The Bear's Lair: Boomers' bursting bubble

By MARTIN HUTCHINSON, UPI Business and Economics Editor  |  Feb. 19, 2002 at 5:51 PM
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WASHINGTON, Feb. 19 (UPI) -- The Bear's Lair: Boomers' bursting bubble

By MARTIN HUTCHINSON, Business and Economics Editor

WASHINGTON, Feb. 19 (UPI) --

As the pattern of overstretched accounting and unexpected bankruptcies widens, it is becoming clear that in the United States we are facing a once-in-a-generation financial meltdown, whatever the effects on the real economy. For the baby boom generation, the late 90s was the bubble of a lifetime, and its bursting calls into question whether that generation's attributes, which made the 60s unique, were also responsible for the 90s.

William Strauss and Neil Howe, in their path-breaking 1990 book "Generations" (William Morrow & Co.) argued that there has been a generational cycle in American life, whereby four different generational types, the "civic," "silent," "idealist" and "lost" succeed each other on about an 80 year cycle. The authors go into considerable detail about what produces this cycle, postulating that a secular crisis (the Revolution, the Civil War, World War II) makes the civic generation uniquely community minded, and prone to large tangible achievements, while a spiritual awakening (the Great Awakening, the "Missionary Awakening" of 1880-1900 and of course the "Sixties Awakening" beginning in 1965) causes the idealist generation to become inner-focused and driven by spiritual or ideological belief.

Strauss and Howe admit that the spiritual awakenings are driven by the generational phase of the American people themselves, but treats the crises as being external, imposed upon the American people rather than caused by them. However, this imposes altogether too large an element of chance into the equation: why should providence cause a crisis neatly every 80 years, thus kicking off another round in the generational cycle? Is it not more likely that, with the idealist generation of each cycle close to maximum influence as the crisis begins, its own characteristics in fact to a large degree cause the crisis?

With an extra 12 years behind us, since the publication of "Generations," and the denouement of another generational cycle emerging, we can perhaps see a clearer pattern emerging.

There are two characteristics of an idealist generation that might be thought likely to cause trouble. First, such generations have a devotion to abstract ideals over day to day practicalities, born out of their spiritual awakening, that can lead to fanaticism. Second, having been spoiled in childhood and conscious of their moral superiority, they believe that previous rules, norms and conventions do not in some way apply to them. To use a phrase that would doubtless appeal to the politically correct baby-boomers, they are "differently ethiced!"

One past example of an idealist generation causing its own crisis is of course the U.S. Civil War, born of an increasingly polarized debate about slavery that no longer restrained itself within the bounds of political discourse. Another may well have been the American War of Independence, in which a level of taxation far lower than in Britain itself, and among the lowest ever imposed on any organized human society, nevertheless drove the rigidly idealist U.S. "Awakening" generation and its devil-may-care "Liberty" successor (to use Strauss and Howe's generational terminology) to believe that compromise with Britain was impossible and a war of independence inevitable. Further back, Strauss and Howe strain excessively to prove the 1584-1614 birth-year Puritan generation had much to do with the revolution of 1688, which in any case was not particularly traumatic for anyone concerned except James II himself. However, that generation was of course in England the overwhelmingly dominant cause of the English Civil War. One need only read Clarendon's History of the Great Rebellion to see how extraordinary were the claims put forward by the parliamentary leaders in 1641-42, and how far from accepted constitutional practice they strayed -- again, their idealist devotion to the Puritan cause and hatred of Catholicism drove them to measures unimaginable to their non-idealist predecessors of Shakespeare's time.

In all three cases, therefore, the fanaticism born of devotion to abstract ideals led the idealist generation to generate a crisis that in turn produced the four-phase generational cycle. When the crisis crystallized early, as in the U.S. Civil War, the generational cycle was somewhat accelerated; when the spiritual awakening of the idealist generation was delayed, as in the Great Awakening (which should on the Strauss/Howe cycle really have happened in the 1690s, not the 1730s) then the crisis, in that case of the War of Independence, was also delayed.

More interesting for the modern comparison is the crisis of 1929-45. Here fanaticism of the idealist generation also played a role, although in this case the ideal was that of socialism not religion. While the New Deal in the end simply delayed recovery from the 1929-32 crash, there were moments at which it clearly stretched the boundaries of what had previously been considered permissible. Notable among these were the 1933 repudiation of the gold clause, even in existing contracts, the National Recovery Administration, declared unconstitutional by the Supreme Court even as it attempted to regulate product lines and pricing at a micro level and of course the 1937 Supreme Court packing plan. The socialist idealists of the "Missionary" generation clearly felt themselves unconstrained by previous conventions.

However, it can not reasonably be claimed that the idealists of the 1930's directly caused World War II. What can realistically be claimed is that the "Missionary" generation's independence of previous rules and conventions also caused the 1920's prosperity to turn into a bubble, and the early 1930's decline to turn into an economic Armageddon, precipitating the rise of Hitler and the Japanese militarists.

Among the 1920's corporate malfeasance was National City Bank Chairman Charles Mitchell, short selling his own bank's stock, J.P. Morgan partner Richard Whitney embezzling stock exchange funds, Match King Ivar Kreuger swindling investors multinationally (the 1920's Enron) and the Shenandoah Corporation and Goldman Sachs Investment Trust building pyramids of holding companies and collecting management fees from each. Equally unprecedented was the reaction of jurists after 1932, in jailing Whitney, Mitchell and other financiers, and of politicians in running for office for a decade and a half through demonizing Wall Street. Harvard's business historian Richard Tedlow, quoted in the Wall Street Journal Tuesday, believes the ethical cloud in 1929 was the worst in U.S. history. The political reaction to it was also unprecedented in its lack of inhibition, causing immense economic damage, both in the U.S. and internationally -- and bringing military as well as economic catastrophe in its wake.

At least the first part of this saga appears to have repeated itself in the 1990s. Previous standards of executive remuneration were swept aside by the mania for stock options, and the refusal to book them properly in company income statements. Previous standards of stock valuation were swept aside in the dot-com mania, where companies that were far from even the prospect of showing a profit were able to raise billions. Previous standards of Wall Street analysis were swept aside by Mary Meeker, Henry Blodget and their cohorts, using their privileged positions as Wall Street analysts, not to provide investors with information, but to pump up the ever-escalating bubble. In political life, previous standards of veracity (even that of Richard Nixon) were swept aside by a president who refused to define the word "is." And of course, as Enron showed, previous standards of conflict of interest avoidance were ignored by the Enron executives who benefited from the special purpose companies, and previous standards of audit behavior were trashed along with Enron documentation by the Andersen accountants even as lawsuits loomed.

The result was a gigantic stock market bubble, which swept aside not only recent standards of valuation but even those of the late 1920's, regarded by all observers until about 1995 as an aberrant peak never again to be approached.

What we don't know of course is where we go from here. Strauss and Howe postulate a global crisis occurring about 2010-2020, which will provide the annealing fire from which the civic virtues of the currently infant "Millennial" generation will be formed (while making the lives of the rest of us very much more unpleasant.) In their view, however, the crisis will be extraneous -- the world will simply find itself in war or economic catastrophe, which will not be anyone's fault.

The history of the 1990s, particularly of the late 1990s, and comparison with earlier crises, strongly suggests that a causal link is at work. If the malfeasance of the idealist generation produces a valuation bubble, the crash of which produces an economic depression (and make no mistake, we are here talking about the d-word, not the r-word) then the beginning of the crisis may already be upon us. Moreover, just as the valuation bubble of the 1990s appears to have been larger than in 1929, so the economic undertow from its bursting may be correspondingly more damaging.

If this is the case, then the road ahead, to avoid an economic/military crisis which however character-building will certainly be enormously painful, is a difficult one. The reaction to economic hardship, if it occurs, must differ from that of the 1930s. In particular, we must not revert to protectionism (which impoverishes other countries) must not carry out a legal and political assault on business (which impoverishes at home and abroad) and must not allow the international financial flows to dry up. In foreign policy, we must be vigilant to block the rise of powerful enemies, while at the same time helping countries in difficulties and ensuring that the world trading system remains open and active.

Above all, we must guard against the metastisizing of government, so popular among idealists grown impatient with age -- this means keeping taxes low, but also opposing rather than assisting the Leviathan of the European Union. A world war, if it is to occur, will involve economically and militarily strong countries, not just weak ones; the two leading candidates for the U.S.'s opposition in such a conflict must be China, which could be radicalized by the huge economic crisis that seems likely there, and the EU, which could in a time of hardship attempt to define itself in opposition to the U.S. (or, alternatively, try to prevent by force the breakaway of some of its constituents.)

By 2025 we will know, of course. If there has been no crisis, then Strauss and Howe's timing has been thrown off, and the "Millennial" generation will have become to old to be made "civic" by it. If there has been a crisis with no apparent causal connection to the activities of U.S. baby-boomers, then Strauss and Howe's thesis has been validated, at least for another cycle.

As outlined above, it is however in my view much more likely that the crises are to a considerable degree caused by the character defects of the successive idealist generations. If this is the case, then let's not wait till 2025 to find out; we must do something now, and put in place the policy changes that will bring us quickly out of what may by now be the inevitable depression, while preventing what is, one hopes, an entirely avoidable world war.

(The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that, in the past 10 years, the proportion of "sell" recommendations put out by Wall Street houses has declined from 9 percent of all research reports to 1 percent. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

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