Welcome everyone to the 28th edition of Bogleheads on Investing. Today our special guest is Roger Lowenstein. Roger is a former Wall Street Journal, Heard on the Street columnist, and the author of six best-selling books about the financial industry. Hi everyone, my name is Rick Ferry and I'm the host of Bogleheads on Investing.

This podcast, as with all podcasts, are brought to you by the John C. Bogle Center for Financial Literacy, a 501(c)(3) nonprofit organization. Donations can be made at boglecenter.net. I am pleased to bring you today Roger Lowenstein. Roger was a long-time reporter for the Wall Street Journal. His work also appeared in Bloomberg, Fortune, New York Times magazines, and other publications.

But most noteworthy are his six award-winning books about Wall Street. We'll be talking about each one of those books today. So with no further ado, let me introduce Roger Lowenstein. Welcome, Roger. Rick, it's a pleasure to be on the show. Well, thank you so much for being our guest on Bogleheads on Investing.

I've been a big fan of yours since back in the mid-'90s and actually met you one time. I know you're not going to remember, but we were at a Charter Financial Analyst meeting in Detroit. You were promoting your Buffett book, and I got to sit next to you. I got there really early to make sure I got to sit next to you because I wanted to meet you.

I thought that was just a fantastic book. And we'll get to all of your books in a minute. But before we get there, could you tell us a little bit of how you end up being Roger Lowenstein, the author? Sure. I was a journalist in college at Cornell. Got very into journalism then.

Always was a big reader and had in mind being a writer would be a cool thing. But no idea of financial journalism or financial writing. I should say when I went to college, which was back in the mid-'70s, there was very little interest on campus or anywhere as far as I could tell in Wall Street.

There was so much political focus due to the Civil Rights Movement and the Vietnam War and then Watergate. And Wall Street was just something that all guys in gray suits did, and we didn't pay much attention to. But I got a series of jobs with small papers just because I wanted to break out into something more interesting.

I went down to South America and I was working for a terrific paper in Caracas, Venezuela, which unfortunately the current government finally shut down. Down in Venezuela, to supplement my income, I started stringing for The Wall Street Journal. You may have at least heard of them. Because Venezuela had a lot of oil production and was interesting to Wall Street and to its readers.

And I discovered there that there was budget stories and that economic stories could be fun. And through the medium of the journal, I realized that there was real interest and you could get to a lot of facts and also a lot of interesting stories through economic journalism. And after about two years, I was ready to come home and they offered me a job.

By the time I got there, this was the very end of the '70s, late '79. And the big story then were mergers and acquisitions. It was just CEOs were waking up in the morning, looking at proxy contests and discovering that they didn't run their companies anymore. It was exciting stuff.

I just got hooked writing about business and investing in economics. And it sort of took off from there, I guess. And then you went on to write six books so far. And I understand you're working on another one. That's right. I always had this desire to write more long forms.

I did some magazine work. But my family, I don't mind saying, had an investment in Berkshire Hathaway. And I got interested via that in Warren Buffett and thought he would be a good subject for a book. He wasn't so well-known back then. And that was the first book. That's how I got into writing books.

We'll talk about that Buffett book in a minute. Actually, the first book that I really want to talk about is your latest book, which is America's Bank, The Epic Struggle to Create the Federal Reserve. And this book was a financial history book. And what made you interested in going back and looking at the struggle to create a central bank?

Well, two things. And I appreciate you bringing up that one first because it's really a favorite, a personal favorite. I've written a lot of contemporary histories of basically bad financial news because when the Fed gets involved, usually the Fed's like an umpire. You only notice them when something goes wrong.

So I was very interested in the role of the Fed. And I felt that readers were interested in the role of the Fed. The history of the Fed was just remarkable to me because we had been so late in ever having one. I mean, way after European nations, the Russians, the Japanese, everybody, entire developed world, realized that you had a stronger financial system if you had a lender of last resort, somebody to lend when nobody else was lending.

But we didn't have one. And the reasons we didn't have one go back to George Washington, but they're really very current. You look at the American reluctance, say what you will, good or bad, about Obamacare, any health care plan. Every other country around the world has figured out that it makes sense to have a system, not the United States.

Having something centralized, it touches a lot of raw nerves in this country. It has ever since 1776. After all, that was our history of rebelling against the central government. And the story of how the Fed was created, really the story of one banker who came here from overseas, from Europe, and couldn't believe that an otherwise developed and advanced, financially advanced country was still living sort of in the 18th century.

And so I just thought it was a very good story to tell and a very relevant story today. Yeah, I didn't realize how late the U.S. was to central banking. I mean, of course, we in this country think that our central bank is big and powerful and so forth, and we probably created the whole concept.

But in fact, we didn't. No, we didn't. Our central bank lived on Madison Avenue. It was a guy named J.P. Morgan. I mean, I say that tongue-in-cheek, but not completely, because we would have periodic market crashes, and the government would go to him, hat in hand, to get up a syndicate and rescue the government.

And, yeah, this was fine in an era when the government was small and the economy was small. And finally, there'd been some stirrings before this that we really needed to modernize the system. We were losing. We want the creditor behind all sorts of trade agreements. London had all that business because they didn't have a lender at last resort.

So there were other reasons. But in 1907, there was a market crash. It came from what we'd call the shadow banking system that always seems to come from the edges and creep into the heart. At that point, they went to Morgan, and Morgan couldn't do it this time. It was too big for one man.

There were panics in banks across New York City and then across the country. And there was increasing realization then that we needed a system, not just -- you know, we were too big for Big Daddy or Warbucks to save us. And there was a commission of congressmen and others who went over to Europe and studied central banks.

By the way, it was still such a bogeyman that when the lead senator involved and a few bankers decided to map out how this should happen, they went in secret to an island off the coast of Georgia and wrote the original blueprint for what became the Federal Reserve, telling nobody because if the word got out that people were planning a central bank, they'd be dead in the water.

It was hot stuff. That was Jekyll Island. That was Jekyll Island, yes. And now let me ask a question. In your view, and this is your opinion, has the changes that the Federal Reserve Bank has been going through under first Ben Bernanke after the financial crisis and now Jerome Powell with buying assets that are traditionally not treasury bonds in order to help monetary policy, I mean, these are big changes.

Well, the specifics are different. Our financial system is way more complicated. The sorts of instruments that are out there are more numerous and more complicated. So that if you want the Federal Reserve, the central bank to be relevant, it's going to have to act in different ways and through different instruments.

But if you look at the history of the debate around the creation of the Federal Reserve, they have these same debates. There was all this talk then about what sort of debt instruments would the Federal Reserve purchase, which was another way of saying what will be money. If anything that the Fed would buy would be money and farmers from the Midwest and bankers in the Midwest said they should buy warehouse receipts.

Corn should be money. And you can imagine why the farmers in the Midwest would say that. That didn't make it into the bill. So the fight over or the argument over what financial instruments should be backed by the Fed is age old. And the basic purpose, all the instrumentalities of change is more complicated, obviously far bigger, have changed.

The idea that the Fed should rush in when there's a real systemic crisis, that hasn't changed. And that's what we saw in 2008, 2009. We're seeing again, of course, now in the economic crisis caused by the pandemic. So in that very basic sense, I think the Fed is still doing the job that Paul Warburg, the founder, I alluded to before, Nelson Aldrich and Carter Glass, some of the other founders had in mind.

Oh, great. Thank you for that. Let's go back to the beginning, the first book that you wrote, Buffett, The Making of an American Capitalist. You did such a fine job with this book. I've read all the Buffett books before and after, and I've always come back to this as the best Buffett book in my view.

Thank you. Tell me, in investigating this book, what did you learn that struck you as being something very different and unique about Warren Buffett? Well, one thing I learned in this state was how tough he is. He's a nice guy, sort of folksy guy, he's got that chuckling sense of humor.

And all that's true, that's not invented or anything. He's extremely tough. When I say tough, if you ask him for something once, believe me, don't waste time going back and asking three weeks later. He's enormously efficient. And one of the ways in which he's efficient is he doesn't waste a lot of time rethinking decisions.

He's sort of cold-blooded about what makes sense. I remember there was a friend of his in Omaha, and he was putting together some idea for a new company. He was trying to get investment support, so naturally he went to the richest guy in town. This is years before the country knew about Buffett, but everybody in Omaha knew he was the big financial wheel.

And he said, "Do you think enough of this idea to invest in it?" And Buffett said, "No." And he said, "Well, do you think enough of me to invest in it?" And Buffett said, "No." Just like that. And this gentleman said it was so refreshing. There's nothing like going, "No," instead of the labor explanation and excuse.

And maybe I'll think about it. It freed this gentleman from having to wander and come back, and it freed Buffett to go on to the next thing. He does that all the time with investments, and this is a real lesson. Some people, if they're presented with an investment idea, maybe their broker says, and they're sort of wondering about it.

They're not convinced, so they'll just go in a little bit. Buffett doesn't go in a little bit. If he doesn't like something, he moves on, but he's just very good at saying no. He does that with philanthropies, too. If it's not his thing, he doesn't give a little bit just because he wants to make the person feel good, even if the person is a friend.

That's caused some hard feelings at times over the years. He's very tough. He sort of follows his inner compass and is also very honest in a fundamental way. I was struck by that. I was also struck by just how terribly quick he is, just spending time with him. He's so smart.

I went to all the annual meetings that he held while I was in the three or four years that I was doing the book. In these days, it was still held in the Jobson Museum in Omaha. They'd moved out of the hotel down on Dodge Street, but they were kind of what was then Midtown.

In the Q&A, somebody says, "Mr. Buffett, how good is your health? I can't afford an event risk." Buffett immediately spits back, "Neither can I." He really is quick. I know from firsthand, he sees journalists coming around the corner or people trying to raise money. You might as well just hit him straight because if you have some ulterior motive or you're going to warm up to your question or your request, he's going to see it coming around the corner.

When I did the book, the first thing I did when I got a contract was I wrote him telling him I was going to do it. There were all these situations I wanted to interview him in, in his office, in his home, when he was on the road, all that kind of stuff.

He just went back and said, "No, I'm not interested." That was pretty hard. He said something interesting. He said, "It'll be better for me." He didn't want to be crowded by me. He said, "It'll be better for you as well." At first, I thought he was just saying that to let me down easy.

As I did it, not having him in the room forced me to come to my own conclusions about Warren Buffett. There's plenty of material out there. You read the book. There's no shortage of information about him. This could be my book. Interesting about Buffett. A lot of people perhaps don't know this.

At first, it was a hedge fund or a private equity fund. A hedge fund. It was a private partnership. Since it wasn't buying mainly private, they had one whole company. They weren't buying companies and taking them private. It was pretty close to the hedge fund model of today. >>COREY: He made his money by, instead of taking a big salary, taking money out of the fund, he took his cut, which if I recall, it was like 20% of anything over a certain return.

It wasn't the return of the market, but it was over a certain return. >>WARREN: It was over 6%. >>COREY: There we go. It was over 6%. >>WARREN: I believe, it's been a while since I've written the book, but I believe it was a quarter of the profits, but over 6%.

He had no fee. It was in a sense a more self-confident framework than virtually every hedge fund I've set up today, because today, they take a cut of the profits, but they also take a fee, a percent of the assets. If they're not making it one way, they're making it another way.

Buffett took no fee, so if he didn't beat 6%, which was back then an assumed treasury rate, a risk-free rate, so he wasn't going to earn any money just for getting you the treasury rate. You could do that on your own. You didn't need him for that, but once he started for the profits he made above 6%, I believe it was a quarter, he took a quarter of it, and that's a generous, that's a big cut.

>>COREY: Yeah. It is how he- >>WARREN: It only paid, I mean, his money really was where his mouth was. He wrote these beautiful partnership letters, which were proxies for the annual letters that Buffett shareholders have today, but he just went to the small circle of people who own his partnership, and he kept saying in his letters, "Someday I'm going to lose money, and we're not going to do this forever." He beat the tower every year, he never lost money, and he just didn't have a bad game.

It was bizarre how good he was. >>COREY: But this is how he made his money. He made his money by taking his fee, but leaving it in the partnership, and this is how he became wealthy. >>WARREN: This was the origin of his wealth. One of the stocks that they bought in the early '60s was a textile maker, brought cloths and things like that, in New Bedford, Massachusetts, called Berkshire Hathaway.

He sort of got into a ruckus with the guy who ran it. By then he was the biggest outside shareholder, he didn't like the management, he didn't want to sell it, and so the partnership bought a controlling stake, and Buffett became the controlling investor, and when he liquidated the partnership, at the end of 1968 he just said, "This is a bad market, I can't find anything," and he returned all the money to the shareholders, completely called the top of the market by the way.

But there were two stocks that he owned too much of to sell, and so he just said, "I'm going to give you your pro-rata share." One was a retailer named Associated, the other one was Berkshire, and he said, "You can do what you want, by the way, I'm holding onto my share of Berkshire," and anybody with any brains knew that was good advice for them too, and then he just sort of sat with Berkshire for a few years, and it was a textile company, and then he bought a steel mill with it, and a small newspaper, and then he buys an insurance company with it.

And now that this textile company owned an insurance company, he had a float to invest, and he starts buying common stocks, and the people were following Buffett, very few said, "I think the guy is going to do it again," and now under a corporate framework, I think from the partnership framework of his early years, he was in fact doing it again, and obviously did do it again.

The stock then was $40, $60, $80 or so in those years, so if he'd gotten into it, then you'd be clipping a lot of coupons. "Buffett, the Making of an American Capitalist," you really get into the details of how Buffett became what it is today, how Berkshire Hathaway became what it is today, it's a really great book.

Let's get into the next four books, and the next four books kind of follow a pattern, and I call them crisis books, crisis books. You had the financial crisis of 1998 that was caused by a hedge fund called Long-Term Capital Management, and this is a great book. Any finance student needs to read When Genius Failed, The Rise and Fall of Long-Term Capital Management.

It was just a real lesson to me on what goes on inside a hedge fund. I just want to say first that when you mentioned those four books, and they were all about a financial crisis, at each juncture where I wrote each of them, I thought, "Well, I'm really lucky because I get to write about the one and the biggest financial crisis of our generation that we'll ever see." And then like two and a half, three years later, the lesson doesn't get learned.

John Kenneth Galbraith said that they don't ask military historians, "What do we do to prevent another Waterloo?" People sort of figure, "Well, they won't be dumb enough to invade Russia again." But that's not true in economics. In finance, everybody wants to happily avoid the next financial disaster because they keep happening.

I still think long-term capital, that's sort of the When Genius Failed story, was sort of the model for what happened. Very smart guys, because nobody would lend money to people who weren't that much money, who weren't very smart, took a whole lot of risk, and you'd have to be smart enough to think you were that good to take that much risk, you could say a little arrogant.

They thought that they were hedged. Guess what? Hedges, they work great in good times and bad times. I think there's a line in the book that the correlations go to one, which means everything starts to go bad at once. Everybody wants to take any sort of risk, and no matter where you had risk, it was going bad against them.

And so it just sort of plays out, and you see these people who were truly the best and brightest and richest of the financial world, watching them probably day after day as the gods of finance turn against them. The leitmotif of the book is another lesson that hasn't been learned, it won't be learned, I'm convinced.

They were all disciples in two cases. They were Nobel Prize winners for having written some of the textbooks of modern financial theory, the idea that you could program all this and feed it into a computer with big enough brains, a history of price movement, and know exactly which you were going to come up against in the future.

That works until it stops working. The history books don't tell us what's going to happen in the future. They don't even tell us what could happen in the future. Lord knows we've seen that now, I was listening to a radio show yesterday about a small business that had all kinds of insurance, insurance against floods, against earthquakes.

They didn't have insurance against the pandemic, however, and they're just things we can't anticipate. You know, markets, they just don't always act the way they did in the past. If we tried to model for an event like the Great Depression in the year 2005, we would have said it happens once a century.

After 2008, we would have had it up to twice a century. Now, it's three times. To think that somehow the computers are any smarter than the data that's fed into it, and the historical data can guarantee you the future, is really a fool of comfort. That was really the leitmotif of the book.

What was interesting was, who are the investors in long-term capital management? Initially, Meriwether went out and they got outside investors, but after a while, and to the benefit of the outside investors, they all got kicked out. Yeah, not all. The partners in the fund realized they felt they had too much capital.

The reason they felt they had too much capital was over the first few years, markets had moved in their direction. So, the type of trade they did, there wasn't as much room to go in the future. They tried to make up for this by adding leverage. In other words, if you can't make as much money, you can still make the same amount of money if you're more leveraged, which is a really nutty way.

You have to take what the market gives you and not be greedy. They decided to leverage up, and the way you leverage up is to have less capital for each style you're investing. They returned capital to their outside investors, much to the joy of these outside investors. I want to spend a moment, though.

You mentioned who their investors were, Merrill Lynch, UBS in Switzerland, all the big names in finance. There's this myth that the inside guy, the pro knows better. The pro doesn't know better. The average investor out there, I mean your uncle, your sister-in-law, whoever it is, knows better because what they're trying to do is they're looking for stocks they understand.

They're probably buying Apple. They're following the Peter Lynch dictum, not only the day traders but the ones who are buying things for long term. They're doing things they understand, not with the pros who bought LTCM. It was a black box. They didn't understand it. They weren't even allowed to see it.

They were mesmerized by this image of omnipotence, and they got suckered, not suckered willfully. There was nothing untoward about it, but they got duped into taking the same kind of risk that the partners themselves took. Going on to the next crisis book. You talk about the origins of the crash, the great bubble and its undoing.

Here we're talking about the tech boom, the internet boom, dot-com bubble that occurred in the 1990s, and then it blew up. This is really a personal favorite, and I'm glad you brought it up. This is really a book about the character of Wall Street and the role of executive compensation in how companies will run and misrun.

Companies like the late great MCI, the late great Enron, and so on. Also the character of speculation, but now speculation on a much more mob and pop level, if you remember those dot-com stocks, those were stocks that your uncle and sister-in-law were buying. The Webvan, if you remember that name, and Pets.com and all those stocks, many of them went under.

This was just a bizarre era in which companies weren't even showing profits or the forecast of profits, and people couldn't get enough of them. That era sort of merged into this era. The stock profits were so great that conventional companies felt the need to get their stocks up and they began to play with their numbers.

Or change their name to dot-com. Yeah. I mean, Enron did that. Enron was an energy services company that became a new age company. MCI did that, Lucent, Xerox, Waste Management, all these companies played terrible games with their numbers. Some of them failed, some of them didn't, but their stocks all plunged and was all about enriching the executives in the short term by juicing the stock no matter the long term.

It was really a come to Jesus moment for Wall Street. People don't remember the stock market fell in half, which was quite a serious downturn. Bush, who was no big regulator, said, "This has got to stop. Business pages shouldn't look like a scandal sheet." I think those were his exact words.

I recall Wall Street analysts who were highly compensated in many ways by this whole era where... Yes. It was called the daisy chain where the analysts, of course, were touting the stocks that their investment bankers were selling. Mary Meeker was asked, "Morgan Stanley, what was your justification for a very high-priced stock?" She said, "Bull market." "Well, that's not analysis.

That's chewing." She was anything but alone. Then, privately, there were some emails where these analysts between each other would say, "I wouldn't touch this with a 10-foot pole," and they'd put a buy on it because they were looking for investment banking business. That's right. Interest rates, once again, were very low, and people were willing to take more risks because of that.

They thought they discovered Galconda, the expression used in about the 1920s, the New Era, this wonderland where companies could sell stock forever without any profits, which you think about was really just a Ponzi scheme because the only source of paying off the first round of investments would be investments from the next round, and the next round of investors.

As soon as you got to have profits, your company's not going to survive. It was the new paradigm. The next one, I'm actually going to skip a book here, and I'll get back to it because I want it to be my last book, so I'm skipping one. I'm going to your fourth crisis book, and that was the end of Wall Street.

Here, now, we're talking about the mortgage crisis and what created it. That crisp broke in 2008. The origins of it were people like Mozilla Countrywide and Washington Mutual out in Seattle who were seeding the entire country with mortgages, first 95% of the equity, 98% of the equity, 100% of the equity, because it's not a loan when you give someone 100% of the equity.

It's a gift. Then they were giving 100% loans at steeply increasing prices, so you had millions of homeowners who had zero equity in their homes and who owed an amount of money that couldn't withstand even a minuscule depreciation in price. This was being blessed by the credit rating agencies.

It was being blessed by the Wall Street banks who were selling mortgage securities, but it really was a larger version, and for that reason, a more serious version of the first one in this series we talked about, of when genius failed, of the LTCM. It was just giant risk-taking on a much more serious scale because this time, the people affected were a sizable percentage of the homeowners of America.

Homes are something if Wall Street fat cats want to go out and play with their assets or even their firms, that's one thing, but when you destabilize Americans' homes, which are for most Americans, the great bulk of the equity they have, you really get a serious problem. You remember that we went into this terrible recession, unprecedented since the Great Depression when the mortgages collapsed and nobody was prepared for it, not the treasury, Bernanke at the Fed said that the subprime mortgages won't be a blip.

Not only did he say it wouldn't affect the entire economy, he said it wouldn't even affect the entire mortgage industry. It would just be a modest rise in subprime default. All these experts were dead wrong. In fact, they were playing a different version of a daisy chain game because anytime someone needed refinancing, someone's mortgage is up, they just refinance.

That game of papering over bad loans with more loans can only go on for so long. Eventually in 2006, prices began to peak and once prices peaked, the game was over because the whole thing was presaged on ever-rising housing prices. That was a scary time. It was thrilling to write about, but it was really a frightening time.

I remember that Sunday night when Lehman went down and nobody really knew whether the sun was going to rise, at least in a financial sense, on a Monday morning. >>COREY: One of the scariest comments made during that period of time was when Alan Greenspan said, "In retrospect, we really didn't understand how the financial system worked," or something to that effect.

>>TED: What he said was, and this comes up in one of the early books we talked about, Origins of the Crash, when the lack of regulation of financial instruments was a big issue. Greenspan's view, because he was a big free marketer, and look, I'm a free marketer, but I believe in the highway, but we've got to have speed limits and you have to have speed limits in financial markets.

Greenspan had said that basically any deal that private bankers make with each other, since each banker is acting in their own self-interest, has got to be rational and basically doesn't need to be regulated, which was said in such complete ignorance of what history had shown us. There hadn't been a banking crisis ad infinitum in the past, and it also overlooked a fact of how banks are run.

If you're on the mortgage desk at Lehman and you package a lot of securities, you get paid for it. If they all go bust two years later, you don't have to give the money back. In fact, you probably moved on to Bear Stearns and Merrill Lynch by then. It's somebody else's problem.

The people making those deals didn't, in many cases, even have an incentive not to make bad deals. They had every incentive to make every deal they could, good or bad. Greenspan, the comment you're referring to, I can't remember the exact word that's in the book, but we who had faith in the markets to operate, he fessed up.

Yeah. It was a little scary to me to hear him say something like that. Yeah. Yeah. He was naive. Maybe willfully naive. But by the time he fessed up, he was out. Yes. That's correct. He was a disciple of Ayn Rand and ultra-free marketers and Bernanke at that moment, and this figures in the end of Wall Street, fortunately for us, although we hadn't seen it coming, he did know what to do because he started the Great Depression and he knew that you had to be that lender last resort a la America's Bank, the Federal Reserve.

He turned the Fed into the greatest rescue operation in its 100-year history. I find it interesting how Treasury stepped up during this crisis, first with Timothy Geithner and then Hank Paulson, to work with the Fed to save the day in many ways. Well, Hank Paulson, of course, was Bush's Secretary of the Treasury.

I interviewed him a couple of times for the book. He and Bernanke made a very interesting team because Bernanke was Republican and Paulson was really a rib rock of Republican, neither he nor Bush came into office with any thought of socializing the banking system, and yet, when they proposed the TARP, in a partial sense, that's exactly what they did.

They had the Congress purchase equity shares of the Federal Government in J.P. Morgan Bank of America and right on down the list of all the biggest banks and virtually all the banks, some small share to stabilize the banking system in the case of the banks that were teetering to save the banks.

That was, I think, kind of heroic on the part of Bernanke and Paulson, and frankly, W., who had no notion of wanting to do that kind of stuff, but when they came to him and said, "You got to do it," he did. The Republican Congress was not so eager when the TARP was crafted and came to a vote.

The House voted down and the market fell 700 points that day. Representative Kyle later said, "My constituents were divided." Half of them said, "No," and the other half said, "Hell no," but they felt that the Wall Street crisis would just sort of affect Wall Street. The Main Street would just sally on unaffected, and when the market then started to crash day after day, the House was called back in a hurry to approve the TARP.

Yeah, very interesting point in history. Let me circle back to the third crisis book, which is now, in my opinion, still on the table, and that is While America Aged, How Pension Debts Ruined General Motors, Stopped the New York City Subways, Bankrupt San Diego, and Looms as the Next Financial Crisis.

To me, this is still on the table. Yeah, thank you. Yeah, that was different in this sense from the others. The pension crisis is a slow-burning crisis. These other ones all had big crescendo-like moments, LTCM when it took a bailout from the banks on Wall Street, the mortgage crash when Lehman went under, and so on.

This one book was published in 2008. I started working on it in 2006, and we're still talking about its current in the end of the year, 2020. The reason that's so is because, of course, the pension system isn't one system. It's particularly the public pension system is thousands of individual systems, teacher systems, state systems, municipal worker systems across the country.

They've each hit against hard times at different times, but since that book has come out, Puerto Rico, Stockton, California, Detroit, small and large cities across the country have failed, some of them literally in bankruptcy, and some of them effectively like Puerto Rico. Chicago now, there's no way to see how they get out of their pension mess.

Same thing with New Jersey. That's as much a political book as a financial book because there's nothing wrong with the pension system in theory. Collective insurance is a very good idea. If a group of people insure themselves, the odds are it's going to be a sounder system than if one person saves for their own retirement.

The problem is that when you get political actors approving benefits, and these are benefits that stretch out 20 and 30 years in the future, that political actor has an interest, of course, in awarding generous benefits because by the time the benefits come due, they'll have retired. Certainly, we're going to another job, and in most cases, retired, and so there's just a natural moral hazard, and they keep voting these benefits in and not approving adequate funding.

The book was not an attack on pension funding or benefits. It was just a cry, "Please fund whatever level you decide," and that's a negotiated question between unions and the government. Whatever level you decide, you've got to fund it, but you can't approve benefits without funding them. I'm afraid, as with the others, that's a lesson that we're still learning the hard way, and given what the pandemic has done to municipal finance, there's going to be a lot more to have to come.

One of the big problems that I see as a financial advisor is that these areas of the country that you mentioned that have big pension holes, they're losing business. People are leaving because they keep having to increase their state income tax, and now you see an exodus of wealthy individuals, of retirees, of businesses from those areas of the country that have these huge pension liabilities, to other parts of the country where there's not as high or an onerous of a tax rate on either the corporation or the individuals.

That makes it even harder for the people who stay back. Sooner or later, taxpayers also will vote with their feet. In a sense, and this may sound securitous, but we learned a lesson, the teachers' unions, the sanitation workers' unions, and so on and so on in jurisdiction after jurisdiction, they represent a narrow interest.

Those interests aren't society's interests. Society has a much greater interest. Our cities and states have to be run and compensation has to be meted out, including pensions, with that larger interest in mind, not just with satisfying the narrow parochial interests of public sector unions. Roger, I just want to get your parting views of how do you think America sits today in the world?

I think we've been through a very rough time, but I think we're starting to see silver linings. There were people saying, and I really didn't believe this because I think it's never as dark as it looks at the darkest hour, but Wall Street would never come back and the economy would never come back.

We've now lived through the pandemic for six, seven months. The economy's lived through it for six, seven months. The pandemic's still with us, but the brutality rates are dropping from it. The economy has been, I think you'd have to say, remarkably resilient in the face of everything it's been through.

I'm hopeful that the spirit of the country is becoming less rancorous and maybe a little more united. Look, 2020 was a tough year, but if I had to bet 2021, 2022 and so on, things will start to look better. We've been through periods like the Great Depression, and we'll get through this one.

You're working on another book, and I know that you can't disclose what it's about, but I just sort of made a list of three big areas where if I was to make a guess as to what it might be about, it might be about trade and trade conflicts, could be about Medicare and COVID, and the last, it could be about small business and how small business is changing.

I know you can't tell me what the book is about, but- Well, I'll just say it's historical, but it has great resonance to today, and I'll be out in a year, and I'd love to talk to you about it in depth when it comes out. Okay. Fair enough. Well, thank you so much for being our guest on Bogleheads on Investing.

We really appreciate the time today. Rick, it was really a pleasure to talk with you. This concludes episode 28 of Bogleheads on Investing. I'm your host, Rick Ferry. Join us each month to hear a new special guest. In the meantime, visit bogleheads.org and the Bogleheads wiki, participate in the forum, and help others find the forum.

Thanks for listening.