Paul Revere or Chicken Little? Selling the Y2K Problem

NEW YORK —  Edward Yardeni sees it as a marketing problem: How do you sell an outlandish idea to people whose initial reactions range from boredom to irritation?

Yardeni, chief economist and managing director of Deutsche Morgan Grenfell, is the Paul Revere--some say Chicken Little--of the year 2000 computer problem.

The Yale-educated economist is perhaps the leading proponent of the notion that the glitch--known as the millennium bug or just Y2K--may wreak havoc on the global economy.

By Yardeni’s most recent estimate, there is a 70% chance that Y2K will cause a worldwide recession as bad as the one sparked by the 1973 OPEC oil embargo. That’s up from his prediction of a 30% chance last summer, shortly after he began looking into the issue.

Yardeni regards the expense of fixing the problem--$600 billion or more worldwide by some estimates--as a dead weight on the economy. He also fears a credit crunch when banks balk at lending to companies that seem vulnerable to Y2K woes.

While agreeing that Y2K is an expensive, labor- and time-consuming problem, most experts think it will be solved. Few share Yardeni’s fear that Y2K will pull under the global economy or snuff out a seven-year bull market.

PaineWebber’s chief strategist, Edward M. Kerschner, contends that not only is a recession unlikely, but that there may also be a Y2K dividend, when all the computer-upgrading activity “leads to greater information-processing capabilities and ultimately boosts productivity.”

Yardeni views the skepticism as simply a business problem.

“It’s OK to come up with far-out notions,” he said in a recent interview in his midtown Manhattan office, “but if you can’t convince anybody, then what have you accomplished? I have a marketing task here of not overselling what I know and getting too far ahead of what people are willing to accept.”

The first step toward acceptance is broader awareness, and that is certainly coming. Last week, for example, President Clinton made his first official speech on the millennium bug, calling it a challenge that is not “susceptible to a single government program or an easy fix.”

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A few days before Clinton’s speech, Merrill Lynch had weighed in with a special report on how Y2K will affect investors. Based on a survey by analysts on six continents, the 440-page report said that most corporations have been working on the problem for two years and that few expect any noticeable impact on earnings.

But the strongest consensus among the surveyed business executives was that government would not be ready in time.

In its most recent quarterly report on Y2K, the U.S. Office of Management and Budget said that of 7,336 computer systems identified as “mission critical” by federal agencies, 40% were Y2K-compliant as of May 15, up from 35% in February.

Eighteen of the 24 major agencies reviewed were rated as making either “adequate progress” or “adequate progress with concerns,” OMB said.

However, the remaining six, identified as either behind schedule or expected to miss the March 31, 1999, implementation deadline, include some biggies: the departments of Defense, Transportation, Energy, Education and Health and Human Services, and the Agency for International Development.

Like failing students, the laggard agencies have been placed on a remedial schedule of monthly progress meetings with John Koskinen, who chairs the President’s Year 2000 Conversion Council, the top oversight panel for Y2K.

The computer-intensive financial services industry is seen as vulnerable to Y2K, but regulators say banks generally are getting their houses in order.

Gov. Edward W. Kelley Jr. of the Federal Reserve Board, which oversees the nation’s banking system, said in an interview that the Fed’s most recent survey--in late June--indicates that more than 90% of U.S. depository institutions are “well on track toward compliance.”

Two weeks ago, the Fed began testing banks’ fund-transfer systems by simulating the switch over to Jan. 1, 2000, and examining whether the transactions were completed accurately. The testing will continue and intensify well into next year.

The Securities Industry Assn. began similar testing of stock brokerage transaction systems last week.

Although he does not expect automated teller machine networks to collapse, Kelley acknowledged that because of such fears, the Fed has developed contingency plans to cope with greater-than-usual cash demands as the millennium draws near.

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Although Yardeni has been critical of U.S. corporate and government response to the millennium bug, he expects the worst problems to originate overseas, where awareness is “dangerously low.”

Clinton, perhaps in acknowledgment, proposed that the United States contribute $12 million to the World Bank to help spread the word about Y2K through the developing world.

Yardeni’s aggressive position on Y2K is typical of his style. He likes to spot long-term, secular trends rather than try to predict the direction of stock prices over the next month or quarter.

One of his greatest calls came from the realization a decade ago that as the huge baby boom generation matured into middle age, its shift from consumption spending to investing would fuel an unprecedented stock market boom.

If you listened to Yardeni that time, you got in early on one of the century’s greatest bull markets.

On Wall Street, where experts run in herds, Yardeni has set himself apart on the Y2K issue, particularly since he expects stock prices to fall as they do in every recession.

“My clients are institutional investors and they like bulls,” he said. “Bears they can do without.”

Yardeni says the Y2K glitch is exacerbated in an odd way by America’s can-do spirit. People are so confident in our problem-solving ability that they assume any obstacles will be quickly overcome.

Another problem is getting high-level executives to focus on an issue that mainly interests computer nerds.

“No CEO would ever say, ‘I know nothing about money,’ but they will say that without embarrassment about information technology,” Yardeni said.

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The economist is spending much of his time lately testifying before congressional panels, posting alerts on his Internet site and otherwise trying to rally more attention to the problem.

“I’m not looking to panic people,” Yardeni said. “I’m looking to alarm them. Alarm is a constructive emotion.”