Man Without Qualities

Tuesday, July 15, 2003

Fear And Loathing In The Audit Season

The recent past has seen some claim that a principal drag on the United States economy is - and for the immediate future, will be - fear of accounting scandals. Paul Krugman expressed that concern. Recently departed Federal Reserve Bank of New York President William McDonough expressed this opinion, citing the damage done to investor and lender confidence by corporate scandals - and his views and appointment to be the first head of the new Public Company Accounting Oversight Board were fulsomely praised by Brad DeLong. Warren Buffett, John Bogle and Arthur Levitt also seem to have shared this concern.

In each case, the proffered remedy for the damage done to investor and lender confidence by corporate scandals has been stronger laws and penalties applicable to corporate chieftains! The Man Without Qualities has not been impressed.

And, now Alan Greenspan, chairman of the Federal Reserve, warned that "a pervasive sense of caution" following America's rash of corporate scandals had held back investment and employment.

Et, tu, Alan?

Well, no. Brother Alan is not saying that investment funds have been in short supply because of the damage done to investor and lender confidence by corporate scandals - the recent broad and sustained run-up in the stock market is enough to show that such damage has probably not been a drag on the economy. No, what Brother Greenspan is quite correctly concerned about is that all the baloney and excessive regulatory action attendant to the recent accounting scandals have caused corporate chieftains to become too cautious in making the kind of risky corporate investments that the economy needs, as Mr. Greenspan noted: "As yet there is little evidence that the more accommodative financial environment has materially improved the willingness of top executives to increase capital investment ... Corporate executives are seemingly unclear . . . about how an increase in risk-taking on their part would be viewed by shareholders and regulators."

Oddly, the Financial Times also reports: This concern was held by William McDonough, former president of the New York Fed, but until recently appeared a minority view within the Fed as a whole.

But Mr. McDonough's most public worries didn't concern management anxieties - they concerned investor anxiety. He - and the rest of the people named above - proposed measures that would increase management anxieties of exactly the type Mr. Greenspan now says he is concerned about. And the Fed Chief is right, as usual.

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