Business

DR. DOOM ON MONEY, MARKETS AND THE FUTURE OF OIL

WHO’S better qualified to talk about today’s troubled economy than a guy who was once known on Wall Street as Dr. Doom?

Henry Kaufman now runs his own shop but he was once a legendary economist at Salomon Brothers, where he could move markets simply by speaking his mind.

Though today his proclamations produce a more low-key reaction, there’s nobody around with more experience who knows the key players better – from the folks now running the Federal Reserve to the bosses on Wall Street – than Kaufman.

I had a conversation with Kaufman at his Madison Avenue office the other day and you might be surprised at what the 81-year-old Dr. Doom thinks about Ben Bernanke, Alan Greenspan and our current problems.

People think the economy is bad. What do you think?

Kaufman: Well, we are in a period of slow growth or no growth. And it’s being buttressed a little bit this quarter and next quarter by the tax rebates.

Are we in a recession?

Kaufman: I think it will be designated eventually a recession . . . [although] it’s not going to be a difficult recession. But coming out of the recession there will be a period of slow recovery, rather than dramatic [recovery].

What’s going to hold us back, the troubles on Wall Street, the housing industry?

Kaufman: Holding us back are a combination of developments. Certainly, housing activity is going to be difficult to regroup. At the same time, the financial system does not have the firing power to create more credit and more debt – which, after all, is the backbone of economic expansion.

What’s oil doing to us? What do we need to do with oil?

Kaufman: Oil is, of course, taking away a bigger slice from the spending capacity of households and to some extent of business. Also, I suspect – not that I know – that the commodity market, including oil, has become more speculative [and] has become more of a financial vehicle than it was several decades ago.

Last week President Bush proposed opening offshore drilling in the US, and the markets laughed at him. The price of oil went up $2.50 that day.

Kaufman: That’s a longer-term solution. There are no short-term solutions. We have to be confronting the oil problem on all fronts, which we are not yet doing now.

Will that solve the problem?

Kaufman: Over the longer term – if we use atomic energy, we do more drilling and we change our dependence on oil as a fuel, eventually that will help solve the problem.

What do you think the next president should do?

Kaufman: I think the financial system needs to be restructured and improved. And from that perspective I think the next administration will have to say what should be the structure of our financial system, how it should be supervised, and certainly, from my perspective, we need far more intensive supervision of large, integrated financial institutions.

So we have to supervise Wall Street more?

Kaufman: Wall Street more, and by Wall Street you can’t define it as just investment banks because you have large financial conglomerates which have in them banking institutions, investment banking activities, money management activities, global activities, domestic activities.

What did you think about the Fed’s foray into bailing out Bear Stearns, and maybe having to do so with others?

Kaufman: Well, I would have to view this from a two-part evaluation. I think the Federal Reserve recognized the current financial problems very late. And once it recognized the problems, it eventually moved in to prevent systemic risk.

And ultimately, that’s the responsibility of the central bank. But it raised a serious [issue]: we have large institutions in the US and elsewhere that are too big to fail.

You can’t run a system by bailing out a system. Those big institutions, from my perspective, have to be too good to fail. And that’s where the dilemma lies.

Monetary policy up to now, at least in the last two decades, has followed the premise of economic libertarianism, meaning that if you do well, you prosper, if you do poorly, you fail. Well, we don’t carry that out in monetary policy.

Give Ben Bernanke a grade.

Kaufman: I think you have to divide that up into two timeframes. If you look at the time period from where he started to, let’s say, Au gust or September of last year [around the time of the start of the Bear Stearns implosion] . . . I would say I would give him a C+. And since then, I would probably give him a B.

In retrospect, what grade would you give former Fed Chairman Alan Greenspan?

Kaufman: I would let history decide on this. I think Alan’s shortcoming was his unwillingness to recognize the speculative potential in the financial markets, his unwillingness to recognize the significance of the structural changes that have occurred in the financial markets, and their implications for excessive credit growth.

john.crudele@nypost.com