That's why President Bush was on Wall Street Tuesday, appealing to investors to keep the faith by warning corporate executives to cease and desist from abusing the trust of their shareholders. Amid a rolling wave of accounting scandals, the President warned that "faith in the fundamental integrity of American business leaders is being undermined." Restoring that faith, he said, was fundamental to maintaining the American way of life: "All investment is an act of faith, and faith is earned by integrity," Bush said. "In the long run, there's no capitalism without conscience; there is no wealth without character."
[an error occurred while processing this directive]A stirring moral lecture, but critics lined up to pillory the limited enforcement measures Bush proposed to rectify the situation. Even his own party wants more; by Thursday the Senate was debating tougher proposals to protect investors, and Republican House Speaker Dennis Hastert endorsed those, rather than Bush's more limited remedies. Investors appeared unimpressed with either; the Dow lost nearly 700 points for the week, and closed Friday below 8,700.
Restoring the now-shaken faith of investors may take years. The "lure of heady profits" described by Bush in his speech is, in fact, the driving force of capitalism and it is entirely inseparable from the faith that undergirds all private investment. Reforms under discussion in Washington can address abuses; it remains to be seen whether the president's plea for conscience will eliminate excesses. (On this score the President's words are wishful rather than descriptive there's been plenty of capitalism without conscience, and character has never been a precondition for wealth.) But nothing Washington is able to do can address the question of excess in the stock market more specifically, the discrepancy between the price of equities and their potential to generate wealth as a share corporate profits. Analysts have warned for years that the market is dangerously overvalued. Fed Chairman Alan Greenspan warned in 1998 that its ascent was driven by "irrational exuberance," but that didn't stop stock prices skyrocketing.
The prices of many of today's stocks are based not on their earnings, but on the perception that their potential earnings will make the equities themselves desirable commodities, whose price will keep rising as more investors make the same leap of faith. Value, in other words, is easily replaced by the perception (and in many cases the illusion) of value as the cause of a stock's rise. The stock market's heady ascent over the past five years was driven often by faith in the performance of equities on Wall Street rather than by faith in the potential of the companies to earn money on Main Street. Pyramid schemes are based on a not dissimilar psychology the consensual hallucination that everyone will win as long as everyone keeps buying in. And pyramid schemes always end in tears. Value is ultimately finite and tangible; there'd be no poverty if it could simply be willed into existence.
The corporate accounting scandals that have mounted steadily since last winter have revealed the extent to which many executives were prepared to go to keep the party going. But the performance of the market this week suggests that many investors may be questioning why they went along for the ride in the first place. And now the leaders of corporate and political America wriggle uncomfortably with the reality that their fate may be in the hands of the very investors some of them deceived.