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(originally published by Booz & Company)


A Return, Not to Normal, but to Reality

We do need fixes. I hope they bring back the uptick law and institute the Volcker Rule [barring banks from proprietary speculation]. Right now, the larger banks are lobbying against this. That’s one example of why we cannot rely on lobbyists to come up with the right policies, for either the health of the economy or the health of their own industries. I recently met someone who led the banking industry’s lobbying effort, during the Clinton administration, to have the Glass-Steagall Act revoked. They spent $1 billion in cash. They’ve spent easily that much fighting the current wave of proposals.

I don’t know if we will get regulatory assistance, but we definitely need it. There is a strong possibility that it won’t get passed, or that it won’t be tough enough, and then we would go right into another financial crisis, but 10 times worse and without any remedies for the government to provide this time. How much extra debt load can the U.S., the U.K., or the E.U. take on right now?

S+B: What prospects do you see for investors in the current financial system?
I think that investors ought to be very careful. Stocks in this market can move in ways that most investors couldn’t possibly anticipate. A few companies, like Goldman Sachs, have become so good at what they do that the game they’re playing isn’t the same as the game an ordinary investor plays in the market.

A few months before the crash, I was watching Goldman, and I realized that these guys were doing something in that building that nobody else did. I’m not talking about anything illegal — it didn’t have to be. For example, Goldman locates its computer servers within a small distance from the trading servers because they need the extra microseconds of transmission time. I don’t play that kind of game; very few investors can. In May 2010, the Goldman Sachs quarterly reports came out, and said they had 35 days with profits over $100 million; 78 percent of their profits came from trading. And every day was better than the day before. That pattern of profitability never happened before.

S+B: You’re saying that Goldman is the corporate equivalent of the mercantilist governments. They’re all such sophisticated financial players that they change the game for the rest of us.
Yes. You can’t blame them, because they’re playing by the rules — I think, at least mostly. But the rules may have to change. If someone gets to be that good, then they become vampire investors: “I’m just going to take some blood but I’m not going to give you anything back.” That kind of trading is destructive. It doesn’t help anybody; it doesn’t correct imbalances in the market. In fact, it ensures that markets won’t work.

An estimate by Vanguard Group founder John Bogle two years ago put the amount extracted at that time at about $600 billion per year, directly removed from the American economy. Well, what if it becomes $1.2 trillion? Or $5 trillion? At what point do we wake up? Or do we just lie there with the spigot in our veins and never wake up at all?

Rebuilding the Manufacturing Base

S+B: What will happen in the general economy in the U.S. and Europe?
Already, we’ve seen the economies of the U.S. and probably Western Europe split cleanly in half. Some people will be wealthy beyond their wildest dreams. They will be the people in global commerce of some kind, probably with most revenues coming from offshore.

At the same time, a lot of people will have lost their jobs forever. At the age of 35 or 45, they have lost jobs that they dreamed of retiring from, and they’re not going to get them back. For kids just out of school, the job market is so oversaturated that it could be 10 or 15 years before that gets fixed.

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