On Money and Markets: A Wall Street Memoir. - Review - book review

Business Economics, Oct, 2000 by Robert V. Diclemente

By Henry Kaufman, New York, NY: McGraw-Hill, 2000, 388 pp., $24.95 hardcover.

In the mid-1970s, whenever Henry Kaufman encountered Walter Wriston, then Chairman of Citicorp, Wriston would greet the famous Wall Street bear by asking, "Is the world coming to an end yet, Henry?" To which the then chief economist of Salomon Brothers would respond, "Not as long as Citibank has access to the Fed's discount window." That interchange captures much of the flavor and the message of Kaufman's latest book, On Money and Markets: A Wall Street Memoir. Reflecting on a momentous career spanning a half-century, this valedictory is at once a highly personal reminiscence, a unique perspective on the vital and fragile role of financial markets in economic progress, and an engaging, and often controversial, tract for regulatory reform.

At his peak of influence in the late 1970s and early 1980s, Henry Kaufman could at times move markets more than Alan Greenspan does today. Dr. Kaufman, as he was known to those of us who worked with him in those days, only had to make one overly bearish call on interest rates to earn the sobriquet Dr. Doom. But more often than not for the better part of two decades, he was peerless in his predictions in ways that no one since has approached. For unlike other analysts whose cyclical predictions might have brought fame, Kaufman uniquely--and correctly--saw the persistent breakdown in credit restraint as a potentially dangerous secular source of rising interest rates and instability. While he is no longer the "unwitting pundit" for today's New Economy generation, there is much old wisdom here for students of economic history, for policymakers, and perhaps especially for traders whose only experience is with rising markets.

By his own telling, much of Kaufman's perspective draws on the hardships that he and his family endured when he was growing up. He was born to a close-knit Jewish family of butchers and cattle traders in a German farming village in 1927. He recalls vividly his first lesson in economics came from his grandfather, who recounted the story of how he was devastated financially by the great Weimar hyperinflation As a young boy, Kaufman remembers a menacing horde" of Nazis literally smashing down his front door as the final spur to his father's decision to flee Hitler's Germany in 1937. But life in Depression-era New York offered little immediate opportunity; and his mother went to work doing housework while his father delivered milk, both sacrificing enormously for the dream that one day their son would be a physician.

But young Henry Kaufman instead took to economics and finance, apparently inspired in part by Friedrich Hayek's The Road to Serfdom, which warned that economic planning would lead to totalitarianism. Henry toiled as a credit analyst by day, while working toward a Ph.D. at night, studying with Peter Drucker and Marcus Nadler, whose insights left an indelible imprint on Kaufman's thinking -- namely that the drive for profits among financial institutions must be balanced with fiduciary responsibility.

From this perspective, it is easy to see why Kaufman may be "more sensitized than most native-born Americans to economic developments that might endanger this country." Thus, he was among the first to warn of the gathering inflationary clouds of the 1960s, and of the dangers of rapid debt creation in the 1970s and 1980s. He also warned of the financial excesses that accompanied wave after wave of financial deregulation, securitization, and globalization of finance throughout this period.

The chapters on financial forecasting may hold special appeal for economists. Kaufman can rightly lay claim to being a founding father of "Fedwatching," an art that once involved the close inspection of arcane factors affecting bank reserves, but now is the part-time fascination of cab drivers, hairdressers and retired dentists. Fedwatching, along with most kinds of economic analysis in Wall Street has been commoditized. However, in Kaufman's early days at Salomon, it was a ticket to stardom. His insightful analysis of credit supply and demand, and the prospective path of monetary policy, paved the way for his rise to partnership, head of research and member of the executive committee, and, ultimately, vice chairman of Salomon Inc.

No financial economist before or since comes close to the scope of influence that Kaufman enjoyed in his prime. His rise to preeminence often brought him in close contact with the top-ranking political and policy leaders of his day. The descriptions of some of those personal exchanges that occurred at pivotal moments in history will surprise and enlighten the reader. Paul Volcker, a close friend and contemporary, contributes a forward to the book; and Kaufman in turn is unsparing in his admiration for the former Fed chairman's record of leadership. Many readers will be surprised to read that Kaufman is a good deal more reserved in his judgments about Volcker's successor, Alan Greenspan.