Intoxicated with capital

Louis Proyect lnp3 at
Thu Mar 15 10:40:25 MST 2001

NY Times, March 15, 2001

Paying for the Potemkin Boom


Concern has centered on the misery of small investors maimed in the tech
wreckage. But what happened to all the money they squandered in the
I.P.O.'s? Think of the stock market in recent years as a lunatic control
tower that directed most incoming planes to a bustling, congested airport
known as the New Economy while another, depressed airport, the Old Economy,
stagnated with empty runways. The market has functioned as a vast, erratic
mechanism for misallocating capital across America.

In such an atmosphere, the little people of America, egged on by Wall
Street's hired optimists, wrote blank checks to indulge the giddy fantasies
of high-tech entrepreneurs. In the early stages, this sparked robust
expansion and innovation among software, computer, telecommunications,
biotechnology, semiconductor and fiber optic companies. To many New Economy
gurus, the pot of gold from Wall Street seemed fully justified and certain
proof of their own genius.

The sheer number of companies going public guaranteed an indigestible
surplus of new stock. The cash windfall also warped the judgment of chief
executives. Intoxicated with capital, they expanded their companies too
quickly and embarked on overly expensive acquisitions. Economic discipline
was frowned upon as a decided lack of vision. The proliferation of Nasdaq
companies ensured overcapacity in many high-tech markets, which spawned
ruthless price cutting and caused profitability to plummet.

Though the most dire effects of the Nasdaq bubble may be self-contained,
there are worrisome signs that it has spread, and not just to other stocks.
Look at any financial or high-tech center, and you will see that funny
money from the Nasdaq flowed into local real estate, blowing up more
bubbles. In their haste to establish brand names, dot-coms funneled Nasdaq
money into costly advertising campaigns, providing a fleeting bonanza for
media companies. The most serious glut may appear among the dot-coms'
suppliers, like Cisco Systems and Sun Microsystems, which must compete
against a secondhand market in their own Internet equipment - used goods
auctioned off after the demise of dot-com customers.

In despair, many investors now pray for divine intervention - that is,
interest rate cuts by the Federal Reserve Board. During the bubble, many
assumed that the Fed had considerately suspended the business cycle and
acquired magical powers over stocks. Alan Greenspan was transformed from an
aging, if competent, bureaucrat into the all-powerful Merlin of finance.
The last casualty of the Nasdaq bubble may well be the Fed's aura of

In the aftermath of a speculative boom, the policy options become terribly
limited. Almost without question, we will see more interest rate cuts at
the Fed's March 20 meeting. At the same time, an easy money policy, however
necessary and welcome, won't remedy the structural imbalances produced by
the bubble.

Last year, the Nasdaq boom soared to unprecedented heights. If history
proves an accurate guide, the bust may mirror it in depth and duration.

Full op-ed piece at:

Louis Proyect
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