GREAT BARRINGTON, Mass. - Perhaps people are just spooked by debt. Inspired by Warren Buffett's memorable dismissal of spendthrift America as "Squanderville," doomster pundits point portentously to the "twin towers" of debt: record trade deficits ($900 billion) and budget deficits (a projected $448 billion).
The Squanderville chorus prophesies the same debt doom they predicted last year and the year before that and so on, back through the centuries in the annals of finance. In a global economy, shifts in the balance among goods, assets and bonds are utterly predictable and innocuous. A trade deficit between the U.S. and China should arouse no more alarm than a trade deficit between California and Nevada.
Nonetheless, perhaps I am missing something. Perhaps it is different this time. So to get a perspective on debt, I decided to consult the world's leading expert on the subject, Michael Milken. Hoping for some economic bubbly with a side of guru goulash, I headed west for the Milken Institute's annual bash at the Beverley Hilton Hotel in Los Angeles.
I had not visited the place since the glory years of the early 1980s, when the crested capital of Milken's $200 billion junk-bond empire was funding most of the key companies that laid the foundations for a new era of networks. That became the "Telecosm," and it was initially financed chiefly by debt.
At the time, such firms as MCI, TCI, News Corp., McCaw Cellular, Cablevision, Viacom, Turner Broadcasting, Warner Communications and even secondary beneficiaries like Corning and the Walt Disney Co. were widely seen as Ponzi schemes, poised and propped up for quick deal-making profits by the Machiavellian vamp from Wilshire Boulevard and Drexel Burnham.
But among various permutations of ownership, wafted by the relatively gentle but persistent inflationary winds of the late 1980s and early 1990s, these heavily indebted companies grew in market capitalization from less than $100 billion to around $1 trillion and fueled the communications infrastructures for an information age.
After five years of federal harassment of the high-yield security market that he pioneered, Milken went to jail in 1991 on a tidal wave of journalistic and judicial blindness to what he was doing, aggravated by the ulcerating grip of envy at his success in doing it.
When he emerged from jail more than two years later, he found himself nearly bankrupt from $1.2 billion in fines and from the federally enforced crash of junk-bond values. (Congress forbade any regulated companies from buying them, forced savings-and-loans institutions to give them up, and then congratulated itself for foresight as the securities tanked.)
Contrary to the predictions of the politicians and their consultants, though, junk bonds soon revived and became a staple of American finance.
Banned from financial markets and other uses of his amazing talent, Milken found time to address the 1997 Gilder/Forbes Telecosm conference, where he warned that while the 1980s were the era of debt finance, the 1990s were an era of equities.
As Alan Greenspan issued alarms of "irrational exuberance," Milken declared that an eightfold rise since 1985 in corporate price-to-book ratios signified not a vast overvaluation of stocks but the increasing role of intellectual and human capital in U.S. companies. Milken in 1997 saw the change as a sign that equities were still undervalued, but that debt risks had risen.
Meanwhile, Milken was reassembling the shards of his own career. Banished from the fields of finance that he had earlier mastered, he would have to find new work. Paraphrasing his probation officers, I'll sum up the conversation:
"Well, what can I do? How about education? I'm interested in education."
Sure. You can do education.
"How about prostate cancer? Can I do that?"
Sure. You can do prostate cancer.
In one of the greatest second acts in the history of enterprise, Milken within seven years beat his own prostate cancer and accelerated research across the field. Then, he launched a venture called FastCures that is addressing other cancers as well, and he created an education empire under the aegis of Knowledge Universe that's become nearly as lucrative as his junk-bond empire of the 1980s.
Knowledge Universe's companies include Leapfrog, which makes educational toys; CBT-Group, which provides vocational training; Cardean University, which offers Web-based business education programs; and K-12, soon to go public in online courseware.
Milken is one of the few businessmen who have actually enhanced their reputations after leaving prison--in Milken's case, to a point beyond his renown as a high-yield financier. His one-time nemesis Rudy Giuliani contracted prostate cancer and became a friend. And no one any longer speaks of Warner, News Corp., digital cellular carriers or long-distance fiber optics as Ponzi schemes--but few have apologized to Milken for their earlier misjudgments.
George Gilder is a Senior Fellow of Discovery Institute and Editor of the Gilder Technology Report