Henry Kaufman, one of the first economists to earn the now overused sobriquet “Dr. Doom” because of his generally bearish views on interest rates during the 1970s and '80s, is now warning that the conglomeratization of financial institutions, the continued securitization of non-marketable assets and the extreme leveraging which led to the most recent crash leave the global financial system vulnerable to new and potentially more devastating crises.
Kaufman had an inside view of the last economic crash while serving as chairman of the finance and risk committee of the board of directors of Lehman Brothers when the venerable investment banking firm collapsed in 2008.
Kaufman, who is president of Kaufman & Company, Inc., an investment management and consulting firm, said the shift from private partnership to public ownership of the major financial institutions on Wall Street has contributed to a climate of financial irresponsibility that further threatens markets and the broader economy.
Speaking at a lecture in New York sponsored by the Carnegie Council for Ethics in International Affairs and the Dilenschneider Group, Kaufman said, "I wish I could assure you that irresponsible behavior in financial markets will abate in the near future, but I cannot. As we struggle to emerge in the aftermath of the recent financial crisis, far too many financial assets are still not shown on the books in realistic prices.”
Kaufman, a refugee from pre-war Nazi Germany who for years was managing director and member of the executive committee of Salomon Bros., began his career as an economist at the Federal Reserve Bank and was unsparing in his criticism of that institution and of other U.S. and European financial regulators.
He said the Federal Reserve irresponsibly took a “hands-off” approach to managing the credit structure, focusing on the growth of monetary variables instead of trying to restrain the expansion of debt. He also warned that “oversight both in Europe and the U.S. remains under par and still has to be agreed upon.”
In the wake of what he termed "the worst financial crisis in 80 years," Kaufman blamed not only the “behavioral and ethical lapses” of financial executives, but also "regulatory failures, historical amnesia and shortcomings in economic and financial analyses.”
"We seem to have learned shockingly little from past financial crises -- some even dating back centuries," he added.
Many national economies, he warned, are now directly “in the crosshairs” of future crises, which he said could be triggered by financial problems occurring in different parts of the world.
Kaufman also criticized his own profession, saying economists have become entranced with modeling economic behavior and have failed to recognize the impact of structural changes that have taken place in the financial marketplace.
He called for “fundamentally new ways of thinking about market behavior from our economic thinkers and political leaders,” but predicted that that new thinking and leadership would not come from “those who have dominated economic thought and political life in recent decades (and still do),” but rather from “the ranks of tomorrow’s leaders.”