Wriston, Walter B.
Dr. Doom Takes Dark View of Deregulation
For Henry Kaufman, a senior officer of Salomon Brothers with a clear view of its trading floor, to deplore the creation of "excess" credit is like the piano player in the fancy house protesting that he didn't know what was going on upstairs.
But that's just what Mr. Kaufman does in his new book, "Interest Rates, the Markets, and the New Financial World" (Times Books, 258 pages, $22.50). In this survey of the modern financial landscape, Mr. Kaufman repeatedly expresses his unhappiness with the deregulation of financial markets. In particular, he makes an unseemly attack on commercial banks that are competing for business once monopolized by investment banks. Implying that commercial banks suffer from dangerous naivete, Mr. Kaufman says they are "basking in the illusion of riskless 'spread' banking." (There may be commercial bankers who think banking is "riskless." I have never met one.)
Mr. Kaufman yearns for a structured society where each financial intermediary remains neatly pigeonholed and does not try to breach someone else's monopoly. He also thinks deregulation threatens the stability of the whole financial system, besides having other undesirable side effects. The "integrity of credit," says Mr. Kaufman, is "being chipped away by a financial revolution that is helping to lower credit standards and muting the responsibilities of both debtors and creditors."
In fact, though Mr. Kaufman himself works for a company that is one of the world's greatest market makers, an uneasy distrust of the market permeates his book. We learn, for example, that credit needs a "guardian." He also seems oddly fixated on commercial banks, arguing on unclear grounds that they should be barred from underwriting and trading revenue and corporate bonds. But even as he re-argues the case for keeping the 50-year-old Glass-Steagall Act on the books, other competitors he doesn't even mention are moving into the same business. Prudential Insurance Co. buys Bache, American Express acquires Shearson, and General Electric takes over Kidder Peabody.
Mr. Kaufman's philosophy that "although money matters, it is credit that counts" skews the book's focus to the liability side of the balance sheet to illustrate his point. It is regrettable that he does not look at the entire balance sheet. He omits the fact that even before the recent surge in equity prices, the value of household assets from the end of 1982 through 1984 increased by $1.7 trillion. This means that people's assets grew by four times as much as their total debt. Similarly on the corporate side, as Robert A. Taggart Jr. of Boston University has shown, the ratio of debt to total capitalization at market value is lower now than in 1974.
Mr. Kaufman's admiration for regulation and his distrust of the marketplace extend even into the government sphere. He advocates, not too convincingly, government planning on a national level, and laments that "governmental planning is identified with totalitarian countries." As he sees it, planning does not have to fit the totalitarian mold. "It can show alternatives instead of issuing orders."
The rest of Mr. Kaufman's book deals with the growth of global financial markets and the uses and difficulties of forecasting in this new world. Throughout, there are nostalgic suggestions that forecasting was easier before the financial revolution and that monetarism is a failed theory. Besides monetarism, Mr. Kaufman rejects supply-side economics, and laments the 1981 tax package that many would say helped create more U.S. jobs than any other action of the Reagan administration.
And though he acknowledges that technology has created a global marketplace, many of his analyses are based on numbers describing the U.S. market as if it were still a separate world, even though major corporations do not care whether they raise debt and equity in London, New York or Hong Kong.
To the author's credit, he does have an interesting chapter on fallen financial dogmas, such as the idea that high real interest rates discourage economic recovery. Here, and when he discusses interest-rate trends, Mr. Kaufman's analytical powers are everywhere evident. And his text is buttressed with charts and tables.
A large portion of the book is devoted to fairly detailed technical discussions of the yield curve, changing techniques of forecasting interest rates, the impact of financial deregulation on Federal Reserve policy, supply and demand for credit and pension fund portfolio strategy.
There is an irony in the appearance of this book at a time when lower inflation, falling interest rates and a booming stock market are combining to redress the ratio between debt and equity. Long-term obligations are replacing short-term debt, and new equity is selling like warm bread. In short, the market is working today as it always has in the past.
All in all Henry Kaufman's arguments for turning the clock back, combined with an overwhelming worry about the creation of excess credit and his ability to find disaster lurking in the marketplace, suggest that he obtained his sobriquet, Dr. Doom, the old-fashioned way. He earned it.