Henry Kaufman Predicts a Recession
HENRY KAUEMAN PREDICTS A RECESSION Opportunities for Israel in Eastern Europe; Limited Role for U.S. Henry Kaufman, the nation's leading financial guru, "wouldn't rule out" becoming chairman of...
...Kaufman recently endowed a chair at New York University on the history of financial markets and financial institutions...
...Funds not restricted to particular transactions would be available to Israel, he said, not just to European countries...
...buy higher quality obligations rather than lower quality obligations...
...Since the 1960s there has been a series of governmental deregulations...
...On the other hand, if you transfer plant, equipment and so on, you build a productive capacity from which you can get a return...
...They moved to Frankfurt for a year while arranging passage to America...
...The dilemma right now is how to prevent the rate of inflation from building up to 5 percent or more...
...On the way back, they stopped in Germany...
...In a market-oriented society, the price mechanism 'clears' the transaction...
...Henry Kaufman, the nation's leading financial guru, "wouldn't rule out" becoming chairman of the Fed (the Federal Reserve Board), he told MOMENT, but for now the German immigrant whose parents fled the Nazis is perfectly comfortable in his spacious New York office running his own consulting firm, predicting a recession in the next two or three years and explaining why the United States can't play a major role in Eastern Europe's economic recovery...
...Then, in January 1936 during a march through Wennings, the Nazis broke into the Kaufman home...
...There was: an enormous pool of liquidity that had been stored up...
...International institutions, like the World Bank, also may provide financing...
...It's very difficult...
...These are all areas that Eastern Europe and the Soviet Union really need...
...they're going to give out contracts to those who can finance these transactions in the cheapest way...
...Most of these countries [the Soviet Union and Eastern Europe] are already indebted...
...Is there any special opportunity," I asked, "for a country like that, which has its own trade imbalances and economic problems...
...Kaufman recommends that Western European governments finance consumer goods, leaving private institutions to finance capital goods...
...we have recessions and we come out of recessions...
...The financial and economic unification of Europe scheduled for 1992 has produced a spirit in Europe of being introverted...
...It seems to oversee him as he works at his desk...
...We really don't heed very well the lessons of history," he says...
...Henry had gone to a Jewish school...
...So we say we can't allow that...
...Today," Kaufman concludes, "American financial institutions do not have the capacity to make the kind of loans they made after World War II...
...They're short of foreign exchange...
...As examples, he cites between 400 and 500 savings and loan banks that are "incapacitated" and probably will be taken over by the government "in one way or another...
...Financial institutions are now allowed to go into a variety of activities from which, at one time, they were restricted...
...So how can our financial system now go in and be a substantial provider of credit...
...Nine-year-old Henry ran upstairs with his mother...
...The contrast with Hitler's open car was stark...
...a recession does not bode well for stocks, at least going into a recession...
...Returning to the statue of Abraham: "He was tested...
...But you can't hold the children responsible for the deeds of Nazi Germany...
...some are born, others die...
...Business transactions with Eastern Europe and the Soviet Union1' will require credit because these countries do not have the hard foreign currency to pay for the goods and services they want and need...
...Kaufman foresees the creation of a new European bank, recently proposed and now on the drawing boards, that would make available this kind of financing...
...Germany, Henry Kaufman is old enough to remember the rise of the Nazis...
...he asks...
...H.S...
...The American planes overhead somehow symbolized a change.—H.S...
...A recession is defined as negative economic growth for two consecutive quarters...
...In order to meet the expectations of their people, they may place an overemphasis on consumer products, if only for the sake of political stability...
...The quality of their students, their capacity before they get to the university level, and their knowledge base is far greater than the American student...
...Israel has done a lot in the agricultural area, in improving the quality of the products, in improving the quantity of production and the skills of production...
...Financial institutions," he says, "are not completely private institutions because they handle other people's money...
...European countries are looking more at what's going on in Europe...
...This will cost about $300 billion...
...In the short term, Kaufman sees a reduction in "the political volatility in Eastern Europe and the Soviet Union because they are going to get some consumer products that will meet some of the expectations that have been raised in those countries...
...After all, many Israelis are eager businessmen, and a substantial number of them speak Polish, Russian and Hungarian...
...There must be a transfer of machinery, equipment and capital so that you can redeploy those people and train them so they can become productive in a Western style...
...It isn't a rosy picture...
...In these circumstances, some businesses flourish, others do not...
...They were all lost in the Shoah...
...Moreover, financial institutions and markets are not freestanding...
...it causes all kinds of commodity speculations...
...LMost of their holdings were U.S...
...He recalls the name-calling and the anti-Semitic street demonstrations...
...If the U.S...
...Once consumption is spent, it doesn't give you any return...
...A; fter World War II it was different: "Then, our financial system was highly liquid...
...it distorts savings activities...
...age inflation...
...Price stability, he says, is a sine qua non of "economic democracy...
...If you look at the European or the Japanese efficiency of education, just below the university level, it's far better than anything we turn out...
...is ever going to be able to compete again in the international market, "we have to improve our educational and -. transportation facilities...
...Kaufman speaks feelingly about the recent failure of the financial markets to meet their "broader responsibilities...
...Unlike other analysts who blame the national deficit, Kaufman attributes U.S...
...Although Kaufman is involved in many Jewish and philanthropic activities, he speaks most easily about economic conditions and financial analysis...
...The people at the Federal Reserve "would like to be more accommodating," but "they say we can't because if we provide more credit we pump up the economy and encourage the inflationary process...
...This changing role allows the United States over the next decade or so to focus much more on our internal problems...
...Lefs get out," he said...
...I'm not getting my money back.' And corporations say, 'This is my money in that checking account...
...He remembers one occasion when the children were lined up outside the school to see Hitler himself drive by in an open car a few feet from the young Orthodox Jew...
...be somewhat more cautious in your own investment policy...
...We now have an opportunity to address these issues...
...In 1971, President Nixon adopted a new economic program—with wage and price controls—when the inflation rate was threatening to go to 5 or 5.5 percent...
...Today Western European institutions [and] Japanese institutions are financially stronger and therefore can play a bigger role in Eastern Europe...
...That's fine...
...Another reason the United States can't provide the credit it might otherwise like in order to finance transactions in Eastern Europe and the Soviet Union is the problem of inflation...
...It was an extraordinary event," he recalls, "the jubilation, the excitement, the adulation...
...government securities—no creditors...
...There were few loans on the books of our banking system...
...By historical standards this is very high," Kaufman says...
...Two years ago, Kaufman left the investment banking firm of Salomon Brothers after 26 years because of its policies regarding junk bonds...
...When it comes to allowing financial institutions and financial markets to fail, however, we as a society pull away from that discipline...
...The risk of inflation is why "[the Federal Reserve] says we can't be more accommodating: if we provide more credit we pump up the economy and encourage the inflationary process...
...Kaufman sees Israel's biggest opportunity in agricultural production...
...You can't forgive things like this...
...a small town near Frankfurt...
...He endured...
...They have a small capital base and a large liability structure...
...It causes a flight from financial assets to real assets [like art and gold...
...Not all of Henry's family left...
...The whole infrastructure problem is going to come to the fore...
...that's the way it ought to be, but to be able to achieve that standard of living is very difficult...
...A long time has passed," he says, "I'm not going over to accept this and say I forgive...
...Like many others, he is fascinated by recent events in Eastern Europe and the Soviet Union...
...His father, a butcher who also traded in cattle, was arrested for a time...
...If we don't increase governmental stimulus, the chances are we're stalled for a long era of real economic growth at abont 1 to 2 percent [per year...
...They're different from a business corporation...
...For example, we have an enormous educational problem...
...Our economy at present, Kaufman says, "is caught in a vise...
...But "the more you transfer consumer products to these countries, the less, by definition, you can transfer capital goods...
...I asked Kaufman if he saw any special opportunity in Eastern Europe and the Soviet Union for a small country like Israel...
...How deep it will be, he cannot say—in part it depends on how the government manages it—but he thinks it will last between six months and a year...
...Because of this," he continues, "there has to be a balance in financial markets and institutions between financial entre-preneurship, on the one hand, and public responsibility, on the other...
...The United States cannot play the superpower role today that it played then...
...This will not be the first time Kaufman has returned to Germany...
...There is no formula for creating an economy that will never have a recession...
...So it is the country, the business corporation that has -behind it a financial capacity to finance the transaction that eventually will get the biggest share of the business...
...Unfortunately, many financial sectors in the United States are "convalescing," Kaufman says...
...These Eastern European countries and the Soviet Union are not going to give out contracts to the best bid...
...In Frankfurt, he was enrolled in a secular school...
...Quite a few American banks are undercapitalized...
...There is an adjustment process that these countries [in Eastern Europe] have had no experience with...
...That's only part of what we often forget...
...They visited the school that young Henry had attended...
...How to balance these two matters—consumer products and capital investment in Eastern Europe-—is a major problem...
...Moreover, many American commercial banks, both large and small, have troubled real estate loans and third-world-country loans...
...Once you let the inflation rate run up, it's very difficult to knock back...
...There was the feeling that the market would 'clear' the transaction...
...It's all happened before...
...Kaufman has no idea how or where they perished...
...People forget that in the 1950s [our government] moved to policies to restrain the economy when the inflation rate got over 2 percent...
...If we increase governmental stimulus, there's a risk the inflation rate will go up...
...You say, 'It's my de.-posit...
...I knew exactly what this man was all about...
...In Wennings...
...But markets 'clearing' the transactions, means that those who do well, prosper, and those who do poorly, fail...
...The inflation rate is now "creeping up a litde bit...
...In the latter part of a recession stocks usually come back...
...Kaufman does not think the upheaval in Eastern Europe will affect this process...
...Then, suddenly, overhead there was a roar of planes—the American Air Force on maneuvers...
...Kaufman predicts a recession in the United States sometime in the next two or three years...
...This summer Kaufman will return to Wennings...
...We're operating at a relatively high capacity, the unemployment rate is relatively low," yet we can't expand...
...That's why he wants tomorrow's students to learn about it...
...But he also has some longer term concerns: 'These countries see the higher standard of living in Western Europe and the United States and they aspire to achieve it...
...Added to this, a significant number of business corporations are heavily indebted—the junk bond problem...
...On a personal level, Kaufman says, to prepare for the recession, "Watch your discretionary spending...
...Walking through the courtyard, Kaufman felt oppressed...
...Although the United States' role will be more marginal in Eastern Europe, there may also be benefits...
...they understand the people of Eastern Europe...
...Henry's father decided it was time to leave...
...But there has not been sufficient governmental supervision and oversight...
...Our current annual rate of inflation is between 4 and 4.5 percent...
...Such a financial situation in Eastern Europe could lead to political instability, and also create a financial problem for their creditor nations...
...That pool of liquidity is gone...
...We have "abused" our credit system, says Kaufman, "We no longer have the capacity to be significant lenders...
...A market-oriented society by definition means having to deal with uncertainty...
...Kaufman remembers his own family's stories of runaway inflation in Germany in the 1920s...
...A recession surely is not the end of the world...
...Young Henry remained Silent and felt strange...
...Beside his desk is a nearly life-size bronze of biblical Abraham, the work of artist and sculptor Leonard Baskin...
...When you encourage inflation, you take away stability from a society and encourage all kinds of risks...
...Over the next four or five years I suspect our military outlays will be significandy cut back...
...they're linked to other institutions, other markets, domestically, internationally, through a myriad of transactions...
...He has accepted an invitation to become an honorary citizen of his German birthplace...
...Eventually, inflation involves political risks...
...inability to play a major role in the economic recovery of Eastern Europe to its weakened financial institutions now "convalescing...
...Less attention is being paid by them to what is going on in the rest of the world...
...They are difficult issues...
...His paternal grandparents, his grandfather's brother, other relatives stayed...
...It was frightening...
...He tried to do the right thing...
...It stands as a "reminder" to him of "the father of our nation, a people who tried to do the right things," Kaufman says...
...Kaufman is also concerned that over a period of 10 or 15 years, Eastern European countries, unaccustomed to the ruthlessness of a market-oriented economy, might become too heavily indebted...
...all the commercial paper that I invested in is now gone.' Also there are transactions between institutions that affect other institutions that were probably doing reasonably well...
...From an economic viewpoint and probably from a political viewpoint Europe is shifting somewhat more to a po-' sition of neutrality, instead of the cohesion it had with the United States...
...What about financing for these transactions, I asked...
...If you want to [undermine] a political system, one way to do it is to encourKaufman Recalls Boyhood Under Nazis, Returns to German Birthplace as "Honorary Citizen" Born in 1927 in Wennings...
...It takes time...
...In 1977, for his middle son's bar mitzvah—he and his wife have three children, all boys—the Kaufman family went to Israel...
...They knew about a loaf of bread that would cost a barrelful of paper money, and of workers who demanded to be paid twice a day so they could go to the store and spend it before the currency dropped even more in value...
...While they hid, the Nazis tore up the downstairs, smashing what they could not plunder...
...The movement toward this has already created an enormous excitement about the future of Europe...
...A business corporation usually has a substantial capital base and modest indebtedness...
...There is no central authority that prescribes what is to be done each .day...
...It's easy to forget those things...
...Even before the upheaval in Eastern Europe, Western Europe was looking inward, says Kaufman...
Vol. 15 • June 1990 • No. 3
