David Foster cites an interview with fund managers Kevin Duffy and Bill Laggner, two guys who seem to have a gift for expressing themselves well and concisely:
Barrons: You’ve said that perhaps the most redeeming feature of capitalism is failure. Please explain.
Duffy: Any healthy system needs a way to correct error and remove waste. Nature has extinction, the economy has loss, bankruptcy, liquidation. Interfering in this process lengthens feedback loops. Error and waste are allowed to accumulate, and you ultimately get a massive collapse.
Capitalism is primarily attacked by two groups: utopians who wish to impose a more “compassionate” system, and political capitalists who want to enjoy the fruits of success without bearing the pain of failure. They use the coercion of the state to gain privileges, at the expense of everyone else.
Barrons: What about the argument that a financial panic would have ensued and crushed the little guy?
Duffy: The little guy actually has been crushed. Nobody is asking where this money is coming from. And the money has to essentially flow into the political economy at the expense of the real economy. The little guy is always going to be the last one in the soup line. So he will get a bone tossed to him, like cash for clunkers. But if you are Goldman Sachs or if you have got essentially the red bat-phone to Washington, D.C., you are first in line.
Barrons: Where are we in the deleveraging process?
Laggner: We had a massive real-estate bubble and credit growth, thanks to off-balance-sheet banking that went to four or five times gross domestic product in the latter part of this decade — and of course it burst. Because of huge government commitments, we now have rolled the credit bubble into a sovereign-debt bubble.
Barrons: Speaking of a backlash, we now have Goldman managers toting guns to protect themselves from populist rage. At what point will society demand some sort of change from the government?
Laggner: A client sent me an e-mail the other day in which the tea-party demonstrators are getting a higher approval rating than the Democrats or Republicans. There is a backlash building, and that’s a very good thing. But it’s a process. As the arrogance level of central bankers or the money-center banks continues to grow, 2010 and the mid-term elections will be very exciting.
Duffy: Last year, 70% of the people were opposed to the bailout. And so far, through these massive interventions, government has been able to stabilize the financial system. But you have this divergence between the real economy and the political economy. People are still hurting. Consumer confidence has not rebounded like investor confidence has. If we are right, and we are heading for the next leg down, that’s when I think all bets are off. If the political economy and some of those who got bailed out are back asking for another bailout, that’s when the backlash really starts to heat up.
For bear markets to end, they have to teach lessons. But the people who didn’t see this bus coming 2 1/2 years ago — they’re back in droves, and they’re bullish. We haven’t changed behavior, and this bear market will not end until we do.