[This Commentary originally appeared in the March 1, 1990 issue of The Mendon-Honeoye Falls-Lima Sentinel.]
Like its predecessor the Roaring Twenties, the decade past seemed filled with excess. The eighties saw gargantuan gluttonous wrought forth upon a foundation of financial speculation and naïve hopes. But, enough has already been said about the sins of the last ten years.
Indeed, we come not to praise the eighties, but to bury them. While the calendar says we entered the nineties two full months ago, the end of February really marked the end of a decade of conspicuous consumption. First, Drexel Burnham Lambert, Inc. filed for Chapter 11 protection. Next, Tokyo’s Nikkei index dropped about 11% in only six trading days. Sandwiched in between, Malcolm Forbes passed away. In an eerie coincidence, these events all occurred in the span of about a week.
Each symbolized the end of financial irresponsibility glorified by various periodicals and emulated by a generation of yuppie MBAs. In their collective wake, we have a hallow society on the verge of both financial and moral bankruptcy. Let us bury this Trinity one at a time.
Drexel Lambert Lambert (DBL), if we can personify a corporation, represented the top flyboy in the investment banking business. While it did not invent the concept of corporate debt or even leveraged buy-outs (LBOs), it squeezed every penny it could from, as we now call it, the junk bond market.
To fully appreciate the problems of massive LBO type financing, let’s quickly describe the process. It’s very similar to getting a mortgage on your house. If you want a mortgage for a certain amount, the bank requires you to earn a certain amount. The bank assumes if you continue to earn at least the same salary you can afford the mortgage.
LBOs go through an identical analysis, except instead of a person’s annual salary, they use a company’s annual earnings. Investment bankers predict the viability of an LBO on the borrowing company’s projected earnings. If real earnings, however, do not equal these projections, the company can go bankrupt.
Though it has some tax advantages, LBOs can be very risky. A mild recession might knock out a company. It’s not the kind of bet most people would want to make. It smacks of financial irresponsibility. That DBL got tangled up in the insider trading scandals of Ivan Boesky shows it also stinks of personal covetousness and selfishness.
Japan’s stock exchange has been the go-go exchange of the eighties. Of all the international exchanges, it faired the best following Black Monday. In fact, it is more than 50% higher today than it was the day before October 19, 1987. This would be the same as if the Dow Jones Index were about 3,700 today (it’s currently around 2,560).
Speculative expectations continue to drive the Japanese markets. Hidden inside these hopes we find again the concept of projected earnings. As before, if the Japanese company fails to meet these earnings, the typical person might view their stock price as overvalued and that stock price would then fall. A mild recession in Japan’s biggest market, America, could easily depress earnings in Japanese companies.
With this in mind, the reaction we see today in the Japanese markets should not surprise anyone. Untamed speculation often results in financial collapse.
Finally, we have the legacy of Malcolm Forbes. He, more than any other character of the 1980s, epitomizes the worst faults of capitalism. A self described “Capitalist Tool,” Mr. Forbes journeyed the world proclaiming the righteousness of free markets. In doing so, his arrogance (remember the $2 million birthday bash) confirmed the fears every decent person has of unbridled wealth.
Not that free markets should be constrained. In that sense Mr. Forbes was absolutely correct – free markets lead to free societies. Most of us agree that free societies are a good thing. It’s just that he had to be so obnoxious about it. If an international “I Told You So” Award actually existed, I’m sure Malcolm Forbes would lead the list of nominees.
To the point: It’s one thing being right – it’s quite another thing doing right. For all his money, Mr. Forbes sought to be seen as a swashbuckling adventurer, not as a concerned philanthropist. This siren of the eighties sounded “The one with the most toys at the end wins.” We can only wonder what that means to Malcolm Forbes now.
That’s the problem. If you believe we merely exist to accumulate trinkets, you’re missing a large part of living. Luxurious complacency often hinders creative endeavors. It idolizes the individual at the expense of the community. It elevates hedonism to grand and glorious levels.
Think about it. For all the similarities between the eighties and the twenties, they also possess plenty of differences. We can find no equivalent to the Jazz Age musicians in the last ten years. I sincerely doubt if rap music will ever reach the soul the way Charlie Parker does.
The eighties offered nothing approaching the literary class of the Lost Generation. Our bookshelves simply contain the kiss-and-tell stories of various Washington insiders and the insidious ramblings of self important yuppies. I don’t expect Jay McInerney to have the same meaning 60 years from now as Scott Fitzgerald does today.
Unfortunately, the eighties saw the brightest minds flock to business school, not to the Left Bank. They sought to expand their wallets at the expense of their minds. In the end, our society suffers.
So long, eighties. Maybe we can now get back to life.
[What is this and why is here? See Interested in Discovering My Time Machine? for more details.]