American Debt Hogs Risk Backlash, Says Ex-Bear Stearns Banker
"Inflated"
John Wiley & Sons via Bloomberg
The cover jacket of "Inflated: How Money and Debt Built the American Dream" by R. Christopher Whalen.
The cover jacket of "Inflated: How Money and Debt Built the American Dream" by R. Christopher Whalen. Source: John Wiley & Sons via Bloomberg
Dec. 7 (Bloomberg) -- Axel Merk, president and chief investment officer at Merk Investments LLC, talks about the Federal Reserve's policy of quantitative easing. Merk talks with Matt Miller on Bloomberg Television's "Street Smart." (This is an excerpt of the full interview. Source: Bloomberg)
Christopher Whalen
Svein Erik Dahl/John Wiley & Sons via Bloomberg
Christopher Whalen, author of "Inflation."
Christopher Whalen, author of "Inflation." Photographer: Svein Erik Dahl/John Wiley & Sons via Bloomberg
For decades, Americans have gotten away with gorging on debt and inflation because the dollar is the world’s reserve currency, says bank-rating specialist Christopher Whalen.
Now the day of reckoning may finally be at hand.
If the Federal Reserve keeps printing money and spreading inflation around the globe, creditors will turn against the U.S., writes Whalen in his new book, “Inflated: How Money and Debt Built the American Dream.”
Whalen, 51, is the co-founder of Institutional Risk Analytics and a former Bear Stearns Cos. banker. In “Inflated,” he digs deep into history to explain why Americans feel entitled to live beyond their means. In a phone interview, we discussed the past and the future of the financial system, from the days of Thomas Paine to the age of securitization and Paul Volcker’s support for bank bailouts.
Onaran: Are we the only ones addicted to debt and inflation? What about the European countries that are now in trouble, like Greece?
Whalen: The rest of the world is on the flip side of us. When they borrow too much and spend beyond their means, they have to eventually earn dollars and pay it back. We can just print the money. That has allowed us to dig a much deeper hole.
But if you abuse the privilege and treat your own money with contempt, eventually other people will, too. The world is struggling to come up with a global means of exchange that isn’t controlled by one nation. They won’t let us keep this franchise forever. When we lose that benefit, we’ll have to adjust, just like everybody else.
‘Do We Need War’?
Onaran: You argue in the book that U.S. banks pushed the country into World War I. Are they still so powerful? Do we need war to fix the economy again?
Whalen: The banks aren’t as strong today, and they have very different interests and tendencies. The House of Morgan was a partnership and it took political risks. Now banks are run by employees, not owners. They still have great power, but it’s a different type of power. Their agenda is different, too. Now they advocate peace and global trade because those benefit them.
Onaran: You’re also critical of former Fed Chairman Paul Volcker. When I did a profile of him two years ago, I could hardly find anybody critical of Volcker. He’s seen as a hero for bringing down inflation in the early 1980s and you’re arguing against inflation as the biggest ill. So I’m confused.
Volcker Bailout
Whalen: He’s the father of too big to fail. It starts with the collapse of Penn Square Bank in 1982. Volcker wanted to bail out Penn Square. He’s a hawk on monetary and fiscal policy. But he’s never been a hawk on the big banks.
Onaran: Yet the big banks complain more about the Volcker rule than about any other legislation passed in the last two years. So he is advocating punishing the banks, isn’t he?
Whalen: While it does penalize the banks, it doesn’t address the real issue. It might inconvenience them, but it doesn’t get to the heart of the problem. I’ve been arguing that we should have restructured the biggest banks. That is what should have been done.
Onaran: What about securitization? Is it a bad thing?
Whalen: It’s not all bad. It works well with short-term debt. With car loans, credit cards, loans that are one, two years in maturity, securitization works.
But with 30-year mortgages, it doesn’t. There’s too much volatility during the life of the loan, prepayment risk, interest rates fluctuating. I don’t know if we’ll ever go back to securitization of home loans -- unless we move close to something like Denmark’s model, where all the parties involved have a fiduciary duty to the borrower.
“Inflated” is published by Wiley (393 pages, $34.95, 23.99 pounds, 28 euros).
(Yalman Onaran writes for Bloomberg News. The opinions expressed are his own. This interview was condensed from a longer conversation.)
To contact the writer on the story: Yalman Onaran in New York at yonaran@bloomberg.net.
To contact the editor responsible for this story: James Pressley at jpressley@bloomberg.net.
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