The Blame Game Over The Stock Bubble

Broadcast September 9, 2001

Who's to blame for the technology stock bubble that burst over the last year, for the billions of dollars that have been lost? Class-action lawsuits are in full gear. Investment houses and brokerages are on the defensive. The financial media are also under fire for acting as mindless cheerleaders. And what about all those authors who solemnly predicted the Dow would hit 15,000 or 21,000 or whatever absurd figure sold their books?

Let's stop the blame game. The whole bubble really comes down to two things. First, the willingness of many seasoned investors, including large institutions, to knowingly enter a Ponzi scheme, in which vast riches could be made as long as there was a supply of bigger suckers who'd buy more shares at even higher share prices and higher price/earnings ratios. No number of lawsuits or legal challenges and changes will prevent investors from doing stupid things if they believe they can make money off even stupider investors.

But the second reason for the technology bubble was avoidable. It's found in the erosion of all the old Chinese walls, norms and regulations that used to keep separate the functions of investment banking, brokering, auditing, consulting and financial media reporting. These days, everyone's in bed with everyone else. And conflicts of interest about what's revealed to the investing public are endemic. Researchers and analysts advise brokerage clients to buy the same stocks as the investment banking parts of the enterprise invest in. Those same researchers and analysts appear on financial media as supposed experts in an industry or part of the world, but they're really there to advertise the brokerages and investment banks they work in.

Meanwhile, the auditors, who are supposed to make sure company reports are accurate, work for the same enterprises that sell other services to those same companies. So is it any wonder that so much of the information delivered to the public about high-tech stocks was irrationally exuberant? Irrational exuberance is built into the very structure of how securities information is processed and delivered. The only way to solve this is for Congress, the courts and the Securities and Exchange Commission to build fire walls that separate different sources of investor information and establish clear conflict of interest rules.

The lesson from the technology bubble is that while no one can prevent some investors from gambling that other investors will be even bigger fools than they are, the securities and securities' media industries should not be allowed to fool the rest of us.

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