A Runaway Train on Wall Street Jude Wanniski July 15, 2002

Memo To: Sen. Bob Bennett [R UT]
From: Jude Wanniski
Re: You Have Got to Stop It

You probably noticed the Dow Jones Industrial Average fell almost 700 points last week while the entire political establishment pretended not to notice. The reason, Bob, is that both political parties are responsible for the decline, including the executive and the legislative branches. It is of course because of the so-called “crisis of confidence” in capitalism, which surfaced first with the shenanigans at Enron Corp. and Arthur Anderson, and have expanded with the revelations of accounting irregularities and even fraud at other major corporations. Everyone in government now wants to “fix” capitalism by making it a crime for the top brass at publicly traded companies to allow their accountants to make mistakes. Ten years in the slammer, perhaps. I see you voted for this legislation in the unanimous 97-to-0 tally in the Senate, but I have to assume you were going along with the Trent Lott strategy of taking political cover with this bipartisan vote in the hopes the monstrosity can be fixed in a conference with the House of Representatives.

The reason you come to mind, Bob, is that you came to the Senate from a successful tenure as chief executive officer of a major corporation traded on the New York Stock Exchange, Franklin International, a time management enterprise you actually founded. It occurred to me that you may be the only member of Congress who has the right perspective to get your colleagues to see what damage they are doing to the national economy. On a “reform” of such mammoth proportions, you would normally expect a great debate between the two political parties before a bill was signed into law by the President. But with both parties competing to see who can be toughest on “capitalists,” we may be replicating the process that led to the Smoot-Hawley Tariff Act and the stock market Crash of 1929. The fact that you hold the Senate seat of Reed Smoot, chairman of the Senate Finance Committee back then, gives you an opportunity to made amends.

As 1929 opened, nobody really thought there was a chance Smoot-Hawley would pass. There simply were not enough supporters in the Senate. The Southern states had always been free-traders, anti-protectionists, and Smoot-Hawley was clearly protectionist. The House was so confident the bill would be killed by the Senate that it passed it easily in March 1929, which caused a steep slide on Wall Street, until it became clear the Senate opposition was holding firm. When the Senate came back into session after the summer recess, the market began a very gentle slide, as the risks of passage began to increase. It was Utah’s Senator Smoot who began offering bigger deals to the Southern senators, chipping away at their opposition, and by the last week of October, enough of them had switched to support that the stock market “crashed.” Until I made this discovery in 1977, the movement in the Senate was not connected to the Crash, Bob, because there were so many people supporting the tariff that they insisted the market was crashing because the Democrats were dragging their feet instead of supporting it!!

The same thing is happening now. I see Al Hunt of The Wall Street Journal is saying the DJIA fell 700 points last week because it was disappointed that the penalties were not tough enough!! Then I see Sen. John Edwards [D NC], who is running for the Democratic presidential nomination in 2004, telling Wolf Blitzer on CNN the same thing. The market fell, he said, because of disappointment that the legislation was not as tough as it should be. This line of reasoning is making the rounds in Democratic circles and thus firming up the support for tougher measures by the White House. Three weeks ago, when we saw this competition shaping up, we worried that it may result in President Bush becoming the Herbert Hoover of this era.

As in 1930-32, when Hoover destroyed the economy with Democratic goading, Democrats like Edwards will never step forward in front of this runaway train. They only hope Bush and the GOP will get all the blame, because they are in power.

It would be no matter if the President would reverse course and begin hinting that he will veto the bill if it comes to him a mess. But because of the various allegations against his business dealings prior to his political years, he seems paralyzed. We read that Vice President Cheney was totally opposed to getting this ball rolling and urged the President not to go to Wall Street last week to talk tough. He was exactly right, but it is widely written that Karl Rove persuaded the President to go this route. Cheney could be providing the necessary caveats to stop the vicious cycle, but now he is in the docket for this, that and the other thing the snoops are discovering at Halliburton. Trent Lott’s blunder is already evident, as House Speaker Denny Hastert and House Majority Leader Dick Armey have already announced that they would be happy to criminalize accounting error and put the Fortune 500 on ice. In a client letter I wrote last week, I called this a “Corporate Terrorist Tax.” Just as the Senate failed in 1929 because it was easy to get the Dixiecrats from the newly industrial states to become protectionists, now it will be easy to get the House on board because they “only” represent small businessmen. Armey of Texas has a PhD in economics, but he has never run a business small or large. It never occurs to him that when you make it more difficult for business to do business, less business will be done.

In the Senate, your colleague John McCain of Arizona has become smootier than Smoot, while Armey is filling the Hawley role with gusto. While they are saving capitalism, the value of the capital stock of the United States fell by $1.2 trillion last week alone. Enron’s stockholders lost a few hundred million, Worldcom’s are down a few billion, and the other problem companies add another few billion. But President Bush and the Congress in a few days have sliced one thousand, two hundred billion dollars from the savings, nest eggs and pensions of the American people. Democracy does not help when there is no politician willing to step forward and make these connections. Once you show you have the brass to do this, others will be able to join you, and the President himself will be able to note the wisdom of your remarks. If you won’t do it, Bob, please think about who can. Someone has to be willing to stop this runaway train.