Criminalizing capitalism. (Insider Report).

"Health care giant Johnson & Johnson reported second-quarter net income jumped 11.6 percent on record revenues as sales of its prescription drugs, medical devices and diagnostic equipment posted double-digit increases," reported AP on July 16th. Coming amid an unsettling stock market slide prompted largely by dismal corporate earnings reports and concerns over accounting irregularities, this news was very welcome. Mara Goldstein, an analyst with CIBC World Markets, praised the "bullish tone" of J&J's conservative corporate leadership. "They have amazing cash flow [and] good balance sheet management," Goldstein said.

Three days later, shares in Johnson & Johnson plummeted 15.9 percent to a two-year-low, instigating an investor rout that dragged the market indices down to a new post-September 11th low. On July 16th, some analysts looked on Johnson & Johnson as a buoy helping to keep the market afloat; on the 19th, it was an anchor dragging the market down. How did such a dramatic turnaround happen in a mere 72 hours? The July 22nd Wall Street Journal described the key development: "Johnson & Johnson said one of its factories in Puerto Rico is the focus of a federal criminal probe.... [T]he disclosure adds to the list of drug companies having run-ins with regulators over factories."

The Food and Drug Administration's investigation of Johnson & Johnson apparently has nothing to do with the unfolding scandals over corporate accounting that enveloped such firms as Enron, Tyco, Global Crossings, and WorldCom. However, it reinforced a deadly perception. Those of a collectivist bent insist that the corporate world is utterly riven with fraud and completely untrustworthy, and must be brought to heel by the federal government. Investors, on the other hand, fear that collectivists within and outside the government will seize on any positive earnings reports as evidence of criminal conduct, and begin a criminal investigation. These perspectives share a perception that capitalism is being criminalized -- and that perception goes a long way toward explaining why investors are fleeing the markets.

"While the federal government is frustrating when it treats economic problems with nonchalance, it is terrifying when it gets involved," noted syndicated columnist Robert D. Novak on July 15th. "The government seldom makes the right response to economic crisis, and a horrible example came in the 1920s when the executive and legislative branches collaborated to help turn the stock market crash into the Great Depression. The question is whether [President George W.] Bush, so loath to exercise the veto, will stop a criminalization of business that is ravaging stock prices."

As the Senate passed measures imposing draconian penalties for corporate misconduct, one financial analyst cited by Novak warned: "What companies now face is potential criminal liability for accounting errors that will only be discoverable when new final rules are adopted." That such measures violate the Constitution's prohibition of ex post facto laws matters little to politicos eager to capitalize on class resentment as the Clinton-era speculative bubble -- fueled by politically useful, but egregiously irresponsible, Federal Reserve credit policies -- bursts.

All financial bubbles "are saturated with excesses in hype, speculation, debt, greed, fraud, gross errors in investment judgment, carelessness on the part of analysts and investors, huge paper profits, conviction that a new era economy has arrived and, above all else, pie-in-the-sky expectations," noted Representative Ron Paul (R-Texas) on the House floor in a July 9th speech. "When the bubble is inflating, there are no complaints. When it bursts, the blame game begins.... It quickly becomes a philosophic, partisan, class, generational, and even a racial issue" -- and the only ones who benefit are "the central planners in Washington" and their allied special interests.

Rather than initiating a Soviet-style campaign against honest creators of wealth, "Congress should be investigating the federal government's fraud and deception in accounting, especially in reporting future obligations such as Social Security, and how the monetary system destroys wealth," continued Rep. Paul. "Those problems are bigger than anything in the corporate world and are the responsibility of Congress. Besides, it's the standard set by the government and the monetary system it operates that are major contributing causes to all that's wrong on Wall Street today."

In the next issue, THE NEW AMERICAN will examine in detail the causes and consequences of the ongoing market collapse.