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    Stock market turnaround might take longer than we thought

    © St. Petersburg Times
    published July 14, 2002

    With new revelations of corporate accounting scandals and with investors knee-deep in a market swamp, President Bush traveled to Wall Street on Tuesday to try to soothe the markets with tough talk about corporate miscreants. It didn't work. The Dow plunged 1.5 percent by the close of business and another 3 percent on Wednesday.

    That the president's message was so widely ignored by investors is not surprising. After all, he and Congress hardly inspire confidence with their belated claims that they will clean up the corporate excesses of the 1980s and 1990s. Even before this current jolt to investor confidence in the stock market, the underlying U.S. economy itself has been struggling in much the same vein. The reason is that the federal government continues to treat the economy much like it treats the profiteering corporate executives -- hands off.

    Oil is one important example. Businesses have pushed for cheap oil for the past two decades, and the government has been only too eager to help. Rather than enforce greater conservation or alternative energy sources or more domestic exploration, the United States has let the private sector take charge of energy policy. The result is that we continue to import large amounts of foreign oil. As the oil is shipped in, U.S. dollars are shipped out.

    That imbalance didn't create much of a problem in the 1990s, because the U.S. economy was humming along, fueled by the high-tech explosion of computers, bio-tech research and development, cell phones and telecommunications. As money from around the globe poured into U.S. technology companies via Wall Street, the dollar strengthened and the OPEC nations were content to keep oil prices low. Despite the fact that the United States was running trade deficits year after year, and about one-third of those deficits could be explained by oil imports, the dollar stayed strong and foreign investors felt confident.

    But the end of the tech boom signaled the loss of an economic force to strengthen the dollar. In the meantime, the oil dollars were still leaving the country, and years of trade liberalization had led to much of America's manufacturing jobs being shifted overseas.

    Thus, the economic recession, deepened by the events of Sept. 11, has found our nation with fewer means for recovery.

    It doesn't help matters, either, that the federal budget itself is deteriorating. The Bush administration push for tax cuts, along with the escalating costs of the war in Afghanistan and the ongoing fight against terrorism at home and abroad, have helped to turn our hard-won federal surplus into a deficit. And stock markets do not like government deficits. Deficits cause the federal government to borrow money from the public, raising interest rates and slowing economic activity. Stock markets always fall when faced with rising interest rates.

    The government's hands-off economic approach, of course, is also reflected in the way it regulates businesses and the financial industry. In particular, the latest market woes can be directly traced to a 1995 decision by the U.S. Securities and Exchange Commission. At the time, there was a proposal to treat employee stock options (namely, executive bonuses) as expenses so that financial statements reflected the true costs to the stockholders. The SEC instead decided to allow corporations to include them as expenses or include them in the financial footnotes. There is a world of difference, and most corporations, not surprisingly, chose the footnote route.

    In the series of events since the Enron scandal, where directors and executives exercised more than $1.2-billion in stock options while the company was falling apart, most of the major disclosures of overstated earnings have included the news that directors and executives profited from stock options while keeping stock prices artificially high through financial misstatement. In other words, that one deregulated form of executive compensation has led to a new mode of corporate misbehavior. Corporations used to be motivated to maximize long-term profits. Now, they are motivated to maximize short-term stock prices, so the executive can cash out. And that stock-price goal is often aided and abetted by lax accounting standards that misstate earnings. (It is instructive that President Bush, in his address to Wall Street, only briefly mentioned stock options and offered no real proposals for reform.)

    So here is scene for today's American investor: The tech boom is over. Much of our manufacturing has been transferred to overseas markets, eliminating many middle-class blue-collar jobs. There is some passion for the reform of Wall Street, but it appears insufficient to do the job. Our unchanged energy policy of cheap oil at any cost is undermining the dollar. There is the specter of an invasion of Iraq, which would certainly raise oil prices at least in the short run. Our federal budget surplus is withering and soon will be in deficit. And accounting irregularities and excessive fraudulent profit claims by major corporations are being uncovered almost daily.

    Investment advisers are saying not to worry about things, that the market always turns around over the long run. They may be right, but the long run is looking more and more like a marathon.

    -- Frederick R. Strobel is the Selby Professor of Economics at New College of Florida in Sarasota.

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