Join Jason Hartman as he interviews author and financial journalist Roger Lowenstein regarding the history of Wall Street’s demise. Roger talks about the increases in choice, risk, hedging, more volatility, and how free markets are open to speculation, greed, fear and manipulation. There are more markets today susceptible to booms and busts. In the old days, local bankers determined loan eligibility. Today, bankers internationally, who don’t know anything about their clientele, determine eligibility, often to the detriment of the borrowers. For more details, listen at: www.JasonHartman.com. Roger and Jason debate whether Wall Street needs more regulation or deregulation, and discuss the consequences of government interference. They also talk about many of the Wall Street mistakes and the corporations that were rescued by the bailouts and the unprecedented number of failed mortgages. They end their discussion with observations of the Occupy Wall Street movement.
Roger Lowenstein graduated from Cornell University and was a reporter for the Wall Street Journal for more than a decade, including two years writing it’s “Heard on the Street” column. He has published five books, including The End of Wall Street, When Genius Fails, and Buffet: The Making of an American Capitalist. He is also the director of Sequoia Fund. Roger is the son of Helen and Louis Lowenstein. His father was an attorney and Columbia University law professor who wrote books and articles critical of the American financial industry. Roger himself has also written numerous financial articles.
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Start of Interview with Roger Lowenstein
Jason Hartman: It’s my pleasure to welcome Roger Lowenstein to the show. He is the author of The End of Wall St: When Genius Failed. And I think you’ll find this interview to be very interesting. Roger, how are you?
Roger Lowenstein: I’m very good Jason. It’s a pleasure to be with you.
Jason Hartman: Well, likewise. Let’s talk about the end of Wall St and you’re the author of five books I believe, but tell us about this one in particular. It seems to me that for the last thirty years or so the financial services industry has had such a great run, and maybe that leads us to a bit of a bubble. There are so many scandals and problems. Tell us more.
Roger Lowenstein: Well I think we’ve certainly had a bubble. We’ve had a huge bubble obviously in mortgages, and in the stock market . In the business of banks, we’ve seen, just a bunch of related bubbles and scandals from Bernie Madoff to how the banks packaged mortgages and sold them to investors and so on, and how the credit rating agency is operated.
But The End of Wall St, which is the title of the book, was meant to suggest that speculation and the notion that free markets and Wall St could do no wrong and needed no regulation, that all these things really reached that peak in the last cycle. And peaking in ’07 or so, and the world that we’re merging into is really going to be different than that year. We’re going to have more regulation, less profitable banks , more of a government hand, higher unemployment, more volatile and less exuberant stock market, people more afraid to invest in the stock market, or afraid to do anything with their money.
I think you’re seeing most of that play out. We’ve read just recently how bank profits haven’t come back, real estate markets haven’t come back… whatever the new normal is, it sure feels different to me than the pre 2007.
Jason Hartman: Well, I would certainly agree with that. Now, when we talk about the end of Wall St Walter, I guess that needs to be parsed up into what we consider to be Wall St. Of course there are the companies there, the people who own shares in those companies and bonds for those companies. But also there’s the financial services industry that seemed to change a lot. Of course my life hasn’t really been long enough to know, but I kind of look at the 80s as a fundamental change. When people used to invest for income, they used to be dividend investors and it seems like a whole new breed took over in the 80s where it became largely a capital gains and speculation market, and a market more about hot stories than good old fashioned blue chip stocks that paid dividends.
Roger Lowenstein: You know, you have to remember that there was a fair amount of speculation in the 20s, and there was also a fair amount of speculation in the 1960s, the go-go years, where people were buying electronic stocks. They were the precursor of internet stocks.
Jason Hartman: But back then… I do realize that, especially in the 20s. I don’t know as much about the 60s. But were those companies back in those days more, even if they were speculative, were they companies that planned to pay dividends or did pay dividends, and the investors were still looking for income even if it was kind of a hot story or a hot new thing?
Roger Lowenstein: Not a lot of them. There were some real growth stories. Growth stocks, that term really came into its own in the 60s. But let me pick up on your question in a different way because I do think the financial climate has changed and become more speculative and more short term, and I think there’s a proliferation now of financial assets trading that we didn’t have before. Not just, by the way, in securities, but the choices when you get a mortgage, do you want a fix, do you want an adjustable? Do you want a ten year, a thirty year, what do you do with your savings, do you put it in a money market, do you take more risk?
If we go back to the 1970s, the early 70s, then you really had one choice, which was put it in the bank or stick it under the mattress. And I think what has happened since about the early to mid-70s, is we’ve had consistent deregulation, so we’ve had more markets opening up, more financial instruments, more opportunities, sure for hedging and efficiencies and all of that but more viability, more risk, more markets that are susceptible to booms and busts. If you think about the oil market for a second, the price used to be controlled by Texas oil men basically, and then it was controlled by Saudi Sheiks. And they wouldn’t always get the price perfectly right, but now of course the price is controlled by markets.
And you’ll see the price a barrel could run up to 140 dollars a barrel and then a year later it’s back down to 40, and then it’s up to 90. Because open markets as good as they are, they are susceptible to speculation, greed, fear, all this and one other very important example is the mortgage market. It used to be you had the local banker that decided whether you qualified for a mortgage, usually and hopefully by asking some intelligent questions about your income and your family situation and so on, and maybe even knew you if it was your town banker. So he half-way knew those answers before you walked in.
Now, the people who determine whether you should get a mortgage are investors around the world who have never met you, have never heard of you and never will. It’s just how much demand do they have for a higher yielding assets, that determines whether you get a mortgage regardless of whether you Jason can afford that particular mortgage. And I think that dynamic of shifting more and more economic relationships into an unregulated market setting has given us a very different economic environment than what we grew up in.
Jason Hartman: Yeah, it’s sure not the old days of Jimmy Stuart in It’s a Wonderful Life at the Thrift and Loan, where he knew all his borrowers and all his depositors, is it?
Roger Lowenstein: Absolutely. Where the banker was the most respected man in town, and now unfortunately, deservedly or otherwise, bankers are as much in repute as our journalists. Never thought I’d see that day.
Jason Hartman: That’s for sure. And the politicians, too. So are there more scandals on Wall St now, or is the media just reporting them differently, or are we more aware of them? The people were always insider trading, I’m sure, and doing things they shouldn’t be doing and committing financial fraud.
Roger Lowenstein: Yeah well there’s an old saying that if you didn’t have speculation and fraud you would have never had the railroads. Big incentives do create… big opportunities create the incentives to speculate and among some people, to cheat. And as Warren Buffett once said, you don’t encounter a lot of traffic when you take the high road on Wall St. It attracts people there to make money and not all of them are the most ethical.
Your question of whether there’s more… I think it’s very hard to know. If you think of the 1920s or any of the decades before there was regulation, basically everybody cheated because there were no rules, so it wasn’t really cheating. So it was normal for people who ran companies to manage a stock to create runs and short their own stocks, gain investors. What went on was really atrocious, so what we’ve had since then is basically an increasing framework and set of rules that restrict at least the naked abuses.
And of course we get periods where the abuses come running back. We had it recently really because of this doctrine promoted by ultra-free marketers, including Allan Greenspan, you didn’t need any regulation. And I think when you tell that to a bunch of bankers, wow you can do whatever you want, some of them will. Greenspan didn’t mean that they should cheat and break the law, and there’s no explaining Bernie Madoff… It’s like passing a law against crime, you have it to stop the 99% who are going to listen – there are always going to be some people who won’t. I think to the extent that banks have become bigger and more distant from their customers, I think they’ve become, if not more fraudulent, less careful.
You used to walk in, they didn’t want to lend you too much money, hopefully for your good, certainly for their good. Now, they don’t know you and their good doesn’t enter into it because they’re going to sell that loan an hour and a half later anyway. So I think the financialization of the economy, and that the financial industry has made financial firms less cautious, less prudent and less like bankers.
Jason Hartman: Well so, that’s an interesting term you use Roger. The financialization… I like that. I get what you’re saying when you say that. So when you look at the regulation issue, I consider myself to be a free marketer and have a libertarian bent I guess you could say. And it seems as though you’re advocating more regulation, and this is such a complex, incredibly complex world, that I don’t know if the market can regulate itself because it’s just too complex nowadays. But I don’t know if the government could do it either, that’s the problem.
Roger Lowenstein: Let me just stop you there. I think when you say you’re a libertarian and I say I’m for regulation, I don’t really believe we’re as distant or as apart as those phrases suggest. Because I think we may be at different places on a continuum…
Jason Hartman: They do meet. They do kind of meet.
Roger Lowenstein: You do believe in regulation. Let’s take insider trading, a lot of insider trading are wrestling convictions lately. And I want to ask you and your listeners, would you be comfortable in a world where, if you bought General Electric stock, just siting that as a well-known corporation, where the executives would be free every time there was a development, an unannounced development to say a product was… to buy this stock, tip off their friends, do what they want, maybe hold back the good news so the stock would be cheap, then when they wanted to sell, pump and dump, put out a lot of good news, you’d come in and buy it, then they’d put out the bad news… I don’t believe you want to live in that type of world.
Jason Hartman: Of course not, of course not.
Roger Lowenstein: So we’re talking about what types of regulation, what work, what don’t work, what are the behaviors that we want to disincentivise and so on. But, you wanted to ask me about Freddie and Fannie.
Jason Hartman: Yeah. Here’s what I was going to get to, is really not, and I know we’re not that far apart in that vein of course, but what I wanted to get to was the concept of attacking either the cause or the symptom. And when it comes to Fannie and Freddie, the free market, the true like purists in the free market thinking would say well there should have never been a Fannie Mae and Freddie Mac. The government shouldn’t be backing mortgages, the government shouldn’t even be in that business at all. And granted, that would have changed the whole complexion of the real estate market for many decades past. We all know that. But what the states goal of Fannie Mae to promote home ownership, whenever you promote something the price goes up, right?
Roger Lowenstein: That’s right. Let me just say, Fannie Mae was created in 1938, I believe ’38 but there was a federal home loan board that became early to mid [0:12:47.9] Fannie Mae. And it was very hard to be a purist in the great depression when millions of people were being foreclosed on, in particular farmers, no one had jobs… it was a moment when pure capitalism maybe didn’t seem quite attractive to most Americans as did some unadulterated capitalism. So they went with it.
And I’ll agree that obviously it distorts the market, if it didn’t distort the market there’d be no reason to have it because you could just have the market. So it does distort the market, and I’ll also agree that I think we take a big risk… if you want to support mortgages, a good way to do it is just to pick a number, whatever the congress approves, a billion, ten billion, whatever is a year and say put it into mortgages.
But when you say, we’re just going to guarantee a growing number of loans every year and pretend it’s going to cost us nothing, I think that’s a very risky way to do it. At least if you have the congress say, we want to support mortgages, we’re going to appropriate X, X is what you spend, rather than what is it now? I think it’s over 200 billion that Fannie and Freddie have cost us. It’s easily the most expensive market.
Jason Hartman: It’s too much, no question.
Roger Lowenstein: Well let me just say one other thing though, because you also mentioned causes. It’s a widely held belief that they caused the mortgage fall-out. And I don’t put this quite in the camp of the CIA killed Kennedy or something, but I think there’s been a fair amount of conspiratorial thinking. And I show in my book that Fannie and Freddie were in the business. They had a lot of business, but one of the things they were doing was putting together mortgages they guaranteed, putting them in the package, securitizing them, and selling to investors.
And private label firms, you’ve heard of Bear Stearns, you’ve heard of Lehman Brothers, firms like that, Morgan Stanley. And instead of taking guaranteed mortgages, they would take mortgages that weren’t guaranteed instead of taking conventional thirty year loans, they’d begin to take more all day loans, which is a term for a riskier loan or subprime loans, really riskier loans. And they began to take business away from Fannie and Freddie. And Fannie and Freddie realized that to compete, they had to hold their market share, they had to start accepting the same types of loans. And their memos, I reproduce and quoted in my book where they say we have to meet the market where the market is or we’re going to lose share. And of course they did meet the market where the market is.
But the point is, the speculation, the bad loans, the foolish risk taking was there before Fannie and Freddie and they raced to catch up to emulate what I’ll call the foolish pay setters in the private market.
Jason Hartman: And I agree with you, but I believe those are distortions that occur in the market, and that’s why when you have government backed players, it’s sort of like nobody’s money. It’s kind of that way on Wall St too when you’re dealing with funds and so forth but I know that there’s…
Roger Lowenstein: It is.
Jason Hartman: Yeah, it is. If it’s everybody’s money, it’s nobody’s money.
Roger Lowenstein: Just say one thing, that in the Lehman Brothers which was a private partnership, Dick Fuld went home every night knowing that he was on the hook for whatever the liabilities of Lehman were. His capital, anyway was all tied up in that firm. Dick Fuld of course the former longtime CEO of Lehman, he was going to be a lot slower to put Lehman’s assets into dicey real estate. Ditto the executives at Bear Stearns and all the other then private partnerships of which Wall St was made up. It became finally the public’s money and the banks had a great one way option. Heads we win, tails the public loses.
Jason Hartman: Right, right. So do you believe, was it a mistake to not save Lehman?
Roger Lowenstein: Well in hindsight I could tell you just about every mistake that was ever made on Wall St.
Jason Hartman: Right, I mean should they have been put in the too big to fail category?
Roger Lowenstein: I don’t think so. I think maybe it was a mistake to bail out Bear Stearns, because I think, that of course happened March about six months before the cascade and failures in September. Because I think that set a tone and expectation that financial firms would be rescued.
But if you remember what happened Lehman week, the government had bailed out Bear Stearns, which it didn’t want to do and then Paulson fired its “bazooka” to rescue Fannie and Freddie, which he really hated doing, but which he really felt the need to do because people had assumed that they were govern guaranteed, and the US government had never disputed that and we were sort of honor bound. We couldn’t say, the Chinese and other foreign investors weren’t going to understand if we say well we didn’t really mean it.
So people were really tired of bail outs at that point. Nobody likes a government bailout, least of all a good republican like Hank Paulson. And Lehman’s in trouble, and he says okay it’s time for risk takers to bear the pain of the risk they took. All that good stuff, all that free market stuff that you were talking about. And in hindsight, all you know what broke lose, but the entire congress, or all that had gotten in touch with the regulators said don’t you dare give a penny to Lehman Brothers, the American public felt that way and there was no knowing ahead of time that things were going to go downhill so fast.
And by the way, there’s no proof that even had we bailed out Lehman, we wouldn’t have had all the trouble. I think we would have. If you look at what happened two days later, AIG was on the hook and this time Paulson and Bernanke said we can’t take anymore, the pain is too great, the panic is too great. We’re going to step in. And they saved AIG and what happened? The dominos kept falling and they kept falling and they kept falling.
So by the time the decision came to bail out Lehman or not, the damage was done. The damage meaning all the loans had been issued, tens of millions of people were living in homes with mortgages they couldn’t afford to service, those mortgages were held by banks and investors around the world that were taking tremendous losses and someone was going to eat those losses. And I don’t think at that point there was a magic bullet.
Jason Hartman: This conversation would not be complete without talking about what’s going on on Wall St and literally in the street and on streets all over the world right now, and that of course is the Occupy Wall St movement.
Roger Lowenstein: Yeah, I was down there last week.
Jason Hartman: What are your thoughts?
Roger Lowenstein: Well I don’t think it’s extremely articulate the protests, I don’t think they have much in the way of solutions, I don’t even think the so called Villains that they’re pointing to in many cases are the right villains. Look at John Paulson, the hedge fund investor who bet the right way. He bet against the mortgage bubble and how to deflate it. And they were marching on him.
However, I think they’re pointing out a very real problem, a problem that’s found expression in Occupy Wall St and maybe even on the right amongst the tea party which is that the American economy has not produced gains for a larger and larger part of the people for 15-20, now 25 years. That median incomes are flat, over the last cycle they’re actually falling, they’re falling not just for blue collar workers anymore, but even for people with college educations.
Jason Hartman: And you’re referring to people who have jobs. So that’s even worse.
Roger Lowenstein: Yes, we’ve got 9% unemployment four years after the bubble burst. We’ve got a rising inequality of income, which isn’t to say that the people at the top are necessarily doing anything wrong, but it is to say that the gains are all going to a narrower and narrower slice. This is not the picture of a healthy economy. And this is the premise. The reason really that democracy, we say go out earn what you can, speculate, make a million bucks, we think and we believe that you’re part of the invisible hand. You’re bearing the work of directing assets where they should go, and most productive uses and all of that. In time make all of us richer, and for a generation it hasn’t really been working.
And while Occupy Wall St, the people may not articulate all this and they may not have solutions, no one has had solutions for a generation and I think that’s why you see such frustration. What are we going to do in this global economy? How do we win when the people in Chicago are basically in the same labor market as the people in Bangalore? And that’s a heck of a problem.
Jason Hartman: Oh sure, the wages are so far away from equalizing that…
Roger Lowenstein: And I’m a free trader, but I think that these people are the canary in this very dark coal mine and we’re going to have to in both parties and elsewhere start addressing it.
Jason Hartman: Yeah, and you know I just got an interesting take on it. I think it’s somewhat interesting, that I’d love to get your opinion on before we go. And that is that, when you look at the right wing media, they’re trying to vilify the Occupy Wall St protestors as hippies and people that just don’t know what they’re talking about and anti-capitalists. And I find that particularly ridiculous because they say they’re anti-capitalists. And I don’t think Wall St is very capitalistic. Think about it, when you get to trade one lobbyists, cronyism, and massive amounts of scale, I don’t think that there’s much capitalism on Wall St at all.
Roger Lowenstein: And guaranteed bonuses.
Jason Hartman: Yeah, and too big to fail bailouts…
Roger Lowenstein: That’s Soviet, that’s Soviet.
Jason Hartman: Yeah, it’s kind of like a fascism or feudalism, I don’t know. It’s not capitalism.
Roger Lowenstein: I agree with you there, but I’ll say this. Look, I was a kid in the hippie era, and this is very different. We weren’t marching for economics back then. It was a movement of affluent or middle class kids who didn’t like the war, didn’t like the consumerism or materialism of society, it was a cultural thing. None of us were worried about jobs. When the revolution was over we were all going to get jobs.
This is very different. This is motivated by economic frustration and economic fear and a sense of economic exclusion. I think it’s a much more classically anti-capitalist or anti-upper class. The movement in the 60s was almost a reaction to too much prosperity, at least among some. And this is tough.
Jason Hartman: Yes it is. And I think we have to consider maybe a more protectionist approach. Tariffs… I don’t know, but the whole world cannot equalize their wages in just a short amount of time, there’s just too much fall out. But we’ll see where it goes. Roger Lowenstein, thank you very much. The book is The End of Wall St. Roger, do you have a website to give out? The book is getting great reviews on Amazon, by the way.
Roger Lowenstein: No, but the book is available on Amazon, Barnes & Noble, and wherever fine books are sold.
Jason Hartman: And this is a fine one. Thank you so much for joining us today. Really appreciate the insights.
Roger Lowenstein: Jason, a real pleasure.
Narrator: The American Monetary Association is a nonprofit venture funded by The Jason Hartman Foundation which is dedicated to educating people about the practical effects of monetary policy and government actions on inflation, deflation and personal freedom. Our goal is to help people prosper in the midst of uncertain economic times. This show is produced by The Jason Hartman Foundation, all rights reserved. For publication rights and media interviews, please visit www.HartmanMedia.com or email [email protected] Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate professional if you require individualized advice. Opinions of guests are their own and the host is acting on behalf of The Jason Hartman Foundation exclusively.
The American Monetary Association Team
Transcribed by Ralph