It was bound to happen sooner or later, of course; the parade of steadily shriller and shriller denunciations of "corporate malfeasance" in the press have clearly all been heading in this direction. But who'd have expected a distinguished economist like Paul Krugman, of all people, to break the taboo by being the first (that I've seen, at least) actually to blame a company's executives directly for the terrible crime of permitting its stock price to rise too high, and then fall too far?

The company in question is Cisco. Says Krugman, "its market capitalization has fallen by more than $400 billion. Nobody from Cisco management — ranked No. 13 in Fortune's 'greedy bunch' — has been arrested." And to think that right here, in America, a stock's price can plummet, and the government just lets it happen!

Not that its current, reduced price is the problem, of course; at its height, admits Krugman, "[s]ome analysts flatly called Cisco a pyramid scheme." In fact, that's Krugman's real complaint: there was an "illusion of profitability" that "sustained the stock price", an illusion that the company conjured up by "using its own overvalued stock as currency — paying its employees with stock options, acquiring other companies by issuing more stock. Thanks to loopholes in the accounting rules — loopholes defended with intense lobbying — these transactions allowed executives to progressively dilute the stake of their original shareholders, without ever declaring this dilution as a business cost."

Now to some people, issuing more stock when it's grossly overvalued and using it to lure employees and buy other companies might seem like an astute way to try to preserve shareholders' long-term value in the midst of a bubble. What were Cisco executives supposed to do, after all, while investors were bidding up its stock price to ridiculous levels--use corporate funds to buy back its own shares at the inflated price? No, if customers are willing to overpay for your product, then you're betraying your shareholders by charging any less than the market will bear. And likewise, if there's a huge market demand for your stock at an excessive price, then creating more of it and selling it to new investors is the only way to fulfill your duty to your current shareholders (and to the new ones, for that matter, once their stupidity in coming aboard is behind them).

Of course, the bubble that carried Cisco stock to such absurd heights also enriched its executives (and other employees), through their stock options. And that really cheeses Krugman off: "the Cisco story...demonstrates just how much self-enrichment corporate insiders can get away with while staying within the letter of the law." What self-enrichment? Cisco's CEO, John Chambers, "was among the world's best-paid executives, receiving $157 million in 2000." Got that? In 2000. When the stock price was high, Chambers' fellow shareholders were all making a fortune along with him, and none of them was uttering a peep of complaint about Chambers' windfall. In fact, either Chambers kept most of his holdings and options too long--in which case he also lost a colossal bundle in the ensuing stock slide--or he liquidated most of his holdings and exercised most of his options at their peak value, in which case anyone who didn't follow his example (which would have been publicized, by law, as an insider transaction) was a fool.

And that's the real point. Nowhere--nowhere--in his column does Krugman so much as hint that Cisco executives falsified or concealed any information from anyone. Rather the felony of which they stand accused is that of failing to stop their stock from skyrocketing, attempting to maximize the company's long-term gain from its own high stock price, and then watching helplessly as that price fell back to earth. To Krugman (and to most of his fellow fulminators about "corporate malfeasance"), the entire stock bubble itself was clearly the fault of "unscrupulous" corporate CEOs, crooked accountants, lax regulators--anybody but the idiot investors who cluelessly poured their money into horribly overpriced stocks during the bubble years. Investors, that is, like a great many of Paul Krugman's (and his fellow fire-and-brimstone journalists') naive, confused, irate, savings-depleted readers, now searching for a scapegoat--and being shamelessly pandered to by a once-respected economist.