Wednesday, April 18, 2012

Generational Shift, as seen by Seth Klarman

Much wisdom in this passage from last year by Seth Klarman, a money manager:
Most of us learned about the Great Depression from our parents or grandparents who developed a "Depression mentality," by which for decades people shunned leverage, embraced thrift, and thought twice before quitting their secure jobs to join risky ventures. By bailing out the economy rather than allowing the pain of the economic and market collapses to be felt, the government has endowed our generation with a "really-bad-couple-of-weeks-mentality": no lasting lessons are learned; the government endlessly intervenes in the economy, and, ironically, the first thing to strongly rebound from the 2008 collapse isn't jobs or economic activity but speculation.
This quote is from an annual letter of his that came out about a year ago. Klarman manages money in Boston, through Baupost Group, which he founded.

During the crisis, facing the very real threat of the payment system collapsing, the federal government had little choice but to do big bailouts of one kind or another. That said, side effects have to follow when risk-taking gets subsidized so heavily. More could have been done to minimize them. For example, managers and directors of banks who needed TARP money should have been sent forcibly into retirement, to vindicate the principle that public funds are not supposed to be used to support under-capitalized private businesses. Politically, this is easier said than done, of course, but it should have happened.

And while we are on the topic of financial culture: a client of mine commented yesterday that her children are learning that putting money away in the bank earns you only pennies per year. That is not a good for the culture, either.