What Edward Wedbush Could Have Taught Janet Yellen
“If you are not prepared to live frugally, do not become an owner of a startup business. You will squeeze yourself from too many directions.” Those are the words of the late Edward Wedbush, the founder of Los Angeles-based Wedbush Securities. He died on January 5th.
When it came to penny pinching, it's apparent Wedbush lived his advice. Having started his eponymous brokerage (one that ultimately diversified into investment banking and private equity investor among other things) with $5,000 of his own money, the Wall Street Journal obituary on the legendary Los Angeleno indicated that he was famously frugal. As the Journal’s James Hagerty put it, Wedbush “gathered up stray paper clips at the end of board meetings. Office carpets were blotched with spilled coffee. Mr. Wedbush toted his lunch, prepared by his wife, to the office each day.”
Reading about Wedbush, it was hard to not think about a New York Times report from San Diego last week. At a major gathering of economists, former Fed Chair Janet Yellen addressed the possibility of a looming economic slowdown. As one would expect, Yellen made the expected and easy-to-discredit observation that “monetary policy has a meaningful role to play in addressing future downturns.” Yet according to the Times report, Yellen also “emphasized” how “government spending would need to play a larger role in combating future downturns.” Oh wow, where does one begin?
How fun if Wedbush were around to instruct Yellen. Having built up his own business into an 800 employee company with offices in 24 states, it seems he knew quite a bit more than the economist about capital formation, how the latter enables business expansion, and how the combination powers economic growth. Not only does unspent wealth give life to the initiatives of others (more on that in a bit), Wedbush well understood that prodigality would “squeeze” the entrepreneur “from too many directions.”
Ok, so what if the prodigal squeezing the innovator is government itself? What if government spending means the entrepreneur has to hand over more and more of his incoming to a wasteful entity that cares not one bit about the daily, capital-starved perils of the start-up founder? You see, it’s not just the individual who might be crippling his start-up’s progress through a lack of frugality. It’s just as possible that the individual can be wise with his finances, on a tight budget, only for a careless government ever eager to penalize private-sector saving (note how capital gains and dividends are taxed, yet municipal bond income isn’t….) to squeeze the start-up founder otherwise intent on acting on Wedbush’s wise advice for entrepreneurs.
How then, does Yellen not see that what she so breezily proposes as the solution (government spending) is in fact a huge barrier to the rise and eventual success of dynamic businesses most often started on the proverbial shoestring? About this, let’s never forget an additional truth about start-ups: founders are almost by definition doing something that most others think has a slim chance of success either due to its perceived outlandishness, or perhaps because its long-term viability doesn’t merit optimism.
Along the lines of the above point, the Journal noted that Wedbush’s original partner in their nascent venture, Robert Werner, sold his stake within a few years. It's not unreasonable to speculate that pessimism about the future at least somewhat informed his sale.
Conaidering the long odds that met Wedbush's entrepreneurial venture, interesting is that he began in Los Angeles’s Crenshaw district, not in a downtown Los Angeles denser with established managers of money. Yet a drive on the 110 Freeway past downtown today includes a sighting of the Wedbush building; the once also-ran investment company now an anchor tenant in a prominent building in one of the world’s most prominent cities.
The main thing is that Wedbush Securities is the seen. The unseen is all the brokerages and investment banks that never made it, or that managed to survive in obscurity, or that made it only for one of those occasional financial reversals (think the 1970s broadly, 1987, 1994, 1998, 2008, etc.) to wipe it away. Wedbush managed to survive them all, and it’s apparent that one reason had to do with its culture of frugality that made it possible for the firm to weather the unexpected.
Yet Yellen calls for more government spending during the downturns? Does the economics profession even try to be serious anymore? Prodigality is prodigality, while frugality is just that. The United States is thick with start-ups, frequently led by founders willing to live in austere fashion (Nike founder Phil Knight famously didn’t take a paycheck for the company’s first ten years) in order to see their dream become a reality, but their parsimony will as a rule be blunted by politicians that fall over themselves to be generous with the money of others; those politicians cheered on by economists like Yellen who surely have high IQs, but stunningly low levels of common sense. Governments should spend aggressively during a downturn? Yellen is quite literally saying that during recessions, governments should compete with businesses and start-ups for precious resources. No, you cannot make this up.
Which has yours truly wishing yet again that Yellen, along with the rest of her misguided profession, could have somehow crossed paths with Wedbush back when he was still watching his firm’s finances all too closely. You see, Wedbush knew well the genius of frugality. It wasn’t just that that it bolstered the start-up founder, it also made and makes what the start-up founder does possible.
Indeed, there are quite simply no jobs, no companies, and surely no entrepreneurial dreamers being matched with capital first. Translated, there’s quite simply no progress of the economic kind without the frugality that Wedbush cheered, but that economists like Yellen dismiss as they clamor for government excess during troubled times; those times right when parsimony is called for the most.
Janet Yellen’s views would be funny if they weren’t so sad, and if politicians in control of the purse didn’t take her and her profession so seriously. Edward Wedbush could have set the self-unaware straight.