Business·Analysis

World may be seeking economic solutions in the wrong place: Don Pittis

The political backlash embodied by the popularity of Donald Trump is a reminder that world leaders might be looking for economic solutions in the wrong place. Thinking big hasn't worked, so maybe it's time to focus on the small, writes Don Pittis.

Recovery requires governments and business to dump casino capitalism and focus on the small

U.S. Federal Reserve Chair Janet Yellen and IMF boss Christine Lagarde are both looking for macro solutions to large world problems, but Don Pittis says the solution might lie elsewhere. (Retuers)

Recent comments by one of the world's greatest experts at making money, Berkshire Hathaway's Charlie Munger, offer a warning that the world may be looking in the wrong place for economic solutions.

And as we wait this week for U.S. Federal Reserve Chair Janet Yellen's latest pronouncement on interest rates, there are increasing signs that the world economy will not be saved by big actions by big players but instead by revolutionary thinking by small companies and young people.

For someone who has made a lucrative career out of buying and selling financial instruments, Munger had some pretty radical things to say about the state of U.S. finance.

'Crazy excess'

Munger, deputy at Berkshire Hathaway to his more famous boss, Warren Buffet, made the comments at a private speech in February, but the details only came out this month on a fund manager's website.

Berkshire Hathaway vice-chairman Charlie Munger says rebuilding the world economy means young people have to get their hands dirty and create something new, not just sit back and gamble on the value of 'little pieces of paper.' (Reuters)

Effectively, the vice-chairman of the investment firm condemned the attitude of U.S. — and by extension, global — finance, saying too many people in the financial industry had become passive gamblers instead of builders and creators. He said it was rare for him to come down on the same side as Democratic presidential candidate Bernie Sanders and Senator Elizabeth Warren, but when it came to their views on finance, they were on the same page.

"It is true that these crazy, false values and this crazy excess is bad morals, and it's bad policy," said Munger in a question and answer session well worth reading in full. "It's bad for the nation. It's just bad, bad, bad. And there's a lot of it."

Gambling culture

He compared today's one per cent and the financial industry that serves it to the aristocratic idle rich of previous eras who spend their time creating nothing, merely gambling on ever-rising stocks and bonds.

"So, we have a vast gambling culture, and people have made it respectable," said Munger. "And I don't see any way of stopping it except with some big legislative change."

The financial industry has become a casino culture, says Munger - who is someone who knows how to play the game - and legislation is needed to change it. (Reuters)

In the aftermath of the banking meltdown of 2008, the sole object of world leaders was to prevent shock waves from the financial collapse from spreading out into the wider community. The solution was to flood the world with cash and keep interest rates low. 

Every time Yellen hints it is time to raise interest rates, the people running Munger's financial casinos cry out in alarm.

Disenchanted

As many commentators have observed, the success of Sanders and Republican candidate Donald Trump are a symptom that voters have become disenchanted with the current "bad, bad, bad" system. And while money has enormous clout in democratic systems, there is always a chance voters will rebel.

Trump, who has implied he would dump Yellen if he were elected, appears to sympathize with ordinary people — seniors, for example, who are suffering because of low interest rates.

"The problem with low interest rates is that it's unfair that people who've saved every penny, paid off mortgages, and everything they were supposed to do and they were going to retire with their beautiful nest egg, and now they're getting one-eighth of one per cent," he said.

Donald Trump, frontrunner in the Republican presidential nomination race, has spoken both for and against low interest rates. He is riding on the support of voters disenchanted by the status quo. (Reuters)

But Trump being Trump, he has also said the exact opposite: "The best thing we have going for us is that interest rates are so low."

Besides political discontent, there are signs of stirring outside the one per cent. Despite tepid and uncertain financial results among the world's corporate giants, jobs and growth keep creeping up.

On Friday, Statistics Canada showed that ordinary citizens had begun to open their wallets. Gloomy prognostications from bank economists were countered by a surge in employment, even in Alberta, where the oil giants are shedding staff.

This Friday, we'll have another chance to see if the previous set of jobs and of growth figures were just a blip when StatsCan releases GDP numbers for February.

Economists have lots to worry about. The end of Moore's law means we can no longer count on endlessly faster and cheaper computers. Growth in the workforce slows as the population ages. We have exhausted the reserve of female workers who've entered the workforce since 1970s and, some say, helped the economy boom in recent decades.

Untapped reserves

But if Munger is right, in principle, there is a reserve of wealth and energy waiting to be tapped. Instead of backing the giant corporations and banks, governments must begin to think small. 

Difficult as it will be, governments must think of how to begin to starve casino capitalism, removing the incentive for bright young people to pretend they are being useful "buying little pieces of paper," as Munger described the work of those making fortunes in the financial industry.

Big finance likes sure things: bonds and government-backed mortgages and stocks that always go up. Meanwhile, young entrepreneurs have trouble getting money for their start-up projects. 

Legislators must struggle to bypass the power of banks, letting people who are currently making almost nothing on their savings direct a portion of that money to small online lenders so that young companies can get the seed cash they need, the so-called fintech described in 2014 by Bank of Canada governor Stephen Poloz.

Well-regulated, it need not be dangerously risky. 

Maybe we need to stop thinking big and start thinking small. Certainly, there are lots of problems to solve.

Besides, as Munger said earlier this year, just chasing money does not make for an adequate life. It may be that the current crop of young people are beginning to realize that. 

"I'm always afraid I'll be a terrible example for the youth who want to make a lot of money … and not do much for anybody else and who just want to be shrewd about buying little pieces of paper," he said.

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About the Author

Don Pittis

Business columnist

Don Pittis was a forest firefighter, and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London. He is currently senior producer at CBC's business unit.