Note directly on topic, but may be of interest to some.
Putting things in perspective.
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New York Times
July 12, 1999
When Today's Market Is History
By EDWARD CHANCELLOR
ELLFLEET, Mass. -- "You've got five minutes -- fire
away,"
the editor said as she cast aside a copy of the newly
published
memoirs of former President Giuliani.
The young economics professor had come to pitch a book on the
great
bull market at the turn of the 21st century.
Now, a quarter-century into the new millennium, he believed it
was
possible to gain sufficient objectivity on that strange period
in American
history. Besides, the subject seemed topical: the Dow had
recently
regained its 1999 peak.
"Well, as you must know, the 1990's were a time when Americans
surrendered their sanity and went crazy for stocks," the
professor started
somewhat diffidently.
"Refresh my memory -- I was in diapers at the time," the
editor replied
tartly.
"It all started with what were then called the boomers. Tens
of millions of
middle-aged Americans were all saving for retirement, and the
Government had changed the pension regulations to allow them
to pick
their own investments.
"So naturally they looked for the largest gains and put all
their money into
stocks. Well, this sent the price of stocks soaring, so that a
share you
could buy for a multiple of eight times earnings in the early
80's cost 35
times earnings by the end of the century.
"As prices rose," the professor went on, "they bought more and
more. It
seems extraordinary now, but none of them considered who would
buy
the stocks from them when they retired. As it turned out, when
the
boomers reached their 60's, stocks were once again trading at
eight times
earnings, and many boomers had to postpone retirement.
The editor sucked on her pen. This all seemed a bit dry. "Can
you be
more specific; what sort of stocks were they interested in?"
she asked.
"Well, the Internet became wildly popular from the mid-90's
onward. It
was changing the way people lived and did business, like the
railroads in
the 19th century. The boomers loved technology and started to
trade
stocks over the Internet, and they loved nothing more than
buying
Internet stocks.
"Some Internet stocks sold for a thousand times earnings, and
many
start-ups had market values of tens of billions of dollars
even though they
had no profits. We know that most of them never did show a
profit."
"Didn't anyone point out the absurdity of this?" the editor
asked
impatiently.
"There were a few Cassandras -- older financial journalists,
those with a
historical bent who claimed they'd seen it all before. But
economists
actually supported the mass delusion. They said their research
proved
that stocks could be relied on to outperform bonds.
"Then brokers on Wall Street came out with the idea that
America had
entered into a 'new era' -- actually, they called it the 'new
paradigm,' to
distinguish it from the new era of the 1920's. They claimed
that the
business cycle was over, that inflation had been vanquished
and that new
technology was increasing productivity -- and that therefore
it was
reasonable to pay more for stocks. It seems fabulous now that
after
some 400 years of capitalism people really believed things had
changed
for good, but that's really how it was.
"The brokers sold the idea of the new era to their customers,"
the
professor continued, "but I don't know if they ever really
believed it in
their hearts. They just wanted turnover, and they got it. When
brokers
started selling shares through the Internet, they took out
wild ads to
attract the money bees. The line for one broker went something
like 'The
Slow Die First' -- which I suppose meant that everyone knew it
was a
crazy game, but if you could get out in time, everything would
be O.K."
"And the Government -- what did it do about this?" the editor
interjected.
"Well, the authorities appeared to encourage it because the
booming
stock market made them look good. It brought prosperity,
people spent
more -- although much of what they spent was borrowed money --
and
they were happy. They made a cult of the chairman of the
Federal
Reserve -- a 'national treasure,' someone called him.
"And it was the Federal Government that decided to invest the
Social
Security fund in stock. In those days, people had given up
saving and
began to believe they could gamble their way to wealth." S o
we know
that the boomers lost out, but who were the winners?" the
editor asked.
"In the end the only ones who made real money were the
businessmen.
They all paid themselves with stock options that didn't show
up as an
expense in their accounts. This was called 'shareholder
value,' and
whenever stocks declined, the businessmen just gave themselves
new
options at lower prices.
"A pretty obvious scam, you might think, but with the market
going up,
few seemed to care. When the Great Slump came, the S.E.C.
outlawed
stock options, but by then the businessmen had already cashed
them
out."
"It all sounds dramatic enough," the editor said, rising from
her chair to
signify that the interview was over. "But I must warn you it
would be a
hard sell. People just don't want to read about the stock
market
anymore."
Edward Chancellor is the author of ``Devil Take the Hindmost:
A
History of Financial Speculation.''
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