Dr. Doom is back—and age has done nothing to soften his views.
Henry Kaufman earned that moniker in the 1970s and 1980s as the hugely influential chief economist of Salomon Brothers, then the reigning bond kings of Wall Street. Along with his fellow nonagenarian from my old neighborhood of Washington Heights in Manhattan, former Federal Reserve Chair Alan Greenspan, Kaufman is back issuing jeremiads about the current state of the financial and economic world.
In a speech on Wednesday evening to the National Economists Club in Washington, the text of which was released earlier, Kaufman argued that efforts to stabilize the financial system following the financial crisis may actually have heightened risks by encouraging more debt and increasing concentration among too-big-to-fail institutions.
He reiterated his previous criticism that financial innovations, such as securitization, have mainly spurred an explosion of debt, much of it for speculative purposes. (Another nonagenarian financial giant, former Fed chief Paul Volcker, once quipped that the automated teller machine was the only financial innovation he thought of value.)
As the quantity of credit has exploded, its quality has fallen, Kaufman continued. As with everything else, globalization and technology also have transformed financial markets. Deregulation fundamentally changed the structure of the financial worlds from the era of clear divides between commercial and investment banking and government-set interest-rate caps. Regulation has been insufficient to balance “entrepreneurship and fiduciary responsibility,” he added, which was checked when Wall Street firms were partnerships, with partners’ net worth on the line, a concept that is being rediscovered by some academics.
Most important, Kaufman sees the biggest threat from the concentration among the financial megaconglomerates that dominate market-making, investment banking, and money management. He calls them “quasi-public financial utilities” that are too big to fail when the government rescues them but free to prosper during times of monetary ease. During times of financial stress, the burden falls on smaller institutions, leading to even more concentration.