The World is Full of Pyramids: Our Conversation with the FT's Brooke Masters Part One

Richard Kramer: Welcome to Bubble Trouble, conversations between the economist and author Will Page and myself, independent analyst Richard Kramer, where we lay out some inconvenient truths about how financial markets really work. Today, we've got a ringside seat to the battle in the markets between bubbles and troubles, with the first of a two episode conversation with Brooke Masters, the FT's chief business commentator and an associate editor. More in a moment.

Welcome to Bubble Trouble. Brooke, can you introduce your work at the FT and how many bubbles you've seen over your long career there?

Brooke Masters: I've been at the FT for 15 years, and before that, I was at the Washington Post, and I covered the troubles of the dot com bubble. I covered the housing market bubble before 2007. I covered CDOs and CDO-squareds and the bubble in crazy financial products before the financial crisis. And now, it seems like we're covering another one. It's very exciting.

Richard Kramer: [laughs] And you must feel that sense of deja vu all over again, as Yogi Berra would say, having seen it up close and, and personal in Washington, the AOL dot com bubble, when Ted Leonsis made an absolute bundle selling something at the very top of the first dot com bubble.

Brooke Masters: Oh, for sure. This definitely feels the same. I have to say, one of the things that made my skin crawl was when my college age kid texted me in the middle of lockdown, "So, Mom, I'm interested in this GameStop thing. Should I buy derivatives?"

Richard Kramer: [laughs]

Brooke Masters: And I was like, "Derivatives, terrible idea. GameStop, crazy." But you know, he bought some. He made some money. And I kept saying, "Sell, sell, sell." And he did, and now he's got cash.

Will Page: [laughs] Well, it's an honor to have you on the podcast, Brooke. I have to say, I have unsubscribed from various newspapers in the past few months, but I've stuck with the Financial Times. And one of the reasons I do is your journalism, be it covering corrupt companies or the value of private school education. It's clear to me the work you put in to produce those words that pop out, so it's a real honor to have you on.

And what I wanted to discuss in the first half is entrepreneurship. Now, I'm surrounded by Americans on this podcast, two Americans in London and one American in New Jersey. And you have some interesting presidents. One of the most interesting ones was George W. Bush, Jr.

And I don't know if you remember the speech he made about Old Europe back in the day, where he said that France and Germany are Old Europe. They don't have the drive of the Americans. They don't have the business spirit of the Americans. And then, he went on to say the French don't have a word for entrepreneur, which has to be the biggest gaffe in US presidential history.

And entrepreneurship is going to be the theme of this discussion. And to get into it, I want to refer to something which is in my book, which is there's this argument that if you take the safety net away from society, the social welfare safety net, as it were, you make people more entrepreneurial.

This is what I was taught at university way back in the age of Henry VIII, that if you remove that safety net, people take more risks, and that's what makes America great. That was a kind of mantra that we were taught.

Now, I've spent the best part of 10 years in the Sweden going up and down to Spotify's office. That country has an amazing safety net, not just 18 months' bank of maternity and paternity leave for parents, uh, the ability to take six months off work to start an education course, the ability to take nine months off work to start a startup, believe it or not.

Incredible safety net. So the logic would go that they wouldn't have an entrepreneurial spirit, yet I see no end of promising startups coming out of Sweden, the most recent one being Klarna.

I just want to ask as a American over here in Britain, which side of the pond do you stand on that safety net argument, Brooke? Because it seems to be a bit of a contradiction to assume that you can or you can't have the safety net, and you can and you can't have entrepreneurial spirit.

Brooke Masters: I think there is the interesting question of how you frame your safety net, because Sweden's safety net is about freeing people up to take chances, and having no safety net forces you to take chances. I think the countries that struggle because of their safety nets are the ones where the safety net, uh, ties you to a job or ties you into a profession you're already in. And so people, you know, h- are unwilling to take risks and very uncomfortable.

I do think it's worth remembering as well that many of the great American entrepreneurs are not, in fact, poverty stricken immigrants, particularly in the computer age. Uh, I think this was less true, say, at the turn of the 20th century.

But if you think about Bill Gates, for example, yes, he founded Microsoft in his garage, but his dad was a lawyer, and h- crucially, his dad said, "Patent the damn stuff." He, he had privilege, and he had the ability to go be in a garage, because he could still eat.

I was very lucky and went to an Ivy League university, and many, many of co- my former classmates have gone on to found both hedge funds and ended up at, at big tech companies and helped found them and s- and did really fabulous things. But many of them were privileged. They could afford to take a job that wasn't necessarily going to pay off quickly, because they had family resources.

Will Page: Let's unpack a few things there. You give examples of where the safety net could be counterproductive, where removing it might have some sort of validity, but where you can have safety nets which produce this entrepreneurial spirit. Let's go through this in order.

If I look here in London, and as Americans in London, you may have noticed the same, the amount of French people living here, middle class French bankers, French lawyers. Is that a function of the safety net in France making it impossible to create new jobs? That is, it's really hard to fire, so it's really hard to hire, so if you're ambitious, you come to London. Is that a safety net gone wrong, in your opinion?

Brooke Masters: I think in some cases, it is. I think also, particularly in finance, there is a network effect. So if you want to be an interesting entrepreneurial banker or somebody who does financial engineering, it's much easier to come to the UK where it's already underway. And I, I think, so that's part of why people come to the UK.

If you think about, remember when Air France tried to cut some pilots' job, and the poor human resources guy had his shirt ripped off him-

Will Page: [laughs]

Brooke Masters: ... by the [crosstalk 00:06:17] people? I mean-

Will Page: Yeah. [laughs]

Brooke Masters: ... that kind of anger is because these people assume they will never get another job if they are laid off here. And I think that is less... You don't see that as much in other places.

Will Page: Now, I don't know the rules in France at present, but when I was studying economics, and I think this still holds, if Brooke Masters is a teacher in France, and she gets fired because she's a hopeless teacher, you get paid three quarters of the salary of a teacher, and you don't have to go back into employment until someone comes along and pays you the same salary rate. And there, you can see a, a rigidity, as economists call it in the labor market. That, for me, is a safety net which doesn't really serve its purpose.

Brooke Masters: I would agree with that, and I do think, actually, it's interesting right now, where we are seeing what everyone is calling the great resignation, where Americans are fleeing their jobs at in- incredible rates.

What gets less publicity amid this is many of them are taking better jobs, because they feel, in a tight labor market, empowered to go, oh, find a better job. And, and they're leaving hospitality, where they have h- which in the US in particular is incredibly poorly paid and entirely dependent on tips, and moving into sectors where they could have a regular wage or they could at least get promised better benefits.

And so I do think that's right. A safety net that demotivates people from working at all is not a great idea. But you also need one that, that empowers people to leave.

Richard Kramer: Let me step in here and try to ask a couple points that we touched on in our last podcast. We were talking about this great resignation, but also, the effect of the gig economy on workers.

And effectively, a lot of the externalities that society is required to pick up, healthcare, unemployment insurance, all those extras that used to go along with a well paid job in Europe or the US have now been chucked aside. And, and it's kind of a fend for yourself world.

Does that effectively turn everyone into becoming an entrepreneur, not out of choice, but out of necessity, because all the jobs there are, that are on offer are gig economy jobs? Or the more creative way to say it these days is participating in the creator economy.

Brooke Masters: I would say yes. I think it also helps explain why kids my son's age are o- out there buying meme stocks, because they figure they're never going to get a good job with good benefits, so why not take a punt? It, it explains the enthusiasm for crysto- cryptocurrencies and things like that, is that established companies and, and established jobs are too hard to get. So be an Uber driver, speculate, invent your own graphic job. Well, they're all about the same.

Will Page: Interesting.

Richard Kramer: Now, when you and I might have been graduating from our respective Ivy League universities, we may have gone to the same one at the same time, we don't know, but the venerated vanquisher of capitalism was the Gordon Gekko figure, the person who sat astride a traditional organization, a bank or, or any other sort of large company. And now, we venerate those entrepreneurs, those world changing geniuses.

What happens when people realize that only a tiny fraction of them get to be successful? And how much have we gone down the road of privileging those entrepreneurs and denigrating, in some ways, the people who work their way up ordinary jobs and work in large organizations that are doing, that require large workforces to get things done?

Brooke Masters: My view would be, actually, we're already there, that a lot of the populism that we are seeing is people [inaudible 00:09:46] say, "Yes, there's a one in a million shot you found the next Google, but it ain't going to be me." I think that is a real, that is a real risk of venerating people who invent companies.

I think it's also, we also need to remember that the companies that succeed, they're often, they may be the first to market with an idea, but often, they're one of several. And for various reasons, they end up being the survivor. They eat the others.

Richard Kramer: Mm.

Brooke Masters: And so for, you know, all those entrepreneurs, a bunch of people have dating app ideas. Match.com seems to be making it.

Richard Kramer: Mm.

Brooke Masters: But all, there are an awful lot of them that aren't. And I think that, it's great that those people invent things, but if they fail, then what happens to them?

I mean, I suppose if they get bought out, and they end up with some money, and then they go start something else, that's good. That's a virtuous circle. If you fail at a company, you get bought by the other company, you end up with a bunch of cash, and then you go, and you found another company, hire some more people, and then you're starting [inaudible 00:10:37] good. But I think there are an awful lot of people who just get left by the wayside.

Richard Kramer: But is this any different than, for example, the pro sports that people pay so much attention to all over the world, where the, there are 400 some players in the National Basketball Association, and there are 800 some players in the Premier League, and there are tens or hundreds of thousands of, of players that want those jobs. And we're venerating the few that get to the top and largely ignoring those that get left behind.

Brooke Masters: Well, I think when you are not paying the college football players who, or the college basketball players who are trying to get there, and all the ones who don't make it end up with nothing, they don't get a proper education.

Richard Kramer: Mm.

Brooke Masters: And they don't get paid for their time. That's a problem. If, on the other hand, the people who are working and don't quite make it have at least, you know, a living wage and they're, and they're rewarded for their, their hard work, that's not such a bad thing.

Uh, the world is full of pyramids. You know, only one person is President of the United States, and there are a lot of people who would like to be president. Not me, I should point out.

Richard Kramer: [laughs]

Brooke Masters: But I think that's... I mean, the world is not equal. Outcomes are not equal, but-

Richard Kramer: Yeah.

Brooke Masters: ... uh, you can't exploit people on the way.

Will Page: And we're going to wrap it up for part one. Thank you for this very inspirational talk. Back in a moment.

So we, we were discussing Theranos, which you've covered in the Financial Times recently, and the theme of fake it until you make it. Is there something to be said there about with regard to a reality check on the American dream?

It's only those who can fund the faking that go on to the making, and those are the ones who have got the deep pockets in the first place. Do you think that's where there needs to be a bit of a correction in terms of how we view entrepreneurship?

Brooke Masters: I think it's dangerous to say Theranos is... She was privileged. She was funded. I mean, she got to $8 billion. So that is not the issue. Uh, it is that people who are good at faking it can attract money if they're privileged. I mean, she went to Stanford. She had sponsors. She made buddies-

Will Page: Mm-hmm [affirmative].

Brooke Masters: ... with buds. But I do think there is a reality check on the American dream, which is that if you have a brilliant idea, and especially until recently, you happen to be female or non-white or non-privileged, the chances-

Will Page: Mm-hmm [affirmative].

Brooke Masters: ... you could get a venture capitalist to even look and listen to you were almost nothing. And so there are lots of very smart people with very good ideas that have never had a chance.

You know, I think it's a good thing that, uh, MeToo Movement started some of this. Like, if you had a great idea that a 40-year-old Ivy League boy didn't understand, you could never get any funding, because that's who had all the money.

Richard Kramer: Mm. But do you think there's a selection bias there that says, "The only ideas that make it through are ones that make sense to those 40-year-old MBAs, and-"

Brooke Masters: Oh, for sure.

Richard Kramer: "... a lot of the other ideas that would be relevant to other walks of life and society are just never going to get funded, because the people carrying the funding don't get the problem?"

Brooke Masters: I completely agree with you. I think it's no coincidence as, that there is an explosion in what they call femtech and female oriented products right now. If, like, companies everywhere are starting to get funded for that, uh, because there is an, in the last five years, there's been this argument, like, "Wow, venture capital is too white and too male, and we need to think about it."

And so everybody's like, "Oh, wait. We better look around." And suddenly, they're discovering that actually, there's all these products that serve lots of needs that we never thought about. And sometimes, they serve needs that I'd rather not talk about, but hey.

Richard Kramer: And before we wrap up and, and I hand it over to Will, I, we did talk about Theranos in our last podcast, and I want to ask you, do you think that's a positive example that someone who fakes it ought to get caught out?

Or do you think that's a negative example, as some people were talking about, that this is going to set back entrepreneurship because people can't take risks or this, this person who had a clever idea somehow wasn't able to see it through?

How do you... Which side of the debate do you fall on in that one, when there's so clearly, as the courts have, have opined, some level of malfeasance, but it might have a chilling effect on other people trying to launch crazy ideas?

Will Page: Mm-hmm [affirmative].

Brooke Masters: I don't buy that at all, frankly. I mean, if you look at the kind of-

Will Page: [laughs]

Brooke Masters: ... malfeasance she engaged in-

Will Page: Case closed.

Brooke Masters: ... absolutely not even close. I mean, I think there, there are people who have great ideas and can't quite pull them off. I, I think there w- there was, the guys who invented MRIs up in Scotland and ended up having, was it Scotland or was it Oxford, and they ended up having to sell to Siemens. I mean, those guys, I feel for.

She, she had a product that didn't work, and she, like, cut and pasted logos of other companies and put them on [inaudible 00:15:09]. That's not, that's not something that, the way you, something was slightly wrong and you couldn't pull it off and, and, and this will somehow chill people. I mean, if you have a, a bent towards fraud, you should be chilled. That's all there is to it.

Will Page: [laughs]

Richard Kramer: Right. And, and there were, and, and before I hand it over to Will to wrap up this first half, there, just a quick shoutout to the FT. You certainly did a, a fantastic job of calling out, much to the dismay of many investors, what was going on at Wirecard, uh, a classic example of faking it 'til you make it, uh, misrepresentation to the markets, and all sorts of malfeasance that we haven't really seen the end of yet.

Brooke Masters: Totally agree. I actually-

Will Page: So Brooke, uh-

Brooke Masters: ... edited the first Wirecard story that moved from our blog to our, our news line. We n- we felt we w- we were, it was getting harder. And, and I mean, Dan McCrum, who did the, spearheaded that investigation, is an extraordinary, dedicated reporter. And that is what we in, as journalists, live to do.

Richard Kramer: Hm.

Will Page: Brooke, as we hit the break, I wanted to ask one question. As an American who, like a boomerang, is returning back home shortly, and when you talk about where the system in America might be broken, if you were president for four more years, is there one nudge you'd like to introduce to make the system a little bit fairer when you look at your funding for ideas, the ability to do your startups and to pursue that American dream?

Brooke Masters: I do think that better healthcare for everybody would make a huge difference.

Will Page: Mm-hmm [affirmative].

Brooke Masters: Obama tried to get there, and we have a bit of it, but proper universal healthcare where you could then have a brilliant idea and know that you are not endangering your family by leaving your job to, you know, try and work on it. I think that would make a big difference.

Richard Kramer: My experience in the UK is that we've had all of our children on the National Health Service. I guess that's unthinkable in the US, that you would rely on the public purse for your most basic fundamental healthcare and, on, in an event in your life which is so important to you as having your first children.

Brooke Masters: Oh, f- for sure. I mean, you could not take that risk, because if you aren't insured, in theory, you are eligible for Medicaid if you have no income, but it's really risky. I mean, a, a Medicaid hospital is not necessarily the place you want to be, for sure. Uh, you may get great care at a fabulous tertiary hospital system, but you could also end up someplace really dreadful.

You know, I also think that the Small Business Administration has a miserable record, for example, of the way its loans work. And there's certainly, there is statistical evidence that suggests that it has, it has not funded all ideas equally. I mean, you can't call them racist because they don't know who... Each individual decision probably isn't, or maybe it is, but maybe. But it's clear that it doesn't fund a wi- the w- a wide enough range of people and ideas. So those would be my two.

Richard Kramer: Mm. Do you think... You see a lot of other countries that have sovereign wealth funds, and those sovereign wealth funds oftentimes act as internal VCs for the government of Singapore or the Qataris or the Norwegians. And maybe those are only small country examples, but the French are trying to stand that up.

Do you think you need that kind of sovereign wealth fund investment in the US? Or is that being, that role being played by the National Science Foundation and DARPA and all those other traditional agencies that are doling out so much funding, the National Institute of Health, for example, that would be funding cutting edge research?

Brooke Masters: I would be inclined to say that I don't think funding is the barrier in the US. There is, uh, really fully functional capital markets and lots of early seed funding. There's very good funding for basic research from the government in things like DARPA and, and NIH.

I think fairer distribution of that funding is probably important. But I don't think a- the actual volume. It's not, it's not the same issue that you have in other countries. I mean, the US does have people with ideas, and it does have money to fund them. The connections between them are sometimes too attenuated.

Richard Kramer: [crosstalk 00:19:17].

Brooke Masters: And particularly because the money tends to be concentrated in a couple of locations among a c- a specific class of... But I don't, I, I don't think the a- absolute value... There are a ton of VCs out there with money that they wish they could give to someone, and they just don't have the imagination to find those people.

Will Page: You make me think of that famous quote of, "The future's already here. It's just not evenly distributed." Which makes me think, do you change the future? Or do you change the distribution?

We'll be back with more of our conversation with Brooke Masters, the Financial Times chief business commentator and associate editor.

Richard Kramer: If you're new to Bubble Trouble, we hope you'll follow the show wherever you listen to podcasts. Bubble Trouble is produced by Eric Nuzum, Jesse Baker, and Julia Natt at Magnificent Noise. You can learn more at bubbletroublepodcast.com. Will Page and I will see you next time.