Wall Street Blues

Leon Levy started his career on Wall Street as a security analyst and became a partner in Oppenheimer & Co., then a small brokerage firm, in 1951. He and his partner, Jack Nash, built the firm into one of the leading brokerage and mutual fund companies in the nation. They sold Oppenheimer in 1982 and formed the investment partnership Odyssey Partners. Odyssey is now being liquidated after producing one of the highest rates of return to investors of any such partnership over more than fifteen years. Levy is currently the chairman of the board of trustees of the Oppenheimer Funds based in New York. He is president of the Institute for Advanced Study in Princeton and also president of the Jerome Levy Institute for Economic Research at Bard College, which he founded in 1986.

The following interview took place on September 5.

Jeff Madrick: With the US economy widely considered strong by most conventional measures, many people are confused by how the turmoil in financial markets overseas—from Asia to Russia to Venezuela—could do so much damage to the US stock market. As we are talking in early September, the Dow Jones Industrial Average stands nearly 18 percent below its high of the year. Did you think foreign events could precipitate such a decline?

Leon Levy: You never know what will trigger a decline in the stock market. That word precipitate is an interesting one. When you keep piling up bags on a scale, finally at some point you might put a few too many bags on the scale and break it. What caused the problem? These international markets may be the immediate issue, and problems there do affect the US. But did they precipitate the market decline? That’s way too simple. The causes of America’s problems are deeper and more complex. The US economy is vulnerable, and has been for some time, and that’s the main point that is getting lost amid all these analyses. The stock market usually reflects—at least over time—the course of the nation’s economy.

J.M.: Nevertheless, all eyes seem to be on the international scene. Some people say that, while the collapse of the Russian ruble may have started the recent turmoil in the US stock market, the Japanese recession is the main problem. Is it the linchpin?

L.L.: I don’t think so. But that doesn’t mean the problems aren’t severe. Japan attracts the most attention. It’s the largest economy in the Pacific Rim. It went down first. But I think its problems are typical of the region. I think the same thing happened in Malaysia, Thailand, Korea, wherever you go in East Asia. They are all over-extended.

J.M.: In what ways are they over-extended?

L.L.: Start with Japan. The solvency of its banks, some experts whom I respect tell me, is largely questionable. In the late 1980s, when so many people thought that Japan was economically invincible, it was spending as much as 30 percent of its Gross Domestic Product (GDP) on capital investment.…

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