TIME: Almanac 1993/TIME Almanac 1993.iso/time/101590/1015510.000

Text File | 1992-08-28 | 7.8 KB | 185 lines

                h                                                              INTERVIEW, Page 16

Beware the Day Of the Bear


JAMES GRANT, editor of Wall Street's influential Grant's
Interest Rate Observer, predicted the credit crunch, yet won't
say "I told you so"

By RICHARD HORNIK and James Grant


    Q. Have the crisis in the Middle East and the resulting oil
shock finally launched the bear market you forecast in
September 1984?

    A. The Middle East, I think, has remarkably little to do
with the slump in world equity markets, which was under way
long before Iraq barged into Kuwait. For the most significant
international financial event of the year, I nominate the
collapse of the Japanese stock market.


    Q. Now that the economy has begun to slide, meaning that
you're finally right, don't you feel like gloating?

    A. If you have kids, how glad can you be that the economy
is not supporting the parents of their friends, or indeed of
oneself? What gives me satisfaction is to see financial events
move in a logic that I understand and advocate. I am frustrated
not so much by being wrong as by seeing the Bakers and the
Bradys and the Greenspans try to manipulate and buy orthodoxy
on the cheap. So they are going to do something clever with the
G-7, or they are going to pass a constitutional amendment to
balance the budget. When I get the numbers wrong on a stock or
on a credit situation, that is one thing, but to see the
authorities with a wink and a nudge just sparring for more time,
that's another.


    Q. Were you ever worried that the financial excesses of the
1980s might go on forever?

    A. Yes and no. My publication, Grant's Interest Rate
Observer, is about interest rates and especially about credit.
On that score my views have basically worked. The junk-bond
market did come apart starting in 1989. And there is a credit
contraction. Bank stocks have been good to sell short. And real
estate, which is another big editorial topic, has been going
down, taking with it such people as Donald Trump.

    What has not come to pass and does give me a lot of worry
is that these problems seem to have had so little impact on
financial markets generally. So there is both gratification in
the run of the news and frustration at a seeming lack of
overall significance.


    Q. Do you ever gloat?

    A. I would have to say that I do in the case of Donald
Trump. Just to have him shut up is such a wonderful gift, if
only temporarily, a great improvement in the quality of life.
And so debt isn't all bad.


    Q. When did Donald Trump first come on your screen?

    A. In December 1987 we wrote a long piece about Trump, and
I had long thought he was emblematic of the times. For that
reason he was interesting to watch. Instead of declaiming on
the universe, we try to pick out people or companies that more
or less represent trends. I thought that Trump was a fine
exemplar of financial leverage and gall, both of which were in
oversupply and now are becoming scarcer.


    Q. What role has real estate investment played in the
financial turmoil of the 1980s?

    A. Real estate is one of the most revealing features of the
credit travails. It was the original taboo. Citibank existed
from 1812 to 1960 without making real estate loans. There was
this cultural resistance as well as regulatory and legal
resistance to making real estate loans because when the
depositors wanted their money it was not the time to rely on
a piece of land.

    Then lo and behold, we had inflation; we had deregulation
of interest rates. And we had banks that were losing their best
corporate customers to the commercial paper market. We had
banks that needed fee income and needed to do something clever
lest they go out of business the slow way, which is by starving
to death. And so real estate lending became the favored
commercial-bank asset. And as with any asset favored by
bankers, it suffered a depreciation because they lent so much
that they helped create a glut.


    Q. How responsible is the Reagan Administration for the
savings and loan disaster and the banking industry's problems?

    A. Certainly there was a great failing of the Washington
apparatus in the 1980s. But I think, paradoxically, a lot of
what happened in the '80s can be blamed on the politicians of
the 1930s. When deposit insurance was written into law in '33,
it was almost a free ticket. The banking system had been purged
of bad loans the old-fashioned way, the weakest banks had long
since failed, and the strong banks were barely making a go of
it.

    The reflexive psychology of bankers was that of -- well,
bankers were starting at the sight of their own shadows. So
deposit insurance could be done painlessly for decades because
bankers were too terrified to do anything resembling making a
bad loan. It was not until a generational shift occurred in the
'70s that bankers prepared to entertain really rank loans. The
government had this free ride for a long time. There were
hardly any failures because bankers were not lending in such a
way as to fail. And now, paradoxically, when the talk is of
cutting back on deposit insurance, the banking system is a
mirror image of the system in '33.


    Q. Is it a passing of generations in the financial world
that leads it to periodic busts?

    A. The generation that was caught up in the great debt
liquidation of the '30s never got over it. If you had started
work in the '50s on Wall Street, you would have heard a lot of
talk about the Crash. Even 20 years later, it would have
defied, never mind financial common sense, it would have defied
known laws of physics to the bankers in the late '70s had
anyone presented to them the proposition that an airline should
be leveraged. "What? You are talking about a labor-intensive,
highly unionized, highly cyclical commodity-driven business
being leveraged?" Yet by the time the cycle matured, people
were not only proposing but actually undertaking to leverage
airlines.

    That is the way great ideas end, not with a bang, not with
a whimper, but through reductio ad absurdum. You know
investment bankers are not satisfied until every good idea is
driven into the ground like a tomato stake.


    Q. Where does this preoccupation with debt lead?

    A. I certainly think there is a severe business slump in our
future, and I think what is so different this time is the
recklessness of financial practices. That recklessness, if this
does not sound too Calvinistic, will come to bear in the
downturn, making it deeper than it otherwise would be. And the
medium of that will be a shrinkage in the availability of
credit. Just as the advent of ever longer maturities in car
loans, for example, helped prolong and deepen the expansion,
so will shrinkage in the terms of credit -- whether they be in
car loans or mortgages or corporate lending -- deepen the
recession. I am not at all sure this is going to be a Grapes
of Wrath. At least, I hope not. But I think by the time it is
all over, people will be refusing to make good loans, just as
they had been overzealous in making bad ones.


    Q. So what should we do? Buy gold bars and bury them in the
backyard?

    A. Well, we had a co-op in Brooklyn Heights, which we sold
last summer. We are now renting because I think that it is a
good time to rent. I think short-dated Treasuries are a nice
way to ride things out. You are being paid what is historically
a good rate of interest, and you are going to get your money
back. I think you ought to be very aware of the credit
condition of your insurance company. There are outfits that
rate the claims-paying ability of insurance companies, and
people ought to ask their financial planners or someone whom
they trust to make sure that their insurance company's
claims-paying ability is the top.