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Financial Finagling Pt. 1

WATTENBERG: Alex Pollock, friend and colleague at the American Enterprise Institute, welcome to Think Tank.
POLLOCK: Thank you.
WATTENBERG: Letís begin, if we might, the way we normally begin these interviews, by asking our guest for some personal biographical material. I know in your case itís been very interesting.
POLLOCK: Itís been a lot of fun. My first real job was as an instructor in philosophy which I did briefly. That was my brief academic career.
WATTENBERG: Where was that?
POLLOCK: That was at Lake Forest College. I actually live in Lake Forest today, about two blocks from where I used to lecture.
WATTENBERG: In the Chicago suburbs?
POLLOCK: In Chicago suburbs -- from where I used to lecture on the history of philosophy. And Iím often asked, 'Well, banking and philosophy, thatís pretty odd.' But, in fact, I find finance very philosophical.
WATTENBERG: I have to tell you that I once wrote a theme that had as a final line, 'While Plato could, Immanuel(?) canít.' Please continue.
POLLOCK: I gave up the idea of an academic career and went to work in the International Banking Department of what used to be the Continental Illinois Bank in Chicago. I got there in 1969, in time for the credit crunch of 1969 when there was a great shortage of funding. The Euro dollar market was being invented, and --
WATTENBERG: Credit crunch means you canít get loans?
POLLOCK: It means you canít get money. You canít get loans, and the banks themselves --
POLLOCK: -- couldnít get money except by going over to London. So the Euro dollar was a big new idea in those days.
The next year, while I was still in the training program -- it was 1970 -- that was the collapse of the Penn Central Railroad and the corresponding collapse of the commercial paper market which ceased to function.
WATTENBERG: Which led to the formation of Amtrack in a way?
POLLOCK: Yes, indeed.
WATTENBERG: What does that mean, the fall of the paper market?
POLLOCK: That means that nobody would buy -- corporations get financed by issuing short term notes in whatís called the commercial paper market, the money market, which various kinds of investors buy. And when everybody gets scared, they stop buying, and nobody could roll over their maturing debt.
WATTENBERG: Every field has its own jargon, and the financial markets is pretty high on the list.
POLLOCK: Very true. Without a mystery language, you canít put yourself up as an expert --
WATTENBERG: As an expert.
POLLOCK: -- in something.
WATTENBERG: Okay. Continue.
POLLOCK: Right. Well, I did -- later on, a couple years ago, I sat down and starting off with these two events, I made a list of all of the financial crises that I had personally gone through, and it filled a whole slide, single-spaced.
I spent about five years in Europe in international banking --
WATTENBERG: In what city?
POLLOCK: In Brussels and then Antwerp and then Frankfort. And I came back --
WATTENBERG: Not very exciting cities. I mean, itís not Paris, itís not London --
POLLOCK: -- it wasnít --
WATTENBERG: -- itís not Rome, but anyway --
POLLOCK: Well, we had a lot of fun. We were young, and we had a lot of fun. While I was in Frankfort --
WATTENBERG: Excuse me. Just a personal note. Youíre married. Your wife is in Chicago and you commute, is that correct?
POLLOCK: Thatís right. Iím here during the week at AEI, and I live in Chicago on the weekend. Thatís where my wife is. We have four kids.
POLLOCK: The youngest is in college. The others are grown. And this weekend Iím going home for the marriage of my younger daughter, the number three. So --
WATTENBERG: This weekend is my birthday, and weíre having a big --
POLLOCK: Well, there were go.
WATTENBERG: -- celebration. Okay, go ahead.
POLLOCK: While I was in Frankfort, there was a big financial event which was the collapse of the Herstatt Bank due to fraudulent foreign exchange dealings which precipitated a financial crisis.
I got home, back to Chicago, back to the U.S., in time for the financial collapse of the real estate investment trusts, which was in --
POLLOCK: R-E-I-T-S, the REITS. It was the REITS.
POLLOCK: That was 1974-75. On a mark to market basis, itís probably true the entire --
WATTENBERG: What does that mean, mark to market? I mean, letís make believe that me and some of the other viewers donít know what mark to market means.
POLLOCK: Mark to market means you take a financial instrument, like a loan or bond or an equity, and instead of having it on your books at what you paid for it, which is called cost, you have it on as what you could actually sell it for today.
WATTENBERG: The reason Iím asking these questions is we did a special once called 'The Shareholders Society,' I think something like that, and somewhat more than half of the people in the United States now own securities.
WATTENBERG: And home ownership is at an all-time high. So these things -- they matter to a lot of people, particularly the very distinguished viewers of Think Tank.
POLLOCK: They matter a lot, and I think the most profound economic idea is that we ought to be -- we are, indeed, already and we ought to be increasingly evolving toward a society of investors where every citizen is a capitalist or an ownership society, if you will.
WATTENBERG: To coin a phrase.
WATTENBERG: I think Jack Kemper originally came up with that idea --
POLLOCK: But the original place that I started thinking about this is a book called 'The Capitalist Manifesto.' It was written by Mortimer Adler of Great Books fame --
POLLOCK: -- and Louis Kelso in the 1950s. And they said, 'This is the real ideal. Itís not the Communist manifesto that weíre going to do away with capitalists. Itís the capitalist manifesto that everybody should be a capitalist, everybody should be an investor and take advantage of the incredible build-up of capital in society.' Iíve always thought that was a most profound and correct idea.
WATTENBERG: Alex, just so we get it all on the record, if you could tell us what companies you are a director of.
POLLOCK: Iím sorry. Let me go on with my biography.
WATTENBERG: Okay, go ahead.
POLLOCK: Then I worked in Chicago for the Continental Illinois Bank for a number of years.
WATTENBERG: Which is a big bank.
POLLOCK: Was a big bank.
POLLOCK: Was the biggest -- we used to say the biggest bank between the mountains, between the Alleghenies and the Rockies --
POLLOCK: -- the biggest bank that wasnít in New York or California.
POLLOCK: Was a big bank, and I was there for the run on Continental, which happened in 1984.
WATTENBERG: The run -- Jimmy Stewart was in a movie. What was that called? 'Itís a Wonderful Life'?
POLLOCK: 'Itís a Wonderful Life.'
WATTENBERG: Where all the depositors want all their money right away --
POLLOCK: Thatís right, and of course, there is no money to give them.
POLLOCK: Lionel Barrymore was the evil banker.
WATTENBERG: Engineering to take over control of the bank from Jimmy Stewart.
POLLOCK: Well, there was a run on Continental, except there were no lines in the lobby. It was all happening by wires and by phone calls saying, 'Just send it back.' That was very constructive.
So after that was over, I decided -- well, I should tell you I was put on a group which the Chairman called the Forces for Good to try to save the bank at the last minute. We called ourselves The A Team. But we didnít succeed.
Anyway, after that, I figured the fun was over. I went to work for a regional bank in Milwaukee. I became the President.
WATTENBERG: What was the name of that one?
POLLOCK: It was Marine Bank. While I was there, we had the collapse of the less developed country debt market. This was in the late 1980s.
WATTENBERG: Weíll make believe that we understand that. Go ahead.
POLLOCK: I went down and took over the largest savings and loan in St. Louis, which was also insolvent, to try to save it, which I didnít succeed in doing, but I had a great time.
WATTENBERG: Have you ever been investigated?
POLLOCK: No. Well, not as far as I know.
WATTENBERG: Oh, okay. I thought you said you once were in charge of a bank that became insolvent. There was no --
POLLOCK: No, no. It didnít become insolvent. It was insolvent when I was --
WATTENBERG: It was -- oh, oh, I see. Iím sorry.
POLLOCK: I was put in. This was this savings and loan.
POLLOCK: I was put in to try to improve the situation, which we did do, and I got great appreciation from the various regulatory bodies for all the good work we did.
WATTENBERG: I salute you, sir.
POLLOCK: Thank you. But we didnít save it in the end. But that was my introduction to mortgage finance.
After that I did a little stint at the Federal Reserve Bank of St. Louis as a visiting scholar. Second best gig compared to being a fellow at AEI.
WATTENBERG: Weíre going to talk about that in a minute, yes.
POLLOCK: Then I went up to the Home Loan Bank of Chicago, was recruited to run it, which I did for 13-14 years and had a very good time. Got into my sixties and decided I wanted to contribute to trying to help --
WATTENBERG: In your sixties meaning your years?
POLLOCK: My years.
WATTENBERG: How old are you now?
POLLOCK: Iím 63.
WATTENBERG: Okay, and just for the record, this is August of 2006. Okay, go ahead.
POLLOCK: And I decided I wanted to try to help the public policy debate in finance which I thought I knew something about and came to AEI. And I consider it one of the great decisions I ever made. So thereís my career in a nutshell. Itís been hugely interesting and a lot of fun.
WATTENBERG: Well, AEI, as I like to point out, is probably the most important institution of its kind in the world. I mean, every foreign leader, right, left and center, every economist -- weíve had sessions on literature and music -- wants to come here. C-SPAN often broadcasts here in order to make their case.
Vice President Cheney was both a fellow and a Director. Lynn Cheney remains a fellow. And itís quite a place. Iíve learned a great deal, written a number of books here. And I owe them big time, as we say, and I like to think that Iíve helped them as well.
POLLOCK: For my part, I cannot imagine any place Iíd rather be than at AEI right now.
WATTENBERG: Okay. So now I want to talk to you about something that --
WATTENBERG: Okay. Alex, can you tell me just for the record which companies you are a Board member of?
POLLOCK: Iím a Director of Allied Capital Corporation and the Chicago Mercantile Exchange and the Great Lakes Higher Education Corporation. And Iím also a Director of three non-profit organizations.
WATTENBERG: Which are?
POLLOCK: Which are the International Union for Housing Finance, the Great Books Foundation. I mentioned Great Books before.
WATTENBERG: Iím familiar with that --
POLLOCK: And the Illinois Council on Economic Education.
WATTENBERG: Okay. Let me bring up something that I know you specialize in and I think we disagree about, the Sarbanes-Oxley Act, named after Senator Paul Sarbanes and Congressman Michael Oxley of Ohio, which put extremely rigorous controls on the auditors and the accountants who monitor the corporate books, giving them what some people think is inordinate power. And you have been very critical of that. And I think we disagree about it. But what do you think about -- what do they call it, SO, or Sarbanes-Oxley, Sar-Ox or --
POLLOCK: Some people call it SOX.
WATTENBERG: SOX. Okay. Weíll call it SOX.
POLLOCK: I call it Sarb-hyphen-Ox.
WATTENBERG: Okay. SOX is shorter. Okay.
POLLOCK: The biggest problem with the Sarbanes-Oxley Act -- there are various debates, but the biggest problem is around a section called Section 404, which has unleashed the excessive expense and bureaucracy.
But the problem really isnít the Act itself, the wording of the Act. The problem is how the wording has been implemented by various bureaucracies and assistant bureaucracies which are --
WATTENBERG: Just for the record, it has been criticized, of course, by conservatives for over-regulation. But a lot of cities and states have sort of picked variants of it. And I know some very liberal accountants who I used to work with, even they say itís been too much.
POLLOCK: Too much.
POLLOCK: I think everybody agrees itís been too much. The SEC --
WATTENBERG: Yes, and theyíre in the process of rolling it back somewhat.
POLLOCK: Well, the SEC itself agrees that the implementation bureaucracy has been excessively costly, heavy-handed, picayune, focused on the wrong things.
But itís really the implementation, not the wording of the Act itself, an example of the famous unintended consequences --
WATTENBERG: Of all unintended consequences, thatís one of the neoconís marching songs. So go ahead.
POLLOCK: Well, this is a great example of it.
WATTENBERG: But let me ask you a question. I think hereís where we disagree. You have major problems with it; a lot of people have major problems with it. On the other hand, just put yourself in the shoes of a foreign investor, and you have pension plan funds you want to invest. And you want to know that itís in a big market, a stable market, in what they call a transparent market where you know whatís going on.
Now, even with its overstatement or its over-regulation, be that as it may, it does provide that. It gives people a sense -- and a legitimate sense -- that thereís a -- theyíre there, and that people -- somebody is looking over somebodyís shoulder.
POLLOCK: Well, it actually gives people a sense that there are a whole series of people looking over each otherís shoulders --
POLLOCK: -- to excess. Now, if youíre an investor, you want to think that you have reasonable accounting records. One of the things you should never think about accounting is that itís somehow the truth or an objective reality. Accounting is the result of a lot of theory and judgments and guesses. So you should be appropriately skeptical. I wonít say cynical, but appropriately skeptical about accounting, not believing itís some sort of objective key.
But you do want that, and you donít want to be defrauded by the insiders. Thatís a theme throughout all financial history. But at the same time, you want your investment to be put to productive use. You donít want your money frittered away with unproductive routines.
WATTENBERG: I understand, but on balance -- and I think this is where we disagree -- you think itís counterproductive, it violates the law of unintended consequences --
POLLOCK: No. It obeys the law of unintended --
WATTENBERG: It obeys the law. Pardon me. And I would say that notwithstanding that, it is essentially beneficial in its effects. Is that a fair statement of our positions? POLLOCK: Now, the question is what is the net. The question is whatís the net, and itís especially the case for smaller firms where the implementation of Sarbanes-Oxley, Section 404, is just starting to come in and is going to be a disaster if itís not fixed.
WATTENBERG: But put yourself in the shoes of, say, a Chinese manager of a pension fund. Now, theyíve got a peculiar problem because of this coerced low one-child family rule. Earlier than most countries, they are going to have this age differential of very few young people and lots and lots of old people, and theyíre going to need pensions. And they want to invest in someplace safe and secure and big and transparent, and thereís only really one such country in the world, which is the United States of America.
And they say, you know, this has got to be -- and they have a lot of money now -- this has got to be safe. Itís got to be transparent. And --
POLLOCK: Those are two different things now, safe and transparent.
WATTENBERG: I understand. Now, they may have overdone it on SOX, but that tells me that theyíre headed in the right direction. And so Iím going to shove in my stack on investing in either funds or individual stocks in the United States. Is that a fair way of describing our differences?
POLLOCK: I think it is, but hereís what we agree on. One of the competitive advantages of the United States, as discussed I thought quite brilliantly by our colleague, John Macon, a month ago or so --
WATTENBERG: Who works for hedge fund operator, Bruce Kovner, right?
WATTENBERG: Heís done very well over the years.
POLLOCK: -- is the provision -- I think he called it savings services or investment services or something like that -- to the world. Now, of course, the former world center of that was London --
POLLOCK: After the First World War or because of the First World War really, the center moved to New York.
WATTENBERG: Which is regulated by Washington largely.
POLLOCK: Which is regulated by Washington. Well, London, of course, is both the political and the financial capitol --
WATTENBERG: Right, I understand.
POLLOCK: -- and we have -- I mean, here we have New York/Washington or Washington/New York.
WATTENBERG: Well, without bragging about what is now my hometown, in many ways, Washington is the center of the universe. I mean, we know when we try to book people on Think Tank, theyíre either here -- theyíre at the Bureau of Labor Statistics, the Census Bureau, the NIH, some growing but great universities or theyíre going to stop by here. And weíve had people from all over the world here. So itís pretty important what we do here.
POLLOCK: I couldnít agree more. Thatís why you and I like to be here --
WATTENBERG: Oh, yeah --
POLLOCK: -- trying to influence the --
WATTENBERG: No, no, and we have a lot of very --
POLLOCK: Now, letís cut back. So is the center going to move back to London out of the U.S.? It will if we foolishly overload the system with bureaucracy, with the risk of incredible financial damage through the activities of our friendly plaintiffís bar and similar problems.
So you want to be a world center for investment services, which means good infrastructure, rule of law, fair accounting, honest reporting --
WATTENBERG: Transparency.
POLLOCK: Transparency, although I really donít like the metaphor transparency because the metaphor implies that you are looking through something at the reality --
POLLOCK: -- and accounting is not that. Accounting
is --
POLLOCK: -- is semi-opaque.
WATTENBERG: -- Sarbanes-Oxley attempts to pierce that veil.
POLLOCK: Yes, but it wonít succeed because itís impossible in principle. But anyway, all that is right. But if you go too far -- if, in the pursuit of this right idea of capital markets to the world, investment services to the world, we burden ourselves with foolish, excessive and wasteful bureaucracy, with behavior thatís risk adverse, over-balanced relative to profit-seeking instead of imbalance, then weíre going to lose our advantage there.
And itís my view that there are five sources of competitive advantage that exist, and the fifth -- well, Iíll tell you what the five are. They are natural resources, labor, capital, knowledge and infrastructure. And the fifth, infrastructure, would subsume this idea of providing investment services, markets, transparencies such that can exist, good governance and so on. If we lose that, we will lose a very important advantage as a country.
WATTENBERG: Agreed. Let me bring up a somewhat ancillary topic. The United States and its script called the dollar, which is no longer even backed by gold, and they closed the gold window --
POLLOCK: 1971.
WATTENBERG: 1971 -- as if that made any difference -- is now the --
POLLOCK: Actually, I think it did make a difference, but anyway...
WATTENBERG: Well, why is gold of any particular value?
POLLOCK: Itís not of any particular value. Itís whether you have any control on the central banks of the world. And after they closed the gold window, remember we had runaway inflation in the whole world for a decade.
WATTENBERG: And you think that was the reason?
POLLOCK: I think itís related.
POLLOCK: Anyway --
WATTENBERG: All right. Anyway, the United States is what -- the dollar is what called the reserve currency --
WATTENBERG: -- which means what?
POLLOCK: Which means that other countries, central banks, monetary bodies or even private companies or citizens hold assets denominated in dollars in other countries as their savings.
So that if you look, for example, at the Chinese Investment Authority of the Chinese Government, it has an investment portfolio, a very significant amount of which is held in assets denominated in dollars.
WATTENBERG: All right.
POLLOCK: And thatís a huge advantage -- if you were going to -- no? Okay. Oh, Iím sorry.
WATTENBERG: Now, Alex, this reserve currency idea, I donít want to be mean-spirited or overstated, but itís sort of a racket in a way, very beneficial to the United States. We issue script which we call dollars. People, in return for that paper unbacked by gold bars in Fort Knox, people send us goods and services, and then they hold on to these pieces of paper.
So we are getting one of the great free rides in the history of the world. I mean, it is -- I donít want to put too fine a point on it -- a racket.
POLLOCK: Itís a great advantage for our country. Thereís no doubt about it. To be the one who issues -- itís like the Government being able to issue paper money domestically.
POLLOCK: The United States is like the issuer of paper money to the whole world in the form of dollars, and itís a huge advantage to the authority that can do that.
WATTENBERG: And let me return to one other thing. You said London could become the financial center again. London, England -- United Kingdom has a population now of about 60-million people. Projections show itís probably declining over the next few decades; then probably down to about 55 or 50-million.
We have about 300-million, and because we have a somewhat higher birth rate and fertility rate and because we have immigrants, some of whom are illegal, we are at 300-million and growing and with a vast empty mid-continent area that we know can provide good homes for people because people have lived very nicely there and who are looking for people.
Now it seems to me unreal to suggest that a little island which used to be a great colonial power, but is no longer, can in any way, shape or form compete with the magisterial potency of the United States of America.
POLLOCK: I think thatís a very important and good point. On the other hand, itís always a mistake to underestimate whether somebody could compete with you.
POLLOCK: And youíre right. You did mention something thatís very important which is that financial centers may also go along with military powers, the policemen of the world, the 19th century --
WATTENBERG: Not only that. I mean --
POLLOCK: -- along with the --
WATTENBERG: -- you have --
POLLOCK: -- of the world.
WATTENBERG: -- people like Pat Buchanan, who are vigorous opponents and write screes about the Mexican-Americans coming into the United States, which has been true of every group thatís come here.
And the Department of Defense, which takes copious -- and issues copious data -- they have their copious -- with which they write it down -- has determined that proportionate to their population, Mexican-Americans in our Armed Services have the highest proportionate share of winners of the Congressional Medal of Honor. And surveys show that immigrants, by and large, are more patriotic than native-born Americans. Thatís a pretty good thing.
POLLOCK: Itís a great thing, I think.
WATTENBERG: Okay. All right. Letís return to how this white collar crime has affected the average American and particularly PBS has -- public broadcasting has an audience somewhat skewed to the older and some of whom are -- unlike the Madison Avenue view of it -- some of whom have enormous discretionary spending. How does this, todayís scandals, affect people?
POLLOCK: In my judgment, the average American is affected not at all. There are some people --
WATTENBERG: Well, now -- now, wait. Wait. Wait a minute. Alex, if I put my money in Adelphia or WorldCom or Fannie Mae or Enron, and I see -- I think I bought Enron at 80 and I sold at 60. I know people who took it way down to the bottom and lost a lot of money. And you are saying that doesnít affect people?
POLLOCK: No, not if they hold -- I was about to say only if they hold a non-diversified portfolio, which if you had a mistakenly over-concentrated portfolio, as apparently especially some employees did, which was a huge mistake -- nothing can be a bigger mistake than having your career invested in a single company --
WATTENBERG: Yes, but --
POLLOCK: -- your savings in that company.
POLLOCK: If you hold a diversified portfolio, no, it didnít affect you much because there are always going to be some things going up and some things going down.
WATTENBERG: Alex, unlike you and even unlike me, some people do not have the money to diversify. And if a company says, 'All your savings must be directed in our 401-K' --
POLLOCK: And the 401-K is in company stock?
WATTENBERG: In company stock --
POLLOCK: Thatís a huge --
WATTENBERG: -- and in company tanks.
POLLOCK: Thatís a huge mistake, and that shouldnít happen. Let me push it one further --
WATTENBERG: But it has happened.
POLLOCK: Yes, but thatís not the average American --
WATTENBERG: No, I understand --
POLLOCK: -- they didnít experience that. Some --
WATTENBERG: Continue that thought, if you would.
POLLOCK: If you think further about concentration, first of all, itís a very bad idea --
POLLOCK: -- to have 401-Ks put into the company stock.
WATTENBERG: But some people --
POLLOCK: Well --
WATTENBERG: -- avoid it.
POLLOCK: -- thatís one of the reforms actually in the new Pension Protection Act of 2006.
WATTENBERG: That it would force the companies to diversify their 401-Ks.
POLLOCK: Theyíd have to let the employees diversify in their 401-K --
WATTENBERG: Okay, and many companies do that already.
POLLOCK: Yes, and it only makes sense.
POLLOCK: You have another kind of concentration risk which does affect a lot of people. About 20-percent of the private sector employees in this country have defined benefit pension plans, what people sometimes call traditional plans. These were mostly invented in the late 1940s and the 1950s, so theyíre all not that --
WATTENBERG: Where it says that when you reach age 65 or whatever, you will get a certain amount of money each month, but it is not indexed for inflation?
POLLOCK: Thatís correct, and actually it doesnít say a certain amount of money. It says a certain formula. Your years of service times --
POLLOCK: -- some percent usually, times your final salary, and then that turns into an amount of money by formula from -- you donít really know what it will be in advance until you get there.
So if the pension plan turns out to be in good shape and the company is in good financial shape and they pay your pension, well and good. But if the company fails as, of course, sometimes will happen and the pension plan is under-funded, which means there are not enough investments in it to pay the obligations, that is almost always the case; that when the company fails, the pension plan is under-funded because, as a rational manager, why in the world, if you were really in trouble, trying to save the enterprise, why would you put your money in the pension plan?
WATTENBERG: But there is Federal legislation -- I believe itís ERISA -- which was -- I donít know what it stands for
-- but I think was initiated by the late Senator Jacob Javits of New York, which provides the investor with a security blanket which says if the company doesnít make good on its pension obligations, we will step in and --
POLLOCK: Thatís correct.
WATTENBERG: -- make you whole, and in return for that, they tax the companies regularly to fund that to make that pot whole.
POLLOCK: Thatís right, and that guarantor or so-called insurer is called the Pension Benefit Guaranty Corporation.
WATTENBERG: Right, and again, maybe we would agree on this and maybe we wouldnít. I think that certain kinds of Federal regulation, which some Conservatives decry -- I mean, there are people in this town that say taxation is theft; neoconservatives like myself do not believe that.
We think the Federal governments, State governments, local governments, complex as they may be, often do good things. And you will find the political heirs of Social Security and Medicare who bitterly opposed those programs now say, 'I wouldnít touch a hair on the head of Social Security.'
POLLOCK: Thatís true. Okay.
WATTENBERG: So you think the idea of certain forms of big government make some sense?
POLLOCK: Certain forms. Iím very fond of the saying of Charles Kindleberger, the great economic and financial historian, who said -- and thereís an eternal debate -- should you be an Adam Smithian free marketer or should you be a Keynesian interventionalist? Kindleberger said, 'Every rational man has to answer both depending on the circumstances.' Thatís --
WATTENBERG: And what did they say --
POLLOCK: Thatís what I think too --
WATTENBERG: I mean, Keynes, I know -- well, you told me what Keynes -- I mean --
POLLOCK: Well, Keynes was in favor, when the circumstances warranted it, of having Government programs intervene to try to fix problems.
Let me come back to pensions, though. Itís a good example of it. So if youíre a regular employee with one of these defined benefit pensions, you have a credit risk on the company. So you have your job there, but youíre also a creditor of the company because itís really the company in the first instance thatís guaranteeing your pension. So if the pension is under-funded, the company fails --
WATTENBERG: It goes to the Pension Benefit Guaranty Corporation, right?
POLLOCK: One more step. You become an unsecured creditor of the company in bankruptcy. You get transferred -- your pension, up to a certain limit, gets transferred to this Pension Benefit Guaranty Corporation. The Pension Benefit Guaranty Corporation is itself insolvent. It has a net worth, as of the end of last year, of negative $23-billion, with a B.
WATTENBERG: But the kitty is constantly refreshed by taxation on existing corporations?
POLLOCK: There are -- whatís technically taxed or they pay 'insurance premiums' are the defined benefit pension plans.
WATTENBERG: But let me just interrupt. We have somewhere about a $12-13 trillion gross domestic product, and itís growing very rapidly. I donít want to be cavalier about it, but thatís chump change.
POLLOCK: If you believe youíre going to use the whole economy to pay off these pensions, that is to say --
WATTENBERG: Well, thereís a certain fungibility about an economy. I mean --
POLLOCK: No, but this is not -- this is an allegedly separate corporation, the PBGC, which is supposed to be self-sustaining financially according to ERISA, 1974, as you so rightly pointed out.
The idea of the PBGC was actually invented by the United Auto Workers in 1961 that would allow them to negotiate for bigger pensions without having them funded. And so they had --
WATTENBERG: And without subjecting their workers to risk -- I mean, to insolvency or whatever.
POLLOCK: Well, the idea was you get the Government to guarantee them. Supposed to be financially self-sustaining. Itís $23-billion in the hole because their funding base is defined on benefit pension plans which are rapidly declining in number.
WATTENBERG: And going to defined contribution --
POLLOCK: Going to defined contribution plans which pay no taxes --
WATTENBERG: Whatever that means, but go ahead.
POLLOCK: -- to the PBGC. So its funding base is eroding. A one very careful estimate was that the PBGC, if you look forward 50 years and count all its in-flows and all its probable out-flows, the present value of its deficit is $90-billion.
WATTENBERG: Which is peanuts compared to some smaller countries than ours that does not have a growing population base to pay these --
POLLOCK: -- but we financial types like to worry
about --
WATTENBERG: Iím sorry?
POLLOCK: But financial types like me like to worry about --
WATTENBERG: No, I understand --
POLLOCK: But now we have the --
WATTENBERG: I salute you for that --
POLLOCK: -- Pension Protection Act which has probably reduced that deficit to --
WATTENBERG: The which Act?
POLLOCK: The new pension act, Pension Protection Act, I think it is, of 2006, which has now reduced that long-term deficit to about $50-to-60-billion, but hasnít addressed the fundamental problems.
WATTENBERG: We have some interesting financial situations that have come about. It used to be that Social Security kicked in at age 65, and if, in any quarter until you were age 72 you earned money, you didnít get your Social Security.
Now you can retire as early as 62, and when I was, I think, 67, a few years ago, they paid me back taxes -- back disbursements of everything that I would have gotten had I called for it when I was age 65. And the amounts have gone way up.
When I worked on President Johnsonís staff, it didnít receive much attention at the time, but he, working with Wilbur Mills, who was the Chairman of the House Ways and Means Committee, I think, they raised the Social Security benefit from $50 to $100. A hundred-dollars in those days would probably be --
POLLOCK: Five-hundred.
WATTENBERG: -- four or five hundred dollars today. And if you look at the lines on the chart, if you wanted to look at property in the United States, you looked under the line that said elderly. And now they have higher than the average income, and thatís a great step forward, isnít it? Itís big government.
POLLOCK: It is. Itís a forced savings. In one sense, itís a forced --
POLLOCK: -- savings for --
WATTENBERG: -- thinks itís scandalous that the Government should help you save. But I must tell you that if it wasnít for that, I donít think I would feel as at ease as I do about my financial situation.
POLLOCK: Yes. We did a bunch of numbers recently trying to look at various cases, thinking of Social Security as a forced savings program where you and your employer pay in each year a certain amount over your life, and then you get a certain amount back, making guesses about how long you live.
And in general -- of course, if you die early, itís a terrible savings program because you lose it all. But in general --
WATTENBERG: You mean in theory, the SSA people in Baltimore are pro-death?
POLLOCK: Yes, right.
WATTENBERG: But I donít think thatís the way they really behave, but go ahead.
POLLOCK: Well, in theory, any writer of annuities is pro-early death.
POLLOCK: The implied rate of return to all your forced savings with average life expectancy turns out to be around two-percent real. And if you --
WATTENBERG: Real meaning after --
POLLOCK: -- real meaning --
WATTENBERG: -- after inflation?
POLLOCK: -- after inflation, which is not a great investment, but itís not dissimilar from owning Government bonds.
POLLOCK: Thatís why Iíd rather give people --
WATTENBERG: But it is inflation-indexed.
POLLOCK: It is inflation-indexed.
WATTENBERG: Thatís very important.
POLLOCK: And thatís why I would rather give people personal accounts that have Government bonds which are inflation-indexed; that is to say, Treasury inflation protected securities that they actually own. I think youíd have a better result all around.
WATTENBERG: Well, I donít have any problem with that. There was another interesting -- I think thereís a one-percent tax for Medicare, but unlike Social Security, thereís no --
POLLOCK: Thereís no ceiling.
WATTENBERG: -- thereís no ceiling. So if Michael Jordan is making $100-million a year, he pays a million dollars a year into the Medicare fund.
WATTENBERG: For him, itís chump change, but to some of us, a million dollars is real money. A million here, a million there, it adds up.
So there has been in this country, as I think there must be in any democratic society, a redistribution of wealth from very rich to less rich. And I think thatís beneficial. Do you buy that?
POLLOCK: I wouldnít buy that. I think thereís a natural redistribution, actually, if you really have a market -- a society; that the generations donít necessarily
maintain their wealth unless you let the laws ensconce them. But Iím somewhat eclectic, as you are, on such questions.
WATTENBERG: Eclectic meaning youíre open-minded and youíll --
POLLOCK: Not too doctrinaire.
WATTENBERG: Not too doctrinaire. Well, thatís nice to hear.
POLLOCK: Can I come back to scandals?
POLLOCK: My observation of financial history is, since I mentioned Iíve lived through a lot of these crises, is that memory is amazingly short. It may be -- I donít know if itís shorter in America than other places, but it might be and that our debates and our experiences and our business planning takes places in very thin strips of time, the last few years, and things that are --
WATTENBERG: -- to see the Depression just as a chart --
WATTENBERG: -- it doesnít mean anything?
WATTENBERG: And itís said that we have enough security now and rules that it couldnít happen again, but they say that about a lot of things.
POLLOCK: I call this the egocentricity of the present. The present seems so clear and so firm, and people think that whatever is in the present, it must always have been that way.
POLLOCK: Things that are rather new historically get called traditional. 'Well, this is the traditional way.' In fact, it might be a few decades old. So we donít have much historical depth to our thinking. And I always try to correct that --
WATTENBERG: Particularly among the younger generation of brokers and advisors and consultants and accountants and --
POLLOCK: Well, I would guess thatís true, but in general I think itís true. So if you look at the long range of financial history, what you find is crises. I mentioned a whole bunch of them that I lived through personally, actually with malice or forethought because I wanted to get to the scandals.
And there is an absolute historical regularity which is when thereís a period of the boom, the boom is on, the boom works like this. Something gets popular. A lot of credit and investment flows to that. The asset prices go up. The fact that the asset prices go up induces more flow of loans and credit and investment. The asset prices go up further. This induces a happy confidence that weíre on our way to -- the happy being happy ever after.
That induces a greatly increased supply of whatever it is, and of course, then the lenders really get confident and they lower their lending standards. They start lending you the interest in addition to the principal, and that sets up the bust.
When the boom is on, it is inevitably and always accompanied by fraud. Booms simply induce fraud. Thereís always somebody whoís around to find a way to fleece the suckers in every boom. Itís nothing new. It always happens about once a decade.
And then when the bust comes on and the psychology changes from 'Weíre on our way to living happily ever after' to 'Boy, these guys really treated us badly and robbed us' and everything, then we have to have punishment and revenge and humiliation of the malefactors, which I donít say is unjustified.
And then we always get a legal and regulatory over-reaction, exactly like Sarbanes-Oxley. It happens like clockwork, and you can just watch it.
WATTENBERG: If you think itís an over-reaction, but, you know --
POLLOCK: No, itís always an over-reaction.
POLLOCK: But it doesnít -- but hereís the really --
WATTENBERG: But it provides --
WATTENBERG: -- people, particularly overseas, with a sense that theyíre getting a square deal.
POLLOCK: With a sense, but notice it never prevents the fraud in the next boom. It always happens again anyway.
WATTENBERG: There are fast buck operators. Nobody would argue about that. But, you know, we did a three-hour television special on Think Tank called 'The First Measured Century,' and then we did a book with charts and graphs on it.
And it was very interesting. It showed that up through the end of World War II, the booms and bust cycles went kind of like that.
POLLOCK: Uh-huh.
WATTENBERG: And then after World War II, in some large measure because of these regulations, the booms and busts went like that and that after World War II, the booms and busts, instead of being like that, they were sort of like this. And they had something called a growth recession that you were growing, but not fast enough. And Senator Daniel Patrick Moynihan, Pat Moynihan, used to marvel at this.
And I know --
(End of Side A, Tape 1.)
WATTENBERG: (In progress) -- in 1930s, the big discussion was could capitalism work because -- and most people of the intellectual class thought not. And then after World War II, lo and behold, we had this rolling boom which continues today. I mean, you have now -- thereís all this turmoil in the Middle East and Venezuela and Nigeria and Russia, and oil prices, after having run way up, are coming down now, I mean, for the moment. Weíre talking about late August of 2006, and one analyst says theyíre going to go back down to single digits.
My hero, Senator Scoop Jackson, the first Arab oil crisis, which was 1971 or something, predicted there would be hundred-dollar-a-barrel oil, which is $400-$500 a barrel oil today, and here itís a little bit -- was a little bit below 70. And I called him saying, 'Scoop' -- but he made some errors. So --
POLLOCK: Okay. The more everybody believes that the price of oil will go very high or the price of stocks will go very high or the price of houses will go very high, the more certain it is that theyíll go down.
WATTENBERG: Tell me a little bit about Allied Capital of which you are a Director and of which I am a shareholder. Whatís your philosophy? Because I think I agree with it, and thatís why Iíve become a shareholder.
POLLOCK: Allied Capital is a very successful private equity company. Itís been in existence since 1958. It makes private investments in middle market companies that have good prospects --
WATTENBERG: Private investments means theyíre less subject to Government regulation?
POLLOCK: Yes, or it means thereís no publicly traded security.
WATTENBERG: I buy it on the New York Stock Exchange.
POLLOCK: Well, you buy Allied. Allied itself is a publicly traded company --
POLLOCK: -- so it has -- itís a SEC registered company with stock that trades on the New York Stock Exchange. But the assets of Allied Capital are private investments --
POLLOCK: -- in companies which do not have publicly traded stock.
WATTENBERG: As I understand it, they are largely American companies.
POLLOCK: Almost all of American middle market companies that have a demonstrated product or service --
WATTENBERG: Middle market means from what range to what range in, say, asset value or sales or --
POLLOCK: Or sales, 100-million and up, not big corporations. Theyíd be public companies and not --
WATTENBERG: And the return on investment which is called something -- thereís an initial for that, but forget about it -- itís working over seven or eight-percent somewhere?
POLLOCK: Well, the dividend --
POLLOCK: The current dividend on Allied Stock is about eight-percent and has historically been at that kind of a level. So even if the price of the stock doesnít go up, youíve got an eight-percent return --
WATTENBERG: And itís growing.
POLLOCK: And itís growing. It has a very successful record of completed transactions; that is to say, you make an investment in a company, and it may be you hold it for some number of years and finally that company is sold. And if you just look at, over the last 10 years, all of those completed cycles that have been actually investment, waiting and then sold, the average return on all those investments is about 18-percent. So thatís extremely good performance.
WATTENBERG: Thatís right up there with the Carlyle Group.
POLLOCK: Tis indeed.
POLLOCK: Tis indeed, and the average --
WATTENBERG: -- 17-percent, right?
POLLOCK: The average return over a long period of time to Allied Capital shareholders, if you count dividends plus price appreciation, is also around 18-percent.
WATTENBERG: Now, again, viewers, this is the personal view of --
POLLOCK: Yes, thank you. Please, that is all completely personal.
WATTENBERG: Right -- of a self-interested party, and I happen to agree with it. Now --
POLLOCK: Yes. With all of that, you heard personal comments from somebody who is a Director.
WATTENBERG: I understand. Let me ask this question. The New York Stock Exchange, of which Allied is listed, used to be a non-profit corporation.
WATTENBERG: And now itís publicly traded for the first time --
POLLOCK: Well, it was a non-profit membership association --
WATTENBERG: Right. You had to buy a seat --
POLLOCK: Yes, for the people who traded on the Exchange.
WATTENBERG: And then the NASDAQ sort of ate its lunch by doing everything electronically, and you didnít have people yelling out 'Buy. Sell.' And there was sort of a scandal or not a scandal in that its Chairman or CEO was Richard Grasso, who was making or got a payout of $300-million.
POLLOCK: I donít remember the number; it was a big number --
WATTENBERG: Big, big amount of money, and theyíre, I guess, litigating --
POLLOCK: Theyíre still litigating right now.
WATTENBERG: Theyíre still litigating that. And now it has become publicly traded for the first time.
POLLOCK: It turned itself into a publicly traded company.
WATTENBERG: Right, and it is buying up other stock exchanges. They bought up the stock exchange in the U.K. and I think maybe one in Germany.
POLLOCK: Well, theyíre buying --
WATTENBERG: Tomorrow the world.
POLLOCK: Theyíre in process of buying Euro next, which is a European exchange which has multiple cities in it: Brussels, Paris, Lisbon and London, I think --
POLLOCK: -- not the London Stock Exchange, but a London --
POLLOCK: -- exchange.
WATTENBERG: -- in theory, an investor could do something not terribly wise which would be put all of his eggs in one basket. Then he could say, 'Hey, the New York Stock Exchange is, in itself, so diversified that I can shove all my money in there,' and then what do you know, thereís a big scandal and kerplop.
POLLOCK: Of course, you should never shove all of your money into any one thing.
WATTENBERG: Right. But you approve of this general idea --
POLLOCK: Well, I do with --
WATTENBERG: -- of --
POLLOCK: -- of demutualization.
WATTENBERG: Of the demutualization?
POLLOCK: This is called that when you go from the membership association --
POLLOCK: -- to becoming a corporation with stockholders. You call that demutualization.
WATTENBERG: Now, Jeremy Siegel, who is a professor of finance at the Wharton School of the University of Pennsylvania, has taken the data of the New York Stock Exchange going back to when it traded its shares under the famous Buttonboard (?) trade down somewhere around Wall Street in 1790 or something like that and projected them forward, even through the Great Depression, and said that if you take any 10-year period -- and even when the market collapsed -- and reinvested the dividends, there is no
10-year period where you didnít come out ahead.
And thatís a remarkable factoid which lends a lot of credence to the idea of partial privatization of Social Security, for example.
POLLOCK: Yes, I agree, although if you did the same thing with, say, the German or the Japanese Stock Exchange, you would not get the same answer.
WATTENBERG: No. Well, I mean, I have a particular problem with those European countries -- is that they are depopulating. They are having a customer -- they will have a customer dearth which, by the way, may -- America may be booming again. Who knows -- which would have a secondary effect on American investments because so much of our money is invested overseas.
So my own view is buy American. I happen to like India for a variety of reasons, but who knows what happens? I mean, you buy that?
POLLOCK: I donít know enough about India to comment.
WATTENBERG: Okay. What do you think of the new Chairman of the Fed, said to be the second most powerful man in Washington after the President, Ben Bernanke, who, it is said, speaks in American where Alan Greenspan spoke 'Greenspeak' or 'Alanspeak' or whatever it was called, very complexified? Howís he doing?
POLLOCK: I think thereís no doubt that Mr. Bernanke is very brilliant. Seems to me to be doing fine.
WATTENBERG: Heís got a beard like mine --
POLLOCK: A tough job --
WATTENBERG: -- but darker. Yeah.
POLLOCK: Well, there are interesting historical cycles in beards and cleanshavenness as well.
WATTENBERG: Great waste of time shaving. Go ahead.
POLLOCK: Thereís a great strategic decision, it seems to me, you would have to make, as Chairman of the Fed; that is the strategy of clearer communication versus unclear, mysterious communication. In general, in life itís better to be clear, succinct and let people know what you want to happen, especially if, say, youíre a manager of a company. Thatís a great -- a great virtue. Youíve got to let people know what you want and what youíre trying to do and what theyíre supposed to do.
On the other hand, I think thereís a strategical argument to be made for mystery and lack of clarity or even call it obfuscation in what seems to be the Greenspan style if youíre the Central Bank.
WATTENBERG: You know, it was at an AEI annual dinner where Alan Greenspan -- and the Dow was about 6000 or so -- said there was an irrational exuberance in the market, and I didnít understand it. I happened to be sitting next to Herb Steiner, who was the former Chairman of the Council of Economic Advisors, and he understood what it meant. It meant that he would raise interest rates to slow it down, right? And all the Japanese journalists ran like hell for the phones to get it up there.
But the Dow then proceeded from 6000 to about 9000 before -- so no one knows nothiní when you get right down to it.
POLLOCK: Thatís the point I was about to make.
POLLOCK: You really donít know no matter who you are or how brilliant, how much data, how much staff. So thereís some advantage to not being very clear.
WATTENBERG: And of course, what allegedly broke the back of inflation under Jimmy Carter -- I think there were months when it was up to 18-percent or something like that -- of doing nothing. I think Carter named Paul Volcker, whoís a great American in many ways in my judgment, as Chairman of the Fed, and he raised interest rates to stop the inflation.
WATTENBERG: And this caused a major recession, and President Reagan didnít like it after he was elected, but did not in any way -- what they say -- jawbone the Fed to lower rates and kick-start the economy. And lo and behold, after a year or two, the economy went like that. It grew by nine-percent a year or something, with much less inflation, and Ronald Reagan was elected by a landslide over Walter Mondale, carried every state, I think, except D.C. and Minnesota and actually incurred the ire of Fritz Mondale by campaigning in Minnesota, but anyway, he liked to win big, as most politicians do.
So the morale of that story, again, is that people donít --
WATTENBERG: So what was the intent of Sarbanes-Oxley? Was there political intent? Was Paul Sarbanes wanting to run for President or something like that?
POLLOCK: Thereís nothing like that as far as I know. It is interesting that he was Chairman of the Senate Banking Committee --
POLLOCK: -- before, just an interim period between two Republican majorities when the Senator Jeffries from Vermont switched parties and got us -- in that sense, got us Sarbanes-Oxley.
I think there was a political intent in the sense for all the politicians involved wanted to show, as they always do in the wake of the bust, then the scandals come out, and they want to show theyíre doing something. 'Have to show that Iím somehow addressing this public problem,' and thatís natural, and so it always happens.
I do think the intent was always -- was, in addition, this notion of confidence -- I put that personally. I put that in quotes -- confidence in financial markets. What you were saying, you want people investing to think theyíre going to get a fair deal, and what that really means is that youíre not going to let the insiders cheat the outsiders. Thatís what it really means.
WATTENBERG: Okay, and so what does SOX, Sarbanes-Oxley, actually do that we average people want to know about? Briefly.
POLLOCK: Well, Iím not sure that thereís anything there thatís so important for average people to know about. It causes senior corporate officers, CEOs, chief executive officers and chief financial officers, to have to certify to the financial statements and the internal control systems under some fairly significant personal liabilities, including potential criminal liability, about -- in a complex company or even a not so complex, but sizable company -- about things they canít possibly personally know. But theyíre the captain of the ship, so theyíre --
WATTENBERG: But it said, I believe, that in some ways, it puts the CPA in the driverís seat rather than the CEO. It says that he has power over the company under Sarbanes-Oxley and that he can tell them what sort of investments to make and not make, what product lines --
POLLOCK: No, no, not that. Not investments to make --
WATTENBERG: Well, I mean, in effect.
POLLOCK: But it does -- it does shift the power between the accountants, the outside auditors, and the management quite significantly. Itís ironic because, on one hand, the accountants are terrified. The accountants themselves --
WATTENBERG: Because they now have so much power --
POLLOCK: No, no, because they have so much liability.
WATTENBERG: Yeah, okay. And power --
POLLOCK: They watched Arthur Andersen be destroyed --
WATTENBERG: Which was one of the Big Seven --
POLLOCK: -- which was one of the Big Five --
POLLOCK: -- theyíre now four. Itís a very uncompetitive industry. Thatís another problem. They watched Arthur Andersen be destroyed as a firm by the Government for auditing mistakes.
They watched the people not only lose their jobs, but lose their pensions. We talked about pensions before if you were with Arthur Andersen. And theyíre terrified at the penalties that they might possibly have, at the lawsuits that they might attract for malpractice of accounting.
So one hand, theyíre scared, and the fact that theyíre running scared makes them willing to do a lot of things to protect themselves. And the company doesnít really have a lot of choice because, under Sarbanes-Oxley, you must have the accountants attest or certify to the fact that theyíre happy with your internal controls. So --
POLLOCK: Just one final thought.
POLLOCK: So think that Iím scared, I can do anything, either more bureaucracy and routines and memos and looseleaf folders full of stuff that I create, the safer I am personally. And I can do all this by charging you; you pay for it all. And in fact, the more bureaucracy I create as the auditor, the bigger my profits are. Thatís Sarbanes- Oxley.
WATTENBERG: Okay. Alex, what do you think about the criminalization aspect? I mean, I know perfectly honest and decent people, or at least I think they are, some with Fannie Mae and with others, who are facing, I guess, now several crimes, but which may be criminalized, and may have to spend slammer time.
WATTENBERG: And in Ken Layís case, he was looking -- who I donít think quite got what was going on; maybe he did -- spend their life in prison, men with families, wives, children and all that kind of stuff. Have we overdone that?
POLLOCK: I think so. I think itís very distressing where ex post facto we turn what might have been mistakes or even stupidity, although itís --
WATTENBERG: The Constitution said there will be no
ex post facto laws.
POLLOCK: Yes. But it looks like what happens is that the distinction between mistakes which end up costing people money and something criminal gets very unclear. I mean, itís a big problem.
WATTENBERG: What do you think of these things that are principally vehicles for the wealthy only?
POLLOCK: The hedge funds?
WATTENBERG: Hedge funds. Now, little guys, for the most part, canít get into them. I guess they can buy --
POLLOCK: Oh, thatís not true.
WATTENBERG: They can buy pieces of it --
POLLOCK: Oh, no. The way that we talked before about the average people, the way that they are in hedge funds is through their pension funds. Pension funds, in fact, are becoming big investors in hedge funds. So you have average employees who are, in fact, invested in these hedge --
WATTENBERG: -- trade currencies --
POLLOCK: They do --
WATTENBERG: -- among other things?
POLLOCK: -- anything. They invest in stocks, both long and short stock --
WATTENBERG: -- billions of dollars trading currencies --POLLOCK: Trade currencies. They trade derivatives, options, swaps. They trade fixed income, bond positions of various kinds. They deal --
WATTENBERG: Let me just interrupt. No, no. I just canít stress enough that that language, for most people, is Greek. I mean --
POLLOCK: Iím sure.
WATTENBERG: There are not a lot of people, including yours truly, who really understand it. But you have to trust your Rabbi and a lot better broker. Heís quite cautious. I like to risk a little bit, and so we sort of blend a little bit. Itís worked so far.
POLLOCK: I think a cautious broker is a consummation devoutly to be wished.
WATTENBERG: Iím sorry?
POLLOCK: A cautious broker is something devoutly to be wished for.
WATTENBERG: Yes, and the nice thing about it -- and Iíve tried in a variety of circumstances -- to find firms. Like in this case, the principal brokerís daughter is also a registered broker who works with him. So you have some continuity, and weíre going to be trying to do that in Think Tank, getting some younger co-hosts involved so the people know that the views and values which we purvey, although we balance pretty well -- I mean, our first program had Robert Bork and Lonnie Grier (phonetic) on it. But itís tilted to this so-called neoconservative position.
But that idea of perpetrating -- of perpetualizing or whatever, continuing the philosophy and views and values is very reassuring, isnít it?
WATTENBERG: I mean, sometime itís called nepotism, but, I mean, my new book is being published by the John A. Wiley Corporation. Itís going to celebrate their 200th anniversary. Itís an American firm. Every member of the Board of Directors is a lineal descendant, I believe, of the original founders.
And nepotism, when it isnít awarding things to morons, is not a bad idea.
POLLOCK: Itís another way of talking about the family which is the singlemost important structure in society. Well, letís let that one go.
WATTENBERG: Give me one other verdict, if you would, on what is euphemistically called the death tax, the estate tax. What do you think about that?
POLLOCK: I donít have a strong view one way or the other except I think that wherever the estate tax starts it ought to be high enough so that most people are not touched by it, and they can leave their assets, their businesses --
WATTENBERG: Most people like myself think it ought to begin about a dollar higher what their estate is worth. So that --
POLLOCK: I would say should miss 99-percent of the population.
WATTENBERG: Yes. But my own view is that we ought to be able to pass wealth on to our children or philanthropies and that that is a good thing, and if you let that money accrue and accrue and accrue, while there are some very public-spirited families -- I mean, the Rockefellers in some instances and others, the Kennedys in certain instances -- we also have some wastrels in our society.
And we have examples of five and six generations of really landed aristocracy with three or four homes and the yachts and all, and that is not in the American style to have an aristocracy that you can just sort of sit around and clip coupons and do nothing.
POLLOCK: I must say that idea doesnít bother me. An aristocracy of privilege bothers me. An aristocracy of political power you wouldnít want to have. But the aristocracy of wealth, if somebody made it honestly, it doesnít bother me.
But I think the motive to accumulate assets and save and build either a business or an art collection or whatever you may want to be building to pass through a family is a good motive. I will say --
WATTENBERG: And you donít think it can create wastrels?
POLLOCK: I think it can create wastrels, and wastrels are -- just like fraud, weíll always have with us.
A friend of mine who is an economics professor in Colorado wrote a wonderful paper about the American tradition of the combination of entrepreneurship and philanthropy; that he thinks this paper argues that the American emphasis on the importance of entrepreneurial risk-taking and thereby the ability to become rich is tightly linked in our culture with the fact that you then want to give it away to worthy causes where you can do things with concentrations of wealth that could never be done if the wealth were all divided up in little pieces.
WATTENBERG: Just hold on one minute.
WATTENBERG: Alex, letís wind this down. Bottom line, are you generally optimistic about the American economy now?
POLLOCK: I am absolutely optimistic on the long-term trend.
WATTENBERG: Okay, and --
POLLOCK: That doesnít mean we donít have short-term problems.
WATTENBERG: Oh, I understand. Well, what sort of short-term problems would you --
POLLOCK: Well, weíre about to have a housing finance bust, for example. Weíre started on --
WATTENBERG: I donít believe that, but thatís all right.
POLLOCK: I mean --
WATTENBERG: Well, if youíre going to grow from 300-million to 400-million to 500-million people, where are they going to live?
POLLOCK: Youíre talking about the long-term trend?
POLLOCK: I agree with you on the long-term trend.
WATTENBERG: Okay. Now, what would, in your judgment, be the biggest challenge for our economy? Is it the real estate bubble, the allegedly stagnant wages, deficits, inflation fears, all that? You know the litany.
POLLOCK: I would say itís maintaining competitive advantages in social -- what I talked about before -- the infrastructure of the society, not letting ourselves drown in our own bureaucracy and maintaining the competitive advantage in the creation of knowledge and its offspring in science, technology, those two things.
WATTENBERG: The role of immigration in bringing knowledge to the United States has been -- the so-called brain drain
-- has been win-win for us, hasnít it?
POLLOCK: It has, and thatís something that historically has gone back a long way --
POLLOCK: -- European intellectuals coming to America.
WATTENBERG: Okay. Well, Alex Pollock, friend, colleague at AEI, thank you very much for joining us on two parts of Think Tank.
And to our viewers, thank you very much for joining us. Please send us your comments via email. We think that makes our program better.
For Think Tank, Iím Ben Wattenberg.

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