1343: Paul Volcker's Legacy & Thomas W Jones, Federal Reserve Bank, Freddie Mac, TIAA-CREF, Travelers, From Willard Straight to Wall Street

Just invest. It's still a great thing to do. I know it can be scary to a lot of people. Jason's been doing this a long time. He's got a lot of knowledge. We're in an age of technology and everything's at our fingertips. You can do a lot of homework on your own, but in the end, make sure you're talking to professionals like Jason.

Welcome to the Creating wealth show with Jason Hartman. You're about to learn a new slant on investing some exciting techniques and and fresh new approaches to the world's most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine, self made multimillionaire who's actually been there and done it. He's a successful investor, lender, developer and entrepreneur who's owned properties in 11 states, had hundreds of tenants, and been involved in thousands of real estate transactions. This program will help you follow in Jason's footsteps on the road to your financial Independence Day. You really can do it. And now, here's your host, Jason Hartman with the complete solution for real estate investors.

Hey, hey, hey. Welcome to episode 1343 and greetings from beautiful but chilly Scottsdale, Arizona. Yes, I know some people think Arizona's hot all the time. Well, oh, no, it's not. Gets very chilly here in the winter. So I left this beautiful Florida weather to come here. But I bet it'll be gorgeous in the daytime here, but at night, yeah, it's cold out there. Okay, so we have got a great guest today, Thomas Jones. And he will be talking about his vast experience on Wall street and then as a venture capitalist now and about the economy and so forth. The thought for the day. Someone posted this on social media recently and I just thought I'd share it with you. It's pretty good. This is pretty good. You know, there's a lot of wisdom sometimes in a little short quip. Here it is, it says, don't forget to drink lots of water and get some sun. You're basically a houseplant with complicated emotions.

That's pretty good. Don't forget to drink lots of water and get some sun. You're basically a houseplant with complicated emotions.

That is true. That's what we are as humans. Hey, so some bad news. A man that I have talked about many times on the show, the former Fed chairman Paul Volcker has passed away. He was either 92 or 94 years old. So he lived a good long life. Conflicting reports on his age, but, you know, he was the Guy that really of all Fed chairs, I'd say he was more of a purist, right? He was not a sellout. He was the one who, who raised interest rates up to break the back of inflation. And that was a very risky move and a lot of people criticized him for it. In fact, our in house economist Thomas, when I posted this, he commented and he said, wasn't he responsible for like 5,000 suicides because of the deep recession he caused? Well, I don't know, but he definitely caused a very deep recession by raising interest rates. But you know, think about it. You always have to ask yourself, compared to what? Right, the Jason Hartman question. Compared to what? That is one question you have to ask. But the number two question is what are the dogs that don't bark in that situation? So say Paul Volcker hadn't come along, say he would have never been Fed chair, say he would have never acted the way he did in the face of that stagflation of the 70s where you have an anemic economy with high inflation at the same time, an odd malady. And of course, as you know, I've talked about what came out of that during the terrible Jimmy Carter economy was the misery index. The misery index, that term was, I'm pretty sure that term was coined then. You know, there were other miserable times in the economy throughout history, of course, but the misery index certainly gained popularity during the Carter era because things were so bad. You had sort of the worst of both worlds. Usually when you have this rampant inflation, you have an economy that is vibrant and moving and booming and lots of stuff is happening because that creates the inflation where people have that wealth effect and they go out and spend the money and that money is chasing a limited supply of goods and services. So of course, good old rule of economics, supply and demand, when there's a lot of supply of dollars chasing a limited supply of product, what do you think is going to happen to those widgets out there? They're going to raise the price of them, right? And there you have inflation. So Paul Volcker, I don't know, I guess history will tell, but I think he was pretty gutsy and I'm impressed with people who have guts and chutzpah, you know, gotta have some chutzpah. Had he not come along, maybe we would have sunken into this massive inflation all through the 80s, maybe it would have lasted into the 90s and there would have been, you know, inflationary economic collapse like Hungary, Zimbabwe, Weimar Republic, Venezuela. History is littered with these terrible examples. So who knows what would have happened if Paul Volcker didn't come along and do what he did? You know, nobody really knows.

We'll see.

But you know, inflation, one of the biggest drivers of mortgage rates, peaked at 13% in 1980 and drove the average US rate of the 30 year fixed rate mortgage.

Are you sitting down, folks?

In 1980, the average rate of the US 30 year fixed rate mortgage. Drumroll please.

18.6% as measured by Freddie Mac. Yes, you could get a mortgage for 18.6%, but hey, that isn't so bad when inflation is 13%. Right? Because think about it, what's the spread between the two? 5.6% is the spread between the rate of inflation and the rate of borrowing.

On a 30 year fixed rate mortgage.

And also today we look at that same Freddie Mac data, right, that shows a rate of under 4, 4%. Now, I know don't panic investors, all of you listening.

You don't get those super desirable rates. That's what the owner occupants get.

But your rates are still pretty great. I mean, you know, you might pay four and a half percent, give or take, right? But you know, pretty awesome rates, for.

Sure, even for investors.

So Volcker, you know, he tackled inflation by tightening the monetary policy. And you saw rates go up and this benchmark rate actually increased at one point to 20%. And other economists called this shock therapy for the economy. Of course, Carter lost his bid, fortunately for a second term in office. I mean, look, I think Carter was a good man. I just don't think he was a good president.

Okay? But I think Carter a good man for sure.

And you know, not was, is. Carter is still with us, but you know, he's definitely getting up there too. But yeah, you know, Volker, interesting guy. And you know, and, and then we came into the long, long era of Greenspan, of Alan Greenspan after that, who was there for a long, long time. And he was the complete opposite. You know, he was just flood, flood the money supply. And of course, Ben Bernanke, you know, he was dubbed Helicopter Ben because he.

Probably regrets saying this.

I'm sure he said, you know, if the economy got too stagnant, if there was a recession, he would just go up in a helicopter and drop money on, on the economy, right? So, you know, those were the opposite people, right? Those were the Keynesian philosophies, right? And the Keynesian philosophy, John Maynard Keynes, the famous economist, is prime the pump. Prime the pump. In other words, inject money into the economy, have the government start some government spending programs, and that'll jumpstart the economy.

Right?

That's what the Keynesian thinking is. You know, that's pretty much opposite of the Austrian school of economics. So, anyway, little rambling there. But without further ado, let's get to our guest today. I think you'll find this interview to be very interesting. If you have comments, questions or thoughts, go to jasonhartman.com ask and let us know what they are. Check out some of our great properties. While you're there, get yourself connected with.

One of our investment counselors.

And you can always call us. Yes, you can pick up the phone. We still have phones. Well, the world is moving away from the telephone. And I find that to be super annoying, by the way, because I think people were meant to to talk. They were meant to talk, and that's the best way to communicate. So you can always call us at 1-800-HARTMAN 1-800-HARTMAN. And here is our guest for today, Thomas Jones.

It's my pleasure to welcome Thomas W. Jones. He is the former vice chairman, president and COO of TIAA cref, the largest pension system in the country, former vice chairman of Travelers Insurance, the Federal Reserve bank of New York and Freddie Mac.

I'm not done yet.

His resume continues. He's former chairman and CEO of Smith Barney Asset Management, former CEO of Global Investment Management at Citigroup, former treasurer at John Hancock Insurance Company and a founder and senior partner of venture capital investment firm TWJ Capital. He's author of the new book From Willard Strait to Wall A Memoir. Tom, welcome. How you doing?

Thank you, Jason. Thank you for inviting me.

I have a feeling you are located in either Boston or New York. I'm just guessing.

I'm actually between the two. I'm in the New York suburbs, north side. I'm in actually southern New England, and I'm a former Bostonian.

Fantastic. Well, I was just up there. I hosted my mastermind group on a New England and Canada cruise just a week and a half ago. So we were just there in your area. Beautiful fall foliage this time of year. You've just got a storied career and incredible, incredible resume. You've obviously done a lot. But what is particularly interesting that we were talking about off air is how you started investing with a conversation with your new bride on your honeymoon about saving money to buy two units that you converted into 10 units, right?

Well, that's correct, Jason, 25 years old, just married, honeymoon. I told my bride I had some ideas to share and said in a capitalist economy, we need to think about how to Build some capital for investment. And one way to do that is since both of us are working, maybe we could live on one salary and save the other salary so that we have some investment funds now. That sounds easy to do, but it's actually quite hard because it meant that we couldn't do some of the things that our peers were doing in terms of vacations and, you know, nights out on the town and things like that. My bride agreed. And within two years time, we had accumulated enough money to respond to an ad that was in the Sunday Boston Globe, an ad from the Boston Redevelopment Authority for people to acquire and redevelop various residential properties around town that were in the possession of the Boston Redevelopment Authority. We bid on two abandoned, burned out brownstones in the South End of Boston in 1976.

Right.

1976. They were just two blocks from Copley Square in downtown Boston. Unbelievably, we were the only people in the entire city of Boston to bid on those buildings. Ultimately we combined it into a 10 unit apartment building. We lived in one unit. And it, you know, it frankly became the foundation of our financial success over the years.

That's fantastic story. And you know, real estate, or really income property particularly, has just always been such a winner for people. It's really an incredible asset class. I absolutely love it. Now, 1976, that was right at the time that Gerald Ford was moving out of office, Carter was moving into office in the 70s. There was a lot of talk about stagflation, the misery index. You know, of course, just a few years prior we had Nixon resign. What was going on in the economy at that time that no one bid on these really well located properties? I mean, did you have to have a lot of faith and sort of be a contrarian to be willing to bid on and buy those properties during that time?

1976 was the early days for the renewal and rehabilitation of the South End in Boston. Even though it was close to Copley Square and close to Back Bay, we already had an apartment in the South End. And so we knew what the potential of the community was. We understood the dynamics of the neighborhood. And, and so we thought that these buildings, which were relatively close to Copley Square, actually could be commercially viable and an attractive residential location, in fact, a place where we were willing to live ourselves. So I think it was that insight into the market that encouraged us, gave us the sense we could move forward with a sense that we weren't taking as much risk as perhaps others might have perceived.

Okay, but those were residential properties. There were two residential units that you converted into 10 residential units. Apartments. Right.

Two buildings. Two brownstones that we converted into 10 apartment units. And we lived in one of the 10 units and rented out the other nine. Our building was cash flow positive within one year's time. So we were essentially living rent free, you know, both having then return on our invested capital as well as the tax advantages that come with owning, you know, commercial real estate, which at that time, you know, tax advantages that could be brought through one's personal income tax return.

Right.

So it really became the core of us just kind of leapfrogging forward economically.

Sure, sure. When I asked you about the economy a moment ago, I was kind of talking about The Broader Economy, 1976. I know you mentioned the specific area there in Boston, of course, but what was the feel in the economy back then? Just kind of paint the picture for our listeners so they'll understand how you might have been thinking, like, was this a risky investment? Were you nervous doing that first deal or was everything going through the roof and you'd be crazy to miss out. Right.

Well, it was definitely a sober era. You know, we had just gotten past the resignation of President Nixon in the Watergate impeachment proceedings. Jimmy Carter had just been elected. And this was before the Ronald Reagan era, you know, kind of the Sunshine in America era. America was just coming out of, you know, still in the midst actually of a period of pretty high inflation. But you know, my sense of regardless of the short term economic cycles up and down, I had a pretty deep conviction that steady savings and investment every year invested in long term growth assets such as US Equity and real estate equity, that that pays off over time. And when you have a dip in the economy such as we were experiencing in the mid-1970s, it's in fact a buy in opportunity. And that's especially true, Jason, when you're young. I mean, we were in our 20s. And so basically I had no fear with regards to if I can get in at an attractive price, will this asset eventually perform? I could not predict that it would be a successful investment in a two year or three year or four year time frame. But I was highly confident that as a long term asset getting in at the low price of acquiring the property from the Boston Redevelopment Authority, that that would be successful over the long term.

Yeah, I agree and I totally agree with you. I purchased my first rental property when I was 20 years old. So it's a great asset class. Talk to us about how Wall street was back then. What year did you start Your career on Wall Street?

Well, I got started in public accounting in the 1970s. Then I was at John Hancock Insurance Company in the 1980s where I rose to senior vice president and treasurer and in 1989 became the executive vice president and chief financial officer of TIAA Cref, the pension company, and became the president of tiaa cref in 1993. So ohn Hancock really was my first day to day working exposure vis a vis Wall street in the 1980s.

Yeah, yeah. How has it changed over the years? You know, I know you hear this storied stuff about Wall street, about how they used to have these kind of like white shoe firms they called them, and how it just used to be a more, maybe a more ethical industry than it is today. You know, there have been a lot of scandals on Wal, the Great Recession and such. Just would love to have your sort of historical commentary on how it's been over the years.

Well, one of the big changes when you refer to white shoe firms, many of the investment banks in that era and brokerage firms were partnerships. And as partnerships, that meant that the owners, the partners, had their own capital on the line. So there was, I would say, a greater degree of caution with regards to their investment disciplines, their lines of business, because losses went directly into the capital account of the partners that owned the firm.

Yeah. Well.

That'S great. And I just finished. Interesting you bring this up. I just finished a couple of weeks ago, Nassim Nicholas Taleb's book, Skin in the Game. And that's the problem with the world today, isn't it? There's this disconnect between the principles and.

The decisions they make.

They're going to get their big bonuses no matter what, Right? Yeah.

Well, it's highly unlikely, Jason, that the financial crisis of 2008-2012 or so would have happened if there had been more skin in the game by people that owned the firms. Unfortunately, we had evolved to a situation where too many players on Wall street could grab the golden ring, so to speak, get bonuses of $10 million or more by one year of good performance and not suffer any long term consequences if those assets or investment strategies then turn sources. And that I think did encourage behaviors that would not have occurred under a partnership structure.

Has any of this been fixed coming out of the Great Recession? You know, any of the reforms, are they going to work or are we just kind of in the same position? We got Dodd Frank. It's amazing to most people that are outsiders, not insiders, that we had the Great Recession and nobody went to jail. I mean, Dennis Kozlowski I guess did, but I think that was even before the Great Recession. But yeah, anyway, you know, what are your thoughts?

Well, I think there's been reasonable improvement with regards to the capital levels that have to be held by the firms that engage in businesses on Wall Street. And there are limitations on things such as proprietary trading by the major banks, particularly in those institutions where that could spill over into businesses that are backstopped by the US Government, you know, such as consumer deposits that are held in banks and guaranteed by the US Government. And I think there's also been pressure with regards to bonuses having to be geared towards longer periods of performance, that there's a clawback two or three or four or five years down the road if it turns out that a bonus that was paid was not justified as the subsequent performance determined. So there have been improvements. I don't think it's as healthy as would have been the partnership environment. But the counter argument is that our financial institutions are able to concentrate pools of capital now at a scale that might not have been possible under a partnership structure. So they can support larger investments and larger companies in the broader economy.

Right.

But in the aggregate, let's assume that there could be the same amount of capital formation. It would just be spread amongst more companies, or really more partnerships, if you will, rather than having these giant Bohemists that are, hey, I'm going to use it too big to fail.

And that's pretty legitimate comment, Jason. And in fact, the most disappointing aspect of the reforms since the crisis is that if anything, our capital markets have become more concentrated and fewer giant institutions, which we know will have to be supported by the government if they're at risk of failure. So that's a pretty fair point.

Yeah. Gosh, I don't know.

Every time they make a new reg.

They basically just put up barriers to new entrants coming into the field. All the established players, Goldman Sachs and all the rest, they can afford to comply with these regulations. The startup can't do it. It's just funny to me that you have such a startup culture in, say, Silicon Valley. And listen, I have my own complaints about Silicon Valley and tech tyranny for sure. But, you know, the point is there's a robust startup culture because there aren't many regulations, at least not yet. Maybe that's going to change. We got Facebook in front of Congress all the time, and probably rightfully so. But on Wall street, the regulatory environment is so burdensome that it would seem like on the face of it, well, that's to protect the consumers. Right? To keep everything fair and square. But the reality in practice is that.

You can't have a lot of innovation.

You just got a few big players when you have big regulations. Right.

Well, you're correct again, the intent was to protect the consumer. But one of the impacts, unintended or not, is that regulation does become a barrier to competition. And you know, one of the most vivid examples of this, it's easier to understand outside of financial services that one of the breakthroughs of the firms like Uber and Lyft was that they took this approach, they had enough capital that they could in effect, just break the law going into business, a regulated business, such as the taxi business, the taxi and limousine business.

Yeah, where's your medallion?

Right, where's your medallion?

Yeah, right.

You know, New York had a regulated number of medallions dating since the Depression. And those medallions were worth a million dollars and more because there was a pretty predictable earnings stream from that scarce asset being out on the streets. And Uber, they just broke the rules, kind of with an attitude of sue me. And they had the resources, you know, unlike most startups, they had enough scale, really big capital backing them that they had the resources make your market fight the bureaucracies and get enough traction that they could then call on their customers to attack the politicians, regulators as doing things that were anti competitive.

Okay, so here's the question. Is that good or bad in your eyes? I think it's good. But what do you think?

Well, I think it's good to have breakthroughs like that like Uber and Lyft. I think it's bad. Frankly. I feel sorry. Using that same example, I feel sorry for the small businessmen who were trapped, who were caught owning medallions with levels of debt that they could no longer sustain.

I agree with you there. So the way to have this kind of creative destruction, if you will, is to let it play out more so slowly so that people can make adjustments in the markets. Now, I don't know much about the medallion business, but I heard that most of those medallions were owned by big Russian oligarchs, you know, or, you know, kind of have a mafia vibe to them. I could be wrong about that.

And that's true at scale. That's true at scale. So you make it, you know, you differentiate between those who own medallions in Mass versus the small immigrant business.

Right.

One cabbie of the small businessman, you negotiate a buyout. That is, if the industry is going to change, there has to be kind of a buyout of this embedded value.

Interesting stuff. And it's amazing to me that Uber and Lyft still haven't made any money. I just can't believe that with their scale, I don't know how you can not make money. But whatever, we'll. We'll see. You know, Lyft says they're going to be profitable next year, so. So we'll see. So you're a VC now? A venture capitalist now? What? Why did you walk away from all of this other stuff to become a vc?

Well, in the autumn of my years, autumn of my career, I understood that, number one, it would be better for my physical health to get out of the Wall street grind. I understood it would be better for my mental health to get away from the Wall street grind. And frankly, there's a lot about running big companies and big businesses that just isn't fun. I mean, you talk about the regulatory issues. There's also enormous amounts of administration, personnel, management. That is just not fun. It's not the fun part of the business. My sense is that what has always set America apart and made our economy very special is this creative energy that we have in our entrepreneurial class. And it's just so enjoyable to be around these people that are excited about new ideas. You know, they're excitement about building new businesses. I mean, it's just joyful. It's just joyful to be around people like that.

It's really exciting. You know, Tom, I'll tell you, I have few addictions, but one of them is hanging out with entrepreneurs. I just like to really. I really. Every time I come back from a mastermind meeting or something, I'm just so revved up. It's really inspiring, you know, to know that these are the people that really are changing the world. Not always for the better, but they're definitely making an impact on it. I mean, it's. It's truly incredible that it's not government. It's actual people that, you know, most of us know that are really moving the needle. It's pretty incredible.

People with vision and with a passion. It's America's secret sauce and it's something we should treasure.

Yeah, I couldn't agree with you more. You know, every time I go to Europe, and I was born in Europe, by the way, it just feels like it's encumbered by bureaucracy and old ideas and, I don't know, it's just not an abundant way to think like in the us it's just a much more abundant type of thinking.

Jason, that's the perfect example of how regulation and bureaucracy hamper economic growth because they create such barriers to new businesses in many of the European countries.

Yeah, it's really amazing. You see that the business startup rate in even Germany, Right. Which would be considered by far the great economy of Europe. It's abysmal compared to the States. There's just nothing going on in these places, comparatively speaking.

China has this great tier of what they call middlestadt, these middle sized companies which are integrated into the industrial side of Germany's economy in particular. But very slow on the startup side though they are trying to remedy that. There is a vibrant startup scene in Berlin in particular.

Right, I agree. Berlin is like the Austin of Germany, I'd say, or the Silicon Valley. Yeah, very interesting.

Are there any questions? I didn't ask you anything.

You just want to share. I mean, you've just got such a tremendous background. Maybe anything from Freddie Mac or the mortgage market that we could learn or whatever you want to share.

Well, you could ask me why I wrote a book.

Yeah, okay. Why'd you write a book and tell us about Willard straight to Wall Street?

Well, you know, my picture is on the COVID of my book and it's a picture as a Pulitzer prize winning photograph that was on the COVID of NewsWeek magazine in 1969 of me exiting Willard Straight hall, which is the student union building at Cornell University. I'm carrying a rifle, I have a butcher knife in my belt. I have a war club hanging from my side. I just have this.

You were a radical, right?

Oh boy. I just have this look of anger and determination on my face. So a lot of, you know, my book is basically two stories. One is just my personal story. Personal grit and perseverance overcoming adversity. You know, one of the first in the wave of black Americans going into corporate America. Rising to the top there. So there's that story. But I also wanted to tell my story as a microcosm of the enormous racial progress that America has made made in the last 50 years. I had that gun and I was that look at anger because I was one of those who felt that what had happened in America with treatment of African Americans for 350 years was going to end in our generation, my generation. It had to end in my time, my lifetime. I didn't expect expect to live very long. I just. It had to end and I was prepared to fight about it. And America, you know, this is, this is just a wonderful country, America. It faced a metaphorical crossroads in the late 1960s. One for to the Left, which meant trying to live up to the founding ideals and creed of this country, which meant inclusion and efforts towards racial and equality, social equality. The right fork would have meant oppression and suppression of people like myself and others who were involved in the civil rights movement of the 1960s. Fortunately, America chose the left fork, and that has led to progress in this country, which frankly, could not have been imagined 50 years ago. If you had described America today to people 50 years ago, they would have said, that's not possible. This country could not change that much. And, Jason, I wrote my book in part because our country does not give itself credit for how much we've accomplished.

That's really interesting, you hear, and of course, the media. It's always sensationalism, right, because that's what sells and that's what gets attention. But you see a lot of people on tv, hear them on the news, whatever, you know, complaining, the minority side.

Complaining that, you know, oh, America's terrible.

It's so oppressive. And I just keep thinking, compared to what I know it's not perfect, but just show me.

You know, I know they whip out.

A couple Scandinavian countries, probably as a comparison, but, you know, by and large, with a broad population of planet Earth, the US Is a pretty darn awesome place, you know. Yeah. In terms of, you know, minority rights and social mobility, I mean, are these people justified in their. In their grievances, or should they be more grateful? Where do you think?

Well, you know, I sympathize with movements like Black Lives Matter when they complain about these incidents of police violence against unarmed black men.

Yeah, that's really. I agree with you there.

But even there, I say even though that complaint is legitimate, the truth is such incidents happen 50 times more frequently 50 years ago and 100 times more frequently 100 years ago.

Right.

So even though it is bad that it's happening even occasionally now, it's not happening that much. The fact is that the reduced incidence represents enormous progress in our country. And with human nature being what it is, we're never going to be completely free of incidents like that. We're never going to be completely free of, you know, some forms of racism. We're never going to be completely free of some forms of hatred. But we should give ourselves credit. To me, it's like when you raise a child, you cannot do it successfully if you always harp on the negative, that no matter what the child does, it's never good enough. Well, you should. Should have done better. I hope you do better. You've got to give encouragement.

You got to look for the good, see the good.

And we need to do that same thing in our social discourse in America. We need to recognize and praise the good even as we acknowledge that which still needs to be improved. And so that was one of my motivations for writing my book. I hope America can hear that message.

Yeah, I think that's a very fair statement. Very balanced. Please give out your website. Of course, the book is available in all the usual places if you want to share a website.

Or from Willard street to Wall street is where you can find it on Facebook.

Great.

Good stuff.

Well, Tom, thank you so much for.

Joining us and sharing your incredible story. We really appreciate it.

Thank you for having me, Jason. I enjoy chatting with you.

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