Mr. Steve Forbes, Chairman and Chief Executive Officer of Forbes and Editor-in-Chief of Forbes Magazine
Thank you very much, President Eastman; Professor John Prevas, my coauthor; honored guests; and especially you, the graduates. There's a long tradition that at graduation, you must listen, you graduates, to somebody perhaps three times your age give you eminently forgettable advice and observations. It reminds one of the legend about University of Kentucky. Each year, the graduating class at the University of Kentucky could designate somebody to receive an honorary degree, and one year, they chose the winner of the Kentucky Derby. The shocked trustees asked, "Why would you want to award an honorary degree to a horse?" and the graduates replied, "We want, for once, the degree to go to the whole horse and not the wrong part of the horse." So, I'll attempt to make this exercise as painless as possible, so here it goes: your last big hurdle.
Obviously, one has to make some observations about the economic crisis. The economy right now, to use a French word, sucks. It is a mess. It is the worst financial crisis since the 1930s. You're going out, many of you, who are not immediately going into graduate school, into a very tough job market. This raises the question: why? Why are we in this mess today? Is this something that's going to last for years and years and years, or is it something that we can quickly recover from? I think first, you have to put things in perspective, and then I think you can see how we can pull out of this thing. Between the early 1980s and 2007, when the crisis hit in the summer of 2007, the United States and indeed the world went through one of the most extraordinary economic periods in human history. Never before had so many people in so many parts of the world advance so quickly economically as happened in that quarter of a century. Literally tens of millions of people around the world were joining the middle class. We all knew about the rise of India, China, but Central and Eastern Europe, that region as a whole was growing even faster than the Asian region. Numerous countries in Africa, to low publicity, were starting to achieve real growth rates, as were many countries in Latin America. Even the United States. None of you graduates know about an old comedian called Rodney Dangerfield -- your grandparents might -- talking about getting no respect. But even in the United States, even though it got no respect, didn't do badly in this era. Between 2003 and 2007 the growth, the expansion of the U.S. alone exceeded the entire size of the Chinese economy. We grew the equivalent of China in four and a half years. Now clearly China's growth rates are higher, but they were coming off of a much smaller base.
If you look at how we got into this crisis, I think you'll see that it was totally an unnecessary crisis. If we'd made the same mistakes in crises of the past -- the early 1980s and the early 1990s when we had a banking crisis -- we'd have been in the same mess today. Now, what I'm about to tell you, and I'll encapsulate it in a few minutes, is absolutely boring, but you are paying the consequences for it. You must understand how we got to where we are today.
It begins with the most boring subject in the world: monetary policy, the Federal Reserve interest rates. It is a totally boring subject. If any of you, after these exercises, go on an airplane, find yourself in coach, middle seat, on the runway watching your life pass away, and you want a little bit of elbow room, talk to your seatmates about monetary policy, and you'll have all the room you want. Many of you are single. If you're on a bad date and want to get out of it, start talking about monetary policy; the rest of the evening will be yours. But just think of it as you would an automobile. You could have a magnificent vehicle, but if you don't have sufficient fuel, you stall; too much fuel, you flood the engine; just the right amount, you have a chance to move ahead. The same is true of monetary policy, Federal Reserve. They don't supply enough money to the economy, we stall; they supply too much, you do the economic equivalent of flooding the engine, create distortions; just the right amount, you have a chance to move ahead. Over five years ago, the Federal Reserve, this boring institution nobody pays attention to, made a fateful miscalculation. It thought the U.S. economy was weak, so what did it do? It printed a lot of money -- lots and lots of money. They made a mistake. They did the equivalent of flooding the engine, putting too much fuel in your car. The first thing that happens when you print too much money, especially with the most important currency in the world, and you start to treat it like trash as the Fed did in 2004, first thing that gets hit is commodities. So what happened in 2004? Think back to then. Oil prices went up; copper went up; steel went up; shipping rates went up. Heck, even the price of mud went up. Everything started to go up. People are wondering, "What is happening?" They blamed India; they blamed China; they blamed oil company executives -- but it was a classic inflation, printing too much money.
But money just didn't stop with oil and gasoline and the like; it also went into housing. Housing was already booming in America in 2004, so why did the money flood in there, this excess money? Because everyone figured housing prices always go up. It's written in the Constitution that housing must go up each year. So everyone figured this was a no-lose proposition, so the money started to flood in. Lending standards went down, because even if a borrower defaulted, it didn't matter; housing prices always go up, right? It's written in the stars. So you got a new mortgage. They invented a new mortgage, and the new mortgage was, "Why have an income?" Why make a down payment? Why pay principal; why pay interest? It didn't matter. This thing was going to go on and up forever. Then compounding this traditional bubble -- and you may have read your history books; you read about bubbles in the past. We'll have them in the future. Holland had a tulip bulb bubble mania over 300 years ago. Tulip bulbs for a while were selling for the equivalent of $20,000-$30,000 a bulb. Now, tulips are nice, but not $20,000 nice. So you go through these things every once in a while when you print too much money.
Then compounding it. Two institutions you probably wish you never heard of, Fannie and Freddie -- Fannie Mae, Freddie Mac. Guarantee of the government. They pumped out a lot of guaranteed mortgages, underwrote, guaranteed over a trillion dollars of junk mortgages within two years. So all this classical bubble stuff burst in 2007, but having made these mistakes brought out the worst in people. You know, what they did with money is the equivalent -- let's say you get in your car, you go on a turnpike, and they serve you free beer and drinks. They say, "Take as much as you want; it's free." Now, you know you shouldn't drink, but you know if you serve it free every time people get in a car, you're going to have some smashups. Bad things are going to happen -- and the same thing is true when you print too much money, but the government decided, "Why stop now? Let's continue this run."
Another boring subject: accounting. However, the regulators took bank capital. You know, banks have to have reserves. They have to have reserves for future losses. Insurance companies need to have money to pay future claims. Well, long story short, the government decided to treat those reserves not as something of steady in value, but treat them as you would a day trading account. It would be the equivalent. You know, this stuff -- if you buy an asset as a bank, you're supposed to hold it what you bought it at until the thing matures, unless it goes bad. But imagine what would happen if you were told -- tomorrow morning, if you own a house, what price would you get if you had to sell it tomorrow morning? If you have a car, what price would you get if you had to sell it in the next ten minutes? You'd say, "That's ridiculous. Wouldn't get much for it. Distressed price." Long story short, that's what the government did to bank capital. So these banks were writing down their capital even though there weren't big losses yet, and so if you look at these big headline losses, over a trillion dollars -- I hate to use numbers at a graduation, but you are paying the price for this. Those big losses, most of them were book losses, artificial losses, not actual cash losses. Even with all the junk and subprime mortgages, do you realize, graduates, that most of those mortgages, the majority, are still paying money today? Yet the regulators said, "Write them all off." That's why banks today have more money, more cash than they've ever had before. The regulators say your capital is inadequate, that's why your credit cards are going crazy; that's why you can't get credit the way you should.
So where does that leave us now? Well, finally they started to correct this crazy accounting called mark-to-market. If you ever hear it just go, "Boo, hiss, bad." You don't have to understand it, just know it was something we brought in the Depression, got rid of it because of the Depression. But bad ideas never die, graduates. This one came back and helped turn a crisis into the disaster that we have today. So they're going to make other changes. Federal Reserve is, in the next few months, going to get the credit system working again.
But put this in perspective. Even though we are in a crisis now, we will eventually pull out of it. We will pull out of it, and you will then get a benefit of something absolutely extraordinary, graduates, and that is, we're on the cusp of another wave of great innovation. We had a wave in the early 1990s. We're about to get a beneficial one again. Just give you one -- a couple of quick examples. Nanotechnology: turning miniature things, literally molecules, into great things. A lot of hype over the years, but finally starting to pay fruit. One example: thing looks like a straw filled with microfilters. You put that thing in a fetid pool of water, by the time that water reaches your lips, it's purer than anything you can get from a tap today. Amazing things ahead. Amazing technology before us. We're about to be able to design drugs, designer drugs that can replace or boost or suppress anything in nature. These things are not just things that are pie in the sky; they're about to happen.
I mention these things not to dazzle you but to remind you, indeed, the true source of wealth -- here, your teachers were right. The true source of wealth, graduates, in a society -- which is absolutely central to a society -- the true source of wealth is not what they thought in medieval times, physical things. They once thought wealth was piles of gold, jewelry, lots of land, big armies, but the real source of wealth is metaphysical: your minds. The human mind. Your teachers were right on that. It's inventiveness, imagination, innovation, the ability to stick to a task, knowledge, culture -- those metaphysical things, the things you can't touch -- that are the true source of wealth. It is entrepreneurship, the courage to try the untried. Just think of something that's been in the headlines during your time here: oil. They say oil is a natural resource. What is oil, though? It's not a natural resource. In and of itself, it's glop. You can't eat it, you can't drink it, you can't feed it to camels; it's just goo. What turned that goo into something we can't live without was human imagination, human inventiveness, that turned this goo into a huge source of energy. And what we did with oil, we can do with other sources as well. So the opportunities are there, even in bad times. In the 1970s -- ask your parents -- dreadful decade. Twenty-one percent interest rates, unemployment higher than today. But during this dreadful decade, what was incubating? Apple, Microsoft, Oracle, Sun Microsystems. Look at the bust in 2000-2001 when high technology crashed. Did high technology end? No, we got Google, social networks, iPod, iTunes.
So even in bad times, things are incubating, and keep that in mind, because the thing, the way to get ahead is don't say, "What's hot?" That will just always get you into something that turns bitterly cold. Figure out what you have a knack for, what you have a real feel for, and find a way to make a living at it, and you'll be able to see yourself through these difficult times. Take, for example, Michael Dell. Dell Computer -- multibillion-dollar company. I shouldn't say this, but I can now because you're graduating. Michael Dell did not want to go to college. His parents forced him to go to the University of Texas. He was a freshman, got there, didn't bother with classes, simply started making and selling computers through the mail. So one day his parents call and say, "Michael, we're coming to visit." Now, as you know, when parents come to visit, you have to, you know, get a fumigator, clean out the room, get the boyfriend/girlfriend out of there; you know, get everything ready. But with Michael Dell, it was different: he had to find a place to hide his inventory that he was storing in his room. So he hid the inventory. His parents came. They looked around the room and said, "Michael, something is not right here." He said, "What?" His parents said, "There are no textbooks." He said, "Oh, God, I forgot to buy them." So, long story short, he had to complete his freshman year, dropped out; the rest is history. But he had a knack, had a passion.
But it's not just when you're young. Yogi Berra, the old baseball player, was right: It's not over, graduates, until it's over. You sometimes won't hit your stride until very late in life. Now, if there are any nutritionists here, I apologize, but an example is Ray Kroc, the man who did McDonald's. He was a guy who was always striving for success, but by his mid-fifties, he'd just never made it. Made a living, but nothing really clicked. He was then a machine -- milkshake machine salesman out in California, making the rounds. Tried a lot of things; nothing worked. One day in his rounds, he came across this small hamburger stand called McDonald Brothers. He saw they were doing a lot of business, and he figured if he could get the McDonald Brothers to open more stands, he could sell them more milkshake machines. But, they weren't ambitious. He realized this was bigger than milkshake machines. He bought them out, and the rest is history. He took a business -- high casualty rate -- no tougher business than restaurants -- turned it into national, international, and he did it in his fifties right through his seventies late in life. Another example, the man who helped win World War II, Dwight Eisenhower, went in the military, graduated from West Point, spent 20 years in backwaters, looked like he had no career, stuck at the rank of major, going nowhere, lot of his colleagues were retiring. Then came World War II, and suddenly he shot up and came into his own very late in life. So, it's not over till it's over.
Allow for serendipity. I got to know Professor Prevas because I read one of his books just by chance in a bookstore, wrote a review of it. He got in contact. We now got a book coming out. We thought it would be done in four months, took four years, but hey, these things you know, you know about four years. Ray Kroc allowing for serendipity. Christopher Columbus thought he was going to India; look where he came to. Allow for serendipity, the unexpected.
And expect failures. You will get setbacks. It's not the end of the world, painful as it is. My own grandfather, immigrant to this country, penniless immigrant, founded our company -- huge success in the twenties, then nearly destroyed by the Great Depression. In 1928 he was offered the equivalent of tens of millions of dollars for his company by a media mogul at the time. He turned it down and said, "I'm going to remain independent." Four years later, he was bankrupt in all but name, barely kept his company alive. Imagine your early fifties, spending your life striving, suddenly you face huge failure. You're going to get setbacks along the way, but you stick to it. President Harry Truman failed in the haberdashery business, went bankrupt, but he didn't let that hold him back. You will have those setbacks.
Expect the unexpected in life, graduates. Great example, Norman Borlaug, won the Nobel Peace Prize for inventing the Green Revolution, which did away with famine in countries like India. When he made these breakthroughs, he was in chemistry, he was in physics. He suddenly realized he had to draw on knowledge that he never thought he would have to draw on -- politics, economics -- to make this idea come to fruition. That's why you have a liberal arts education; you never know what you're going to have to draw on with what life throws your way. You're going to have to take risks. You're going to have to take risks. My grandfather, for example, when he came here as a penniless immigrant and no one would give him a job. He went to an editor one day and said, "I'll make you an offer." He put it all on the line. He said, "I'll work for you for free for a few weeks to show you my worth, and I hope you have the honor if I show you my worth, you'll hire me." Well, he didn't know whether the editor would just take his free labor and then throw him out on the street, but sometimes you're going to have to put it on the line when you don't know how it's going to turn out. In this case, it turned out okay. Got the job. So full of ambition, my grandfather went to another editor, used another name, got a job there, and one of his happiest moments in life was when the two editors got into a fight as to who had the best business reporter. It was my grandfather in both cases. Think outside the box. Think outside the box.
And opportunities. Opportunities, we think in this age, graduates, as, you know, inventing great things. No, sometimes opportunity comes from taking inventions and figuring out how to use them. Take, for example, graduates, one of the big inventions that came out of World War II. The mainframe computer was originally invented to help artillery officers aim the shells better, but obviously computers had much more application than artillery shells, but who made the most money on mainframe computers? It wasn't the original inventor, UNIVAC. It wasn't IBM or its competitors. IBM dominated the field, but IBM nearly went bankrupt 20 years ago. You know who made the most money on mainframes was not those who made it; it was Sam Walton, Wal-Mart. Early 1960s, small northwest Arkansas retailer at the time, graduates. K-mart was 50 times the size of Wal-Mart. How do you compete against that? Well, he figured if he could use mainframe computers, use software, manage information and supply chains better than anyone else, he could beat them at their own game. He did it. The fact that the government's now after Wal-Mart shows he did succeed. That's the sign of success in this country.
Find opportunity anywhere. I'll give you one example, graduates, where opportunity can knock where you don't think. When you get angry, when you lose your temper, you always think, "Oh, God, I got to learn to control myself." Well, just don't think -- give yourself a version of anger management. Do what Thomas Edison, the great inventor, did. How did he -- he invented the light bulb. You know how he invented the light bulb? As he wrote my grandfather, he said, "The story's true why I invented the light bulb." He said, "The gas man" -- in those days, energy came from gas, not electricity -- he said, "The gas man came, cut off my gas because I wasn't paying the bills. That made me so mad that I read up on gas techniques and technology to see if I could make a run for their money at them, find an alternative. I stuck to it for years; didn't hurt them at all except lately." It was his anger at being cut off by the gas man that Thomas Edison decided to invent the light bulb. So don't just do anger management; turn it into an opportunity if you've got a beef about something.
And you'll find opportunities in all sorts of places. Just let me give you a couple of quick examples, and soon this ordeal will soon be over for you. That is, what is the most common commodity in the world today, one of the most common? It is coffee. Anyone can make it; everyone sells it. Airlines still serve a version of it for free. And yet, what's one of the most successful companies out there? Starbucks. How'd they do it? Well, they offer varieties, nice atmosphere, all that stuff. They didn't do things everyone else did. You know, you go to most fast food places, graduates, and what do you find? Small, Medium, and Large. Well, Starbucks wouldn't be so common as that. You go to Starbucks; what is Small? Tall. You have self-esteem issues, go to Starbucks; Small is Tall. You take Medium. Medium. Medium sounds mediocre. In Starbucks land, it's Grande. And then Large is Venti. I don't know what Venti means, but you say "Venti Latte," pay 20 bucks, and you're happy and Starbucks gets rich. It's a great business.
Or take another example, quick one: blue jeans -- denim. You can get a piece of machinery and knock that stuff off, 5, 10, 15 bucks a copy. How are you going to make money in that? Well, about 30 years ago, somebody figured out if you took this common thing, sewed somebody's name on the butt like Willy Nelson, why, you could charge 50, 60 bucks for it. Then somebody else figured out if you make these things so you can't get in them, why, you can charge $100, $150. And then somebody else figured if you made it look like you got it out of a dumpster, why, you can charge $200, $300 for this thing. It's amazing. It's amazing.
So, when you get out there, just look around, and even the most common things, you can figure out a way to do it differently. A couple of other final pieces of advice: get a hobby. A lot of you are going to be focusing on moving ahead. Get a hobby, because that's the best way to rest the brain. Winston Churchill put it best. His hobby was painting. It totally absorbed his mind. He said, "The mind keeps busy." That is, if you're worrying about something, you can't turn it off like a light switch. "If it has been weighing and measuring, it goes on weighing and measuring. If it has been worrying" -- if your mind has been worrying -- "it goes on worrying. It is only when new cells are called into activity that relief, repose, refreshment are afforded." By finding something that totally absorbs your mind from what your work is, that's the ultimate way to get rest.
A couple of other quick things. A lot of you are going to be parents; perhaps some of you are parents already. Graduates, a sure sign that you're succeeding as a parent is when you become an embarrassment to your children. It just is inevitable. And finally -- and finally, one final piece of advice, and this comes from the late Irving R. Levine, great correspondent from NBC -- Irving R. Levine said, "When you go out in the world, it's not who you know, it's whom you know."
Class of 2009, congratulations and Godspeed. Thank you.