, the honest and the dishonest alike.
When Congress came to its final agreement on this legislation, it was not a surprise to anyone — not to politicians, not to the public, not to financial reporters, and certainly not to the market. The new law’s effect had already been taken into account — which is to say, the damage had already been done.
So why did the market then go up? The House-Senate agreement removed any remaining uncertainty. Investors knew for sure what the legislation contained.
The more important question is: why was this minor rally — a small recovery after two weeks of catastrophic loss — billed as the market’s endorsement of the anti-corporate legislation? Reporters were simply projecting onto the market their own endorsement of the legislation. Steeped, like most of the media, in anti-capitalist ideas, they wanted to believe that free markets lead to disaster, while state intervention is our salvation.
That notion — soundly refuted by history — is the bigger lie behind last week’s Big Lie.
