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'So many went into this rush for greed'

A member of the Brady Commission that looked at the Wall Street crash of 1987, noted economist, author and Columbia Professor Amar Bhide says he and his colleagues confronted an 'implausible explanation' for what happened: "Yet with all the resources in the world, and access to every piece of data one could imagine, are you sure that everyone got, even in retrospect, what happened? Probably not."

So while people scratch their heads and try to figure out what's caused the stock market to fall quicker than a thermometer in a blizzard, Bhide spoke to rediff.com and gave his insight into what's pushed a once white-hot economy into a jarring, bearish retreat.

Everyone is talking about how bad the market is performing nowadays, but instead of calling it a recession, they're calling it an 'economic downturn'. Do you feel we are in a recession now?

A recession is typically a symbolic thing. People recognize that a recession took place after the fact -- usually when one dates recessions, the date is usually fixed at a time during which, if you looked at the newspapers, people were not talking about 'a recession is upon us'. And conversely, recessions end when people are still asking when it will end. It's like asking, what is a bear market?

We've had the longest run in expansion, practically ever, and one day it's going to stop. Whether it's now, six months from now, two years from now, is not in itself a big question. I think the more interesting question is what shape and form it takes, rather than when it occurs.

I remember listening to a lecture you gave at the last TiE (The Indus Entrepreneurs) convention, and you mentioned the 'mania' in Internet investing, that if it didn't last too long, we wouldn't go over the edge. But now, have we gone over the edge?

I hope not! You have to make all kinds of distinctions. For instance, the last ten years in Japan have been called 'The Lost Decade'. If you actually look at the pattern of GDP [growth] over there, you'll notice that there has been an absence of growth, rather than any significant contraction. It's not clear to me if that is a better situation than having a year or so of sharp contraction followed by a rebound. If there is going to be a recession, let it be sharp, let it take out the excesses, then let it get back into a growth pattern. Otherwise, it won't be sharp, and instead it will linger.

What do you feel brought this downturn on?

Eventually, all economies run out of steam. But looking at the situation, you can see three separate things going on.

First, there is the economy at large, which has always had a certain cyclical tendency.

Secondly, there has been a concentrated investment boom in IT-related fields, not just in the US but worldwide, and specifically in English-speaking countries. Investments were at a pace that one would not see in a normal economic expansion, and therefore their contraction is sharper than the contraction of the economy as a whole.

Third, there was a ridiculous expansion of asset prices in IT companies, which struck me as having the greatest potential for the severest contraction, and we're seeing it now. It would not surprise me that it went further. If you recall from TiE, I mentioned the analysis I had done of a B2B company called Ventro, which at the time went from $215 to $35. Today it trades for a buck.

So that's the scale of contraction one should expect in things that have gone out of whack, but that's not the scale of contraction you should expect in the economy as a whole, or even in the real aspects of the IT economy versus its financial aspects.

Then why are so many tech companies not meeting earnings? Many are falling flat on their face, once after another. Is this a domino effect?

There was, I think, unsustainable levels of spending across the board in IT. Some of it started with the Y2K issue, some of it was over-investment in the telecom infrastructure; essentially when people scale that back, it has to affect the vendors of this equipment and the software that people were spending money on. It's hardly a surprise.

How is that then connected to the failure of the Internet economy, which you've called an 'unsustainable phenomenon'. A lot of these tech companies, like Intel or Microsoft, produce real products, they have real growth and revenues. They're not dotcom companies with nothing to show.

Well, I'm not at all predicting the failure of Amazon, but it is in trouble. Last year, it was a very big deal for Hewlett-Packard when they announced that they were going to get 90 per cent of Amazon's server business. Guess what's going to happen when Amazon cuts back on its utilization of servers? You cannot easily separate the companies that 'produce' and those that 'use'... if the miners stop mining, you can't sell them pickaxes.

What about investors? You critiqued the haphazard investing of day traders. Do you think they had a hand in the economy's slowdown as well?

Of course. They're the ones who inflated companies in the first place. If you look at a company like Priceline.com, for example. Look at its CEO; for a while he was a billionaire, now he's nearly a centimillionaire. Who put $100 million in his pocket for a company that today is clearly not worth in sum $100 million? The day traders. And, to some degree, the people who invested in the Janus Fund.

I don't feel sorry for them in the least. I can't believe that this enormous contraction hasn't entirely wiped out people's fortunes yet. So many went into this rush for greed... I'm just astonished that we haven't yet heard about people jumping out of buildings!

There was the shift we saw for a while, when people stopped looking at fundamentals and invested more for the future, believing that the technology and the Internet was the future, and if it wasn't making money now, it would later.

I don't think it wasn't even that. It was simply the belief that your X today could sell for Y tomorrow, regardless if the company made money or not. There's a pretence on the part of analysts who were hyping these stocks, but I'm sure that the people who were day-trading these stocks ever had in mind that they were going to hang on to them; they just wanted to make their money. It was very much the case of the greater fool.

You mention in terms of your book, The Origin and Evolution of New Businesses, that you hadn't brought up the Internet economy, and that you were a sceptic of it long before others were. Do you feel vindicated now?

Well, yes, I got a fair deal of flak about the book not being appropriate to the 'New Economy' and my response was that any empirical analysis is based on past events. No serious person can rule out that the future won't be different from the past, but at least it gives you a benchmark, and it tells you that the future has to be incredibly different for this to make sense. Also, I told people that when one writes about business and management, one's claims are not refutable. Things that you can't prove wrong are not that useful. So in a sense, I was given an actual experiment, which would either demonstrate the claims that I was making were obsolete, or that the economy was robust and nothing bad was going to happen. So in that sense, of course I'm pleased it turned out my way! (Laughs)

You have quoted Machiavelli as saying that success depends on conformity to the times. Looking at the market today, what do you feel are the right things to achieve success?

I think we're going to go back to the traditional status of entrepreneurship, and people who aren't entrepreneurs will work for other people, people who ought to be entrepreneurs will start their own businesses...

The other point to remember is that a recession is not necessarily a bad climate for entrepreneurship. A lot of major changes, the growth of mass advertising, communications took place during The Great Depression. The most significant developments in the Western computer industry took place during the worst recession after the Second World War -- the whole PC revolution started in the years widely regarded from a macroeconomic point of view as disastrous. So even if we have a general recession that doesn't stop us from accomplishing things that are innovative and significant.

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