Summer Of Mistrust

BEBETO MATTHEWS/AP
Traders anxiously check monitors on the floor of the New York Stock Exchange

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It has taken a while for the blow to sink in. a market crash doesn't always come in a day. It can sneak up, slow and surreal, and you can think you survived it only to find it has barely begun. Now each week brings a new shudder and crack first Enron and Arthur Anderson, then WorldCom, Adelphia, Xerox and the trials of Martha Stewart. Most Americans 72% in the TIME/CNN POLL fear that they see not a few isolated cases but a pattern of deception by a large number of companies. In one survey, more than half of corporate chief financial officers said they had been pressured by their bosses to cook the books, if not to a full boil then at least to a simmer.

If the revolt was slow in coming, that may be because most Americans hate to hate the rich. They'd rather envy them and hope to get there themselves. The '90s offered a whole new breed of heroes, not starchy heirs to fortune but barefoot geniuses who discovered new worlds in their garages, who wrote best sellers and sat grinning from magazine covers and defended the billions they made on the grounds that they were making us all rich in the process. You did not actually need to get richer to feel richer; even other people's paper profits had a magical effect: Times are good; the Dow is up; let's go to the Sizzler instead of McDonald's, the Seychelles instead of Sarasota. Cabbies turned day traders got crushed when the NASDAQ tanked, but careful investors who did their homework were the luckiest generation ever. Pay $9.95 a trade, buy and hold, and retire at 50.

People now know that this crisis was years in the making. Stocks kept climbing because executives kept finding creative new ways to hide the truth and fake a profit, to pretend they were investing money rather than just spending it. The revelations make for some dark magic now. When $2 billion disappears from Xerox's revenues, $4 billion from WorldCom's, it makes people feel poorer even if they personally lost nothing. The markets now look as if they could manage their third straight year of losses, for the first time since World War II, even though the economy grew at 6% in the first quarter. If people stop investing and capital becomes tight, then how exactly does a recovery happen? If they feel poor and stop spending, how does the economy grow?

"I've been a stockbroker for 15 years," says John Guyette of Greeley, Colo., "and I can't recall a feeling of outrage like there's been lately with these stories. And then you see the pictures of the homes these guys are building ..." It's a short road from disgust to despair: What do I do with my money now? Business schools are adding courses on Enron to their fall lineup; a new book, How Companies Lie, promises to help investors see through the smoke and break the mirrors of corporate accounting. People say they have stopped investing and play poker instead; it's a safer bet. The Wall Street Journal profiles the barber who has given up on cnbc and now takes longer walks with his wife because he knows he has to stay in shape he'll be working more years than he had thought. Fully one-third of Americans between 50 and 64 said they had decided to delay their retirement because their assets had shrunk in the market and that was back in February. "There's no doubt there are more now," says G.O.P. pollster Frank Luntz. "They saw their retirement in the near future, and they watched it move away from them."

Luntz warns politicians that these are people who almost always vote. "The Irritable Voter is the one I'm afraid of," he says. "Someone who had something and lost it." For Democrats, the political beauty of the corporate scandals is that they "play into what people already believe" about Republicans--"that these guys are in the tank with corporate special interests," says Steve Elmendorf, chief of staff to House minority leader Dick Gephardt. "I don't see any downside to this for us." But when the interests of voters clash with the interests of donors, the Democrats too put on the brakes, helping kill McCain's demand that companies list stock options as expenses on their books.

America's gilded ages have reliably ended in scandal, followed by soul-searching and reform. But investors are divided over what needs to be done. The gentle, self-policing era that SEC chairman Harvey Pitt proclaimed last October is dead and gone, but even some battered investors don't trust grandstanding lawmakers to distinguish between reforms that are needed and those that will cramp the recovery even more. That was the argument Dick Cheney and others made to the President that in the long run, Bush will suffer more if he gets a quick political boost from reforms that strangle the economy. While more Americans now see Big Business as a threat, polls show they think Big Government is more dangerous yet.

There are still plenty of cool-headed investors out there who have seen these bumps before and are confident the market will come back eventually. But that has a way of taking years, even without a crisis of ethical confidence. Stocks didn't return to their 1929 levels until 1940; they took 30 years, till 1996, to return to the peak reached in 1966. Many stocks still aren't cheap, third quarters are often painful, and the bears, at least, think there's more bad news to come.

Maybe it was just a coincidence that Attorney General John Ashcroft told us there could be thousands of al-Qaeda sleepers lying in wait among us. But then maybe it wasn't. If the war against terrorism drags on if there are more attacks will people find themselves feeling helpless once again in the face of an elusive enemy who hits and runs and can't be found? Or does the threat become a blessing, keeping people united against a common danger and forgiving of leaders who face challenges greater than figuring out how stock-option grants should be handled on balance sheets? "If they find Osama bin Laden's body," says a Republican close to the White House, "that'll push everyone back 10 to 15 feet." And if they don't, Bush can still argue that there are far more dangerous enemies out there than the sharks in our own seas.