Jack Bogle: US Borrowing Could Create Debt Crisis

Vanguard founder Jack Bogle says the American economy is back from the brink, but the nation could face debt problems like Europe's if the US is not careful about borrowing.


The index fund pioneer and author of the book "Enough" shared his views on the economy with TheStreet.

TS: What's your view of the recovery so far?

Bogle: We have a very good recovery so far, but I see signs of slippage. I'm not sure that I believe we will have a double dip, another drop, but I don't see this recovery getting any stronger than it is now.

Now that's not bad, but it's not good enough for us with all of the fiscal problems in Washington because a slow economy is a slow tax revenue producer.

The way our government keeps adding on debt, we might be the next Greece or Spain. Do you see that happening here in the future?

It will absolutely happen here, unless we have the courage and perspective and wisdom to start to fix the mess we're in. In other words, we don't have a hopeless situation. We have a situation that is only hopeless if we refuse to deal with it. Unfortunately, I think one of the words that is rarely used to describe our Congress is courageous.

We have a commission that the President has appointed to look into ways to improve or reduce the deficit, and it is amazing how many things could be done that wouldn't even be all that painful. Take social security, for example.

If you were to have, let's say half a percent more revenues and half of percent less expenses, you would basically solve the problem within a few years. And the additional revenues could come from a higher retirement age, a higher taxable wage base, and the reduced expenses could come from a more modest cost of living adjustment gradually implemented so people would barely notice it. So social security could help get us back into balance.

I happen to think that a big savings would come from a transfer tax on securities. One of the reasons we have all this speculation in the market is basically that the frictional costs have been taken out of trading. So when you read that one of these firms has an 11-second holding period, that's not quite my idea of the long-term.

Are we facing the problems you highlight in your book?

I think we are on the way to facing them. But I still see, for example, the lobbying that was going on the financial services bill down there. The banks are trying to protect their backsides. I understand why they would want to do that. But society has an interest in getting some decent financial regulations, and some stronger financial regulators. By the way, we had a fairly good regulatory infrastructure before all this happened, but it didn't seem to function. It's not a question of whether it was there. Of course it was there, but it wasn't tough enough.

'You saved up 3 or 4 years to buy a car'

We are at a point where we have to have fiscal discipline and maybe go back to the days where you saved up to buy a washing machine, you saved up three or four years to buy a car. We will probably move in that direction as a nation. And I think that is all good.

Has corporate America — and especially Wall Street — gotten the point that they need to clean up their acts after the economic collapse?

Unfortunately, most companies have not. Take the mutual fund industry, which is a pretty good example. We know something like 75% to 80% of the flows into mutual funds are going to so-called lower cost funds. The problem is that none of them are really low cost except for Vanguard, which, as you know, operates at about 20 basis points while the other so-called low-cost funds charge around 60 basis points. Depending on how you calculate it, the average is about 1.3% per equity fund. So the investor is deciding to go for the low cost route but the competition does not respond. They'd rather keep their fees high on a smaller asset base than lower their fees for a larger asset base. These mutual fund managers make more money doing it the way they have always done it.

What about CEO pay, which is a big topic in the book? Has that come down? There was a lot of bonus cutting on Wall Street during the crisis.

It's true that there was some bonus cutting on Wall Street but overall I don't see a big change in the way we look at CEO pay. There's a lot of grandstanding going on down there in Congress, but I don't see any significant reduction in CEO pay. And I don't think we're going to get anywhere until we finally do something in the way of postponing the delivery of that full incentive over a period of time until we can see how their decisions worked out.

One of the problems is that we have become so focused on shareholder value that it has become a synonym for the rising price of a stock. Stock prices come and go for no reason at all. CEOs should be paid on the ability to create intrinsic value that we will call cash flow over the years.

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Disclosure information was not available for Greenberg or his company.