To: Paul Krugman, N.Y. Times columnist
From: Jude Wanniski
Re: The Wall Street "Bubble"
As promised, I continue to read every word you write for the N.Y.
Times, helping you learn the ropes as the new twice-a-week economics
columnist, fresh from M.I.T. It is not always easy, Dr. Krugman. In
Sunday's Times, I'm sorry
to say, I was disappointed to find you joining the ranks of the Wall
Street "bubble" theorists. Here you were hawking "Robert Shiller's
terrific new book, 'Irrational Exuberance,'" which "makes a powerful
case that the soaring stock market of recent years is a huge, accidental
Ponzi scheme in progress, one that will come to a very bad end."
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Now I know a lot of silly people are writing a lot of silly books
about the stock market these days, so I'm not surprised that this
Shiller fellow has joined the parade. But Professor, you have a Ph.D. in
economics! You have written a textbook which the youth of the nation are
being asked to read in Econ. 101, whether they like it or not!! You have
also described yourself as one of the most important big thinkers to
come along in years!!! And you have been hand picked to write this
extremely important column for the greatest newspaper on earth!!!! How
can you have it as a premise that the market does not work? That we are
witnessing a giant Ponzi scheme?
You do a good job of describing a Ponzi scheme, I will admit. First,
some wise guy comes up with a plausible-sounding but complicated profit
opportunity, one that is difficult to evaluate. "From that point on it's
all a matter of timing and publicity. An initial group of investors must
be pulled in, large enough to attract attention but not too large; then
a larger second group, whose investments can be used to pay off the
first, a still larger group, and so on. If all goes well, stories about
how much early investors have made will spread, attracting even more
people, and the continuing success of the company will silence or drown
out the skeptics."
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Yes, there can be Ponzi schemes involving a few players, con men who
can fool little old ladies and even greater fools. For an accredited
economist of your rank and prestige to even suggest that the Internet
stocks constitute such a scheme makes me wonder if you flunked a
standard course in price theory, but they decided to give you a
doctorate anyway. I know the schools still teach that even markets that
are as broad and deep as Wall Street's can get overheated by speculative
fervor -- a thesis I also reject. But I cannot imagine anyone charging
tuition for teaching that the rise in the value of a specific industrial
sector can be anything but a pure market signal for more capital.
It's like a baby, professor. When it is in its most rapid stages of
growth, it is crying for more milk, and there is nothing irrational
about mommy feeding the kid as long as it is taking the nourishment.
There are teen-age kids who can devour pizzas for breakfast, lunch and
dinner without putting on weight. Somehow, the body's need for calories
is showing up in hunger pangs. When the growing stage ends, so does the
picnic, or the body will expand at the waist. When you were growing up
as a fledgling economist, you would observe the equity market rising and
falling in gentle aggregate swings, but within the aggregations, some
sectors would be rising and others would be falling. That's known as
"business cycles." When chemicals were up, paper could be down, and vice
versa. As they rose, individual enterprises would attract capital in
order to add to capacity. As they fell, capital would stay away and new
capacity would not be built. The supply and demand for paper and the
supply and demand for chemicals would adjust accordingly, some
enterprises inevitably getting hurt on the roundabouts -- either for
having become irrationally exuberant at an earlier point in the cycle,
or for being overly pessimistic just before the upturn. This is how
market capitalism works.
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It doesn't work any differently just because an entirely new industry
comes along. A baby does not return the investment of milk within the
calendar year. Investments are even made in the child right through
graduate school, with no ROI until the kid gets a real job. Even then
the returns will be slim until the graduate learns the ropes and takes
on added responsibilities with much higher wages and stock options. So
it is with
Yahoo and Amazon and the other dot.coms. They are devouring capital at a
phenomenal rate, at least those who have made it into short pants, with
plenty of dot.coms you never heard about not making it out of diapers.
Your colleague at the Times, Thomas L. Friedman, two years ago made fun
of Amazon.com, writing about a man who was selling cheap books over the
Internet out of his garage, as if another several thousand book sellers
would soon join him and puncture Amazon's bubble. Please note Friedman
last month wrote an apologetic column about how his man had gone
bankrupt. The thought occurred to me that Friedman, who specializes in
foreign affairs and does a good job at that, may have consulted you back
when he made fun
of Amazon. No?
If you really want me to help you learn the ropes, professor, please
read my book, The Way the World
Works, especially Chapter VII, which explains the reasons for the Wall Street
Crash of 1929. There was no "bubble," no "Ponzi scheme." Herbert Hoover
did it, with the help of the Republican Congress, Big Business and Big
Labor. You should write a column about it as I made my discovery in 1977
and it has not yet been mentioned in your newspaper, the most important
newspaper in the world.