The Economy: “This Too Shall Pass”

Vernon Hill, founder and former CEO of Commerce Bank, and Jack Bogle, founder and former CEO of Vanguard Mutual, had never met — until we got them together to talk about the economy, Wall Street’s excesses, ninja loans, and their dictatorial reputations.

Philly Mag: As we’re sitting here, the stock market recently closed one of its worst weeks in history. What do you make of it?
Bogle: Can I take one minute to tell the story about how I came up with the title of my new book, Enough: True Measures of Money, Business and Life? Because I think it goes to your question. Kurt Vonnegut and Joe Heller were at a prominent gathering on Shelter Island, a very lifestyles-of-the-rich-and-famous crowd. Kurt says to Joe, “Joe, see that guy over there, our host? He made more money today than you have made on every copy of Catch-22 that was ever sold.” Joe Heller looks at Kurt Vonnegut and says, “That’s okay, Kurt, because I have something he will never have: enough.”
PM: So you contend that’s a metaphor for our current economic ills?
Bogle: Yes. We have enough cost and not nearly enough value, enough speculation and not enough investment, enough complexity and not enough simplicity, enough business conduct and not enough professional conduct.
Hill: Is the book out now? Send me a copy.
Bogle: Happy to do that. I might even sign it. Should we see how this goes first?
Hill: See if we get into a fight? [Laughs]
PM: Vernon, you’ve long talked about the “shadow banking system.” What do you mean by that?
Hill: We have two American banking systems. We have the normal banking system, with 8,000 banks serving consumers and businesses throughout America. Then we developed a shadow banking system, of which Jack was a prominent founder. When I say the shadow banking system, I mean the money market funds, the investment banks, the credit default swaps, this whole system that developed outside of the normal, regulated and supervised banking system. The current crisis is really a crisis of this shadow banking system. We hear on CNBC the world’s coming to an end, people can’t borrow money to make their payroll. None of that is really true except in the New York investment bank world. It’s interesting that the government didn’t step in and guarantee all bank deposits — they guaranteed all money market funds, because these funds have funded the shadow banking system. So this is more a crisis of Goldman, Lehman, Merrill and Morgan than of the basic American banking system. Do you agree with that, Jack?
Bogle: I agree with a lot of it. Banking used to be bringing money in from consumers and lending it to businessmen.
Hill: That’s the way I built my business. You know, as justification for the bailout, we started hearing that the commercial paper market is collapsing. [Commercial paper consists of short-term promissory notes issued by corporations.] Well, the commercial paper market is nothing other than a way to subvert the banking system and borrow money cheap. Nobody makes you go into the commercial paper market. They made a choice to go into commercial paper.
PM: Then why bail out their bad choices?