My new column is up online and in the issue of Time with General Petraeus on the cover. It begins:
In 1951, Princeton economics major Jack Bogle wrote a senior thesis extolling the virtues of the small but growing mutual-fund industry. At the time the reigning view of the stock market was that expressed 1 1/2 decades earlier by the great English economist (and speculator) John Maynard Keynes: it was a “casino,” a “whirlpool of speculation,” a “game of Snap, of Old Maid, of Musical Chairs.” Young Bogle argued that the growth of professionally managed funds would bring a new age of calm rationality to the market and thus “militate against Lord Keynes’ dismal and socialistic conclusions.”
After graduation, Bogle went into the mutual-fund business, later founding the Vanguard fund family, now the country’s second largest. As he had predicted, mutual funds became an ever bigger force–they and other institutional investors now own more than 70% of U.S. stocks, up from about 10% when Bogle wrote his thesis. Professionals managing other people’s money dominate almost every financial market, from bonds to pork-belly futures to collateralized debt obligations.
Contrary to Bogle’s prediction, though, the rise of the credentialed pros and commensurate decline of often ill-informed part-timers haven’t stabilized a thing. This year we’ve seen the professionally managed market for mortgage securities travel from giddy abandon to deep despair in a matter of months, dragging other markets down with it. That’s just this year: think back to the rise and fall of the dotcoms, the emerging-markets meltdown of 1997 and 1998, the bond crash of 1994, the stock crash of 1987. As Bogle put it a few years back, “Keynes one, Bogle nothing.” Read more.
That last Bogle quote was from a profile I wrote for Fortune a few years ago. The Keynes stuff is all from Chapter 12 of the General Theory, a well I have already gone to in this blog. I realize that dredging up old Keynes and Bogle quotes is the last refuge of the columnist who couldn’t get anybody on the phone because it was almost Labor Day weekend. But I did talk to Andrei Shleifer, and I thought the topic was pretty timely.