The Ultimate Lesson of the Ebbers Saga
Hey, lock up your telco assets! Hide your erbium-doped amplifiers and fiber optic lines! Hunker down on K Street behind the public law pinstripes and fine-print magnifiers.
After a mere 13 years of a 25-year sentence, they are letting Bernie Ebbers out of jail. It’s a scandal. Next thing you know they will release Sabrina Meng of Huawei. It can cause a new 5G crime wave in Telecom.
You recall Bernie, the six-foot-four bearded yokel in a cowboy hat, who built Worldcom in the 1990s from a line of penny-ante Mississippi motels into a telco with world-leading fiber optic assets and half of total internet service revenues.
As I wrote in Telecosm in 2000, “big government and mass media feed on fear of monsters.” They report the economy from the shores of Loch Ness. Peering into the shifting murk of markets, they see beneath every technological wave the spectral shape of some circling shark or serpent, from which only a new bureaucracy or litigious constabulary can save us.
A hundred years ago it was the “robber barons.” In the early 2000s, it was the “bandwidth barons.” When he took over MCI and then moved to merge with Sprint, Bernie became the monster of the day. Now many governments are mobilizing against possible monsters among the crypto-boomers.
The real monster, though, is always the 800-pound gorilla. That’s government. Where does it sit? Wherever it wants. In the early 2000s, it chose to sit on Bernie Ebbers for trying to keep his company alive during the telecom crash of 2000.
They called him a crook and a swindler and a monopolist for attacking government-approved monopoly telecoms. They dubbed him the fifth-worst CEO of all time. They compared him to Bernie Madoff.
But in fact, Ebbers was one of the best, and his rise and fall bear crucial lessons today. They even illuminate issues of the Cryptocosm and the flaws of bitcoin.
The King of a Pile of Debt
Bernie was mostly just at the wrong place at the wrong time. America was avidly searching for a scapegoat for the telecom crash of 2000. The government bureaucracies that caused the crash needed a private sector titan to blame. Bernie’s amazing entrepreneurial ascent rendered him radioactive.
A swashbuckling good old boy from Canada, he moved to Mississippi in the 1980s to buy a motel chain. There he discovered the rank perversity of telecom regulation and the rich upside in combining telco assets to exploit the huge bandwidth of fiber optics. Buying bandwidth in bulk and selling long distance minutes, he saw that the collapsing costs of fiber bandwidth offered a bonanza to anyone who could fill the pipes.
Juking and swiveling across the telecom scene through the 1990s, he ended up parlaying debt into the purchase of some 60 independent companies. The campaign climaxed with MCI and a checkmate bid for Sprint.
Seeing that “the internet is a gorilla that will take over the entire industry,” he transformed his failing reseller telco linked to nine shaky motels deep in rural Mississippi into the spearhead of the world’s most rapidly changing and cosmopolitan network. Can’t have that.
Defending the incumbent telecom establishment from this threat, the courts moved in and halted the parade by forcing Ebbers to sell off half his internet assets. Then they blocked his climactic merger with Sprint. The feds said Bernie was going to become a monopoly. The next thing you knew he was broke.
Worldcom stock crashed and Bernie was left high-and-dry, the king of a pile of debt. Surrounded by lawyers and accountants, he tried to fend off financial Armageddon. When it hit the fan anyway, the lawyers and accountants threw Bernie off the boat to feed the federal sharks.
But the trouble with the theory of Bernie as crook and scapegoat is that virtually all telcos crashed. There were a total of a thousand related companies that went down, and Bernie ran only one of them. The real story is a scandal of money.
The lesson today is that crashes are always caused by politicians and their central bankers, waging trade wars and monetary bezzles, not by the entrepreneurs who they yank around.
There are two ways to run a monetary system:
- You can fix the price of the money and allow supply to respond to real economic forces.
- Or you can fix the supply of money and cause its price to gyrate according to imagined economic forces.
The problem with targeting the money supply is that inflation often mimics deflation. Both of them cause a ballooning supply of base money, one chasing the rising prices of goods and services, one hoarding the rising values of money and financial assets.
The Ebbers era of the late 1990s was a uniquely fertile and innovative span in the history of economics. The bandwidth abundance of fiber optics and millimeter waves enabled a broadband internet.
Unleashed to exploit the new platform was a massive efflorescence of entrepreneurial creativity, from Worldcom and Global Crossing to Google and Amazon. The time-prices index collapsed across the board, as incomes surged and costs plummeted. Real productivity, measured in output per hour and minutes of work, soared. Deflation beneficently ruled.
However, Alan Greenspan at the Federal Reserve detected something sinister below the surface of Loch Lomond. He warned against “irrational exuberance” in the stock market and the threat of inflation.
Escaping the Grips of the Monetarist Error
Ignoring the plunge of commodity costs, he targeted the money supply rather than its price. Tightening credit in the teeth of the entrepreneurial boom, ultimately he engineered a drastic appreciation in the value of the dollar. It rose some 40% or more against nearly all commodities and 57% against gold.
The result was to squeeze all debtors who had to pay back their debts in drastically more valuable dollars. Among the world’s leading debtors at the time were the companies building out the global internet with fiber optics.
Worldcom was the most conspicuous of the victims, but all major debtors foundered in the grips of the monetarist error. The most spectacular result was the raging Asian financial crisis, in which Asia went down, one after another, after borrowing heavily in dollars to defend their currencies.
No one looks good in the midst of a crash bankrupting your entire industry. So Bernie went down and into prison as a scapegoat for the crash. It is long past time for him to be released. Now decrepit and afflicted with dementia, he is a tragic figure.
The lesson for the current developers of cryptocurrencies is clear. All too many of them are following the bitcoin model of targeting the supply of coins. This renders them speculative and volatile vessels for trading but deeply flawed as transactional currencies.
To be a real currency, cryptos must be measuring sticks, fixed by price, not by quantity. The root source of truth for all metrics is the fixity of time.
Money is time and time is not volatile. Time is not capped like Bitcoin is. Time remains scarce when all else grows abundant. It is equally distributed to all at a pace of 24 hours a day. The closest proxy humans have found is gold, and that is why gold has been history’s most successful index of monetary value.
When investing in cryptocurrencies, look for the ones that are fixed in price rather than the ones that are tied to quantities. That is the ultimate lesson of the Ebbers saga.
Editor, Gilder’s Daily Prophecy