Tom Vartanian and I have received many comments on our recent American Banker article (“Financial Crisis is Edging Closer. There’s Still Time to Fix it.”). It has clearly struck a chord with a lot of thoughtful and respected people worried about the future of our nation and its economy. The letter below from David Scudder is particularly thoughtful so with his permission I am posting it on my website and my LinkedIn site. David is a well respected investment manager who has spent over 50 years in high-level management of several large and successful investment funds. I could not agree more with the conclusion that it is past time for mainstream Democrats, Republicans and Independents, alike, to come together to fix what is terribly wrong with US monetary and fiscal policies.

Bill, I like your paper very much but I do have some questions.

First, I am very much in agreement with the following statements:

  1. “What we have been doing over the past half century is creating an endless continuum of booms and bigger and bigger busts”.
  2. “Financial crises are built brick by brick through a collision of government policies and private sector actions and reactions, often in periods where the velocity of innovation and pace of economic growth are the greatest”.
  3. We are “creating too much money, too little market discipline, and too many misplaced expectations”.

As for the twelve points, I could quibble about some and want to add others. But let’s leave those quibbles aside.

I do agree with “the regulation of institutions and markets must become smarter… and the government must begin deploying technology…to provide regulators with mountains of real-time information”. And “the country must be serious about reimagining job education”.

I think you leave out some other points:

  1. Banks must be subject to much stricter rules of transparency, especially for opaque instruments like derivatives, and any asset backed security that is not immediately understandable by regulators and other observers of a bank’s balance sheet.
  2. Regulation must become not just smarter but also tougher and earlier in the business cycle.
  3. If it is too late to go back to Glass-Steagall, then at the very least make too-big-to-fail institutions hold even more capital than the Dodd/Frank regulations require, and enforce transparency rules more strictly, despite the howls that sophisticated bankers will utter.

I am a believer that finance—which is both one of the greatest innovations of an economy of all time, and also one of the most dangerous—must be carefully tamed by a recognition that bankers’ self-interest will drive the most venturous towards too much leverage, too much gambling on brand new financial instruments which are comparatively untested, and eventually too much risk. Actually, this has been the story of finance for at least two centuries, although clearly the pace of speculative innovation has picked up in the last 50 years.

I am also a believer, in order to make real progress towards federal budget discipline, that it will take significant sacrifices from each major political party. That is a tall order. Let me make what I consider to be a radical suggestion, sufficiently radical that at least 95% of your readers (both Republicans and Democrats) will immediately disagree with it. Only after some careful thought might some of them see its worth.

Remember that before the 2017 tax cut was passed, we had nearly full employment and still a deficit of about 2 to 2 ¼% of GDP. After the tax cut, the deficit went to 3 3/4 to 4% of GDP. Let’s set the goal of getting back to a budget deficit of no higher than 2 ½% of GDP. To get there, I propose two things:

  1. The Republicans agree support a bill for higher taxes amounting to about the same percentage of GDP that was removed by the tax bill passed in 2017.
  2. The Democrats agree that no further big spending initiatives, after the $500 billion already agreed on infrastructure bill, will be enacted (i.e., withdraw in totality the $3.6 trillion plan).

Then, both parties also agree that no new spending initiatives will be undertaken without added revenues being raised to support them. No sane Republican or Democrat is going to agree to this compromise right off the bat. Which is exactly why I like it. It exposes the politicians for what many of them are: not at all interested in the betterment of the country’s fiscal picture but only in their own priorities.

To accomplish what I think your paper is really after will take such a compromise.

David W. Scudder,
Boston, MA