Henry Kaufman, known as the official oracle of Wall Street and the original Dr. Doom, was previously managing director and chief economist of Salomon Brothers Inc., and before that served as an economist at the Federal Reserve Bank of New York. Kaufman has endowed several chairs at NYU Stern as well as the School’s Henry Kaufman Management Center. He is chairman emeritus of the Stern Board of Overseers and active on the boards of a number of public and nonprofit organizations. Born in 1927 in Germany, his first 10 years, prior to moving to the US, were spent in that country’s politically turbulent, hyperinflationary pre-World War II period, an experience that deeply affected his outlook. Kaufman’s third book, The Road to Financial Reformation: Warnings, Consequences, Reforms, was published by Wiley in August.

 

1. You have indicated that you are, from experience, greatly concerned with the risk of negative political change that often accompanies harsh and uncertain economic times. Do you see that possibility emerging from the current economic crisis, either in the US or internationally?

I do see that possibility, but I suspect it is less than a 50/50 chance in the US. However, I would have to say the risks are higher today than at any time in the post-WWII period because the financial situation is more dire and the mishaps more extreme. The response by the public and the White House and Congress can be quite significant when you have extreme economic and financial behavior that induces potential social/economic/financial shifts – as happened in the ’20s and ’30s. We are a strongly embedded democratic society, but Germany in the ’20s was heading toward a dictatorship. In the US, the Depression led to significant reforms, but we maintained our social/political/economic structure. There is the potential that the situation today will result in a more governmentally run economic and financial system.

 

2. What are the risks facing the US economy at this moment, and how well do you think the administration and the Fed are handling them?

The risk we are facing now is a malfunction in our financial system. We have a constrained system that is not a willing lender at this time. So far, the private sector financial system is ailing and has not returned to a vibrancy. A good part of the lending has been taken over by the federal government. We must move out of that, but how speedily we will be able to is not clear.

 

3. Are there any lessons from the past that we in the US should be heeding now, but are not?

Financial institutions and markets have a dual responsibility to the private sector. As holders of savings, they have a fiduciary responsibility, and at the same time, they have entrepreneurial drive. These have not been well balanced in the past couple of decades. That is a key lesson: We need to create a financial structure in which these two responsibilities are balanced.

 

4. Where do you see the US economy in two years? In five?

In the next two years, I see a modest economic recovery, which by most historical standards will not be as great as in previous cyclical expansions. In five years, it is a question of how well we have rebalanced our financial institutions and markets and also their supervision – which is in front of Congress today.

 

5. Is there a silver lining to the current economic distress the world is experiencing?

If there is a silver lining, it would have to be that only in periods of great duress is significant change made. But you have to be careful of that. In the ’30s, the government enacted the banking acts of ’33 and ’35 and established the FDIC and the SEC. This was a sharp deviation from the past, and this system performed reasonably well for a number of decades. Similarly, now, the major industrial powers will need to recognize that financial institutions play a unique role, and their public responsibility is significant. Rules and regulations for behavior will need to be put in place. No one does that when things are going well.

 

6. Do you see a need for more such regulation on an international level?

Since my view has been that we live in a global world, I believe we must have extraordinary coordination with other nations, because the markets will arbitrage and the problems will crop up wherever rules are less strict. It will not be easy to come by, but there ought to be a global board of overseers of major financial institutions, in which the major powers would participate.

 

7. The 20th century has been called the American Century. Who or what do you think will be central to the 21st century?

The 21st century will be one of global integration. The barriers to trade and financial markets are coming down. The functioning of economic and financial systems has to become far more integrated. The US still will be the dominant country, because we are a democracy with rules of law and behavior; also our education system at the university level is far more diverse and larger than anywhere else in the world. It’s not easy to get that kind of body of knowledge going in a developing country. The US will continue to play a leadership role.

 

8. What lessons did you learn at Stern – academic or otherwise – that were most useful to you over the course of your career?

One of the lessons I learned is to approach problems by looking at both sides. Don’t prejudge the answer, try to prove it to yourself. I also learned – primarily from my mentor, Marcus Nadler (retired Stern finance professor and leading financial economist) – to try to simplify complex issues. He could take complex economic issues and explain them, putting forth both the plusses and the minuses of an issue and come down to a reasonable answer. My professors had one foot in the real world – the financial world – and one in the academic world and were able to blend that.

 

9. Why do you prize education so highly?

Ignorance is not bliss, it is dangerous. It breeds wrong conclusions. Only over the longer term can we make social and economic changes and that can only come through education. Unless we can raise the level of educational competence, dangers will increase.

 

10. What are you most proud of?

I’m lucky and proud to be here, in America. I could have been caught up in the Holocaust rather than become an American. It’s only when you know the difference that you value this country.