LG, this is a little dated but not by much. It is an excerp from an interview with John K. Galbraith. While I have do not like his socialistic stance, I think he has some interesting comments here. Some may have already read this. The bold print is my enhancements.
I have followed him over the years because in one of my first business courses in college we were required to read his books. (Dated myself didn't I <g>)
Galbraith on crashes, Japan and walking sticks
John Kenneth Galbraith is approaching his 90th birthday. He carries a stick now - "to enhance my dignity, not for necessity," he insists. And he happily boasts that The Great Crash, the book Galbraith wrote 40 years ago about the stock market slump of 1929, has never been out of print. "Whenever it seemed in danger of being relegated to the back shelf, there was another episode which fostered a new edition," he says.
Galbraith was in London last week. He pointed out that a key theme of the book, that euphoria begets disaster, is as relevant now as ever. "This is a time when banks, other financial institutions and corporations get caught up in euphoria, go beyond the law or common sense," he said.
Last Wednesday, two days after fears about Japan had sent stock markets tumbling, but before central banks stepped in to support the international value of the yen, JK Galbraith spoke to Ben Laurance and William Keegan.
Sunday June 21, 1998
The Observer: Let's start with Japan. What do you see as the medium and long-term game?
Galbraith: Japan is still in the aftermath of one of the great speculative episodes of our time - both in securities and, especially, in real estate. There was a time - and this is one of the most remarkable statistics of all time - when the total real estate value of the city of Tokyo was in excess of the total in the United States. There was both a stock market bubble and a financial bubble that had to burst.
Japan has suffered the characteristic consequences of optimism in the good time. Management has become careless, the banking system over-optimistic, and both the economic and business structure unduly bureaucratic: indeed, the association between the two, which was once very productive, has now become stale.
The Observer: And the policy response to Japan's problems?
Galbraith: How interesting to compare last year's decision to raise taxes with the advice Japan is now getting from Washington to use macroeconomic measures to encourage expansion. The wonderful thing about financial advice is that it can deal in direct opposites without anybody being surprised!
A situation had developed both in Japan and in the US which will be ended only by a Schumpeter-type cleansing. [Economist Joseph Schumpeter described the aftermath of booms as 'creative destruction'.]
In the case of the US, we are seeing stock market speculation, some real estate speculation and a terrific boom in mergers and acquisitions not benefiting efficiency but benefiting those bringing it off - plus there's an explosion of subsidiary financial operations, including in particular junk bonds.
When the market fell on Monday, it was blamed on South Asia; any future problem will be so blamed. But no one should doubt that there are grave flaws in the Wall Street financial structure.
The Observer: The fall on Monday wasn't huge, though.
Galbraith: But it was an indication of the depth of the uncertainty. I wouldn't make any predictions as to when there might be a crash. One's wrong predictions are always marvellously remembered; one's right predictions always get forgotten.
The Observer: If we assume there is going to be a crash on the stock market, what do you see as the macroeconomic picture in the West over the next two or three years?
Galbraith: I, of course, don't use the word crash; I repair to financial language and talk not about a major correction but a major adjustment. (I am considering retitling my book on the 1929 crash The Major Adjustment.)
One of the undoubted effects of a correction will be on the macroeconomic condition of the economy, because we have a very large percentage of the population of the US now holding stock market securities in mutual funds [the US equivalent of unit trusts].
When the correction comes, there will be a slump in consumer buying and some slump in public investment - in other words a recession. One cannot separate what happens in the securities markets from what will happen to the flow of aggregate demand in the economy, to use that old Keynesian word. And this will call for government macroeconomic action; they are already calling for it in Japan. Keynes is out of fashion in the US - except when talking about Japan.
The Observer: But do you believe there will be a Keynesian response in the States?
Galbraith: Inevitable. It's not because people are starting to read the general theory again; it's because there's no ready alternative. Low interest rates and government support of employment - there isn't anything else.
What is certain is that some new name will be invented for Keynesianism. This was the genius of my old friend Ronald Reagan. He inaugurated the most strongly Keynesian policy since Keynes himself - large-scale government borrowing, large-scale publicly supported employment, all justified by the fact that it was for defence we didn't need.
The Observer: How do you think Greenspan has been handling things?
Galbraith: Greenspan has been doing admirably what the Federal Reserve has always done - which is nothing. He was very clever the other day when he said deflationary influences would come from South Asia, restraining American speculation: toning down American speculation, rather than emphasising the speculation itself.
The Observer: Would you generally approve of the way he has conducted monetary policy at the Fed?
Galbraith: Absolutely not. There should have been far more warning about the speculative splurge on Wall Street and the extent of citizen participation. That was the mistake that the Federal Reserve made in the Twenties, and the mistake that it has made again now.
And the reason for it is simple: you cannot warn against a speculative splurge without taking responsibility for what happens thereafter; no head of the Federal Reserve wants to be held responsible for a dip in the stock market. Once or twice he has got close to saying that, and he certainly knows it. But nothing appeals so much to a central banker as personal caution.
One thing is wonderfully clear - when trouble comes on Wall Street, the blame will all be passed to Indonesia, Malaysia and maybe Japan. Wall Street insanity - let me use a slightly milder expression, Wall Street 'speculative error' - now has a perfect cover.
The Observer: If you look at the return on capital in the G11 countries, it has been rising pretty consistently since 1982. But clearly the graph can't continue up forever. Do you think we might be at a turning point now?
Galbraith: Profits have been very high and growing. But returns from owning common stock, particularly in the major companies, have actually gone down to nominal levels. Dividend income of major stocks is almost insignificant. To own common stock that has a wonderful capital value and no income is a slight anomaly that only the better financial minds can explain.
The Observer: With reference to Schumpeter and the Schumpeterian correction, to what extent do you think that we just have to go through the inferno?
Galbraith: We could move much more aggressively than we are doing to clean up the situation, to make sure that we have common honesty in the operation of all these mutual funds, for example. One always worries that there may be some relationship between what a mutual fund is doing with its investors' money and what the participants in the fund are doing with their personal funds.
There have been some cases of that in the newspapers recently. In the US we now have far more mutual funds than there is intelligence, perhaps integrity, to handle them. They are the bridge between the innocent and the eventual loss.
This is a time when we should tighten, and be very certain about, the quality of our bank regulation. There should be strong warnings against investment in high-interest bonds. Nothing calls for more concern than the revival of the junk bond; while the problem of regulation is a bit difficult, we should look with some concern on this whole mergers and acquisitions binge.
But having said all that, I would emphasise again that the sequence of speculative boom and its result is part of the market system (one cannot now use the word capitalism) and has been for hundreds of years. The market system has its considerable accomplishments, but one should never ignore its downside.
The Observer: Do you think we are going to come back to a point when some kind of Bretton Woods system is needed, and some control of capital?
Galbraith: One of our stronger points is that in consequence of the existing Bretton Woods system - if properly financed - we have a structure for easing what the financial community loves to call a correction.
We should always bear in mind that, as is happening now in East Asia, the peculiar genius of the IMF is to bail out those most responsible, and extend the greatest hardship to the workers, who are not responsible, who are innocent participants.
The Observer: Do you believe, and have you ever believed, there is any truth in the 'new paradigm' idea?
Galbraith: When you see reference to a new paradigm, you should always, under all circumstances, take cover. Because ever since the great tulip mania in 1637 [when 'investors' bid up the price of bulbs to astronomical levels, even devising a system of call options on tulips they didn't actually own], speculation has always been covered by a new paradigm. There was never a paradigm so new and so wonderful as the one that covered John Law and the South Sea Bubble - until the day of disaster.
The Observer: Would you agree that we should be worrying less about inflation now than we should have worried 10 or 20 years ago?
Galbraith: You have to divide the situation in the US from that in the United Kingdom. In the US, we've managed to combine very high employment (or very low unemployment), with relatively stable prices. On the other hand, here in the UK, inflation has been a somewhat more pressing problem. We Americans have managed to put aside Phillips [the economist famous for the Phillips curve, describing the trade-off between inflation and unemployment]; but he's still relevant here. When all is said and done, the labour movement and the problem of the wage-price spiral is still stronger in the UK than it is in the US. |
