Subtitle: People, Policies, and Institutions, Palgrave,
Macmillan, 2016, 180 pgs., index, bibliography
This is a more important book than it may appear to be, from its size. It is a
very personal memoir by an author who was for critical years inside and a
commentator of the transformation (tectonic shift) that he describes. One could
apply Niall Ferguson's networking methods to see the extent of Kaufman's
network throughout the financial world. And by extension one could also
construct a meaningful picture of the international financial- political world
as well. Dr. Kaufman well knows the individuals about whom he writes here and
he shows to the reader the significant roles they plaid in this transformation.
The individuals created or changed financial institutions and developed new
financial tools and products, based on new theories, which expanded the role of
finance itself in the markets. One can observe this, for instance, in the
relative size of the financial industry category in the various categories in
the S&P 500 used by mutual funds and ETF's when constructing portfolios.
While the author describes the changes in financial markets and methods over
the extended period in which he was a central actor, his focus is on what
happened in the financial crisis of 2008 and why the changes he describes
played a central role. His organization of chapters is partially chronological
and partially topical.
I placed some links below to other authors who have discussed the same issues.
Here is a biography of Henry
Kaufman. There is
another at Bloomburg. There is an excellent review by John Authers in the
Financial Times, June 25, 2017.
Preface by Paul Volcker -
He writes a very personal account based on years of friendship and professional
interaction. He writes that Henry Kaufman knows so much about what is wrong
with financial policy and activity and about economics in general because he
has lived his life in the financial world. He writes; "One of the
important lessons of Henry's books is the degree to which those in financial
markets have lost their way."
Chapter 1 - How It Began as Salomon Brothers
Dr. Kaufman begins by noting that the financial world was very much different
in the 1960's from it today. He provides some of the specific differences -
among them that non-financial debt has increased from $1.1 trillion to $6
trillion and that U.S. Government debt has increased from $320 billion to $17
trillion. (that is 17 thousand billion). The list is lengthy and of fundamental
factors. He begins with Salomon Brothers because it was in the 1960's that this
organization began its rapid and steep expansion toward becoming a "major
force in the money and capital markets." He writes that he will comment on
these changes that created such a new financial world. He believes that these
major changes were not the result of a planned policy-driven effort by
government or leaders but the culmination of smaller actions taken by specific
He recounts how he joined Salomon Brothers in 1962. Then he describes his role
in the transformative activities of the company until he left it in 1988. Among
the key individuals he mentions in this chapter are Walt Wriston, Charlie
Sanford, Michael Miliken, Sidney Homer, Bill Salomon, and John Reed.
Chapter 2 - The Art and Science of Forecasting
In this chapter Kaufman discusses the expansion in demand for forecasting that
took place and some of the major problems forecasting faces. One of his
conclusions: "As for long-term forecasting, there is simply no scientific
methodology that can produce accurate predictions." Among the key
individuals he mentions in this chapter are Walter Friedman, Ronald Reagan,
Jimmy Carter, and Charlie Simon. The chapter should be studied along with
Philip Tetlock's "Superforecasting: The Art and Science of
Prediction" and study of Bayes' Theorem and its use in prediction.
Chapter 3 - Presidents versus Fed Chairmen
Dr. Kaufman points out that the FED is considered to be independent of the
government and in particular of the executive office of the President. Yet the
two often have conflicting opinions and objectives. He cites various specific
examples of the results of these differences, naming the actors involved. The
key individuals he mentions in this chapter are William McChesney Martin,
Thomas B. McCabe, Harry Truman, Lyndon Johnson, Arthur Burns, Richard Nixon, G.
William Miller, Paul Volcker and Alan Greenspan.
Chapter 4 - Paul Volcker, Perennial Public Servant
Kaufman jumps back in years to 1957, when he joined the Federal Reserve Bank of
New York and met Paul Volcker. He devotes the chapter to comment about Volcker
and also to the significant issues on which he played a part. He includes his
own comments and responses to events and decisions of that time. The main issue
was inflation, what to do about it and in that connection what to do about
interest rates. He specifically notes the important financial issues on which
he differed from Volcker. The key individuals he mentions in this chapter are
Paul Volcker, Robert Rosa, Al Wojnilower, Leonard Santow, Aubrey Lanston, Jimmy
Carter, Milton Friedman, and Walter Wriston.
Chapter 5 - The Fed and Financial Markets: Greenspan,
Bernanke, and Yellen
He begins by noting that these three Federal Reserve Chair persons have
received more public and political attention than any previous central bankers
in U.S. history. And, of course, with good reason considering the central role
they have played and the increasing influence of monetary policy in politics.
He pens a polite understatement when commenting that they 'remained rather tone
deaf to structural changes in financial markets and how those affected monetary
policy'. Kaufman describes the events and changes in the financial world during
this critical period. A critical issue was financial risk evaluation and
'taking'. He quotes Greenspan's testimony that the economic model which had
determined his view of the financial world and hence his monetary policy
decisions was faulty. Specifically, he notes Greenspan's role in canceling the
important Glass-Steagall Act and its replacement by the Gramm-Leach-Bliley Act.
Kaufman's evaluation: "Alan Greenspan therefore left his biggest imprint
more through what he failed to do - rein in credit and investment bubbles,
regulate derivatives, control financial concentration, and later (under
president George W. Bush) speak out against burgeoning deficits - that what he
FED governor Bernanke also comes in for criticism. Kaufman mentions Bernanke's
famous book "Essays on the Great Depression" which, I also, consider
contained 'strong clues as to how he would steer monetary policy during the
crisis' (2008), and in my opinion not for the good.
Kaufman's summary: " Bernanke's record regarding 2008 and its aftermath
was decidedly mixed." And, "One reason for the lack of foresight
about the crisis was that, like his predecessor at the helm of the Fed. Mr.
Bernanke didn't understand the interrelationships between monetary policy and
financial markets and institutions." Kaufman provides his own analysis of
the 2008 financial crisis and quotes Peter Conti-Brown (see below). Among other
evaluations, Kaufman writes: 'The decision by key government officials to let
Lehman fail was heavily influenced by politics." He considers Treasury
Secretary Paulson an important player in this. The principle individuals he
mentions in this chapter are Greenspan, Bernanke. Christopher Cox, Hank
Paulson, Robert Rubin, Larry Summers, President Bush, and briefly Janet Yellen.
and President Trump
Chapter 6 - Charles Sanford and the Rise of Quantitative
Dr. Kaufman considers Charles Sanford to be "one of the most innovative,
entrepreneurial, and philosophical commercial bankers in the post- World War II
Era.' In this chapter Kaufman reverts back to the period beginning in 1961 when
Sanford joined Bankers Trust. He credits Sanford with a major restructuring the
bank by 1997. And he devotes the chapter to describing the significant
developments in the banking and whole financial world during this 30 + years.
He quotes several of Sanford's lectures on the changes and future of financial
markets. He also notes the legal problems that Bankers Trust faced. He notes
that the financial community did not learn from these lessons.
Chapter 7 - The Dominance of Walter Wriston
Walter Wriston was CEO of Citibank from 1967 to 1984, and Kaufman's comment is:
that Wriston was the most dominant banker during that period during which he
"pushed the boundaries of American banking." Among other important
innovations, Wriston created the ATM machine. Kaufman cites other policies: to
push aggressive risk taking in order to increase earnings, and reduce capital
requirements versus liabilities, and negotiable certificates of deposit, These
policies were then copied by other banks in order to remain competitive. But,
Kaufman, believes, "No other commercial banker of the era was more
outspoken, aggressive, or influential." Among the early disasters was Citi
loans in South America. Kaufman quotes from his contemporary warnings about
these dangers. He also faults the government regulators for enabling the
expanded financial policies that led to greater risk. His assessment is that
the "financial meltdown was propelled by reckless lending,." Among
the individuals he mentions are Wriston, Edward Palmer, John Reed, Charles
Prince and William Spenser who all fought his analysis.
Chapter 8 - The Bigness Crisis
Dr. Kaufman sees two major problems that took place together in 2008. One was
the publicly observed systemic collapse itself. Another was the collapse of
many of the institutions that intermediate between lenders and borrowers into a
few remaining giant players in a process promoted by official policymakers.
Thus was created the well known "too-big-to-fail' condition in the
financial institutions. Government officials required these giant institutions,
then, to accept partial government ownership. This spread the damage from the
financial system into the national economy as a whole. He notes that
consolidation and creation of oligopolities has been spreading throughout the
business world. He notes further that while government officials have been
focused on the variety of new financial instruments they have not paid enough
attention to the structure of the 'dominant' financial institutions'
themselves. He describes the gradual process that took place from the 1960's
on. And he provides some telling data. For instance, as recently as 1990 the
ten largest financial companies had about 10% of the U.S. Financial assets. Now
they hold 80%. "Of the fifteen largest U.S. financial institutions in
1991, all but five have lost their independence." Of investment banks only
two important entities remain - Goldman and Morgan Stanley. He includes a long
list of famous companies that no longer exist.
He provides some specific conclusions. 1. the financial industry has 'not been
an anchor of stability in our financial system'.
2. The leading firms' drove the credit creation process with great ingenuity
and force. They also played a central role in popularizing quantitative risk
analysis... which as encouraged risk taking."
3. "leading financial conglomerates played a central role in shifting the
concept of liquidity to one that was asset-based to the liability side of the
4. "There is a clear correlation between institutional bigness and rule
He continues for several pages describing and analyzing the adverse results of
all this. Here is one key example; "Yet another damaging effect of
financial consolidation, the most important of all, is its role in pushing our
political economy away from economic democracy, whatever its imperfections. In
an economy with a highly concentrated financial sector, the government will
remain a powerful force in the allocation of credit, as shown by the 2008
Dr. Kaufman has fingered the most important result. But he refrains from
further consideration and analysis. Financial industry is one of the
'commanding heights' of any economy, along with education, health, and energy.
It is a key goal of revolutionaries at all times to gain control of the
financial industry. It has been a central political struggle in the U.S. since
Hamilton and Jefferson. Since the beginning of the 'progressive movement' now
the radical leftist elite control of the financial system has been recognized
as critical. The creation of the FED and its support by a national income tax
was a major and fundamental 'progressive' achievement.
Chapter 9 - A Meeting with Margaret Thatcher
Dr. Kaufman notes an unfortunate habit of leading politicians, neglect of or
even understanding of economic issues. He mentions that he met all the U.S.
Presidents from LBJ to Clinton. And then also he met Israeli Prime Minister
Shimon Peres and British Prime Minister Margaret Thatcher. His point is to
comment that these two possessed an exceptional breadth of knowledge and
understanding, Mrs. Thatcher, in particular, was unusually knowledgeable about
monetary policy. He quotes at length from her memoir and then remarks. "It
is, unfortunately, difficult to imagine a U.S. President discussing economic
matters with such sophistication and clarity." He descries his own views
that he offered the Prime Minister. Among them was the greatly increasing role
of credit in the money supply making it difficult to define the money supply,
hence to conduct monetary policy as a control over the economy.
He continues, "In the new world of finance, I suggested to Mrs. Thatcher,
the very concept of liquidity was changing rapidly, and with it the possibility
of money supply targeting."
He continues, "yet another obstacle to an effective money supply target, I
continued, was the rapid globalization of financial markets, with London itself
playing a key role in the process." For this book, he adds further
conclusions. Then he turns to the question of government bonds and the creation
of a new type - inflation indexed bonds. He gives excellent reasons for his
opposition to these, but notes that Great Britian, then the U.S. and many other
countries did create them. He is correct, that government indexing financial
instruments to inflation itself assures the increase of inflation.
Chapter 10 - Michael Milken: Moving Junk Bonds to
As the title indicates, this brief chapter is all about the role of Michael
Miliken on expanding the use of less that prime credit instruments to
accomplish such projects as using debt to take over target companies. As
Kaufman indicates, this put 'junk' bonds into major play in credit markets
which encouraged general expansion of using risky credit. His base was the
brokerage, Drexel Burnham Lamert, they encouraged corporate raders to use high
leverage to pursue corporate takeovers. Frequently the purpose was to then
extract value and unload the shell of the company. The stated rationale was to
enable small firms to use credit to expand and improve their corporate
operations. In the process, of course, Miliken and Drexel made billions of
dollars of profits through their fees. Kaufman relates his exposure to this
game, in which he declined to participate. He cites a book by W. Braddock
Hickman, which Miliken read, in which Hickman claimed that 'junk' bonds were
underrated and not as risky as the agencies claimed. If they were really
underpriced then using them could generate large profits at low risk. Kaufman
states that the junk bond market totaled $6 billion in 1970 and reached $210
billion by 1989. The process was one of those involving acceptance (even
courting) greater financial risk that soon permeated the markets.
Kaufman concludes, "Mike Miliken's impact on financial markets has been
underrated. He influenced its participants to become much more entrepreneurial
- to take more risks as borrowers and as money managers.".
Chapter 11 - Financial Crises and Regulatory Reform
In this chapter Kaufman opens another broad topic. He concedes that efforts at
'financial reform' have been triggered by financial crises which seem to come
in waves or as some contend, cycles. He also contends that the larger problems
that need addressing in reform efforts are frequently seen long before the
related crisis. He refers back to 1912 - 1913 and the House hearings ()Pujo
hearings) about the 'money trusts'. They were about the perceived influence of
the very large New York banks and Trust companies to control the investment
banking industry. In that era control was achieved by having a few key
individuals be members of the boards of several corporations in various
industries and then able to manipulate policies. The Pujo committee did not
find actual evidence or proof of conspiracies, but still made many
recommendations for significant changes (reforms) But Congress refused to
expand federal government control into widespread private markets. But it did
create the Federal Reserve ansd the Clayton Antitrust Act. Then, during the
Depression The Roosevelt Administration created more major banking and
securities laws. Kaufman describes the function of each. As he notes, the new
regulatory system remained (with amendments) since then. He notes that the
Savings and Loan 'debacle' in the 1980's generated more changes. He continues
to discuss more such regulatory efforts. Then came the financial collapse in
2008, which resulted (among other things) in the Dodd-Frank legislation with
its Financial Stability Oversight Council and Office of Financial Research.
Kaufman expresses his 'concern' about this. He finds other 'problems'
throughout the legislative responses to the 2008 crisis.
His conclusion: "In the immediate wake of the shattering events of 2007
and 2008 the Obama Administration squandered a rate opportunity to
fundamentally revamp the financial sector". And his question: "Where
will the second great financial crisis take American capitalism?"
Chapter 12 - The Present Value of Financial History
Kaufman turns to a critique of the common failure to learn from history. He
notes the significant difference between simply remembering something and
systematically analyzing it.
"Ignorance of history has two main dimensions. One is refusing to believe
it matters. The other is believing it matters but learning the wrong historical
lessons." His appraisal of not only the public's but also business,
financial and political leaders' knowledge of history is very negative.
"Any kind of historical perspective is painfully lacking.".. in
short, our financial leaders need broad horizons."... " Financial
crises are rife with valuable lessons." He suggests some lessons from
financial history. Many of these focus on the malignant activities of leading
individuals such as Ivan Kreuger, Kenneth Lay, Jeffrey Skilling and Charles
Ponzi - and the whole gang at LTCM. He mentions the false ideas of james
Glassman and Alan Greenspan.
Chapter 13 - The Politicization of the Fed
Dr. Kaufman opens with this appraisal: "The U.S. Federal Reserve record
since the end of World War II has been checkered at best." He describes
successes and failures. His view: "As a starting hypothesis, it seems
uncontroversial that our complex, advanced economy requires a robust and
well-integrated financial sector to intermediae the savings and investment
He focuses on the allocation of credit. "A shift in attitudes over the
last few decades has caused the differences between money and credit to become
In my opinion credit has always played a significant role as a component of the
real money supply. That there has been a 'shift in attitudes' is due to the
greatly increasing role credit now plays as the largest component of actual
money - although many officials continue to ignore that. We continue to read
about 'money AND credit' as if they are different, when we should read
'currency and credit' ARE money.
But Kaufman also cites the Fed as it "has failed to recognize on a timely
basis changes in the financial structure and the implication of these changes
for monetary policy." He lists some of the changes.
1 -"Spread banking" - result rising interest rates, expansion of
debt, freedom from restraint and deterioration of credit quality.
2. - FED "failure to appreciate the significance for monetary policy of
the rapid increase in securitizaton of obligations."
3. - FED "adhered to the notion that liquidity was heavily based on the
amount of short-term assets on the balance sheets."
4. - Questionable ability of the FED to calculate the extension which financial
institutions and markets are much more international now.
5. - the perceived relation between reward and risk that encourages taking
risks including illegal activities.
6. - "the impact on monetary policy of the concentration of financial
assets in the hands of a few institutions."
He relates all this to the 'independence' of the FED from political
considerations. The result, he believes, is that the failure of the FED to
prevent these changes (and indeed to encourage them) as resulted in this
development of the concentration of financial resources in a few giant
institutions and the increase in FED regulation over them. FED officials now
are permanently assigned within banks. Among the other problems he cites is the
new concept of 'forward guidance' - that is FED pronouncements about its
assessment of the economy and its plans for future interest rates. Now, he
notes, everyone are 'mesmerized' by these words. Unprecedented and also usually
wrong. He comments: 'Governance of today's Fed is distorted."
Well, my observation, as with many other sectors of the economy the occurrence
of mishaps leads to demands for expanded regulation and control, which then
enables further mishaps which increase the demand for more expansion of
Chapter 14 - Tectonic Shifts
Dr. Kaufman sees the various results of the explosion in computers,
communications and 'big data' as a tectonic shift. He questions whether the
inundation with masses of data is entirely positive when so much of it is
doubtful. The frequent revision of the basic GDP number he cites as an example.
He has many concerns. Such as: "More broadly, the prevailing analytical
approach to cycles fails to capture key structural changes in business and
finance and their significance." .. "Relying solely on cyclical
economic analysis can lead to false expectations." He lists more.
Chapter 15 - You Can't Go Home Again
In other words, what is done is done. The changes described in prior chapters
cannot be undone. but we do have to not only deal with them but also be
proactive in creating new institutions and policies. The bulk of the chapter
includes a detailed description and analysis of a central concern - the massive
expansion of credit-debt both private and government.
He writes: "In U.S. financial markets, tectonic shifts have been
breathtaking, their consequences only beginning to unfold, debt has been
growing at a very rapid clip, not only in absolute terms but, more importantly,
relative to GDP." And, "The relative and absolute volume of debt are
not the only issues. Equally important is the dramatically deteriorating
quality of debt in recent decades." He believes the long term secular
decline in interest rates is over. He wonders if we will see another increase
in rates similar to that of 1946 - 1981. He questions such terms and concepts
as a "new normal." He lists several major problems the financial
system will face when the next crisis occurs.
Some related references
James Rickards - The Road to Ruin
James Rickards - Currency Wars
Niall Ferguson - The Square and the Tower
Niall Ferguson - The Ascent of Money
Charles Calomiris & Stephen Haber - Fragile by
Anat Admati & Martin Hellwig - The Bankers' New
George Melloan - The Great Money Binge
Peter J. Wallison - Hidden in Plain Sight
Peter Conti-Brown - The Power and Independence of the
Danielle DiMartino Booth - FED UP