David R. Henderson  

Galbraith Bests Henderson: AEA Edition

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Note: Because it's hard to get on line at my cottage, I'm not as responsive to comments on my posts as I normally am. I will say, though, that I thought Mike Davis's comment yesterday was excellent.

I said in yesterday's post that I would lead my discussion of the Richard Parker book on Galbraith by recounting an event in which Galbraith beat me on a factual/intellectual issue. Here it is.

The event: The annual meetings of the American Economic Association in New York

The date: January 1989

The panel: A panel on the economy, with John Kenneth Galbraith, Bob Bartley of the Wall Street Journal editorial page, and two others whose names I've forgotten

Number of people in the room: About 400.

I was standing at the back because when I got there, it was standing room only. During the discussion, Galbraith had expressed his fear about what would happen to high-yield, aka, junk, bonds if the economic growth fell. Somehow I had the idea, I thought from reading the Wall Street Journal editorial page regularly, that that was not a problem: In a minute, you'll see why I thought that.

So, never one to be shy, at least after about age 10, during Q&A, I stuck up my hand and said that I had a question for Professor Galbraith. This was going to be my glorious "gotcha" moment.

Henderson: Professor Galbraith, isn't it true that there's a special clause in junk bonds . . .

Galbraith (holding his ear with his hand so that he could hear): Young man, come to the front of the room so that everyone, including me, can hear you.

(This was even better. I would get even more attention for my forthcoming critique. So I strode confidently to the front and turned obliquely to face the panel and the audience.)

Henderson: Professor Galbraith, isn't it true that there's a special clause in junk bonds under which, when the crunch comes, they don't have to be paid off? Investors in bonds, recognizing that, have taken that into account and so if the bad thing happens, it's just not that bad.

As I spoke, I saw Galbraith's eyes twinkle and the ends of his mouth turn up in a bit of a grin.

Galbraith: No, that's not the case. Well, why don't we ask the man from Wall Street? Bob [turning to Bartley], are you aware of any such special clause in junk bonds?

OMG, I thought, I blew it, especially when I saw Bartley look at me as if I was from another planet.

Bartley: No, there's no such clause. I don't know what he's talking about.

So here I was, at the front of a room containing 400 people, facing a long walk to the back after I had completely blown it. But I've always thought there's nothing shameful about making honest mistakes. So even though I could feel some shame growing, I told myself that I had just made an honest mistake. So I looked at the panel and then the audience and then said:

Henderson: Well, one of the reasons I come to the AEA meetings is to learn things and I just learned something.

Then what happened stunned me. I estimate that at least a third of the audience broke into applause. That made the walk back a lot easier.


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CATEGORIES: Finance



COMMENTS (8 to date)
Mr. Econotarian writes:

Perhaps you were just prescient!

Mr. Popper also found that there has been a big increase in the issuance of bonds with “optional interest payment,” which allow borrowers to skip cash interest payments if the company runs into trouble.
The Junk Is Back in Junk Bonds, NYT
Marc F Cheney writes:

Great story, Dave. I aspire to face my own mistakes with the same dignity.

Jon Murphy writes:

This is how I would have handled it:

:-)

Ted Levy writes:

I must be missing something. Whether there is a clause or not a clause in junk bond contracts, why isn't the risk of non-payment due to a downturn in the economy something potential purchasers already factor into their decision making, thus already reflected in the price? Wasn't that your point, after all?

So were you right after all, David?

Bostonian writes:

I admire David Henderson's modesty and manners and am enjoying the book he co-authored, "Making Great Decisions".

David R. Henderson writes:

@All above,
Thank you.
@Ted Levy,
I was wrong on the narrow factual point and right on the spirit. I'm sure that what I had taken away from various WSJ op/eds was the point you made--and somehow in my mind I translated it to a wrong factual point.

Tom West writes:

A delightful response from you (I think the common response would have been to simply slink back to one's seat rather than actively acknowledge the point), and even better, an acknowledgement from the audience that such a response is appreciated by the audience.

David R. Henderson writes:

@Tom West,
Thanks, Tom.

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