Lawrence Lindsey on Wall Street's Sins

You want...appropriate reform, says President Bush's economic adviser. You don't want to cause the markets to become dysfunctional

With share prices continuing to slide and accusations of accounting abuses still mounting, the Bush Administration is under the gun to do something to reassure panicky investors that Washington is on top of the problem. Lawrence Lindsey, the President's top economic adviser, argues that the Administration has already done a lot to restore integrity to the market. He warns, though, that overreaction on the part of regulators may only make things worse.

In a June 11 interview in his White House office, he also took issue with suggestions in BusinessWeek and elsewhere that the Administration had failed to provide leadership on the issue. Here are edited excerpts of his conversation with BW Senior Writer Rich Miller.

Q: Isn't the drop in the stock market a vote of no confidence by investors in the Administration's ability to come to grips with this problem?


I don't know why markets go up or down. The excesses being investigated [by the Securities & Exchange Commission] didn't happen yesterday. They happened while the market was going up in the '90s, and they were not investigated at the time. While we may have had a lack of skepticism [back then], perhaps your question implies that the reverse is true today.

The President laid out a 10-point plan on Mar. 7 [to tackle the abuses and fix the problems]. It does take time to make those changes, but they are being made.

Q: What are some of things the White House has been doing since the announcement of the 10-point plan?


We've been working with the SEC and others to implement what the President laid out. We worked very hard to get legislation through in the House. We're working with some in the Senate to get legislation there as well. We have been in communication with others [including the stock exchanges], urging them to take the ball and run with it. Your magazine said that the [President's] 10-point plan was nothing but that the [New York Stock Exchange's] proposals were strong. In fact, the NYSE copied the President's 10-point plan. They did essentially what the President called for.

I would argue that the 10-point plan and the enhanced SEC enforcement are exactly what the country needs to restore integrity in the markets.

Q: Are there any risks to the economy from the sliding stock market and crisis of confidence among investors?


There are two ways this could pose a danger to the economy. It does make [investors and corporate executives] much more risk-averse. Maybe one could say they were insufficiently risk-averse when the abuses were happening. Now, there may be excessive risk-aversion.

The second risk [to the economy] is an overreaction. In spite of what's happening, if you look at U.S. markets, as imperfect as they are, they are the most transparent markets in the world, they generate the most capital. They are something you do not want to destroy in the process of reform. You want to have appropriate reform. You don't want to cause the markets to become dysfunctional.

Q: How does what the SEC is doing fit in?


The enforcement actions are the best way of preventing abuses in the future. The cops, who maybe were asleep at the switch when a lot of the abuses were taking place, are now aggressively patrolling. They are out there taking the actions that are needed. And the stock exchanges are taking on increasing policing roles. And the market is making signals that they're not going to tolerate what they tolerated in the past. The boards of directors and managements are now on notice that this is a new day. I think the correcting mechanism is going on.

Q: Does the SEC have enough resources to do the job?


We added 100 new lawyers in the budget. We will consider any reasonable proposal for more resources.

Q: Despite all this, investors seem unconvinced. Doesn't the situation cry out, not just for action, but for rhetoric from the Administration to rebuild confidence and draw attention to what's being done?


I think there's some merit in that. [But] you're asking me a communications question. The substance is there, and the substance is more important.

Q: Do CEOs recognize the gravity of the situation?


Some people get it, and some people don't. We went through a period in which mere legality was considered the acceptable standard throughout society. What President Bush has said is that leadership demands more than that. It involves setting an example. And corporate leaders also need to be mindful that they are setting an example, and near-legality is not a sufficient standard. Some moral leadership here is appropriate. I think a lot of people out there are stepping up to the plate on this, on the business side. And there are some who are not.

Miller is a senior writer in BusinessWeek's Washington bureau

Edited by Beth Belton

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