Bogle: Financial System's Woes Hit 'Real' Economy

Scott Simon talks with John Bogle, the founder of the Vanguard mutual fund giant, about the continuing mortgage crunch and the stock market's downturn. Bogle says this bear market is worse than previous ones because problems with the financial system are affecting the "real economy."

SCOTT SIMON, host:

This week the federal government reported that the economy isn't doing well. Well, you don't need to be a Wall Street analyst to know that. But it's not as bad as it had predicted. But does that matter to homeowners who are on the verge of foreclosure, or investors who are worried about their 401(k)s, or the 51,000 people who lost their jobs in July? John C. Bogle is the founder of The Vanguard Group. He joins us from Lake Placid, New York. Jack, thanks very much for being with us.

Mr. JOHN CLIFTON "JACK" BOGLE (Founder, The Vanguard Group): Good to be with you, Scott.

SIMON: This is the 10th bear market that you've weathered, but I gather you think this one is different from the others.

Mr. BOGLE: I think this one is different because the first nine by my counting were more about overdoing the financial markets themselves. What's different about this one is it seems to me that the financial system has taken such a huge role in our society, the faults of that system are creeping over in part of the real economy, you know, the manufacturing sector, the consumer sector. And that's different. No question about it.

SIMON: Let me get you to expand on that, the real problem, as you talk about the role the economy's playing in society.

Mr. BOGLE: Well, what happens is the financial system is usually the source of the speculation that brings about the cycles in the market. Speculation is very different from investing. It's a really - a key point here. And as we used to have a financial system built on investing, which is owning businesses and holding them forever, and now to an astonishing and often-unrecognized extent, that system is heavily based on speculation. Now, even at the 1929 high in the stock market, stocks were turning over at about 130 percent a year. In my first, say, 20 years in this business, they were turning over at about 20 percent, maybe 30 percent a year. Now, they're turning over at 280 percent a year.

It's without precedent in our history. And these are all traders and speculators pushing pieces of paper back and forth with each other, and that of course flowed into the creation of these, quote, "innovative," quote, new financial instruments of unbelievable complexity. Instruments that are designed, I think pretty obviously, to make money for those that are selling them at the risk of those who are foolish enough to buy them.

SIMON: You have a wonderfully expressive quote in The New York Times, "The banks are too big to fail, and the man on the street is too small to bail." Is that kind of what you're talking about?

Mr. BOGLE: Yes, it's exactly what I'm talking about. You know, we have basically privatized, if you will, the rewards in our financial sector and socialized the risks. These executives in Wall Street creating these instruments, the executives of the two government-sponsored enterprises Fannie Mae and Freddie Mac, made huge, staggering amounts of money. And then when it all falls apart, they don't give anything back. And the people who have invested in those securities have lost an enormous amount of money.

SIMON: The congressional mortgage bailout bill passed this week. What do you think of it?

Mr. BOGLE: First of all, they had to bail these agencies out. Their instruments are held all over the world, and we could not fail to honor the implied credit of the federal government. The problem is that Congress, in my opinion, has been so politicized by these agencies that they didn't develop even a basis of a new system of running these agencies, a much more demanding system in which we could control to a much better way, for example, the amount of leverage they have, and their costs can also be controlled much better.

SIMON: What do you foresee in the next few months?

Mr. BOGLE: I foresee a fairly extended period where the present crisis in the financial system will spread out somewhat to the general economy. I believe that housing is going to take a long time to recover. And I also believe that consumer spending is going to be very hard to be maintained at these present levels.

But my own view is investing is about owning businesses for the long term. And I'm reasonably confident, if not highly confident, that the companies in the Standard & Poor's 500 index will be making a lot more money 10 years from now than they are today. But between 10 years and now, I think we've got some bumps in the road that are quite severe.

SIMON: John Bogle, founder of The Vanguard Group. Jack, thanks so much.

Mr. BOGLE: Great to be with you, Scott.

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