Michael Green's Thesis: Unpacking the Systemic Risks of

Passive Investing and Paths Forward

1. Executive Summary

This report provides a deep dive into Michael Green's compelling

critique of passive investing, a phenomenon he argues has
fundamentally distorted capital markets and introduced significant
systemic risks. Green, a former hedge fund manager and Chief
Strategist at Simplify Asset Management, challenges the
conventional understanding of passive investment, asserting that it
is, in reality, a form of "mindless systematic active investing" driven
by regulatory advantages rather than fundamental analysis. He
contends that the growing dominance of passive strategies leads to
market concentration, inefficient price discovery, fragile valuations,
and an inherent "self-destruct mechanism" that could trigger severe
market dislocations. To mitigate these risks, Green proposes a multi-
faceted approach encompassing significant policy reforms, a re-
evaluation of corporate influence, and a shift in societal priorities
towards long-term human capital development.

2. Introduction: The Cassandra of Passive Investing

Michael Green has emerged as a prominent and provocative voice in

financial markets, often referred to as the "Cassandra of Passive
Investing".1 This moniker underscores his role as a prophet whose
urgent warnings, though compelling, are often unheeded by the
broader financial community. His perspective is informed by a
distinguished career, including stints with prominent entities such as
Canyon Capital and tech billionaire Peter Thiel, and the founding of
a fund seeded by George Soros.1 Currently serving as Portfolio
Manager and Chief Strategist at Simplify Asset Management, Green
has leveraged his extensive experience to scrutinize the

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foundational assumptions underpinning modern market behavior.2

Green's central message, which he has delivered across influential

forums including the International Monetary Fund (IMF) and the
Securities and Exchange Commission (SEC), is that the prevailing
"craze to invest" in passive strategies is not benign. Instead, he
argues, it actively distorts capital formation, creates market
instability, and harbors the potential for a severe market crash, a
phenomenon he terms a "passive bubble".1 His research was initially
spurred by observing what he described as "weird" market behavior
post-2012, where traditional fundamental analysis seemed to lose its
explanatory power and "value investing… was losing money".1 This
personal observation, coupled with his deep market experience,
lends a practical urgency to his academic-level critique. The high-
level policy relevance and recognition of his work are further
evidenced by his presentations on the shift from active to
systematic passive investment strategies to influential bodies such
as the Federal Reserve, the Bank for International Settlements (BIS),
and the IMF.2

The context for Green's warnings is the dramatic and rapid ascent of
passive investing. Over the past decade, capital flows have
demonstrably shifted, with passive stock mutual funds and
exchange-traded funds (ETFs) attracting approximately $2.8 trillion
in inflows, while actively managed funds simultaneously experienced
$3 trillion in outflows.1 This quantitative evidence highlights the sheer
scale of the phenomenon Green is analyzing. He estimates that the
percentage of the market controlled by passive investors is
significantly higher than commonly perceived, standing at about 45
percent, a figure that includes not only index funds but also futures,
total return swaps, and option hedging based on indices.1

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Historically, passive funds constituted a mere sprinkle, less than 5%
of the market in 1995, escalating to between 40% and 50%
currently.8

The primary drivers for this surge include the appeal of low costs
and the historical outperformance of passive funds relative to most
active investors over the last two decades.8 However, a critical
aspect of this growth, as Green emphasizes, stems from significant
regulatory advantages. The Pension Protection Act of 2006
fundamentally altered the U.S. 401(k) system, shifting it from an opt-
in to an opt-out policy, meaning employees are automatically
defaulted into participation unless they actively choose otherwise.9
Furthermore, the Qualified Default Investment Alternative (QDIA)
mandate, influenced by lobbying efforts, led to target-date funds
becoming the prevalent default investment option for 401(k)s by
2012.4 These funds, critically, allocate capital based solely on an
investor's age, completely disregarding market fundamentals,
prevailing economic conditions, or current valuations.4

The choice of the "Cassandra" analogy is deliberate and impactful. It

is not merely a descriptive term but a powerful framing device that
suggests Green's warnings, despite his established credibility and
presentations to global financial institutions, are being largely
dismissed or underestimated by the mainstream. This implies a
systemic reluctance or inability within the market and policy spheres
to fully acknowledge or act upon deep, uncomfortable truths about
the current market structure. The "craze to invest" in passive
strategies, therefore, appears to be driven by powerful, almost
irrational, forces that override rational assessment of long-term
systemic risk. This sets the stage for the report to explain why these
warnings are so critical and what makes them so difficult for the

3
system to internalize.

The regulatory shift, particularly the widespread adoption of QDIA

and target-date funds, represents a fundamental, non-market-
driven catalyst for passive growth. This makes the phenomenon a
policy-induced outcome rather than purely a matter of investor
choice. The implication is that the "passive" investor is often not
making an active, informed decision, but is being "herded" by
design. The continuous inflows into these funds, mandated by
regulatory frameworks, ensure that capital flows mechanically into
market-cap-weighted indices, irrespective of fundamental valuation.
This deepens the critique by showing that the expansion of passive
investing is not merely an organic market evolution but a structural
distortion influenced by government policy, intended to simplify
retirement savings and protect employers from liability.

The sheer scale of passive investing, controlling approximately 45%

of the total market capitalization and, more strikingly, receiving
"more than 100% of the marginal capital" entering the market,
suggests a critical tipping point has been reached.1 This isn't just
incremental growth; it signifies a fundamental shift in market
dynamics. If active managers are being "fired in fairly sizable"
numbers 7, it directly implies that the traditional price discovery
mechanism, historically driven by fundamental analysis and
thoughtful capital allocation, is being significantly undermined. The
market is no longer merely influenced by passive flows; it is
increasingly determined by them.4 This sets the stage for the
breakdown of market efficiency and an increase in systemic risk, as
the market's "brain" (active management) is being systematically
replaced by what Green metaphorically calls a "giant mindless
robot".3

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3. Michael Green's Core Criticism of Passive Investing

Green's fundamental critique begins by dismantling the very

definition of "passive investing." He argues that the term is a
misnomer, as these strategies, particularly index funds and ETFs, are
not truly passive in the textbook sense but rather a powerful,
systematic form of active management.

The "Myth" of Passive Investing: It's Not Truly Passive

Green fundamentally challenges the conventional understanding of

"passive investing." Traditionally, a passive investor is theorized as
someone who simply holds every security in an index, does not trade
frequently, and therefore does not actively influence market prices.4
They are considered "free riders" on the price discovery efforts of
active managers.1 However, Green asserts that "there's no such
thing as a passive investor" in the real world.11 He argues that these
so-called passive vehicles are "trading all the time" and are "almost
always in one direction: up" due to continuous inflows.1 He
characterizes them as "mindless systematic active investors with
zero interest in the fundamentals of the securities they purchase".14
Their operations are governed by "super, super simple rules and a
massive regulatory advantage" 10, rather than discretionary analysis.
Consequently, the market's pricing mechanism is increasingly
determined not by the "thoughtful investors who are doing the work"
of fundamental analysis, but by the "very regular unthoughtful
contributions" channeled through passive investment vehicles.4

The perceived passivity is, in fact, a result of "super, super simple

rules and a massive regulatory advantage".10 The Pension Protection
Act of 2006 shifted 401(k) plans from opt-in to opt-out,
automatically defaulting employees into participation.9 By 2012, due
to lobbying efforts, the Qualified Default Investment Alternative
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(QDIA) predominantly became target-date funds.4 These funds
allocate capital "only ask[ing] one question when doing so, how old
are you?".4 They do not consider economic conditions, interest
rates, or stock valuations, leading to "unthoughtful contributions".4
This regulatory framework creates an "inelasticity" in the market,
where demand is not price-sensitive.10

Passive investing has grown from less than 5% of the market in 1995
to nearly half of all money in stocks, around 40-50%.1 More critically,
Green highlights that "more than 100% of the marginal capital that
is coming into the market is now passive," meaning active managers
are being net-fired.7 This overwhelming flow dictates market
behavior.4

The Inelastic Market Hypothesis and Distorted Price Discovery

Green's critique is deeply rooted in his "inelastic market hypothesis."

This hypothesis directly contradicts the Efficient Market Hypothesis
(EMH), which posits that asset prices reflect all available
information, making it impossible to consistently "beat the market"
because prices only react to new, unpredictable information.7 The
EMH implicitly assumes markets are "perfectly elastic," meaning
prices adjust smoothly and immediately to new information without
significant distortion from trade flows.7 In contrast, Green argues
that markets are surprisingly "inelastic," meaning prices are highly
sensitive to capital flows and demand shocks.11 His research,
supported by academics, suggests that investing just $1 in the stock
market can increase the market's aggregate value by approximately
$5.15 This "price impact multiplier" 12 indicates a low aggregate price-
elasticity of demand for stocks. Crucially, Green notes that this price
impact is "quite long-lasting," potentially even permanent.15 This is
not necessarily because flows convey new information, but because
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a permanent shift in demand for stocks must create a permanent
shift in their equilibrium price. As a direct consequence of this
inelasticity and the dominance of passive flows, Green contends
that "market efficiency is breaking down at scale".11 Prices become
increasingly "disassociated from the underlying fundamentals" 4,
with "valuations no longer matter[ing]" as capital is "blindly buying
regardless of valuations".9

Green's most provocative assertion is that passive investing is not

truly passive.11 This is a foundational re-framing. The traditional
Efficient Market Hypothesis (EMH) assumes passive investors are
price-takers, holding securities without transacting.4 Green directly
refutes this, arguing that passive vehicles are constantly "trading all
the time" 1 and are "mindless systematic active investors".14 This re-
characterization is crucial because it shifts the focus from individual
market participants being irrational to the inherent design and scale
of passive vehicles themselves being the source of distortion. If
passive investors are, by their nature, not passive, then the
foundational assumptions of market efficiency break down, leading
to predictable, rather than random, market distortions. This is a
direct, high-level challenge to the EMH at scale 11, suggesting that
the market's ability to self-correct through rational price discovery is
severely compromised. The "passive" label provides a shield, such
as liability protection for employers offering QDIAs 4, thereby
encouraging widespread adoption despite its distortive effects. This
suggests a deep, systemic issue rather than just an investment style
choice. Furthermore, the "free rider" concept is inverted; instead of
passive investors benefiting from active price discovery, the sheer
volume of passive flows overwhelms active price discovery, making
active management less effective and thus perpetuating the cycle

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towards passive. This implies a negative feedback loop where
passive growth undermines the very foundation it supposedly relies
upon.

The widespread adoption of QDIA and target-date fund structures 4

is not just a market trend; it is a direct result of a regulatory
advantage.10 This framework, designed to simplify retirement savings
and shield corporations from liability 4, has the unintended
consequence of actively disincentivizing the thoughtful, fundamental
analysis that active management provides. Green argues that this
system "penalizes people trying to do that thoughtful job of capital
allocation".4 This is a deep, second-order critique of policy
unintended consequences: well-intentioned rules, by prioritizing
simplicity and liability protection, have inadvertently led to a market
that is "disassociated from the underlying fundamentals" 4, where
capital is allocated "unthoughtfully".4 This highlights a systemic flaw
where regulatory design, rather than market forces, dictates capital
flow, leading to structural distortions.

The following table provides a concise comparison of traditional

views on passive and active investing versus Michael Green's
interpretation, highlighting the fundamental differences that
underpin his critique.

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Table 1: Passive vs. Active Investing (Green's Perspective)

Characteristic Traditional Passive Green's "Passive" Traditional Active Green's "Active"

(Conventional (Reality) (Conventional (Remaining
View) View) Influence)

Market Influence Price-taker, no Price-maker, Price-maker, Price-maker,

influence on market significant and influences prices attempts to
prices. distorting influence through fundamental influence prices but
due to mechanical analysis. is overwhelmed by
flows. 10 passive flows. 8

Trading Behavior Holds all securities, Trades constantly Trades based on Trades based on
does not trade or (due to inflows), individual security individual security
transact. 4 almost always in one analysis. analysis.
direction (up). 1

Basis of Decisions Piggybacks on active Mindless systematic Fundamental Fundamental

managers' work; rules, massive analysis, valuation, analysis, valuation,
reflects market regulatory company prospects. company prospects.
consensus. 4 advantage, zero 4 4

interest in
fundamentals. 10

1
Characteristic Traditional Passive Green's "Passive" Traditional Active Green's "Active"
(Conventional (Reality) (Conventional (Remaining
View) View) Influence)

Impact on Price Harmless free rider; Distorts prices, Sets accurate prices, Struggles to set
Discovery benefits from market creates momentum, allocates capital accurate prices;
efficiency. breaks down market efficiently. influence diminished.
efficiency. 11 4

Primary Driver Efficient market Inelastic flows, Skill, research, Skill, research, but
hypothesis, investor regulatory defaults information facing overwhelming
preference for low (QDIA, 401k). 9 advantage. structural
cost. 14 headwinds. 7

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4. Identified Risks and Their Manifestation

Michael Green identifies several critical risks stemming from the

dominance of passive investing, arguing that these factors
contribute to market instability and broader economic imbalances.

Market Distortion and Concentration

Passive investing fundamentally "distort[s] prices" and significantly

impacts "valuation, volatility, and the long-term sustainability of
equity markets".11 This distortion leads to "mega-cap dominance"
and "extreme multiplier effects," where the largest companies
receive an "additional impulse and get larger" simply because of
their existing size within market-cap-weighted indices.7 This results
in an increasingly "concentrated" market.7 The consequence is that
"market efficiency is breaking down at scale" 11, causing prices to
become "disassociated from the underlying fundamentals".4 In this
environment, "valuations no longer matter" as investors are "blindly
buying regardless of valuations".9 The market is "overrun" with
passive investing, sending "perverse signals" for capital allocation.4

A key piece of evidence Green presents is the dramatic "correlation

collapse".9 Historically, the correlation between market-cap-
weighted and equal-weighted S&P 500 indices hovered at 85-90%
+, indicating that macroeconomic factors broadly influenced most
stocks. Even during the "Nifty 50" era, this correlation only dipped to
about 74%. However, Green notes that by the end of 2021 and
currently, this correlation has fallen below 50%.9 This significant
divergence means that the markets are now "dominated by a subset
of companies that everybody is buying into" 9, primarily the largest
components of the indices. This phenomenon is a direct
manifestation of the "momentum reinforcing behavior" 9 driven by
passive flows, where capital mechanically chases what has already
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performed well, leading to increased correlations between the
largest securities within the index, while their correlation with the
broader market (equal-weighted) declines.16

The market, instead of being an efficient allocator of capital,

becomes a "funhouse mirror" reflecting only the momentum of
inflows into the largest entities. This is evidenced by Green's
observations of price movements disassociated from fundamentals,
such as a stock price rising disproportionately on an earnings report
or even tripling post-bankruptcy announcement, indicating a clear
breakdown in the efficiency of information diffusion.19 This means
capital is being misallocated not just at the company level, but
potentially at the macro level, directing resources away from
productive, innovative ventures towards already bloated mega-
caps. This misallocation of capital has long-term economic
consequences, potentially reducing overall productivity growth and
fostering economic stagnation, as capital isn't flowing to where it
can generate the highest real returns. It also suggests a weakening
of capitalism's core function: efficient resource allocation based on
merit.

Fragility of Valuations and Systemic Instability

Green highlights the "fragility of valuations under passive

dominance".11 The continuous, valuation-agnostic inflows propel
stocks to "record levels of (over?)valuation".3 Green explicitly calls
this a "passive bubble" 1, warning that "we know what happens when
everybody does the same thing in markets".1 Passive flows are
described as "distorting market prices and fueling extreme
valuations".18 The market's increasing "disassociated[ness] from the
underlying fundamentals" 4 means that traditional valuation metrics
lose their relevance. Investors are "blindly buying regardless of
2
valuations" 9, leading to an environment where stocks are
"propelling... to record levels of (over?)valuation".3 This creates a
market structure that is highly susceptible to sudden reversals if the
underlying flow dynamics change.

Green identifies an "embedded self-destruct mechanism" 9 within

passive investing. This mechanism arises because withdrawals from
passive funds are a function of the asset level (i.e., the total value of
investments), while contributions are primarily a function of income
levels (e.g., bi-weekly paychecks into 401(k)s).9 At some point, as the
asset base grows and retirees begin drawing down savings,
withdrawals are mathematically destined to exceed contributions.9 In
a recessionary scenario, if investors lose jobs or retire and begin
spending, there will be "few active managers left to buy stocks that
might seem cheap".1 With buyers scarce, Green suggests "the
markets could melt down".1 This leads to a "theoretical crash under
net withdrawals" 11 and a critical "problem of timing a passive
unwind".13 He draws parallels to historical market events, suggesting
a potential for a crash akin to the "big one in 1929" 8, emphasizing
that this risk is being "overlooked".8 The system is described as a
"self-reinforcing bubble (Ponzi-like in nature)".18

The "self-destruct mechanism" represents a critical, second-order

risk. It is not just about current market distortions but a future,
inevitable crisis built into the passive structure. The reliance on
continuous inflows from working populations (401k contributions)
will eventually be challenged by an aging demographic that shifts
from accumulation to decumulation (withdrawals).1 This structural
imbalance means the "passive bubble" is not merely speculative but
has a demographic fuse. The problem isn't if withdrawals exceed
contributions, but when and how violently the market adjusts. The

3
"inelasticity" of the market 10 exacerbates this. If passive funds have
no "instruction to sell" 10 based on fundamentals, and active buyers
are scarce 1, then a reversal of flows could lead to a rapid,
uncontrolled collapse, as there is no price-sensitive mechanism to
absorb selling pressure. This connects the current market structure
directly to a potential future systemic shock.

The lack of discretion in passive funds means there is "no instruction

to sell".10 If 100% of owners were passive, prices could theoretically
become infinite as there would be no willing sellers unless instructed
by end investors.10 This "reduced market elasticity" raises "the risks
of extraordinary price movements".16

Capital Misallocation and Corporate Governance Issues

The dominance of passive flows contributes to a "problem with IPO

scarcity and capital misallocation".11 Because passive funds
mechanically allocate capital based on market capitalization, "big
companies—like Apple, Microsoft, or Amazon—keep getting more
money from passive funds just because they're already big".8 This
occurs "even if their businesses aren't growing as fast".8 Conversely,
"smaller companies get ignored, even if they are good companies
with impressive upside".8 This means capital is not efficiently
directed to the most promising or innovative enterprises, but rather
reinforces the status quo of existing mega-caps, hindering broader
economic dynamism and competition.

Green argues that passive funds, by their very nature, act as a

"voting machine" without a "weighing component".4 This implies that
their investment decisions are "unthoughtful" 4, as they simply mimic
existing market structures rather than evaluating individual company
fundamentals. This disconnects the market from its traditional role

4
of providing "incremental reward or penalty associated with choices
being made by management teams".4 In essence, passive investing
diminishes the market's ability to discipline or reward corporate
behavior through capital allocation. Green traces these corporate
power issues back further, noting that corporations were granted
"personhood" and "unlimited charter life" in the late 19th century,
likening them to "vampires" that accumulate vast resources.9 He also
highlights the "Bork doctrine" of the 1970s and 1980s, which rolled
back antitrust protections, leading to a "dramatic increase in
consolidation and lack of enforcement in antitrust".9 This historical
context suggests that passive investing exacerbates an existing
problem of corporate dominance and unchecked power,
contributing to the trend where "small businesses are disappearing
while mega-caps consolidate power".18

The erosion of corporate governance and efficient capital allocation

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due to "unthoughtful" passive flows suggests a broader economic
inefficiency. If passive funds primarily act as "voting machines"
without a "weighing component" 4, it means capital is allocated
based on existing market capitalization rather than a company's
fundamental performance, innovation, or future potential. This
actively "penalizes people trying to do that thoughtful job of capital
allocation".4 The consequence is that capital disproportionately
flows to already large, established companies, even if they are
"overvalued" 3 or their businesses are not growing rapidly.8 This
starves smaller, potentially more innovative companies of crucial
capital (leading to IPO scarcity 11), exacerbates market consolidation
9
, and ultimately leads to a less dynamic and competitive economy.
This is a significant macro-economic implication, suggesting that the
passive investing trend is not just a financial market problem but a

5
structural impediment to efficient capital formation and broader
economic health.

Green highlights that active managers "can't have enough scale to

even stand in front of it".1 The "passive sugar flood is too strong" for
them to "fix the mix".8 This is not just about active managers losing
market share; it is about their diminished capacity to perform their
essential market function of price discovery and capital allocation.
As active managers are "on net being fired in fairly sizable" numbers
7
, the market loses its "thoughtful" component.4 This creates a
negative feedback loop: passive grows, active shrinks, market
efficiency degrades, making passive seem "better" (due to
momentum-driven returns), further accelerating passive growth.
This implies a weakening of the market's internal self-correction
mechanisms. Without robust active management, the market
becomes less resilient to shocks and more susceptible to "perverse
signals".4 It also raises questions about the long-term viability of the
financial ecosystem if the "worker bees" 7 that set prices are
systematically eliminated.

The following table summarizes the key risks identified by Michael

Green, detailing how each risk manifests in the financial system.

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Table 2: Key Risks of Passive Investing

Risk Category Specific Risk & Manifestation Key Evidence/Mechanism Cited by Green

Market Mega-Cap Dominance: Disproportionate "Mega-cap dominance" and "extreme

Distortion & capital allocation to largest companies, driving multiplier effects".11 Largest companies "get
Concentration prices based on size, not fundamentals. larger" from passive inflows.7 Market is
"concentrated".9

Breakdown of Market Efficiency & Price "Market efficiency is breaking down at scale".11
Discovery: Prices become disassociated from Prices "disassociated from underlying
fundamentals, driven by mechanical flows fundamentals".4 Valuations "no longer matter".9
rather than information. Examples: disproportionate price rises post-
earnings/bankruptcy.19 Shift from "mean
reversion to mean expansion".11

Correlation Collapse: Divergence in behavior Correlation between market-cap-weighted

between large, index-weighted stocks and the and equal-weighted S&P 500 fell below 50%
broader market, reducing diversification by end of 2021.9 Breakdown in correlation
benefits. between value and growth stocks.13

Fragility of Overvaluation & "Passive Bubble": Stocks propelled to "record levels of

Valuations & Continuous, valuation-agnostic inflows inflate (over?)valuation".3 "Passive bubble" or "self-
Systemic asset prices to unsustainable levels. reinforcing bubble (Ponzi-like)".1 "Fragility of
Instability valuations under passive dominance".11

1
Risk Category Specific Risk & Manifestation Key Evidence/Mechanism Cited by Green

"Self-Destruct Mechanism" & Potential for Withdrawals are function of asset level,
Crash: Inevitable net withdrawals (asset- contributions of income level.9 "Few active
based) will outpace contributions (income- managers left to buy stocks".1 Potential "melt
based), leading to a liquidity crisis with few down" 1 or "1929-like crash".8
buyers.

Reduced Market Elasticity: Lack of price- "No instruction to sell" in passive funds.10
sensitive sellers in passive funds makes Prices could theoretically become infinite on
markets prone to extreme price movements. the upside.10 "Reduced market elasticity raising
the risks of extraordinary price movements".16

Capital IPO Scarcity & Stifled Innovation: Capital is "Problem with IPO scarcity and capital
Misallocation & directed to existing mega-caps, neglecting misallocation".11 "Smaller companies get
Corporate smaller, potentially more innovative ignored".8
Governance companies.

Erosion of Corporate Governance: Passive Passive funds are "unthoughtful" in capital

funds act as "voting machines" without allocation.4 Diminished ability to
"weighing components," weakening market reward/penalize management.4 Exacerbates
discipline on corporate behavior. dominance of large corporations; "small
businesses are disappearing".18

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5. Suggested Ways to Reduce Risks and Policy Recommendations

Michael Green's proposed solutions are multi-faceted, extending

beyond mere financial market adjustments to encompass broader
societal and policy reforms. He posits that the current market
structure is a symptom of deeper, long-standing misalignments in
economic policy and societal priorities.

Policy-Level Interventions

Green advocates for fundamental shifts in government policy to

address the root causes of market distortion and systemic risk.
● Reversing Policies that Disadvantage Young People: Green
argues that society has prioritized spending on older
generations, leading to high interest rates that disadvantage
young people who need to borrow for housing, cars, and
education.9 He suggests reversing these policies and instead
investing in children and young families by creating
infrastructure and resources that allow people to get a step up
on the economic ladder. This would require "unpopular policy
changes," including an increase in government spending
directed towards human capital development, rather than, for
example, hip replacements for the elderly, which he argues add
no real productivity benefit to society.9
● Fiscal Responsibility and Progressive Taxation: Green
believes that older and wealthier generations are responsible for
the current economic misalignment due to past policy choices.
He argues that these groups should bear the cost of fixing these
issues, specifically through higher taxation, to pay off
accumulated debt and expenses.9 He explicitly states that he
would adopt a "much more progressive tax rate" as a single
policy change to improve the US financial and economic system,

1
 acknowledging it would be an unpopular but necessary step akin
to repaying war debt.9
● Rolling Back Corporate Influence: To address the unchecked
power of corporations, Green proposes rolling back their
influence by removing their "personhood" status, which he
likens to "vampires" accumulating vast resources due to
unlimited charter life granted in the late 19th century.9 He also
calls for reversing the "Bork doctrine" of the 1970s and 1980s,
which rolled back antitrust protections and led to increased
consolidation and a lack of enforcement.9
● Rethinking 401(k) Structure and Regulatory Environment:
Green is critical of the current 401(k) structure, particularly the
automatic default into passive target-date funds, which he
views as a "regulatory environment that are designed to herd
people into a particular area".4 He advocates for removing the
"cudgel of liability" that shields corporations when offering low-
cost passive options but exposes them to liability for active
managers.4 He also highlights concerns about the shift in 401(k)
withdrawal rules, moving from mandatory withdrawals at 70.5 to
72, and potentially "never," which he sees as a violation of the
401(k)'s original spirit of saving for retirement and a vehicle
increasingly used for shielding wealth for the wealthy.4
● Penalties for Systemically Important Firms: Green suggests
imposing taxes and penalties on large passive investment firms
such as Vanguard, BlackRock, Fidelity, and State Street. He
notes that despite managing trillions in assets, none have been
labeled as Systemically Important Financial Institutions (SIFIs),
warning that if these firms face significant withdrawals, it could
lead to a crisis similar to what was seen with Silicon Valley Bank.4
● Promoting Better Governance: He believes that the current

2
 political class is focused on transactional policies rather than
the needs of the people. Green states that the US operates as a
republic where elected representatives are supposed to express
the interests of the people, and that a better job needs to be
done in electing these individuals.9

Green's solutions extend far beyond just financial market

mechanics, encompassing tax reform, investing in children, and
rolling back corporate personhood.9 This suggests that he views the
passive investing crisis not as an isolated financial problem but as a
symptom of deeper, long-standing societal and policy
misalignments. The "fix is very straightforward" but requires
"unpopular policy changes".9 This implies a need for a fundamental
re-evaluation of societal priorities and the social contract, moving
from enriching the already wealthy to investing in human capital and
equal opportunity.6 This perspective elevates the discussion from
mere investment strategy to a call for systemic societal rebalancing,
where economic policy is designed to foster broad-based prosperity
and dynamism rather than concentrating wealth and power.

Market-Level Adjustments and Individual Strategies

While the primary onus for change lies with policymakers, Green also
discusses adjustments at the market level and considerations for
individual investors.
● Optimal Active/Passive Proportion: Green suggests that
around 20-25% passive investment can create "tremendous
value" by introducing players that operate off simple algorithms,
which can lower volatility and improve transaction efficiency.4
However, he believes the current situation is "overrun" with
passive investing, leading to "perverse signals" in capital

3
 allocation and economic expectations.4 This implies that his
critique is not an outright rejection of passive investing, but
rather a warning against its dominance. This suggests that there
is an "optimal disequilibrium" where a certain level of passive
investment can provide efficiency benefits without completely
eroding price discovery. The challenge is to restore this balance,
which would require active policy intervention to "flip that
system" 4 and reduce the regulatory advantages currently
favoring passive.
● Restoring Active Management's Role: Green emphasizes that
active management's purpose is to allocate capital to
companies likely to have good results and take capital away
from businesses incapable of generating attractive returns. This
action, when combined with other thoughtful players, helps
establish the "cost of capital" and rewards or penalizes
companies for their choices.4 Policies should aim to "make
active management great again by reducing some of its
barriers".12
● Individual Investor Awareness: For individual investors, the
most important step is to be "aware of the current market
dynamics".4 He emphasizes understanding that retirement
security is increasingly being outsourced to a market that no
longer functions historically. Understanding this problem is a
significant part of the solution.4 Individuals should examine their
401(k) choices, ask their HR manager how these choices were
selected, and verify the information to understand the
consequences of "groupthink" dynamics.4 While he suggests
that for most people, the answer might be to "ride this horse as
far as it will take you" 12, he immediately pivots to the
responsibility of regulators and government officials to question

4
 the system's goals.12
● Options Strategies: For sophisticated investors, Green
mentions "options strategies for convex tails and market drift"
as a way to manage risk in a flow-driven market.11
6. Conclusion

Michael Green's comprehensive critique of passive investing

presents a profound challenge to conventional wisdom in financial
markets. His thesis moves beyond a simple debate of active versus
passive performance, asserting that what is commonly perceived as
"passive" is, in fact, a powerful, "mindless systematic active" force
driven by regulatory frameworks rather than fundamental analysis.
This redefinition is critical, as it implies that the market's traditional
mechanisms of price discovery and efficient capital allocation are
being fundamentally undermined.

The analysis reveals that the dominant scale of passive flows,

particularly those mandated by retirement plan defaults, has led to a
market characterized by severe distortions. These include
unprecedented concentration in mega-cap stocks, a breakdown in
market efficiency where valuations become irrelevant, and a
dramatic collapse in the correlation between market-cap-weighted
and equal-weighted indices. Furthermore, Green identifies an
inherent "self-destruct mechanism" within passive investing, where
future withdrawals are mathematically destined to outpace
contributions, posing a significant systemic liquidity risk that current
market structures are ill-equipped to handle. This creates a scenario
ripe for "violent swings and potential crashes" reminiscent of
historical market dislocations. The diminished capacity of active
managers to counteract these forces creates a negative feedback
loop, further eroding the market's internal self-correction

5
mechanisms.

Green's proposed solutions reflect the systemic nature of the

problem, extending beyond mere market adjustments to encompass
broad societal and policy reforms. He advocates for a fundamental
re-evaluation of government priorities, including progressive
taxation, investing in human capital, rolling back corporate influence,
and a significant overhaul of retirement savings structures. His
nuanced perspective suggests that while passive investing can offer
benefits at an optimal level (around 20-25% market share), its
current dominance has created an unsustainable disequilibrium. The
imperative, therefore, is for policymakers and investors to
acknowledge these structural challenges and implement
comprehensive changes to foster a more resilient, equitable, and
fundamentally sound financial system.

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