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Mar. 7, 2012

Vol. 112, No. 8

A Moment With...

John Bogle ’51 on Wall Street, reform, and idealism

By Mark F. Bernstein ’83
Published in the March 7, 2012, issue


PHOTO: RICARDO BARROS

Over a 60-year career in the financial ­markets, John Bogle ’51 has seen it all. He is the founder and former CEO of the ­Vanguard Group — the largest mutual-fund organization in the world — and has written widely about investing and the financial-services industry. Now 82, Bogle is finishing his 10th book, “The Clash of the Cultures: Investment vs. Speculation.”

What do you think of the critiques made by the Occupy Wall Street movement?

We have one hell of a problem in this country, and it is not badly articulated by talking about the 99 percent and the 1 percent, although if you wanted to split hairs, we’d be talking about the 99.9 percent and the 0.1 percent. That’s really where the big problems are. At least 25 to 30 percent of that 0.1 percent comes out of Wall Street.

The classic function of Wall Street is to direct capital to its highest and best uses. Well, let’s look at that. Last year, Wall Street directed about $200 billion in capital to IPOs and other long- term investments. But Wall Street was also an intermediary for $40 trillion worth of trading volume. So only one-half of 1 percent of what Wall Street does is capital formation. Most of the rest is short-term speculation.

Do you disagree with the Occupy movement at all?

I love the notion of idealism and taking a stand, and they have the right under our Constitution to peaceably assemble. I am less sympathetic with their desecration of property. I’m also bothered by their proposal that Princeton or any other institution of higher learning should ban any firm from recruiting on campus. The movement also doesn’t seem to have any leadership or a specific agenda. 

What caused our current problems?

It was a lot of things put together. The Federal Reserve made money available cheaply, which made speculation in mortgage-backed securities possible. People want to blame Fannie Mae and Freddie Mac for the subprime mortgage crisis, and they should shoulder some of the blame. But it was basically nonbanking companies going out with armies of salesmen and selling mortgage deals to people who couldn’t afford them.

Part of the problem comes from the aftermath of the great bull market of the ’80s and ’90s. We got terribly overleveraged as a society, and now we are deleveraging.

The way we now compensate many corporate CEOs is also one of the great absurdities of the age. How is anybody worth that kind of money? 

What should we do?

I don’t think the solution is to “soak the rich,” but I do think we should tax different types of income differently. I don’t begrudge Steve Jobs or Bill Gates their income, but at least they created goods and services that make our lives better. People who have inherited wealth, or gotten wealthy speculating on Wall Street, should pay a higher rate of tax on that wealth than those who earned it through their own labor. We should also change the rules on carried interest. It is outrageous that hedge-fund managers can take their income as a capital gain on the profits of the company. For everybody else, it would be considered salary income.

Can government fix our problems? 

The government can’t create jobs, although it can make it easier for corporations to create them. There is no regulation that will make people more ethical or moral. But it is the government’s role to establish a free, unbiased playing field where the economy can work its problems out.

However, I do think we should reinstate the Glass-Steagall Act. A bank should be in either the deposit-banking business or the investment-banking business. When banks become too big to fail, everybody knows they won’t be allowed to fail, so they get bigger. The banking system worked pretty well when investment banks were private firms with unlimited liability. Believe me, Lehman Brothers never would have had the problems it had if Lehman’s partners had been on the hook.

Are you optimistic about the future?

Whenever I get concerned about the future of the country, I make a quick visit to places like Princeton or West Point, and my optimism returns. The best of these young people have the right values: idealism, integrity, a global view, intellectual brilliance, and a dedication to community service. 

— Interview conducted and condensed by Mark F. Bernstein ’83 

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2 Responses to A Moment With...

Gaetano P. Cipriano '78 Says:

2012-02-27 16:02:40

By what divine inspiration does Mr. Bogle believe that the federal government should decide which sort of income is more desirable than some other, should be taxed at a higher or lower rate, or is morally more deserving of special treatment than some other sort of income? We have free markets in this nation. So what if somebody speculates and makes a profit or takes a loss? That is called FREEDOM. That is called CAPITALISM. Long live speculation and the free market. Mr. Bogle should have paid closer attention in high school civics class. He seems to have forgotten the Constitution.

John Eckel '58 Says:

2012-03-05 10:19:08

Mr.Cipriano, the Constitution's First Amendment -- speaking of civics, if not civility -- encourages just the sort of exchange of ideas Mr. Bogle engages in.
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