If one looks back over the last 8 years, the seeds of today’s deep recession can be seen. To be fair, the Clinton Administration presided over the earliest seeds, the dot-com bubble. In many ways it set forth the “faux business model” that would thrive during the Bush years.
As you may remember the “dot-com” fade grew from the wild west of the new internet age. Company after company set up shop using a web address as their mailing address. These companies offered everything from medical advice to books. The one thing most had in common was that they themselves did not make anything, they only sold the goods or service. But the scam of dot-coms was not just that their business model was unsustainable (they were selling something that someone else made), it was the attempt to take the start up companies public through an IPO.
Market conditions were ripe with plenty of liquidity and a thirst by investors (some not so savvy) to make a quick profit. The cheaters offered IPOs with big promises and little history of their companies performance. For sure there were plenty of promises (and plenty of sizzle) but very little data. A second group of cheaters pushed to get in line and obtain an initial block of stock from the IPO. This second group were the predecessors to today’s “flippers”. This group bought the IPO stocks and then timed a sale when the stock had risen sufficiently. This game was so good for a short time that, believe it or not, some investors even borrowed money to buy these IPOs. (Sound familiar?) When finally investors began to think through what was going on, experience was showing that many of these dot-coms were not living up to their promises. Suddenly the dot-com bubble burst.
Enron, MCI, and Adelphia were the poster child of the next generation of scam thinking. The companies that “cooked their books” and are remembered for that crime. All these companies had business plans that relied on growth of revenue to outdistance costs and in the process dazzle investors who in turn would buy more company stock (sending the stock price through the ceiling). The leaders of these companies syphoned off their loot by selling stock options at huge profits.
With these two examples of “free enterprise gone wrong” fresh in Government officials’ minds, one would have expected the Government to be much more vigilant. Instead the Republican mantra was laissez faire. The grand daddy of all schemes grew symbiotically with the growth in new house construction. From all appearances this looked like healthy growth and certainly stimulate wide swaths of our economy.
Soon the banks were doing a great business and recording excellent earnings. Then investment firms and hedge funds saw an opening. They could attract a lot of liquidity by promising untraditionally high returns (10-20%). The stage was set perfectly again. The public, through investments and 401k’s, wanted the attractive returns and chose not to ask how it was possible or that the senior executives of these firms were taking their cut first and their cuts were mind boggling huge.
With the collapse of the financial services sector, this game has ended. There should be criminal indictments but only time will tell. Even with indictments it is hard to predict whether any lessons have been learned.
During this entire time frame another phenomena has been taking place. There has been a steady exodus of manufacturing jobs and a disinvestment in math and science education. Math and science represent hard work and manufacturing has come to represent less desirable work. Of course the truth is that so much of Americas manufacturing base moved off shore, restarting the US economy is going to be very difficult and will require hard work.
“Looking back” can not change today’s problems. “Looking back”, however, can help guide us to both the short term and longer term fixes. Laissez faire is ok as long as there are rules and the sherif is honest and around. There is no substitute for hard word and real value production. The American dream can be revived if we simply use common sense and perform the necessary hard work.