"While I don't think it's a guide to how things will eventually play out today," says Kaufman, "the book reveals the limits of our leaders' capacity to combat systemic problems, cataloguing the various mistakes that were made, which arguably paved the way for an even more devastating global war."
So how much can we learn from history?
"Today, we've got a student of the Depression chairing the Fed," observes Kaufman, "but despite his solid credentials, [Ben] Bernanke failed to recognize the excesses of the financial market-the enormous growth of debt, the enormous growth of financial derivatives, the deterioration in the quality of credit in the housing market-until it was very late."
These excesses were being fueled by a sharp change in public policy over the past 20 years that promoted deregulation based on the belief that markets know best and that they can respond to risks of an increasing credit bubble. "Clearly they can't," says Kaufman.
Policy
A fan of opera and an avid art collector with a passion for modern American paintings, especially Marsden Hartley, Kaufman believes one's understanding of art improves when he's focused-a sentiment he also happens to apply to President Obama's rangy domestic strategy. "I would've preferred if the administration concentrated on economic stimulation and put off its other programs to a later time," says Kaufman. But overall, he thinks Obama is pursing the only feasible choice there is.
Kaufman believes reviving the economy ultimately comes down to a single matter: removing toxic debt from the financial system. It will be a slow process, with the public eventually bearing the cost of defibrillating banks' balance sheets.
But as this plays out, Kaufman would like to go further than Treasury Secretary Timothy Geithner's recently announced plan by designating large financial conglomerates as public utilities-like water and electric utilities-with limits on return on equity. Such a metamorphosis would substantially reduce banks' various conflicts of interests.
For example, Kaufman would want to prevent financial institutions who take in deposits from co-owning hedge funds. And he thinks these conglomerates with depository functions that underwrite stock or bond issues should not be allowed to have equity or debt stakes in these issues. "Ultimately," Kaufman concludes, "I would like to spin off pieces of these conglomerates to reduce the concentration of risk."
Defensive Investing
Kaufman realized at the start of 2008 that it would be a very difficult year. So he took a variety of defensive steps.
First, he began liquidating some of his long-only fund holdings and then sold out of about one-third of his hedge funds because he believed their managers might be tempted to tie up capital after a severe market slide. He subsequently sold off his commodity exposure and started to short the S&P 500 index.