A great deal has been said since Sept. 11 about the Americanpeople's renewed faith in government. Much less has been said aboutan equally important shift in attitude: people's diminishing faith inmarkets.
For much of the past 20 years the free market was regarded as theway to solve problems. The market was efficient. It delivered thegoods and it did so at low prices with less hassle. But over thepast year a series of events has led to an erosion in the confidencewe once placed in markets.
The latest event came this past weekend with the bankruptcy filingby Enron Corp. Houston-based Enron was the ultimate market company.Along with a handful of others, Enron transformed a stodgy oldbusiness - the sale of electricity - into a freewheeling, deregulated enterprise. It sent energy around the country at whateverprice the market would bear.
And it seemed to work. In 2000 Enron earned a profit of nearly $1billion. Last January, the stock reached $82 a share, whichtranslated into a market value of $70 billion. Then it all started tounravel. There were accounting irregularities. The company couldn'texplain its complex financial structure. Yesterday, Enron stock wasselling for 43 cents a share. The whole company had a market value of$300 million.
"In a capitalist system one of our freedoms is the freedom tofail," said Robert Goodman, senior economic adviser for PutnamInvestments.
The problem, however, is that the failures are mounting. Enron'scollapse is eerily like the collapse of the dot-coms. One day theywere worth a fortune. The next day they were gone. On a less dramaticscale is the decline in the value of the stock market. Even with itsrecent comeback, the Nasdaq Composite index is down more than 60percent from its March 2000 peak. The other averages are off by amuch smaller amount.
Still, millions of Americans have felt the pain. Their collegeaccounts have shrunk. So have their 401(k)s. And the notion that weare all responsible for our financial well-being, which was soappealing two years ago, suddenly seems more scary than exciting.
Government hasn't been immune from the shift in public mood. It ishard to remember now, but when President Bush came into office,privatizing the Social Security system was one of his top domesticpriorities. Last Thursday, his Social Security commission advancedsome proposals for changing the system. Their report barely made thenewspapers. In a bear market, persuading people to put even more oftheir retirement dollars into the stock market is a tough sell. TheBush team has all but stopped talking about its plans to inject morefree-market competition into the Medicare program.
"The pendulum has certainly shifted," said Daniel Yergin, authorof "The Commanding Heights," a 1998 book about the rise of the marketsystem over the past half century. Yergin's book describes theadvance of capitalism everywhere from China to England and thegrowing conviction that markets can do a better job than governmentin delivering goods and services. The hero of his book is the formerBritish prime minister, Margaret Thatcher, who, as Yergin wrote, wanted to replace "the Nanny State and its cradle-to grave coddlingwith the much more bracing risks and rewards of the enterpriseculture."
Yergin isn't suggesting the march toward market solutions is over.But he concedes that enthusiasm for the market is influenced byevents. "It turns out the business cycle still exists," says Yergin.
That revelation is particularly distressing for younger people,many of whom have seen markets and the economy go in only onedirection: up. "It has been such a long time since we've had arecession that many people have no professional memory of what arecession is like," said Nicholas Perna, a Connecticut economist. Inrecessions, said Perna, markets go down and companies go broke. Pernaexperienced one of those failures firsthand over the weekend when hishigh-speed Internet service was shut off, the result of the failureof ExciteAtHome, a bankrupt broadband provider.
Are we at a turning point? Will we look back years from now andsay 2001 marked the end of an era? Our guess is no. What's going onis more like a rebalancing of portfolios. Americans are lightening upon the market and adding a little more government to their accounts. Think of it as a correction rather than a turning point.
Steven Syre (617-929-2918) and Charles Stein (617-929-2922) can bereached by e-mail at boscap@globe.com.
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