Democratic Capitalism
Simply stated, this is quality reading & its evident to see how and why New York Attorney General Eliot Spitzer is the rising star that he is. There are a few choices of words I'd prefer to edit, but the central theme is one that I maintain as a central element of my own partisan faith.
The shame of it all is that this is behind TNR's subscriber firewall. If you get to a bookstore and see the occassional two-week old copy of The New Republic, however ... snag this one (its the cover story from the issue of 3/22).
One snippet to tease with:
Government has been effective and well-received when it has acted to preserve (or restore) confidence in the fairness of the market itself. At a basic level, for a market to be truly free and efficient and have the full confidence of its participants, two things are required: integrity and transparency.Integrity, in this context, is the idea that actors in the marketplace are what they purport to be: that those who claim to offer independent advice and analysis are not tainted by conflicts of interest; that those who are entrusted with protecting shareholders do so, rather than enriching themselves at shareholders' expenses; and that those who, by virtue of their wealth, power, or access, may be positioned to violate the rules do not. In a system where there is not, and cannot be, a cop on every metaphorical street corner, we rely on this integrity to give us confidence that the system is fair and genuinely competitive.
Just as actors must be what they claim to be, information in a free market must be accurate and truthful, freely flowing, disseminated in a timely way, and available to all. Transparency--implemented through disclosure requirements, institutional barriers to abuse, or widely accepted rules of conduct--is what makes meaningful choice possible. And choice by all actors in a rational market--be they investors or consumers, CEOs or shopkeepers--is what creates the competitive pressures that make the market more efficient and create wealth for us all.
Government is the institution best-suited to protect against corruption and abuse and to ensure that the economic playing field is level. But, in the 1990s, Wall Street experienced what can only be described as the "perfect storm" of government failure. It began with the consolidation of the financial-services sector--permitted by the repeal of the Glass-Steagall Act, a Depression-era statute requiring that commercial and investment banking be separated. The result was the formation of vast full-service enterprises that brought together many potentially conflicting lines of business, including commercial banking, investment banking, stock analysis, and retail brokerage. At the same time, we democratized the marketplace by (wisely) encouraging the American public at large to invest in the capital markets. The interface between mega-institutions and small investors was fraught with risk--risk met by a regulatory void. Indeed, Harvey Pitt, the first Securities and Exchange Commission (SEC) chair appointed by Bush, is a former industry lobbyist who promised the financial sector a "kinder, gentler SEC," an approach that led to a total breakdown in market enforcement. From Tyco to Enron to mutual funds to analyst compensation, the SEC simply was not attentive to the structural failures that were widely known to industry insiders.
With protections against conflicts of interest severely hobbled, integrity and transparency were soon sacrificed. As a result, research analysts whose compensation and career prospects depended upon the fortunes of their investment-banking partners pushed information about companies that was not just "imperfect," but false. In one infamous example, Merrill Lynch analyst Henry Blodget simultaneously helped pitch banking business to InfoSpace, a Web search company, and hyped the stock to investors, all the while telling his co-workers that the stock was a "piece of junk." In relying on corrupted advice like this, investors invested, corporate executives and investment bankers got rich, and companies that should have been market losers actually "succeeded."
But that success, which took the form of skyrocketing stock prices, options values, and compensation packages for corporate executives, was necessarily short-lived. The market had its revenge, as artificially pumped-up companies were unable to compete over the long term. Their business models failed and their stock prices plummeted. And yet abuses continued. Despite WorldCom's sinking fortunes, Citigroup analyst Jack Grubman kept promoting the stock, all the while receiving compensation that resulted from WorldCom's banking business with Citigroup. But, ultimately, he couldn't keep reality from catching up to WorldCom: Its share price dropped from $60 to 20 cents, wiping out $100 billion in market value.
The real victims were the companies' employees, the investing public, and the market itself. Not only had the public confidence essential to market performance been squandered, but the companies into which huge amounts of capital had been funneled were, from a long-term perspective, the wrong ones. Inefficient, unsound, and simply undeserving, these businesses failed to create meaningful jobs, growth, or lasting wealth. Couple these structural failures with the impact of other corporate scandals--such as Enron, Tyco, and Adelphia--and the result was grim. When the bubble burst in the late '90s, and the truth about overhyped companies came to light, stunned investors experienced the biggest drop in the S&P Index since the 1987 market crash--a drop with profound ripple effects throughout the national economy. A recession that was perhaps inevitable was deepened, and individuals who had set aside assets for education or retirement suddenly found these assets diminished or wiped out entirely.
So much had gone wrong in so short a time that government's ability to right the economy was limited. That said, the forceful reassertion of government's role as facilitator of the twin values of integrity and transparency has contributed powerfully to a sense that we are beginning to put our national economic house in order. With the acceptance of industry-wide codes of conduct by financial-services companies, new and more stringent disclosure and certification requirements under the Sarbanes-Oxley Act, and the aggressive policing of segments of the marketplace, the decline in investor confidence has been halted and perhaps even reversed.