It has become tiresome reading the multitude of blatherings about how the recent financial crisis is a failure of capitalism. John Bogle’s piece in Tuesday’s WSJ is particularly troubling.
The malfeasance and misjudgments by our corporate, financial and government leaders, declining ethical standards, and the failure of our new agency society reflect a failure of capitalism. Free-market champion and former Federal Reserve chairman Alan Greenspan shares my view. That failure, he said in testimony to Congress last October, “was a flaw in the model that I perceived as the critical functioning structure that defines how the world works.” As one journalist observed, “that’s a hell of a big thing to find a flaw in.”
What’s to be done? We must work to establish a “fiduciary society,” where manager/agents entrusted with managing other people’s money are required — by federal statute — to place front and center the interests of the owners they are duty-bound to serve. The focus needs to be on long-term investment (rather than short-term speculation), appropriate due diligence in security selection, and ensuring that corporations are run in the interest of their owners. Manager/agents need to act in a way that reflects their ethical responsibilities to society. Making that happen will be no easy task.
Four points come to bear on Mr. Bogle’s assessment:
To the point – there is no model of capitalism. So how can there be a flaw in the model? The flaw is in people’s belief that any organizational form is perfect. The flaw is in people’s mistaken belief that the world is not characterized by scarcity. The flaw is in people’s assuming that some other system can do better.
Quiz time: Who knows when this was written? “Our earth is degenerate in these latter days; bribery and corruption are common; children no longer obey their parents; every man wants to write a book, and the end of the world is evidently approaching” No, that was not Al Gore, it was an Assyrian tablet from 3000 years ago (apx. 2800 BC.)
But beyond that, why is it that financial firms somehow need “to place front and center the interests of the owners they are duty-bound to serve” but that such problems are not endemic in others? Why does Wegmans not poison its customers and impoverish the Wegmans family that owns a majority of its stock? How is it that Nike or Adidas seems to make sneakers and sportswear that people are comfortable in? What allows financial corporations to be hijacked by the operating agents but other companies do not suffer from such a mishap? Without answering those questions Mr. Bogle, I would argue that it is not only disingenuous, but rather irresponsible to be proposing solutions to such problems – particularly when you yourself recognize that one of the “culprits” in this whole mess was the government itself. What has that institution ever done that was “fiduciarily responsible”? And what makes you so confident that this time government regulators will get it right, not be hijacked by special interests, and now use their newfound regulatory powers to unleash something far worse than the subprime crisis on us?
Read the piece here. When individuals face the consequences of their bad behavior, we enter the world of a fiduciary society. Why is it that I try to treat my wife and kids well? Why is it that I work hard to prepare for every class I teach? Do we need a federal statute to REQUIRE me to place my family and student’s interests ahead of my own when it comes to my familial and professional life? And if you say yes, we need rules to insure it, are you confident in the people writing the rules to know exactly what I need to do to treat my family well or to teach my classes better? And are you confident that the people writing the rules will not do so to improve their own condition? After all, if you believe that greed and lack of fiduciary responsibility is a flaw in mankind, then how come when you give those same people guns and the power to command others, suddenly the greed goes away, and suddenly we all become responsible fiduciaries? Ironic that a founder of a company that “manages” low-cost index funds would hold such a position, no?
Well-stated rebuttal!!!!
Speedmaster is right.
John Bogle had one idea right — start a low-cost mutual fund that would appeal to all corporate pension plans by being unmanaged, but rather would be based on the empirical fact that since the last Depression the stock market is the place to be, if you have several decades to wait out the ups and downs. Many companies converted their defined-benefit pension plans to 401-K’s, and many offered Mr. Bogle’s Fortune 500 fund as an option. Mr. Bogle, in Barron’s and elsewhere told anyone who would listen that this approach was better than following the latest Fidelity Magellan hot star.
This was pretty good advice, especially to companies who did not want to get sued. More to the point, it sold billions of Vanguard’s fund, and entirely absolved Mr. Bogle of any responsibility for giving investment advice. Wish I had thought of that.
Now Mr. Bogle proposes a “fiduciary regime” where anyone who offers someone else investment advice, including not only financial advisors (wow! you mean insurance salesmen, tax lawyers, accountants, and the real estate people in infomercials?), but also John Smith, CEO of Plastics, Inc. who foolishly buys an injection molding machine which turns out to be a bad idea, be regulated by wise men in Washington?
The catch is that the wise men in Washington enjoy sovereign immunity for their mistakes.
Sounds like Fascism to me.
Alan Greenspan is a “free-market champion?” No wonder the split between preferences of capitalism and socialism was 50/50.
Al once wrote an article in The Objectivist explaining gold and its relationship to sound money. Got a copy. This was one of the most informative articles, better than the essays of Nathaniel Branden. Al actually explained the subject in clear terms.
Then Al married Andrea Mitchell, of KYW-Philadelphia fame, and went to the Inn at Little Washington. After the honeymoon, Al never spoke the same. “My views on monetary policy, and the role of the federal reserve, are cautioned by my reluctance to describe the beauty of the East Fork of the Shenandoah River, which merges with the North Fork, and flows into the Potomac, or as some would say, into the Rapahannock, which all flow into Atlantis, or the Atlantic Ocean, provided that my labor indicators, which are the guideposts to a Labor dollar, prove to be right under current predictions. Let me be clear: the fluctuations in the value of our currency is like a wave that overwhelmed me.”