Enron and the press
In last month's Prospect, Richard Lambert, the former editor of the Financial Times, asked why the press had failed to see Enron coming. He acknowledges that part of the failure lies in the mood of the times. Unfortunately, he does not go far enough. It was, after all, a TMT (technology, media and telecoms) boom, and the Financial Times was at the heart of it. Just over two years ago, Pearson, owner of the FT, was applauded by the market for raising hundreds of millions of pounds to invest in internet ventures: FT.com was soon followed by FT Marketwatch.com, FTyourmoney.com, and so on.
A few weeks before the bubble burst, the pink paper restyled itself, "the newspaper of the new e-conomy." At the time, the FT's earnings were being swollen with the proceeds of advertisements from internet businesses and investment bankers boasting of their high tech IPOs and merger deals. Of course, the problem was not confined to the Financial Times. As John Cassidy, in his account of the internet mania, Dot.con, observes: "Journalism, like all commodities, is subject to the laws of supply and demand. As the demand for sceptical reporting dropped, the supply fell back to match it. Similarly, as the demand for upbeat coverage increased, the supply expanded to meet it."
Defoe's view of the market
The damage caused by the recent stock market bubble might have been lessened had bankers and investors dipped into their history books beforehand. Fortunately, the market is a self-correcting mechanism which learns from its recent mistakes. Perhaps this explains an advertisement in The Economist by a "Leading Global Financial Institution" for a historian, who will play a "key and influential role advising the Bank's senior management on the historical context for strategic decision-making." A six-figure salary is promised. Where shall the lucky appointee start in his role of bringing history to a philistine City? I suggest he purchases a copy of Daniel Defoe's financial pamphlets, just published by Pickering & Chatto.
The author of Robinson Crusoe witnessed the emergence of the London stock market in the 1690s and later wrote extensively on finance. Having lost money in a failed speculation early in his career, he remained sceptical of professional market operators. In his "Anatomy of Exchange-Alley" (1719), Defoe denounced the stock-jobbers of his day with words that might be applied as appropriately to the modern investment bank analyst: "if you talk to them of their Occupation," he wrote, "there is not a Man but will own, 'tis a Compleat System of Knavery...."
Defoe's invective came from a belief that brokers and jobbers were continuously engaged in manipulating the market. He had an acute sense of the difference between intrinsic value and market price: "the setting of a Price upon the Stock is the work of Artifice, and perhaps of Knavery, and is too often in the power of the most scandalous Sharpers of the Alley." Recent revelations of corruption in the market for initial public offerings would not have surprised him.
He also displays a sophisticated understanding of the effects of money and credit upon prices. After the collapse of the South Sea Bubble in 1720, he maintained that stocks were trading below fair value for want of money: "The Rate of the Stock at Market is rather a Test of the Price of Money rather than the Value of the Stock; when Money is dear, all sorts of Goods will be cheap; when Money is cheap, and Paper coin current, Goods will bear a Price." I imagine Defoe, observing the Federal Reserve's success in inflating the money supply last year, would have predicted that stock market's revival.
Defoe took a keen interest in the nature of credit. He lived during a period when the English government succeeded in establishing its credit and reducing its cost of borrowing. Credit, in his view, was "a voluntary trusting of the Government with our money." In exchange, the government was expected to show certain qualities: justice, fair dealing, punctual compliance, honourable performance of contracts, and universal probity. He contrasted the birth of the national credit in England, under the protection of parliament, with its decay in absolutist France.
The difference was that credit accompanied freedom and the protection of private property: "The Arbitrary Government of the King of France, the Property of every Man intirely at his Dispose, destroy'd the very Reason and Nature of Public Credit; and the limited Power of Great Britain's Crown... has been the Reason and Foundation of such an immense, boundless Credit, that nothing can hurt or destroy, unless the Parliament should Invert their way of acting, and take into their hands the same Absolute Power which it is their business to Restrain, and wound and injure themselves, that it to say, the People whom they represent."
I believe that Defoe would have considered the British government's surprise decision to re-nationalise Railtrack, without reimbursing its shareholders, as an act of "arbitrary" government which served to weaken the nation's credit. He would have seen Railtrack as being in a similar position to the French Mississippi Company in 1719, "a Brat of State, which has its Life in the King's Breath, and must die whenever that Breath pleases to determine it ..." He advised that credit could only be restored with honour. A quality in short supply with New Labour.
