Nobody can beat the Taiwanese when it comes to the craziness of stock market investing. Not even the Wall Street bubble that preceded the Great Depression of the 1930s can be put in the same league as the Taiwan's Stock Exchange's great rise and fall of almost exactly 10 years ago, when the TAIEX went from 1,000 points to 12,000 and back to half that in what must have seemed like the blink of an eye.
So when The Economist and Fortune both came out with issues last week that took a hard look at the state of the US economy, in particular the way its capital markets are being increasingly moved by retail investors, one can pretty much imagine how their concerns were shrugged off by the person on the street here in Taiwan. In fact, you can almost imagine a conversation down at one of the local brokerages. "What do you mean the Fed is worried that so many Americans are now playing the stock market for themselves? We've been doing it for most of the past decade, and it's never hurt us. That Greenspan guy needs to chill."
On the face of it, they may be right. Taiwan still has the scars to show for its 1986-1989 period of "irrational exuberance" as Alan Greenspan, the Fed's chairman, might have called it (a messy banking system is just one of them). But it was hardly a national catastrophe. High school girls who had turned to part-time prostitution to scrape together enough cash to play the market simply went back to their books. Government employees -- indeed, most employees -- started actually working again in the mornings. And the people who lost fortunes literally overnight didn't go and throw themselves off buildings en masse; many just switched fortune-tellers.
But US officials should probably spare a moment to consider Taiwan's anecdotal evidence from that insane period of its history. Because although US citizens may not be behaving in quite as nutty a manner in their stock-market dabblings as the Taiwanese did a decade ago, they are exhibiting some remarkably similar characteristics.
Of course, Greenspan is not about to echo the words of Taiwan's Central Bank Governor of the time, Chang Chi-cheng, to the effect that the stock market was "an ungovernable, man-eating casino." But he might want to consider the parallels with what Chang had been observing then. Such as people demanding that belief in the universal laws of economics be suspended. Or alarming newspaper reports of a declining interest among high school graduates for studying subjects unrelated to "investment." Or the proliferation of advertising from "low-commission stock brokers" showing "day traders" getting the kind of high out of their day that only a rising stock price could provide.
The message will certainly be clear enough. Taiwan's market blew itself into a bubble with the breath of retail investors: nice enough folks, but people who knew very little about what they were doing. People who felt as if they had money to burn, and who proceeded to burn it.
Don't get me wrong. I'm not against the empowerment of the individual in as many matters pertaining to their well-being as possible. But there are some areas of life that are better left to the experts. Medical surgery is one, lighting cigars is another. And if I am to go right out on a limb, I would have to say that stock-market investment is definitely in this category.
For anyone who wants to challenge this notion, you should first take a trip down to the south of the island. Talk to people sitting on street corners about what impact the Great Crash of Feb. 1990 had on their lives. You might feel differently.
It's not that they're starving. It's more that many of them had their dreams shattered. Dreams of sending their kids to a decent college; of owning their own house and passing it on to the next generation; of living a comfortable life in retirement, instead of having to sit there on that street corner. They were all set for it, many will say, until they lost their heads for a few months and threw it all away on -- what was the name of that stock again?
Don't forget, these were people living on an island with world record-high savings levels, almost the complete opposite of the US at present, which is carrying its first negative private-sector balance sheet of all time -- meaning Americans are spending more than they are earning, on aggregate.
Also, the underlying Taiwanese economy was still based on fundamentals that had far less to do with stock market valuations than it did with products that could be manufactured and sold in other markets. US consumers kept the Taiwanese export machine going, in other words. Who will do the same for the US? Europe and Japan. Possibly, but it's still more of a hope than a plan.
At the end of the day, probably the most that Greenspan and his compatriot at the US Treasury, Larry Summers, could learn from the Taiwan experience is what Taiwan's financial authorities learned from it. Which was that the influence of retail investors in Taiwan's stock market needed to be reduced. The finance ministry and central bank have not produced any stellar results in this regard over the past 10 years, admittedly, but that has less to do with an understanding of the problem and more to do with politics. It must also be said that they have clearly been trying to get Mom 'n Pop out of the market by promoting the establishment of mutual fund companies. And the very fact that foreigners are becoming a rising force in the market is testament to the authorities' desire to professionalize trading activities.
Sometimes, however, it's easy to get disheartened, too, so no one should expect US officials to take the Taiwanese experience too seriously. Not only have most of Taiwan's mutual fund companies recently followed the US lead in offering investors the comfort and convenience of trading over the Internet -- sans so much as a cautionary word from a real, live stockbroker -- but some are giving their services away for free. Just goes to show, when it comes to retail investment, the Taiwanese can always go one step further. Even if it is down the path of madness.
Writer's note: Anyone interested in an account of the rise and fall of Taiwan's stock market in the late 1980s should read Steven Champion's book, The Great Taiwan Bubble.
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