Vintek pointed me to a Bill Moyers interview with John Bogle, founder of The Vanguard Group and patron saint of index funds. (He’s also one of my financial heroes.) Mostly, the conversation revolves around the problems with the modern U.S. economy:

BILL MOYERS: What is the job of capitalism?

JOHN BOGLE: Well, ultimately, the job of capitalism is to serve the consumer. Serve the citizenry. You’re allowed to make a profit for that. But, you’ve got to provide good products and services at fair prices. And that’s the long term, that’s what businesses do in the long term. The businesses that have endured in America have done that and done that successfully.

But, in the short term, there’s all these financial machinations in which people can get very rich in a very short period of time by creating highly complex financial instruments, providing services that can be cut back easily [...] not measuring up to basically their duty.

We all know that in professions, the idea has been service to the client before service to self. That’s what a profession is. That’s what medicine was. That’s what accountancy was. That’s what attorneys used to be. That’s what trusteeship used to be inside the mutual fund industry. But, we’ve moved from that to a big capital accumulation — self interest — creating wealth for the providers of these services when the providers of these services are in fact subtracting value from society. So, it doesn’t work.

I’m struck by the notion that the financial industry is “subtracting value from society”. Bogle — as the foremost proponent of index funds — has long maintained that this is the case. Is it true? I don’t know. That sort of claim is beyond my ability to evaluate.

But the idea reminds me of James B. Stewart’s book, Den of Thieves, which explores the stock market scandals of the 1980s. When I read it last spring, I wasn’t just shocked by the crimes of Michael Milken, Ivan Boesky, Martin Siegel, and Dennis Levine; I was amazed by the billions of dollars the financial services industry drained from the market as a matter of everyday business. It must drain some money in order to operate, but the salaries and perks these people earned seemed extravagant.

JOHN BOGLE: Banks, money managers, insurance companies, certainly annuity providers. They’re all subtracting value from the economy. They have to subtract. To be clear on this now — I don’t want to overstate it. To be clear on this, they have to subtract some value. But, the question is —

BILL MOYERS: What do you mean they subtract some value?

JOHN BOGLE: In other words, — you’ve go to pay somebody something to provide a service. It’s just gotten totally out of hand. My estimate is that the financial sector takes $560 billion a year out of society. Five hundred and sixty billion.

BILL MOYERS: Where does it go?

JOHN BOGLE: It goes into the pockets of hedge fund managers, mutual fund managers, bankers, insurance companies.

Finally, here’s a warning from Bogle about the dangers of deficit spending:

JOHN BOGLE: People are spending at a higher rate than they’re earning, and we’re starting to pay a price for that now, particularly in the mortgage side. But eventually, that could easily spread and people won’t be able to do that anymore. You can’t keep spending money you don’t have…

It wasn’t that many years ago — maybe a couple of generations ago — that if you wanted something, you saved for it. And when you completed saving for it, you bought it. Imagine that. And that wasn’t so bad.

But now that we know that we can have the instant gratification and pay for it with interest payments, of course, over time — which is not an unfair way to do it — we’re going to pay a big price for the excessive debt we’ve accumulated in this society, both in the public side and the private side.

This is fascinating stuff, even though it’s outside my area of expertise. Get Rich Slowly is not a blog about economics (and I don’t expect to post again on the subject any time soon). Yet economic forces do play a role in shaping our personal finances. If you have the time and the inclination, watch the video or read the transcript. As for myself, this interview strengthens my resolve to invest in index funds.

Postscript: Last month, Bill Moyers interviewed Dr. Benjamin R. Barber about “how the global economy produces too many goods we don’t need, too few of those we do need, and, to keep the racket going, targets children as consumers in a market where shopping is a twenty-four hour business.” I haven’t watched this interview yet, but it sounds interesting.

This article is about Gurus, Interviews, Investing