TEN YEARS HENCE
In Part II of the discussion about capitalism, the documentary “The Ascent of Money” explores the forces behind market bubbles and crashes.
FEBRUARY 5, 2010
On Feb. 5, 2010, Finance Professor Paul H. Schultz and John W. Rosenthal Sr., chief executive officer and managing member of Rosenthal Partners Capital Advisors, presented a panel discussion titled, ”The Ascent of Money.” Their discussion followed presentation of the documentary “The Ascent of Money: Blowing Bubbles” hosted by Harvard Professor Niall Ferguson. The film explored the reasons why stock markets produce bubbles and crashes. This was the second of two Ten Years Hence lectures devoted to the documentary.
Following are excerpts from comments by Schultz and Rosenthal.
Schultz: The wrong way to look at the bond market is to say that bond traders control the bond markets. That’s like saying surfers control the waves. What is really moving the bond markets are the underlying economic forces of inflation and economic growth.
Schultz: When politicians are critical of the bond markets, it’s because the bond market is the messenger, often delivering news that they don’t want to hear: that their policies are not working out, that they’re inflationary and unsustainable.
Schultz: Niall Ferguson talks a lot about euphoria and fear in stock markets and other markets and makes it sound like that’s what is really driving financial markets all the time. It’s not. Most of the time, when stocks go up or down, or other assets go up and down, it is in response to information. Often this is private information or people’s opinion or interpretations of information, which is really hard to identify.
Schultz: It is easy to identify after the fact that people were overly optimistic or too pessimistic in the stock market. But it is very hard to make money on it in the present time because things are a lot less certain.
Schultz: During the dot-com bubble in 1999 and 2000, there were three online sites devoted to selling pantyhose, and their stocks were selling at huge prices. It is easy to look back and say this is really insane. But if you go back to what people knew at the time, you see this phenomenal growth in Internet revenues and sales, and you can see why there was so much excitement and why it looked like this was going to be a tremendous new sector of the economy.
Rosenthal: There is a terrible, oxymoronic situation going on. The regulatory arm of the government is saying to banks, “Be careful, lend only to those that are creditworthy, don’t take risks.” They don’t say, “Look at the measure of the person, look at whether he has had a historic good run.” And the political side of the government is saying, “It’s these lousy banks that aren’t lending.” There needs to be a more centralized approach.
Rosenthal: I am a community banker by training and practice. Our particular community bank practiced the art of underwriting loans and also the science. We did the quantitative work as well as the art part, which involves the concepts of trust. It is because we sat across the table from people and talked to them to see whether or not they had a good idea and were honorable.
Rosenthal: I am a firm believer in capitalism. Our group is starting a limited partnership arrangement in which we are inviting our friends to invest with us in certain types of community banks. I think the pendulum is swinging away from big banks.
Rosenthal: I’m a great believer in community banks. The whole notion of “too big to fail” causes increased volatility in the markets and causes bailouts to have to occur.
Rosenthal: I think there will be a resurgence of a focus on clients or customers. Value is created, not by a magical formula or pixie dust but rather by serving clients in a way that they have a win. Something good comes to them and you can profit from that interchange.
Paul H. Schultz is the John W. and Maude Clark Professor of Finance at the University of Notre Dame. His expertise is in corporate finance and market microstructure. John W. Rosenthal Sr. serves as chief executive officer and managing member of Rosenthal Partners Capital Advisors LLC. He was chairman, president and chief executive officer of St. Joseph Capital Corporation and St. Joseph Capital Bank from 1996 until its sale to Old National Bancorp. Rosenthal is a graduate of the University of Notre Dame.