A phrase made famous by Franklin D. Roosevelt is repeated in times of economic and political
distress: fear nothing but fear itself. This advice, although generally sensible, can sometimes turn idiotic. It can lead to hubris. It can lead to a form of unbridled capitalism expressed in the relentless love of material possessions. This phenomena may have had its apotheosis in the wake of the Sept. 11 tragedy when the Mayor of New York, Rudolph Giuliani, urged New Yorkers to hit the theatre district, to have dinner in Manhattan and to spend like wanton heathens. The mayor, who did not intend to be disrespectful, was clearly aware of how money and consumption are at the backbone of New York commerce and culture.
The famous FDR phrase has jumped into vogue again as the American economy enters the early phases of a recession. It comes after a prolonged period of yes, unbridled capitalism, in which millions and billions were made by ordinary folks, bricklayers and bartenders, cabbies and chambermaids. Now some of these folks are hopping mad. Some will probably hit the medicine cabinet. A recent survey of 1,000 U.S. investors, conducted after Sept. 11 by Cigna Retirement and Investment Services, showed that an alarming number are starting to distrust the stock market. Forty-seven percent planned to make switches in their retirement accounts if the markets do not recover soon; 17 percent would switch to more conservative investments; 15 percent would save more while 10 percent would put their assets into more aggressive investments.
Can you blame the average Joe for thinking the stock market might actually be no better than a slot machine in Vegas that eats up hard-earned money and, only once in a while, pays outsized winnings? The Nasdaq composite index is down some 60 percent from its March 2000 peak; the Dow has lost about 11 percent this year. Nearly $30 billion, a record, was yanked from U.S. stock mutual funds in September. The health of the U.S. stock market will influence the shape of the trading industry. If the market does not recover soon, firms that depend on equity order flow as a primary source of revenue will have trouble. However, a prolonged bear market could encourage the SEC to be, dare I say, less reform minded. On the other hand, SEC Chairman Harvey Pitt might be tempted to support a mandatory central limit order book if it leads to cost-savings and stimulates markets. One industry gadfly, Junius Peake, a former NASD governor and a professor at the University of Northern Colorado, contends that a mandatory CLOB, as well as other fixes, could turn trading into a more commoditized business. That, in turn, could reduce trading costs by 50 to 60 percent, he says. It sounds like a wild figure, a figure that some will dispute since a mandatory CLOB would hurt many traders. But a weak economy, a prolonged bear market, could force lawmakers and pressure groups on Wall Street to demand money-saving reforms such as Peake's. These new reforms would not be cushioned by the same economic harvests as the 90s. Sure, the reforms could succeed. But they must not exacerbate our worst fears, or encourage hubris. They should renew our self-confidence. They should bring the markets back. It is the American way.
John A. Byrne
Editor
