the Crisis in Europe
January 24, 2012
Let’s change the subject a bit. I think Alan Greenspan is getting a bad rap. The Nobel Prize-winning economist Robert Lucas famously said that economic growth is so important that it is hard to think about anything else. Under Greenspan's watch, the U.S. economy grew tremendously. When there isn't a crash, when we are having a normal growth period, isn’t it important for that growth to be very strong so we have a margin of safety?
It's good to have growth, yes. But Greenspan made the right trade-off. He had one lever to pull and it was the interest rate. It's hard for me to fault him for what he did, because at the time I didn’t think he was doing anything horrible – I can't Monday-morning quarterback that decision.
What troubles me, however, was that he didn’t regulate the subprime lending market in the way that he could have. I made the same mistake that he did. The reason I wrote The Big Short, the reason I got interested in the topic, was that I was shocked that these big Wall Street firms, filled with all these really smart and totally self-interested people, people who are so good at getting what they want, collectively came together to commit suicide. I couldn't believe it.
Then, when I thought about it again, I concluded that it actually did make sense. The incentive structure was so screwed up that it led to ruin.
But, until that point, I thought mortgage securities were an unreservedly good thing. This came out of my experience on the ground at Salomon. I thought options and futures, and swaps and derivatives, were more efficiently distributing risk. Alan Greenspan thought that too. So he wasn't looking very closely at what was going on, because he thought that markets would function – that people had an interest not to get themselves in trouble. I made the same mistake, so it's hard for me to get really worked up about him making that mistake.
With respect to the housing bubble, I thought that if a house has a fundamental value of $500,000 and some darned fool wants to pay $1,000,000 for it, let him. The market will show him that he was wrong, and why should anyone else care?
Yes, why should anybody else care? That's right. So I have a hard time getting worked up about Alan Greenspan.
How do you invest your own money? Based on your experience, what is the best way for financially unsophisticated investors to find an advisor in whom they can place their trust, or, barring an advisor, a process for investing?
I don't take financial advice, but I don't do anything interesting myself either. I invest in stock market indices, so the decisions I'm making are basically asset allocation decisions. I don't put all my eggs in one basket.
The one thing I've done since the crisis that probably goes against my core belief (that no one can predict where individual securities are going) is that I've skewed my portfolio toward blue-chip, large-cap stocks, because I think that we are in for a long period of economic misery, and the big battleships are more likely to survive than small startups, but only slightly.
I just try not to lose money. I don't think I'm supposed to make lots of money by investing my money. I'm very conservative with it and don't do anything interesting. I read Burton Malkiel as a youth, and I haven't read anything much in the way of investment advice that has interested me since.
People know that you are going to write about them and yet they agree to be interviewed, and often tell you stories that reflect on them in less than flattering ways. How do you get them to talk?
I try to tell them what I'm doing. If you read something that you think is an unflattering description of a person, some other reader may read it as a flattering description and the person himself may not think it is unflattering. What people think is unflattering or flattering is highly variable. But getting people to talk, especially getting people to let me into their lives – not to just talk to me, but really give me an inside view of what they are doing so I can kind of inhabit them – requires them to understand the spirit in which I am operating, and what I am trying to do.
And that is about it. If they approve of the spirit in which I am operating and what I am trying to do, they are usually all for it. They usually see what I see, that it's a great story that they've been a part of, and it is fun to have it told. Having said that, people turn me down. So what you are seeing is the people who have said yes; I am not perfectly successful at talking people into doing this.
Laurence B. Siegel is the research director for the Research Foundation of CFA Institute and senior advisor at Ounavarra Capital LLC. He can be reached at .
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