The Millenium Bubble and Its Aftermath: Reforming Corporate America and Getting Back to Business

Abstract

Bubbles are recurring and inexplicable phenomena. Periodically, the seemingly irrational conduct of investors results in speculative mania evidenced by skyrocketing stock prices and exaggerated enthusiasm. Virtually all market participants become absorbed in this mania, encouraging investor bravado and thereby contributing to the growth of the bubble until it bursts. The burst of the bubble causes widespread losses and often reveals mismanagement, misfeasance and malfeasance that contributed to the bubble. The losses and scandals erode public confidence and contribute to a serious downturn in economic activity. The burst of the of the late 1990s and early 2000s and the ensuing collapse of corporate giants such as Enron have, as in past collapses, resulted in a crisis in investor confidence and an economic downturn of such magnitude as to threaten deflation. The response has been congressional hearings, investigations, prosecutions and sweeping new regulation - to express our condemnation of the conduct that created the crisis, to punish corporate wrongdoers and to impose structural, procedural and behavioral requirements to reduce the likelihood of the crisis's recurrence. This paper, which is an update of a speech I gave to the Commercial Club of Chicago in November 2002, discusses the evolution and collapse of the Millenium Bubble and the regulatory regime that has emerged as a result of the post-Enron crisis. It then highlights two essential themes for long-term reform of corporate America: First, post-Enron regulations will be effective only if accompanied by fundamental changes in corporate culture. To bring about true reform, those who are regulated must share the goals embodied in the rules that they are obligated to follow. Second, in our efforts to restore confidence in our markets, we must guard against overregulation and overzealous prosecution, as these may stifle the recovery of our economy.