LOU DOBBS MONEYLINE, February 1, 2002: Interview with Paul Krugman

SYNOPSIS: Paul Krugman and Kitty Pilgrim discuss whether or not there are more Enrons out there

PILGRIM: All right, thanks very much, Tim O'Brien in Washington. Thanks, Tim. The Enron collapse caught many people by surprise, but it may not be unique and it may not be the last. "New York Times" columnist Paul Krugman says, there are more Enrons out there just waiting to happen, and Paul Krugman joins us now. Paul, thanks for joining us.


PILGRIM: And I have to say you do get my attention when you say that this aggressive accounting is fairly commonplace. Let's fill our viewers in on your theory of this.

KRUGMAN: Let me make a confession. Ever since I started writing for the Times, I have been getting letters, memoranda from people saying lots of these big companies out there are phony, you know. Microsoft is a ponzi scheme, Cisco, you know. Did I look into them? No, I didn't because none of them as far as I remember mentioned Enron, but it just wasn't plausible. Well now we know that a famous company, a darling of the media, can turn out to be basically a pyramid scheme, and I don't know if there's anything quite as bad as Enron out there. But there's a lot of evidence that people who follow these things have been pointing out that there is tremendous misstatement. A lot of the profits that we thought we had in the boom years of the late '90s were a losery.

PILGRIM: Yes. You know it's a tough issue because the markets have been very jittery because any little number in the market will get a sell off, even if it's a legitimate bad number because people just don't know what's behind the numbers. When you violate trust -

KRUGMAN: Yes. I mean we have had - it's turned out that over the last five years or so, it has become commonplace for companies to do things that take real expenses off the books, take real debt off the books. In fact, you had to do it if you were a company, because -

PILGRIM: Many are perfectly legal, right?

KRUGMAN: Well that's the trouble. It's not even clear that anybody will go to jail at Enron when all is said and done. It may have been legal. The trouble is that we created an environment in which stake numbers were a necessity to do business and some may turn out to be really explosive. It may turn out that - I particularly worry about what you might call the old new economy companies, the companies that people thought were highly profitable, but also we're supposed to have, you know, I can't single any out without risk of being in a lawsuit myself. But I think we should really watch for some time bombs there.

PILGRIM: Well now that you have everyone highly nervous about everything, do you think there's enough legislative initiative going on on Capitol Hill to actually correct this situation?

KRUGMAN: I think so far not much at all, and what we think we know now is that the best sanction is not so much the accounting laws as the threat of lawsuits from the private sector. And, it turns out that in 1995, legislation was passed that made those lawsuits much harder to bring.

PILGRIM: Do you think, and I've read the Private Securities Litigation Reform Act is what you're referring to.


PILGRIM: In 1995. Do you think if we haven't had that, we would have had Enron?

KRUGMAN: I think we would have had something like it but not as bad. I think the Bull market, the bubble, the euphoria over technology probably made this kind of fraud fairly easy to happen regardless. But the biggest effect of sanction was removed just at the wrong moment.

PILGRIM: All right, a pleasure to talk to you tonight.

KRUGMAN: Thank you.

PILGRIM: Paul Krugman of the "New York Times". Thanks.

KRUGMAN: Thanks.

PILGRIM: Still ahead, more signs the economy is coming out of recession, but there are some mixed signals tonight on the state of the job market. We'll have a report on that.

Originally broadcast, 2.1.02