Peter Bernstein interview in WSJ on economic crisis

Peter Bernstein, the Wall Street investment banker turned historian, and the first editor of the Journal of Portfolio Management, has a very interesting interview in today’s WSJ (link via Moneyweb).

Bernstein, now 89, has written wonderful books on the nature of contemporary finance economics. I once reviewed his Against the Gods: The Remarkable Story of Risk, in the TLS back in the mid-1990s. I have the review posted as an open access download at SSRN; as the financial crisis has taken off, I note that it has been increasingly downloaded.

All of Bernstein’s books are worth reading, including the ones that deal with the new hedging and leveraging strategies in finance. But I think Against the Gods is his best book, a genuine classic in finance, one that succeeds wonderfully in offering a highly informed understanding of risk economics to the non-mathematical reader but, more importantly, succeeding in revealing it as a core cultural and historical competency of Western culture from the Renaissance forward, a crucial element in the growth of capitalism but an independent cultural and intellectual history all its own.

“Mr. Bernstein, whose books include "Against the Gods: The Remarkable Story of Risk," sees two culprits. One is the abuse of securitization -- the trend for banks to hold fewer loans on their books and instead turn them into securities that were sold to other investors. The other is simply years of overborrowing by financial institutions and consumers alike.”

Bernstein sees the crisis taking much longer to resolve than many analysts, used to the Fed waving its magic wand, seem to think, and thinks the resolution will be shallower with less upside. Strikingly, however, he sees an environment in which those with the capital to take risks will find opportunity. Why? Because the resolution of the crisis will entail a long term pull back in risk and credit. Opportunities will be available for those able to take risks - but the crisis will severely limit the credit available for such risks. Those with available resources will be able to take advantage.

Also, Bernstein suggests that although a recovery in real estate is crucial for the economy, it is too hard for regular investors to enter such areas easily - too much money is involved, and credit too tight. So he suggests - I was intrigued by this, because it struck me as counterintuitive - the stock market as offering a complete range of risk but with some level of liquidity unlike real estate.

(Unrelated: there is one other great book on finance as intellectual history, political theory, a whole bunch of intriguing things run together, well worth reading, and that is James MacDonald’s A Free Nation Deep in Debt.)