Andrew Ross Sorkin on Market Bubbles, Banking Rules, and the Real Lessons of 1929 | CWT

Introduction to Andrew Ross Sorkin

Background and Achievements

• Tyler Cowen introduces Andrew Ross Sorkin, highlighting his roles as an award-winning journalist for the New York Times and co-anchor at CNBC's Squawk Box.

• Sorkin is noted for founding DealBook and authoring "Too Big to Fail," which was adapted into a film nominated for 11 Emmy Awards.

• He is also recognized as the co-creator of the Showtime drama series "Billions" and has recently published a new book titled "1929: Inside the Greatest Crash in Wall Street History."

The Nature of the 1929 Stock Market Bubble

Discussion on Stock Prices Pre-Crash

• Cowen questions whether stock prices before the 1929 crash were indicative of a bubble, suggesting that some companies represented future potential.

• Sorkin acknowledges that while some companies like RCA had promising futures, their stock values plummeted significantly post-crash, indicating speculative risks.

Long-Term Investment Perspectives

• Cowen points out historical trends showing that stocks generally yield positive returns over 30-year periods, even if purchased at market peaks like in 1929.

• Sorkin agrees but emphasizes that short-term perspectives (5 years or less) can lead to significant losses, citing Charles Merrill's advice against investing just before the crash.

Critique of Historical Figures During the Crash

Views on Speculators and Economic Optimism

• Cowen discusses figures like Irving Fisher and Herbert Hoover who criticized pessimistic views during the crash, suggesting speculators were justified in their optimism.

• Sorkin expresses sympathy for Hoover but critiques his policy decisions that exacerbated economic downturn rather than alleviating it.

Consequences of Policy Decisions

• Sorkin argues that Hoover’s choices led to a series of events culminating in high unemployment rates and bank failures during the Great Depression.

The Psychological Aspect of Economic Crises

Hoover's Approach to Public Sentiment

• Sorkin reflects on Hoover’s belief that he could influence public sentiment positively through rhetoric despite poor economic conditions.

Modern Parallels with Current Leadership

• Drawing parallels with recent inflation issues under President Biden, Sorkin notes how leaders may downplay economic concerns while citizens experience financial strain firsthand.

Housing Bubbles and Financial Crises

The Role of Debt in Housing Prices

• Discussion on the housing bubble, highlighting how past predictions seemed wise at the time but were ultimately incorrect.

• Comparison between the 2008 financial crisis and the 1920s economic euphoria, emphasizing that both were fueled by excessive leverage and debt.

• Argument that while debt inflates prices, it can be justified if long-term value is expected; borrowing to buy homes may be rational for those not needing immediate liquidity.

Historical Parallels: 1929 vs. 2008

• Sorkin draws parallels between stock market behaviors in 1929 and real estate in 2008, noting that panic selling was often due to over-leverage rather than fear.

• Explanation of how individuals leveraged their investments heavily before the crash, leading to forced liquidations when values dropped significantly.

• Emphasis on how leverage can distort perceived value during economic downturns, affecting affordability and market stability.

Economic Context and Individual Mistakes

• Cowen argues that while some individuals were over-leveraged in the '20s, overall U.S. economy debt levels were lower compared to post-war periods.

• Sorkin counters with observations about current consumer and government debt levels being unprecedented relative to historical standards.

Personal Anecdotes Reflecting Market Impact

• Sorkin shares a personal story about his grandfather witnessing a suicide during the 1929 crash, illustrating the deep psychological scars left by financial crises.

• This anecdote serves as an example of how traumatic experiences from market crashes can influence investment behavior across generations.

Speculation and Federal Reserve Policies

• Discussion on public utility shares' roles during market fluctuations; speculation around their reliability may have contributed to inflated prices.

• Inquiry into whether different interest rate policies by the Fed could have mitigated speculative excesses during the late '20s.

• Reflection on historical Fed decisions influenced by past mistakes; concerns about political ramifications led to hesitance in raising rates despite evident speculation risks.

Economic Crises and Policy Responses

The Role of Interest Rates in Economic Recovery

• Discussion on the necessity of raising interest rates to curb speculation, which could inadvertently tip the economy into a recession. COWEN reflects on historical perspectives regarding economic recovery post-crisis.

• SORKIN emphasizes two critical aspects during a crisis: prevention measures and responses once a crisis occurs. He notes that there was no proactive approach taken to prevent the crisis.

Post-Crisis Measures and Historical Lessons

• Analysis of the Federal Reserve's response during crises, particularly referencing discussions around lowering interest rates and flooding the system with money. The complexities introduced by the gold standard are highlighted.

• COWEN suggests that implementing deposit insurance and abandoning the gold standard earlier could have mitigated downturn severity, arguing that current interest rate decisions reflect uncertainty within the Fed.

Regulatory Considerations in Financial Markets

• SORKIN discusses potential regulatory measures such as bank capital requirements and restrictions on margin loans to alter market dynamics before crises occur. He questions why these measures were not implemented historically.

• Mention of Carter Glass's attempts to impose taxes on trades as a possible preventive measure against financial instability, acknowledging that while not all measures would have worked, some could have been beneficial.

Shifts in Debt Perception Over Time

• COWEN reflects on changing attitudes towards debt since 1919, noting how borrowing became more accepted as part of American life due to shifts in consumer behavior initiated by figures like John Raskob.

• SORKIN highlights historical resistance to deposit insurance among political leaders who feared it would lead banks to become "too big to fail," illustrating societal attitudes toward debt prior to 1920.

Modern Implications of Historical Financial Policies

• COWEN points out that many European nations did not adopt formal deposit insurance until late into the 20th century, relying instead on various forms of bank bailouts for depositor protection.

Roosevelt's Banking Policies and Glass-Steagall Act

Roosevelt's Approach to Banking

• Roosevelt's banking policies were more rational than they appeared; a simple bank lending and recapitalization program could have stabilized the money supply without needing the FDIC.

Influence of Alex Tabarrok on Glass-Steagall

• Sorkin discusses his collaboration with Alex Tabarrok, highlighting how their blogging partnership influenced his understanding of the Glass-Steagall Act.

Construction of the Glass-Steagall Bill

• The Glass-Steagall Act, passed in 1933, aimed to separate commercial banks from investment banks, leading to significant changes in banking structures like J.P. Morgan spinning off its unit into Morgan Stanley.

Misconceptions about Glass-Steagall

• Sorkin reveals that the construction of the Glass-Steagall bill was not as straightforward or pure as commonly believed; it had influences from powerful banking families aiming to undermine competitors.

Critique of Glass-Steagall's Effectiveness

• COWEN argues that the entire premise behind the Glass-Steagall Act may be flawed, citing research indicating that conflicts of interest it aimed to address were not supported by data.

The Impact of Historical Figures in Finance

Insights on the 1920s Economy

• Sorkin reflects on surprising discoveries about New York’s architectural boom during the 1920s while researching for his book.

John Raskob: A Key Figure

• John Raskob is compared to Elon Musk for his influential role in finance and politics; he constructed iconic buildings like the Empire State Building and proposed a five-day workweek based on economic reasoning.

Raskob's Political Influence

• Raskob actively engaged in politics, attempting to undermine Hoover’s reputation through financial means and media manipulation shortly after Hoover took office.

Legacy and Recognition Issues

• Despite being a significant figure in his time, Raskob is largely forgotten today, illustrating how even prominent individuals can fade from historical memory over time.

Exploring the 1920s: Media, Business Leaders, and Philanthropy

The Allure of the 1920s Media Landscape

• Sorkin expresses a fascination with the emergence of magazines and newspapers during the 1920s, highlighting it as a pivotal era for mass media.

• He notes his interest in radio as an exciting new medium that transformed communication and entertainment.

• Sorkin speculates that prohibition may have driven people towards stock trading as a pastime instead of drinking.

Comparisons Between Past and Present Business Leaders

• Sorkin draws parallels between historical business figures like John Raskob and modern leaders such as Elon Musk, suggesting they share similar motivations.

• He identifies common traits among these leaders, including insecurity and a desire to fill emotional voids through wealth accumulation.

Wokeness Across Eras

• When asked about wokeness in comparison to today’s standards, Sorkin struggles to relate the concept to the 1920s.

• He references Carter Glass's racist views from that time, indicating that elite attitudes towards race were not particularly progressive.

Philanthropy Then vs. Now

• Sorkin discusses how many wealthy individuals in the 1920s were not yet philanthropic due to their status as "new money."

• He mentions significant figures like Henry Ford and Rockefeller but questions whether their contemporaries engaged in philanthropy at all before losing their fortunes during the Great Depression.

Banking Regulations: A Historical Perspective

• In discussing banking practices, Sorkin suggests that if he could change history, he would favor consolidating banks similar to Canada’s system for stability.

• He acknowledges potential risks associated with local banking while advocating for community service obligations from larger banks if consolidation occurs.

Discussion on Banking Policies and Credit Markets

The Impact of Consolidation in Banking

• Discussion on the economic implications of policies leading to consolidation in the banking sector since 2009, with a notable lack of new banks emerging.

• Mention of the "too big to fail" doctrine resulting in deposits being concentrated in four major banks, raising questions about further consolidation.

Risks Associated with Smaller Banks

• Reference to Silicon Valley Bank and Signature Bank as examples of smaller banks engaging in risky practices without adequate government backstops.

• Concerns about a bifurcated loan and credit market post-financial crisis, highlighting the rise of private credit over traditional bank lending.

Shadow Banking System Concerns

• Acknowledgment that formal banks account for only 20% of lending, with shadow banking posing potential risks due to less regulation.

• Discussion on how increased capital requirements for banks may inadvertently shrink their capacity for local community lending.

Dilemmas Surrounding Private Credit Funds

• Exploration of uncertainties regarding the connection between private credit funds and traditional banks, particularly concerning liquidity lines.

• Expression of concern over potential systemic risks if private credit funds face simultaneous issues, likening it to a horror scenario.

Narrow Banks and Credit Availability

• Inquiry into John Cochrane's proposal for narrow banks backed by high-quality assets, questioning its impact on overall credit availability.

• Agreement that speculation is necessary for innovation but caution against excessive risk-taking leading to financial instability.

Stablecoins and Regulatory Challenges

• Debate over whether stablecoins should be backed by Treasury bills or allowed more flexibility with asset holdings; concerns about reduced market liquidity.

• Anticipation that regulatory standards around stablecoins may evolve over time as initial measures are implemented.

Private Investment Fund Disclosures

• Critique regarding the introduction of private investment funds into retirement accounts without sufficient disclosure compared to publicly traded companies.

• Call for greater transparency and auditing within these semi-liquid funds that will have valuations managed by fund managers.

Discussion on Market Dynamics and Risk Perception

The Nature of Investment and Disclosure

• COWEN expresses skepticism about the value of disclosures in investments, suggesting that modest diversification can yield similar results to more complex strategies.

• He compares investing in Bitcoin to sports gambling, highlighting the volatility and risks associated with both activities.

• SORKIN recalls the SPAC phenomenon in 2020, warning viewers about potential misalignments between sponsors and investors regarding fee structures and projections.

Public Sentiment Towards Risky Investments

• SORKIN shares his experience of being dismissed when cautioning people about SPACs, likening them to lottery tickets where most participants lose money.

• He acknowledges the allure of risky investments like lottery tickets but questions how to balance access with consumer protection.

• COWEN argues for stronger social norms around recognizing new financial products as forms of gambling, emphasizing personal responsibility.

Regulation and Self-Regulation

• COWEN believes that extending disclosure laws may not enhance safety in financial markets; instead, he advocates for a recognition of inherent risks.

• SORKIN reflects on humanity's struggle with self-regulation, citing historical examples from 1929 and 2008 as evidence of poor risk management behaviors.

Accountability in Financial Losses

• SORKIN contrasts past attitudes towards financial losses—where individuals often blamed themselves—with today's tendency to shift blame onto others or external factors.

• COWEN suggests that providing safe investment options could help mitigate some risks while acknowledging that individuals will always take personal risks regardless.

Central Bank Independence and Political Influence

Historical Context of Central Bank Independence

• The discussion begins with the notion that central banks have historically struggled with true independence, often influenced by political considerations, as seen in the 1920s.

• There are instances where presidents have exerted direct influence over the Federal Reserve (Fed), including recent actions by President Trump.

Challenges of Political Pressure

• Making politically unpopular decisions is essential for effective governance; if politics dictate actions, necessary measures may not be taken.

• Ben Bernanke and Hank Paulson are credited for making tough decisions during crises despite their unpopularity, highlighting the importance of leadership in economic policy.

Joint Decision-Making Between Treasury and Fed

• The collaboration between the Treasury and the Fed is acknowledged as a natural part of decision-making processes during crises like COVID-19.

• Concerns arise when political figures discuss having a "majority" on the Fed, which could lead to significant shifts in economic policy based on political agendas.

Debt Management Perspectives

• The conversation touches on national debt levels and inflation as potential solutions to manage it, emphasizing that fiscal responsibility lies primarily with Congress.

• Both speakers express agreement on the need for better fiscal management but share skepticism about current intentions to address these issues.

Personal Insights from Sorkin's Career Journey

Early Aspirations in Journalism

• Sorkin reflects on his long-standing support for the Knicks while sharing insights into his early career aspirations as a journalist.

Naivety Leading to Success

• He attributes his success in journalism partly to youthful naivety, which encouraged him to pursue opportunities others might deem unrealistic.

First Experiences at The New York Times

• At age 16, Sorkin started a sports magazine that garnered attention from The New York Times, leading him to write letters to reporters he admired.

Unexpected Opportunities

• An editor at The New York Times mistook Sorkin for an experienced professional due to his demeanor and attire; this led him to write articles rather than perform menial tasks.

Mentorship Impact

• His relationship with mentor Stuart Elliott was pivotal; they collaborated without disclosing Sorkin's age or initial intentions, resulting in successful article contributions.

Insights on Curiosity and Information Consumption

The Role of Curiosity in Information Gathering

• Sorkin expresses his innate curiosity, describing it as a driving force behind his information consumption habits. He mentions being "addicted" to platforms like X (formerly Twitter) and regularly reads various news sources including the Wall Street Journal and Financial Times.

• He highlights the collaborative nature of his work with a team at DealBook, where they share ideas and stories through a Slack channel, emphasizing the importance of teamwork in news gathering.

Travel and Spontaneity in Learning

• When asked about travel for learning purposes, Sorkin acknowledges that while he desires spontaneity, his commitments to television limit his ability to travel freely. He plans trips well in advance but still makes an effort to explore globally throughout the year.

Fame and Public Recognition

• Sorkin reflects on fame, noting that while he enjoys positive interactions with fans who appreciate his work, he finds some situations awkward—especially when approached during personal moments like family dinners or workouts.

• He shares that he values genuine connections with admirers but is also conscious of making those encounters comfortable for both parties involved.

Insights from Producing "Billions"

• Discussing his experience with the TV show "Billions," Sorkin credits co-creators Brian Koppelman and Dave Levien for their leadership. He describes the production process as a complex collaboration involving hundreds of people across various roles.

• A key takeaway from this experience was understanding how much storytelling can evolve during editing—a lesson reinforced by previous experiences with film adaptations like "Too Big to Fail."

Future Interests and Projects

• Looking ahead, Sorkin reveals an unexpected fascination with tulips stemming from recent research. He expresses interest in exploring historical events related to tulip mania but acknowledges challenges due to limited archival resources.

• Despite having completed numerous interviews for his book promotion, he humorously notes that family obligations prevent him from diving into new writing projects immediately.