Two widely-followed investment gurus—Peter Bernstein, best known as author of “Against the Gods: The Remarkable Story of Risk,”and GMO chairman Jeremy Grantham—obviously didn’t get the memo, and spent the weekend fomenting anarchy.
Bernstein chatted with The Wall Street Journal:
WSJ: How long do you think this whole process will take, before we get back to normal?
Mr. Bernstein: Longer than people think. The people who think we will have turned in 2009 are wrong. There has to be a respite along the way. Nothing goes in one direction forever. But it will take longer than people think. If that weren’t the case, I would be talking entirely differently. I would be saying, “What an opportunity we have got.” And I just can't believe that the opportunity is here yet. There is too much to unwind.
Grantham, in GMO’s quarterly newsletter, goes even further, having the temerity to suggest that moral hazard may be afoot:
What’s worse, those who took on unjustified risk live to prosper and reinforce the existing agency problems. These problems were big enough already: stock options, for example, that encouraged risks by rewarding upside success and not punishing failure...To maintain a healthy respect for risk taking, it is surely necessary to punish egregious over-reaching or spectacular misjudgment with the spectacular penalties they deserve and used to get but get no longer. Bear Stearns (BSC) and others leveraged 20, 30, and 40 times...Such extreme leverage may be fine if you get away with it, but of course failure should have very painful consequences or the leverage will be 50 times next time. But this time the Fed volunteered to transfer the pain from ineffably rich bankers to the taxpayers. No wonder Volcker could hardly control his disgust last week: “The Federal Reserve has judged it necessary to take actions that extend to the very edge of its lawful and implied powers [spit], transcending in the process certain long embedded Central Banking principles and practices.” (Hawk and spit!).
One Guy Who Has Seen It All
by E.S. Browning
The Wall Street Journal Apr. 26 2008
Immoral Hazard!Time Sink Alert!
by Jeremy Grantham
GMO Quarterly Letter, Apr. 2008