Greed: the essential engine of a market-driven economy

The Argument

History insists that reforms are fine, but bubbles will go on bubbling -- and bursting.

Books

January 19, 2003|By Larry Williams | By Larry Williams,Sun Staff

Have greed, corruption and fear so seriously damaged the great American market system that the nation faces serious long-term economic decline? The evidence supporting that dire possibility has accumulated relentlessly in recent months.

The markets -- whose long-term growth have funded millions of comfortable retirements, swelled the wealth of our social institutions and turned an army of union workers into eager capitalists -- have lost a breathtaking $7 trillion in wealth over the last three years.

Investors have learned that securities analysts for many of Wall Street's most distinguished firms have habitually lied to trusting investors about the true value of stocks; that more than a few landmark corporations have fixed their books to create false earnings and hide losses, and that a horde of business insiders have grabbed billions while thousands of workers have lost their pensions.

Can American capitalism, founded on investor trust and business honesty, survive such serious wounds? The future seems much in doubt these days as we question whether the system that has brought us so much can carry on after such massive abuse. These worries seem particularly relevant as we face the economic jolts and insecurities that have come with the war on terrorism.

An array of books published in recent months raises that question and offers prescriptions for cures designed to save the markets and our futures.

But history suggests that while reforms are advisable, the market system is likely to thrive even in the presence of a certain portion of fraud and corruption. Truth be told, greed has been the essential engine that has driven markets since they began.

Harnessing market greed without losing its benefits mirrors our larger struggle to harness the grinding power of capitalism without sacrificing the wealth it brings.

In his brilliant novel exploring the effects of greed in England's earliest stock trading, A Conspiracy of Paper (Ballantine Books, 442 pages, $14 softbound), David Liss provides insight into both the market's creative potential and its destructive power.

Liss vividly chronicles the fever and fear that accompanied increasingly frenetic trading in the stock of the South Sea Co. early in the 18th century. The value of the stock eventually crashed and many investors lost almost everything.

"The crash of the South Sea stock produced an intense and immediate response," Liss noted in an essay on his book. "There were parliamentary inquiries, unruly crowds, calls for blood in the newspapers -- but in the end, not much came of it....

"Ultimately, the Bubble did not change that much, because, despite the ruin it caused, it did not change the essential fact that anyone with money had to invest in the government or in corporate funds, since not earning interest on money is pretty much the same thing as losing money," Liss noted.

"These financial institutions are committed to divesting our money of value and replacing it with promises of value. For when they control the promise of value, they control all wealth itself," one of the characters in the novel noted.

And Steven E. Ambrose's history of the early boom days of America's railroad industry, Nothing Like It in the World: The Men Who Built the Transcontinental Railroad 1863-1869 (Touchstone, 431 pages, $16 softbound) paints a 19th-century picture uncannily like the Internet bubble of the 1990s.

The early railroad entrepreneurs promised to transform the nation's economy by tying America's isolated regional economies together, just as the Internet moguls promised to transform commerce and communications on line.

And, just as with dot-com IPOs, the rail barons won their fortunes on the issuance of the railroad stock, not from actual railroad profits, which were rare in the early days, despite massive federal subsidies of the transcontinental rail building effort.

In the end, many railroads fell into bankruptcy, just like the internet startups.

But economists now argue that the rail boom and crash set the stage for significant national economic advances. The internet bubble seems likely to do the same, despite the current hard times.

The seeming inevitability of the cycle of market boom and bust does not mean the long struggle to make markets as fair as possible shouldn't continue or that individual investors can't take prudent steps to minimize the negative impact of a market system that is stacked against them.

Former Securities and Exchange Commission chairman Arthur Levitt offers his prescriptions in Take on The Street (Pantheon Books, 288 pages, $24.95). Levitt provides painful detail on all the ways investors have been cheated, by brokers, by stock exchanges, mutual funds and corporations. His answer is tougher regulation and hard work by investors to gather the information they need to make the right decisions on who to invest with and what to invest in.

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