We've always had a very robust set of strategies for dealing with all kinds of different kinds of markets, but I think the big mistake that we made, or that I made, was effectively to say, "We need a strategy to deal with anything that's happened in the post-war period." So, inverted yield curves, inflation, a crash like in '87, all different kinds of panics.
But I explicitly ruled out a return, in essence, to depressionary conditons, just like I ruled out a new Civil War, for example. Well, the answer, I think, is you can't rule out anything. Anything. I think you have to look at anything that can hit aggregate demand or aggregate supply. And that's the thing I think we're well prepared for now.
And also, understanding that there are two types of financial crises: one of them, which we've navigated in very well, like the crash of '87, which are liquidity-driven crises. The strategy in a liquidity-driven crisis is pretty simple, which is, when massive liquidity is injected, you buy what the center of the crisis is; in an asset-based crisis, like we had in 2008, that strategy is very bad, as we found out to our chagrin. The proper strategy there, in an asset-based crisis is, you don't do anything until the authorities move to stabilize asset values and preserve them. That was TARP. Everything the Fed had done or the government had done, the Treasury had done up until TARP destroyed equity value. So, wipe equity holders out at Bear Stearns and wiped them out, and even creditors, at Lehman Brothers.
Once they decided to preserve equity values with TARP, that was the beginning of the end of the crisis. That was the time you go in and buy. So, I think we're covered on both kinds of crisis in the future.
~Bill Miller, chairman and CIO, Legg Mason Capital Management, CNBC's Squawk Box, April 6, 2011