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Drew Lanza 12/5/2012 | 3:09:44 AM
re: RHK: Rest in Pieces There are a couple of different things going on here, so let's try to sort them out.

First, there's the accuracy of all these forecasts everybody produced. brookseven is spot, dead on when he writes:

"We have a lot of analysts who are great at linear prediction of the future based on the past. The issue is that we are in our 5th year of massive disruption. This makes the work of analysts almost useless."

The second issue relates to who really saw the downturn coming. I'll tell you this. Anyone who 'predicted' it after early November of 2000 doesn't get any credit. That's when Nortel's bubble first burst and that's when most of us in the industry realized that the ride was ending. Go look it up.

I think the final point relates to egregious behavior, of which there was much. But I'll defend the RHK folks, including John Ryan, on this front. I do not doubt that they could be arrogant and wrong. Show me an analyst in any booming industry who isn't. My point was that, in the main, they were decent hard-working folks trying to provide a valuable service. My interactions with them were always friendly and cordial, although we disagreed frequently on the analysis.

Finally, it is very, very important to remember that the final chapter of the story was not an inevitability based on all that had come before. Had the government made a couple of smart moves, they could have minimized the disruption.

Certainly, the governments in Korea, Japan and some European countries got in tune with the technology wave and they have quantifiably benefitted from having a far better broadband infrastructure than we have here today. And, no, that doesn't mean I'm not a capitalist. We would not have universal penetration of telephones, water, electricity, or roads if the government had not forced it to be so.

As I look back on the past 20 years I can find fault with all of the players: the carriers, the manufacturers, the analysts, the bankers, and the government. But far and away the most incompetent and unethical in this group were our elected representatives who meddled in an almost random way with our industry and, to this day, have no clue and no vision about our communications future.

dwdm2 12/5/2012 | 3:09:44 AM
re: RHK: Rest in Pieces An interesting story on what credit/blames Greenspan gets on the bubble. Enjoy.


The stock market bubble and Mr Greenspan
By Nick Beams
18 September 2002

As the after-effects of the collapse of the stock market bubble flow through the US and global economies with warnings of a Japanese-style stagnation no longer uncommon, the role of Federal Reserve Board chairman Alan Greenspan has come under closer scrutiny.

Faced with the criticism that he should have been aware that a financial bubble was in processG«Ųat least from the time he made his famous statement about the G«£irrational exuberanceG«• in December 1996G«ŲGreenspan sought to justify his actions at this yearG«÷s annual financial symposium held in Jackson Hole, Wyoming, at the end of August.

The thrust of his argument was two fold: first, it was impossible to tell if a bubble was in formation and secondly, even if the Fed had known, there was nothing that could be done about it.

The existence of the bubble was clearly evident from figures available at the time. As Greenspan himself noted, between 1995 and 2000 the price-earnings ratio of the S&P 500 index rose from 15 to nearly 30. To attribute such an increase entirely to an increase in earnings G«£would require an upward revision to the growth of real earnings of 2 full percentage points in perpetuity.G«•

Seeking to deflect his critics, Greenspan told the symposium that, G«£the struggle to understand developments in the economy and financial markets since the mid-1990s has been particularly challenging for monetary policymakers.G«• They were G«£confronted with forces that none of us had personally experiencedG«• and aside from the recent experience of JapanG«Ųthe collapse of the share market bubble after 1989G«ŲG«£only history books and musty archives gave us clues to the appropriate stance for policy.G«•

He said that while the Fed had considered a number of issues related to asset bubbles, as G«£events evolved, we recognised that, despite our suspicions, it was very difficult to definitively identify a bubble until after the factG«Ų that is, when its bursting confirmed its existence.G«•

However, as a number of GreenspanG«÷s critics have pointed out, the minutes of the Federal Open Marketing Committee (FOMC) tell a different story. At the FOMC meeting of September 24, 1996 Greenspan recognised that G«£there is a stock market bubble problem at this point.G«•

In his Jackson Hole address, Greenspan insisted that even if a bubble had been identified it was far from obvious that it could have been pre-empted G«£short of the central bank inducing a substantial contraction in economic activityG«Ųthe very outcome we would be seeking to avoid.G«•

Moreover, from recent experience, he continued, it seems that there is no low-risk, no low-incremental monetary tightening that could reliably deflate a bubble, nor even a policy that could G«£at least limit the size of the bubble and, hence, its destructive fall out.G«•

In seeking to defend his role, Greenspan went further than he might have intended. His comments amount to an admission that those in charge of the G«£free marketG«• are powerless in the face of economic and financial processes that have wiped out the life savings and destroyed the retirement plans of millions of people.

Furthermore, the clear implication of his remarks is that if it is not possible to limit the financial bubble and its G«£destructiveG«• effects, then it is not possible to initiate policies to overcome the economic stagnation following its collapse. That is certainly the experience of Japan over the past decade where a program of zero interest rates and the greatest expansion of government spending in history has failed to restore consistent economic growth.

Continuing criticism

GreenspanG«÷s attempts to free himself from blame have not cut much ice with his critics.

Writing in the Financial Times of September 3, Stephen Cecchetti, a research associate at the National Bureau of Economic Research and director of research at the Federal Reserve Bank of New York between 1997 and 1999, asked why, given the damage they cause, did Greenspan and the Federal Reserve Board deny that trying to head off asset bubbles and their G«£disastrous consequencesG«• was in their department.

As Cecchetti pointed out, the overall cost of the bubble is G«£several percentG«• of US gross domestic product and G«£still counting.G«• G«£When faced with the potential for output losses of this size, central bankers usually work to try to minimise the damage. So why, when faced with strong evidence of a bubble, do they react so differently?G«•

An editorial published in the Financial Times of September 14, under the headline G«£Mr GreenspanG«÷s tarnished legacy,G«• noted that the FOMC transcriptsG«Ųthe latest available under a five-year publication delay ruleG«Ųshowed that far from not being aware of their existence, the Fed chairman was G«£happy to talk about bubbles and the means of pricking themG«•.

The editorial went on to point out that after his brief warning in December 1996, Greenspan waxed enthusiastic about the G«£new economyG«• until in 2000 he G«£regularly talked of a G«ˇonce in a century acceleration of innovationG«÷, a G«ˇpivotal period in American economic historyG«÷, where G«ˇI see nothing to suggest these opportunities [of high rate of return productivity enhancing investments] will peter out any time soon.G«÷G«•

Morgan Stanley chief economist Stephen Roach, in a recent comment entitled G«£The Great Failure of Central Banking,G«• also pointed out that it was not just policy accommodation that G«£nurtured the excesses of AmericaG«÷s asset bubble.G«•

G«£The rhetorical flourishes of Chairman Greenspan took perceptions of the New Era to an entirely different level. He became almost evangelical in his passion. In a January 2000 speech before the Economic Club of New York, he maintained that G«ˇthe American economy was experiencing a once-in-a-century acceleration of innovation, which propelled forward productivity, output, corporate profits, and stock prices at a pace not seen in generations, if ever.G«÷G«•

GreenspanG«÷s critics are able to expose his claims that he was unaware of the development of the financial bubble, and his role in fostering its growth, but they make no assessment of why it was that the Fed chairman, who had responsibility second to none for the functioning of the US economy, refused to act against the financial disaster in the making.

The reason is not to be found in GreenspanG«÷s lack of knowledge but in the deep-going structural changes taking place in the US economy at this time. These changes were the subject of an article in the magazine Foreign Policy published in 1996, just as the bubble was starting to inflate.

G«£SecuritisationG«Ųthe issuance of high-quality bonds and stocksG«Ųhas become the most powerful engine of wealth creation in todayG«÷s world economy,G«• it declared, noting that securities were worth more than the worldG«÷s output of goods and services and would soon be worth more than two yearsG«÷ output.

In the past, it pointed out, when wealth creation was bound up with manufacturing, exporting and direct investment it proceeded relatively slowly. But now it was possible through financial measures to create wealth quickly. This G«£new approachG«• meant that G«£a state had to find ways to increase the market value of its assetsG«•. Consequently G«£an economic policy that aims to achieve growth by wealth creation therefore does not attempt to increase the production of goods and services, except as a secondary objective.G«•

The origins of the bubble

While this characterisation did not provide an analysis of the origins of the bubble, it was an accurate depiction of its impact on policymaking.

The key to this analysis lies in an understanding of the contrast between the rapid growth in financial markets and the relatively slow growth of the real economy to which the Foreign Policy article pointed.

While the various G«£financial innovatorsG«• saw the creation of new forms of wealth as the outcome of their activities, it was, in fact, an expression of a deepening crisis within the capitalist economy.

Inasmuch as profit rates were starting to decline and overcapacity was developing in the key sections of industry, large masses of investment funds could not find profitable outlets in the expansion of industry and so turned to the financial markets. As long as money kept coming into these markets it was possible to rapidly expand wealth through the buying and selling of financial assets.

The creation of an ever-larger mass of fictitious capital, and the increasing importance for the functioning of the US economy, saw the growth of a new financial elite whose wealth and power was rooted in the financial bubble. Wielding considerable influence, it was more than prepared to mount a political struggle against any measures it regarded as inimical to its interests.

The growth of this stratum can be seen in the figures on the distribution of wealth flowing from the stock market boom. It is estimated that of the stock market gains between 1989 and 1997, around 86 percent went to the top 10 percent of households, while just over 42 percent went to the top 1 percent.

Detailing this process in his book Wealth and Democracy, Kevin Phillips writes: G«£The upthrust of the largest US fortunes principally reflected gargantuan increases in stock market valuations, especially technology holdings. Of the top thirty fortunes of autumn 1999, eight were new money, mostly first-generation, in the computer, software, cellular, and Internet sectors. Eight others fell into the related media and entertainment fields; many were second and third generation. Parenthetically, of the entire Forbes 400, 140G«Ųa full 35 percentG«Ųrepresented technology in some formG«• [p. 111].

According to Phillips, the 400 richest Americans increased their average net worth from $230 million in 1982 to $2.6 billion by 1999G«Ųa rise of 500 percent in constant dollars, while the entire top 1 percent, over 1 million families, gained around 75 percent in real terms over the same period.

Other figures show that the growth of inequality proceeded at such a rapid rate that in 1999 the top 2.7 million, or 1 percent, had as much after-tax income as the bottom 100 million. Between 1997 and 1999 their income had increased by 119.7 percent, from $234,700 to $515,000 while over the same period the income of the middle one-fifth of the population declined by 3.1 percent, from $32,400 to $31, 400. [See Wolman and Colamosca, The Great 401(k) Hoax p. 89]

It was this financial aristocracy, whose wealth had been boosted in such large part by the share price spiral, which insisted that nothing be done to deflate the bubble. As part of this financial elite, Greenspan did not take much convincing that it was far better to sing the praises of the G«£new economyG«• than take action to combat the mounting problems it was creating.

When he did move to marginally tighten interest rates in 1997, Greenspan was faced with a G«£torrent of political criticism for tampering with the democracy of the markets.G«• Under these conditions G«£the so-called independent central bank did an about-faceG«•. Any further tightening was shelved, and the bubble took on a life of its ownG«• [Roach, The Great Failure of Central Banking].

The whole experience has far-reaching political implications. It is a first-hand lesson in the political economy of social inequalityG«Ųa demonstration that there can never be any real democratic control of the economy without the establishment of genuine social equality. This means overturning the present economic order in which a tiny financial elite is able to increase its wealth at the expense of the livelihood and future of hundreds of millions of ordinary working people and establishing an economic system based on social ownership, control and democratic planning.

See Also:
Is the US economy heading into deflation? http://www.wsws.org/articles/2...
[29 August 2002]
Greenspan knew share market boom was a financial "bubble" http://www.wsws.org/articles/2...
[5 March 2002]

Scott Raynovich 12/5/2012 | 3:09:43 AM
re: RHK: Rest in Pieces Drew,

I kind of disagree with your "November, 2000" line in the sand.

People kept doing more and more stupid stuff right on through the end of 2002 -- possibly even into 2003 -- when I think the psyche of the industry may have bottomed.

Shouldn't folks get credit for how quickly they realized they were doing/saying stupid stuff?

Some people never admitted they did, wrote, or said one stupid thing during the mania. I admit to doing some or all of it. But at least I admit it.

And if you're looking for folks who were correct pre-crash, two (more general) analysts I have seen who consistently called the peak in all the bubble/mania including telecom is the hedge fund manager Bill Fleckenstein, who called the top of the Nasdaq stock market almost to the exact day, and stock-market advisor Michael Belkin.

Here is what Belkin wrote in March, 2000:

"The fraud component of the current speculative mania consists of this: Unprofitable companies are unsuitable investments for all but the most reckless of investors -- and fund management companies which lower their standards and pack their portfolios with shares of such money-losing companies are violating their fiduciary responsibilities to their shareholders.

"That's an easy line to cross when the entire financial industry is urging such behavior and the stock charts of such entities are soaring. But the end of that game is approaching and fund managers will ultimately be left holding such shares in a plunging, no-bid environment. And public sentiment (as it always does after a collapse) will blame the financial industry for improper investments in the unprofitable and unproven companies. Such is the glorious future of the Iridium Internet market."

Source: Fleckensteincapital,com (a for-pay site)

Impressive stuff, no?

For the record, Fleckenstein and Belkin are both predicting another macroeconomic setback when the bubble in government credit and housing burst.

I used to write a stock market column at the time (I was writing at Red Herring, of all places, during the mania), and I still think back on how right these guys were.

dljvjbsl 12/5/2012 | 3:09:41 AM
re: RHK: Rest in Pieces
When did Ross Healey said that though? It seems that everyone was still promoting the industry up till Q'1-2001 even though some did realize that the UUNET data were pretty skewed, back in August 2000 when the carriers- especially the Service Providers were lowering their purchases and some sales people knew that revenues would not be as forecasted.

Healey was saying it through the entire Nortel run up. This was certianly long before 2001 or even 2000. It is just that nobody would listen to him. He correctly saw that there was no value in the Nortel optical strategy.
jim_smith 12/5/2012 | 3:09:40 AM
re: RHK: Rest in Pieces I don't think anyone can predict when a bubble is going to burst (at least not the folks who post on this board :-). Because if they could, they would be really really rich by now.

There were many articles that called the bubble. I remember reading an article in 1999 to that effect in Barrons (or one of the other Wall Street mags). But none of those articles could have credibly predicted when the bubble was going to burst.

The same is true of the current housing bubble. Everyone (except for those who lack common sense) knows it's bound to deflate. The trillion dollar questions are when, by how much, and for how long?
Drew Lanza 12/5/2012 | 3:09:40 AM
re: RHK: Rest in Pieces Scott:

There were a lot of us here on the West Coast who saw Nortel's pronouncements in early November of 2000 as the bursting of the telecom bubble. I just went back through my emails and there's a fair amount of traffic to that effect in my email that month.

I can tell you that's when I felt that the boom was not suatinable and that's also when I made a career choice to move in a different direction. I know there were a lot of people out here who felt the same way that I did.

You're correct that the industry had a lot of momementum and it took the rocket ship a fair amount of time to fall back down to earth.

When they write the history, I think they will identify November of 2000 as the beginning of the end. There were many who forecast the unsustainability of the bubble before then. That was not hard to forecast.

But anyone who forecast the timing and the reasons behind the bursting (and some have been pointed out in these series of postings) were clearly prescient and correctly understood the dynamics that drive our industry.

larry333 12/5/2012 | 3:09:39 AM
re: RHK: Rest in Pieces Thanks Nietzsche. You are my favorite philosopher!

As I pointed out before, there's really no way that a competent analyst is going to come up with stuff such as $10 billion for the WDM components market. But the analysts I knew from RHK were quite impressive, so somebody there was changing the numbers to make them meet the "needs" of RHK's customers. As the guy from ADL pointed out, it really wasn't that hard to come up with forecasts that weren't orders of magnitude too high.

B-u-t (And its a big but) some of the posts here seem to get close to blaming the whole bubble thing on RHK or John Ryan personally. Of course, we all know that RHK was also behind the Kennedy assassination.

kww 12/5/2012 | 3:09:39 AM
re: RHK: Rest in Pieces I'm pretty sure that I earned my position through 17 years of engineering in telecom. CTO is the most frustrating position on earth, though. Too market oriented for engineering to respect you, and too engineering oriented for marketing to respect you.

dwdm2 12/5/2012 | 3:09:39 AM
re: RHK: Rest in Pieces "I don't get a lot of credit for that. ...
Owner, The Great Escape Hotel, Bonaire"

Congratulations on your new (and presumably happy) carrier.

I know lot of people got CxO positions by the stroke of luck during the pre-bubble era and eventually they caused and blew the bubble. Many, OTOH, who earned the position stayed in it, suffered with it, and trying to make a difference for better. It all depends on personal choice(?). Cheers.
kww 12/5/2012 | 3:09:39 AM
re: RHK: Rest in Pieces I seem to remember screaming it out loud at anyone that would listen throughout most of 1999 and 2000 that telecom couldn't hold that many players, and that all of the CLECs were doomed. My e-mail tends to agree with you, though. Sometime in late 2000, around November, I switched from being a vocal minority member to being a vocal majority member.

In retrospect, we all should have noticed that RHK's numbers for telecom spending would exceed the US GNP by 2007.

I think that Scott Raynovich hit it on the head with:

"People kept doing more and more stupid stuff right on through the end of 2002 -- possibly even into 2003 -- when I think the psyche of the industry may have bottomed.

Shouldn't folks get credit for how quickly they realized they were doing/saying stupid stuff? "

I don't get a lot of credit for that. 2003 is when I realized that there just wasn't room for another SONET chip company. It took me until early 2004 to realize that I needed to run like hell, and nearly a year to actually do it.

Kevin Wayne Williams
Former CTO, Mayan Networks
Owner, The Great Escape Hotel, Bonaire
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