Paul A. Samuelson, the Nobel laureate economist, is unequivocal on the importance of equities to pension fund investments.
"A well-running stock market is indispensable for a well-running institutional pension setup."
Such investing, he added, "contributes to the rational use of savings."
His views on the stock market were not always evident. In an early edition of his widely used college textbook, "Economics," Mr. Samuelson gives the capital markets, including the stock markets, barely a page of mention. As the subject has evolved, however, that has changed in subsequent editions of the book. Published by McGraw-Hill Cos., New York, the text is celebrating the 50th anniversary of its 1948 first publication.
In an interview, Mr. Samuelson said he welcomes the awarding of Nobel prizes in economics for financial issues.
"What's interesting is that there have been seven (Nobel laureates) in the field of finance," Mr. Samuelson said.
Speaking of financial issues, he said, "This is an important branch of economics, where every day we've got 100,000 empirical observations for testing."
Winner of the Nobel Memorial Prize in Economic Science in 1970, the second year of its existence, Mr. Samuelson names in the interview the seven individuals who won the award for their investment-related work. He includes the most recent winners, Myron S. Scholes and Robert Merton, who won for their work in options-pricing theory.
He believes options and other derivatives are powerful tools that can be useful instruments with many advantages for those who understand their complexity, but dangerous for those who don't. He noted a number of financial debacles caused by the reckless use of derivatives, including the Orange County losses.
"Derivatives are a tool that can enable pension funds to lower costs" to employ an investment strategy, he said.
He believes broad disclosure of derivatives, proposed by the Financial Accounting Standards Board, is a key controlling their use. "The whole purpose of public accounting is so people in advance can assess the risk" of financing techniques, he said.
He blames the lack of disclosure in large part for recent economic troubles in Japan and other Far East nations.
The reason "the Japanese bubble could burst so terribly is because of the bad accounting," he said. "With bad accounting, corporations are not only swindling other parties - such as investors - but are fooling themselves." The lack of accounting controls hides financial problems.
On other investment topics, Mr. Samuelson is a proponent of the efficient market hypothesis, at least among the largest 3,000 or so stocks. While a trustee of the College Retirement Equities Fund portion of TIAA-CREF, New York, Mr. Samuelson helped move 80% of the domestic portfolio to indexing, leaving only 20% actively managed. He was a trustee from 1974 through 1985, when he reached the mandatory retirement age.
"You're not going to have any insight on what Microsoft or IBM is going to do when there are hundreds of brokers and analysts following it," he said.
The market is efficient because of arbitrage, he said, in which investors seeking to profit from small pricing aberrations bring prices back to equilibrium.
