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CORPORATE FOCUS: Bull Market or Ponzi Scheme?

"The Internet economy, with its fast companies, is poised to replace the old economy, with its a raging bull market. But is the booming market for real, or is it a naturally occurring Ponzi scheme, ready to crash and leave the last round of investors holding the bag?"
 
 
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The Internet economy, with its fast companies, is poised to replace the old economy, with its slow ones.Forget current profits. Sales are booming, and the profits will come. It's new era economics. The result -- a raging bull market.Geeks with pencils in their shirt pockets become instant millionaires. Spend your days staring in front of a computer and strike it rich. In some areas, millionaires are a dime a dozen. The working poor become invisible. We've become a casino culture.So, is the booming market for real, or is it a naturally occurring Ponzi scheme?Charles Ponzi is the crook from the 1920s who told people he had a business that made money exploiting mispricing in international postage reply coupons. In fact, there was no such market, but he took people's money and promised them a spectacular rate of return on their investments. And he paid off the first round of investors with the money he received from the second round of investors. And he paid off the second round of investors with the money he received the third round -- until the scheme ballooned into a multimillion dollar market. Finally, the bubble burst, leaving the last round of investors holding the bag.Sound familiar? Robert Shiller, A Professor of Economics at Yale University, thinks it could be a good explanation for what's happening in the market now. Except that there is no Charles Ponzi here. And there is no deception -- it just developed naturally. And it's being fed by irrational exuberance, feedback loops, herd behavior, and epidemic madness.It seems that people never learn from previous Ponzi schemes until it is too late. A couple of years ago, in Albania, for example, a gargantuan Ponzi consumed a good fraction of a year's gross national product for Albania. When the Ponzi scheme finally collapsed, there was rioting in the streets, the Army came out, shot some protesters, and the government resigned in disgrace. There was mass chaos.Shiller has written a new book, Irrational Exuberance (Princeton University Press, 2000), in which he looks at the current speculative bubble in the United States through a lens of behavioral economics. It's not just numbers driving the market, he reminds us, it's mass psychology, too.And Shiller is not just another apolitical market naysayer.He makes the point that there is a moral demoralization that occurs when the market bubble inflates to the degree that it has. Instant millionaires abound, but what about hard-working regular folks who toil day-in-and-day-out for a living wage, come home, turn on the tube and hear about the instant millionaires who struck it rich by signing on with this dotcom or that?"When people see others flaunting their wealth, it's painful" he told us recently. "It is so painful to see people devoting their lives to caring professions -- school teachers, police officers, fire fighters -- while someone buys into the market and gets rich. You feel like a sucker. It feels bad. Nobody wants to be a loser. Today, it seems the world is divided into winners and losers. The old feeling of solidarity with your fellow human being is eroded somehow. There was a feeling of labor solidarity. I remember hearing union songs on the radio when I was growing up in Detroit. That era is gone. If you work for your money, if you are unionizing, you are a loser."And it is not as if Shiller himself wrote the book out of sour grapes. As a young professor at Yale in 1982, he invested in stocks, and just got out recently, when, he believes, the market started spinning out of control.Shiller predicts poor market performance over the next five years, with the Dow dipping to 5,000 and perhaps slowly coming back to 10,000 by 2020."People seem to think that the market has to grow explosively," Shiller said. "You ask someone -- what is the Dow going to be in 2020? And they say -- oh, my God, 200,000. That would be the knee-jerk response. But it represents a misreading of history."Shiller recommends that investors get out of stocks now -- as he has done.He points out that one major problem with Ponzi schemes is that until the end, people are making lots of money. At the end, everyone loses, and things turn ugly.Russell Mokhiber is editor of the Washington, D.C.-based Corporate Crime Reporter. Robert Weissman is editor of the Washington, D.C.-based Multinational Monitor.