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Preventing The Next Great Mania
Can it be done?
by Robert B. Gordon, Sc. D.
September 11, 2001

Introduction

Let's take a mental journey three generations into the future, to say 2079. What will well educated people think about the period we're now passing thru? Will they have read the scary stories of the world's great Manias starting with the Tulip Bulbs in Holland, the South Sea Bubble in London, the Great '29 Crash in Wall Street or the Japanese Stock and Real Estate Bubble of 1989-2001? Will the senior citizens in 2079 have learned about the Internet Bubble of 1999 from their fathers and grandfathers. Are they asking or have they heard others asking questions about the causes of the 1999 Mania? Perhaps questions like, "how could supposedly intelligent leaders of a great country, instead of working to prevent the disaster from the many early warning signs, have succumbed to the mirage of the bubble and actively promoted it?"

While writing this essay I have read Ben Stein's scathing special to TheStreet.com on 9/5/01. He decries in harsh words the many crimes of commission and omission by our investment houses, security analysts and brokerages. He singles out the mutual fund industry for special criticism for their rush into the bubble at the expense of their millions of unsuspecting clients. He accuses the SEC of sleeping soundly thru the pivotal years of the mania when it might have been contained at least in part. He calls for a full formal Congressional investigation such as that of the Pecora Commission after the '29 Crash.

I do not have Ben Stein's background as a trial lawyer, Presidential speech-writer or expert witness on financial fraud. I fully agree with the accuracy and seriousness of his accusations. I, too, want to see all the guilty brought to justice. I want to see a complete and fair compilation of the Mania's record from its beginning to its end whenever that may be. My point of view of the full mania spectacle has been different from Stein's and I wish to ask different questions aimed, perhaps optimistically, at preventing the occurrence of yet another in the World's long string of manias.

It might be useful to review my 86 year life to date and identify how my current high level of knowledge on bear markets and manias came about. We will never stop future manias from at least starting unless and until our leaders in Washington and Wall Street have learned the history of manias and developed a capability to combat them at the start. We will address the problem of education for our country's future leaders. Can it conceivably be done by anything resembling our current system at the high school and college level?. To avoid another mania ,we must assure that our future responsible leaders in government and industry reach their positions possessing full essential information on manias and their prevention.

Learning About Manias

I was 14 in 1929 and I cannot remember any discussion of the Crash and its aftermath because no one in our extended family was in the stock market. I was busily engaged in keeping up on the news of my favorite minor and major league baseball players. I spent the Depression years from 1931-39 in undergraduate and graduate college studies in engineering and science. It's interesting to recall that our sophomore class in Econ 101 covered all the then popular ivory tower theories and never discussed the fascinating approach of the NYSE to its important 1932 bottom. In 1934 I took an interesting course in the History of Western Civilization which covered all the great wars in detail but made no mention of the great manias of the past or present.

In the middle of my professional career in 1961-62, I attended UCLA's Executive Course in Business Management with lectures from distinguished faculty members. One faculty expert teaching Corporate Finance covered all the appropriate areas inside a corporation including new stock and bond issues but failed to discuss the current stock market which was then entering the exciting Go-Go years. As a result, I used my own resources to learn all about the Nifty 50 stocks and the mini-bubble and crash in mutual funds who got in trouble from buying restricted securities. By the time the 1970's arrived I was fully immersed in managing diversified investments. As a result, I lived daily thru the ups and downs of the second largest and longest bear market of the past century. Running from early 1972 to late 1975, the unweighted average of all NYSE stocks dropped a full 64%. There were 3 bear market rallies and when it ended the atmosphere was a very deep gloom. There were no buyers at the bottom and no one was asking where's the bottom. Wall Street was almost a ghost town. The bottom was only recognized after the fact in the early 1976 bull rally.

By this period in my life I had read most of the classic books on investing, including those on past manias. Upon retiring in 1980, I bought a computer and have been a full time investor since then. I have given illustrated talks on historic manias to my fellow retirees. Due to my background, I became pessimistic in the bull market as early as 1995. My views were strengthened by reading Robert Prechter's epic Tidal Wave book. So I missed much of the bubble and have never regretted it. But it was fun to watch as a non participant.

A Review of Recent History

Would the Clinton presidency have done anything differently if, while in Britain as a Rhodes Scholar, our president-to-be had attended some lectures on one of the great manias of all time - the South Sea Bubble of 1720-22? Or more recently, would George Bush Sr. have won a second term over Clinton if he and his advisors had been more savvy of the stock market and economy. Surely the basic knowledge of short and long market cycles has been available in printed form for many decades. The problem has been lack of understanding at high levels and the associated lack of appropriate actions.

As the stock market bubble was forming in the mid to late 1990's, quotations from our leaders in the 1920's were appearing in the public press. Remarks of economist Irving Fisher of Yale, read as if they had just been uttered by our current generation of financial experts. But, as the bubble grew, these fascinating quotations appeared to have no effect other than to entertain the small number of bearish readers. As we now know, our current bubble fooled our nation's leadership from Alan Greenspan down thru lower echelons of the financial community. Objective experts outside the bubble, were severely criticized for their bearish views and were eventually excluded from the popular news media. Their views were finally available only on a few bear web pages and read only by the conservative few. By the beginning of year 2000, just before the crash, it was almost impossible to find a single bearish commentary on Wall Street.

Can Education Help Prevent Another Mania?

While the stock bubble is slowly unwinding and a potentially huge real estate bubble appears to be peaking, we believe the time is ripe to ask these questions:

1. Is it within the capability of a free society to stop the established pattern of manias?

2. Is the Western World bound to create a new mania as soon as old memories fail?

3. Can specialized education aimed at government and industry leaders be of help?

4. Is a complete overhaul of American education at all levels the only viable approach?

My short answers to the four questions are:

1.  Yes.    2.  Yes, if nothing is done.    3.  Yes.    4.  No.

In the U.S., where high school graduates can barely balance a checkbook, there appears to be little current hope for adding stock market manias to the curriculum. Undergraduate college courses in the social sciences, economics and history could be expanded to cover various aspects of manias. But their implementation would be slow. It would take several generations to reach an acceptable level of understanding among investors.

The history of manias is that all levels of society, motivated by fear or greed or both, are eventually drawn into the bubble. With the Tulips in Holland it was virtually everyone. In the London Bubble it is reported that the entire London City Council and even the King were involved. In 1929, just before the Crash, Winston Churchill visited New York and invested 20,000 gold crowns at the very top. In the Japanese bubble of the 1980’s, the value of their local real estate reached such high values that their greed caused them to come to the U.S. to pick up bargains at Rockefeller Center and Pebble Beach.

With this kind of history, is it any wonder that virtually every person working on Wall Street was inside the bubble during its final frenzy. The guilty ones include all the analysts, the economists, the brokers and especially the media. In 1966 when Alan Greenspan uttered his famous irrational exuberance message, the Dow was at 6400. What a marvelous opportunity was lost to do something about the building mania. But Greenspan has also said that he couldn't recognize a Bubble until it had burst.

In the final days of the mania, there were books predicting Dow 20,000, Dow 36,000 etc. and one great book by Prof. Robert Shiller of Yale entitled "Irrational Exuberance" that predicted the crash at its very peak. It is a sad commentary that this great book came from an ivory tower economist and not one of the hundreds of economists gainfully employed in Wall Street. What earthly good do our army of working economists do for our society it they cannot help prevent a $5 trillions dollar evaporation in the stock market?

Recommended Special Education Program

Since the job of educating millions of investors about manias is enormous and would take decades to accomplish and also be of dubious merit, I suggest a program aimed at a vast improvement of knowledge in the relatively small number of managers in two groups:

1. Security industry managers at middle, senior and top levels who develop, supervise, sell and police all types of investment programs intended for the general public.

2. All management employees in the SEC and other government financial regulatory bodies at the federal and state levels.

3. Selected management employees in Federal government or agency positions whose activities play a major roll in measuring or regulating all aspects of our economy.

The instruction should be at an upper class college level. It should use a special textbook and have a list of required reading material on the details of prior manias. It should have written exams that test the knowledge and understanding of the students and fully check their ability to recognize the symptoms of market action that would or could lead to a mania.

Satisfactory completion of the required exam should be required for every manager in specified positions within industry and government as a requirement for employment.

Special Note On Government Statistics

How much of the blame for the current mania can be laid at the desk of statisticians working for our Federal Government? How much of the total blame can be attributed to the corrections that are regularly made to "improve" the results? Would it not be wise to have two sets of data, one of them without any "corrections"? Could not these historic corrections fail to serve their purpose just at the time when good reliable data is needed most?

How many of the commonly reported economic statistics are "massaged" for political reasons? How can anyone be sure of the validity of statistics after witnessing the hugely bad results of the "Hedonic" upward revision of productivity attributed to computers?

This country cannot stand anything but the very best and most accurate data on every aspect of our economy. There will probably always be questions on how to best use the data, but our nation cannot afford to tolerate bad data or data tainted by politics. Perhaps we need a high level technically qualified group to validate the existing data and suggest improvement when they find they are misleading or perhaps erroneous.

A Request to Our Readers

If you see merit in some of the ideas and suggestions in this essay, please send a copy to your representative in Washington best suited to do something about the problems. Of course it would not hurt if President Bush had a pile of these in his mail also.

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© 2001-2003 Robert B. Gordon, Sc. D.
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Robert B. Gordon, Sc. D.
Sun City West, Arizona
September 3, 2001 / republished 5/30/2003
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