Political fallout

As it might be expected, this unprecedented revelation of scams, financial irregularities, and fraud among the highest echelons of US business has had serious political fallout on the incumbent Republican Party, under whose watch the daily parade of brigandage is occurring. This is somewhat ironical, since the Republican Party is a far stronger ally of big business in the USA than is the Democratic Party. As we saw last week, not only are those who deal on the stock market the immediate victims of this corporate thievery, but also negative spin-off effects to the wider economy, the fiscal balance, the exchange rate, and consumer confidence are already considerable. These have affected the wider global economy threatening both a worldwide stock market crash and a further lengthening of the global recession.

This situation combined with the pressure of Congressional elections due in November this year, forced President Bush to take centre stage in an effort to steer events to a safer shore and away from the looming precipice facing the USA.

On Tuesday, July 9, the President in a much anticipated speech to a gathering at Wall Street called for “a new era of integrity in corporate America.” He urged harsher penalties for investment fraud to put a stop to the mounting scandals that were undermining the trust of Americans in business institutions. As we have noted repeatedly in this series, without trust, capitalist market institutions cannot function efficiently and effectively.

Presidential proposals

Judging from market reactions and media commentary afterwards, while long on rhetoric the President’s speech was short on concrete remedial details. There were about six main proposals. One was to create financial crimes SWAT Team in the Justice Department to go after the crooks. Another was to increase the budget of the Securities and Exchange Commission by $100 million. This agency supervises and regulates US capital markets.

A third proposal was to double the maximum prison term for mail and wire fraud to ten years. The fourth proposal exhorted financial analysts to be “honest advisers” as the crisis revealed the conflict of interests between financial analysts and consultants in the same firm doing business with other companies.

The President charged these analysts not to be salespersons with hidden agendas. He called on chief executive officers to describe and defend their compensation in annual reports to shareholders, including personal loans. Finally, in cases where accounting fraud was proven company officers should forfeit all compensation.

Reactions

By the end of the week the President gave his speech, Friday July 12, all three major financial markets had rapidly declined. The Dow Jones Industrial averages were down by 7.4 per cent. The Standard and Poor 500 index had dropped by 6.8 per cent, and the Nasdaq was down by 5.2 per cent.

This was to be the eighth straight losing week for these three major Wall Street indexes. The rot also spread abroad. Thus, the London stock market plunged to its lowest level in the past five years, losing in the course of that week 93 billion pounds sterling of its value.

To all intents and purposes, the President’s speech did not have the intended effect. This resulted in a shift in political momentum. Presi-dent Bush who had until then enjoyed what US politicians call a ‘lock-step’ approach with Republican Members of Congress, saw that come to an end.

Many Republicans began to push for more radical proposals than the President and in many instances even their Democratic Party counter parts. Members of Congress jockeyed for positions as leading defenders of American consumers and ordinary folk who were being duped and deceived by corporate America. In the frenzy the Senate voted 97 to zero for tougher penalties for corporate crooks than Bush had proposed in his speech.