[Congressional Record (Bound Edition), Volume 148 (2002), Part 11]
[Senate]
[Pages 14909-14910]
[From the U.S. Government Publishing Office, www.gpo.gov]




                        STOCK MARKET VOLATILITY

  Mr. BENNETT. Mr. President, I have been reading the popular press, as 
have most of us. As we watched the gyrations that occur in the stock 
market at the moment, I have been interested at the way people in the 
press have been portraying what has been happening.
  We have been told in the last few weeks that the market went down 
because President Bush's speech was not tough enough when he spoke to 
Wall Street. We have been told that the market went up because Chairman 
Greenspan's presentation to the Banking Committee was encouraging. We 
have been told that the market went down because the Banking 
Committee's bill on corporate governance was too tough and was 
frightening people. Then we were told that the market went up 
dramatically because the same bill was passed and people were 
reassured.
  The consequence of all of this is to demonstrate to me that the 
popular press does not have a clue as to why the market does what it 
does. They do not understand market forces, and they are looking for 
reasons with little or nothing to do with what happens in the market.
  I will make a few comments about the market and what it is we might 
really do in Congress if we want to have an impact on the market and 
the economy.
  In the short-term, there are two factors that we know about investors 
in the stock market. No. 1, they hate uncertainty. They hate a 
situation where they do not know what is going on. This is one of the 
reasons why they reacted to the recent scandals with respect to 
accounting: They did not have the certainty that they could depend on 
the numbers.
  Now, as they are beginning to sort through some of the information we 
have, they are beginning to feel a slight increase in certainty in 
their reaction to the numbers. That is showing up in some of the 
stabilization in the market. It has nothing to do with what kind of a 
speech the President gives or how eloquent we are in the Senate.
  No. 2, the market has a herd mentality in the short-term. If everyone 
is

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selling, we ought to sell. That is the reaction in many brokerage 
houses. There are those who say: We are contrarians; if everyone is 
selling, we are going to buy; we are out of the herd mentality. But 
they are in a herd mentality among the contrarians.
  So there is no careful analysis of what is going on but a flight from 
uncertainty and a herd mentality, both of which rule the market in the 
short-term.
  In the long term, however, which is what really matters, there are 
also two factors in the market we must pay attention to. No. 1, in the 
long term, the market is self-correcting. Errors of judgment that are 
made on one side of a trade are compensated for by intelligent 
decisions on the other side of the trade. One brokerage house or one 
fund manager who overreacts and makes a serious mistake is offset by 
another fund manager who serendipitously makes the right decision. Over 
time, the markets are self-corrected so that the frantic headlines we 
see in Time Magazine or on the front pages of the New York Times, the 
market this or the market that, on the basis of the President's speech 
or the Congress's actions, over time they have no relevance to reality 
whatever. The market over time is self-correcting, goes in the right 
direction, and rewards people who do the right thing and punishes 
people who do the wrong thing.
  Second, over time, the market depends on fundamentals. There are 
periods of time when we have froth. There are periods that I call 
``tulip time''--remembering the tulip mania of the Netherlands. Over 
time, these periods of froth are squeezed out, and the market makes its 
decision on fundamentals.
  I say to my friends in the popular press who are trying to sell air 
time or newspapers: Stop trying to frighten the American people one way 
or the other. Come back to an understanding that fundamentals in the 
economy are the things that really matter--not speeches by the 
President, not actions necessarily by the Congress.
  I think we had to act on the corporate governance area, but we didn't 
drive the market up or down by the action that we took. We added to the 
question of fundamentals.
  How well the Sarbanes-Oxley bill works will play itself out in the 
fundamentals. If it works in a solidly fundamental way, it will benefit 
the markets. If it turns out it has flaws, it will hurt the market. But 
the speeches we imagine as we pass the bill have little or no impact.
  One final comment. If we were serious about doing something to change 
the culture in corporate America, we ought to consider removing 
taxation on dividends. We have had a lot of conversation about options 
and managing earnings. If dividends become a reason why people buy 
stocks, as they once were, that would change the nature of corporate 
governance fairly fundamentally.
  If a CEO knew his stock price would go up if his dividend were 
increased and if his investors knew if they get an increase in 
dividends it would not be eaten up in taxes, there would be a change in 
the corporate boardrooms of this country that would be salutary.
  I don't have the time to go into this, but at some future time I will 
explore it. I raised this with Chairman Greenspan when he testified 
before the Banking Committee and asked him about the propriety of 
removing taxation from dividends. That was the beginning of a 
conversation that I want to have over time.
  As we go through the experience of the present economic difficulties 
and the gyrations of the market, it is time to reflect on fundamental 
things we can do that will change the nature of the corporate culture. 
Addressing stock options and expensing stock options is something we 
can talk about. Dealing with corporate compensation is something we can 
talk about.
  Back to my earlier point. Over time, the market responds to 
fundamentals, and, over time, we ought to look at some fundamental 
changes. That means we have to look at the tax laws. There is nothing 
that government does that affects corporate activity more than the Tax 
Code. That is where we ought to look for serious cultural changes.
  I yield the floor.

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