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 >> Lorrie Keating Heinemann:  

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 Thank you very much.  

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 I'm really honored to be here,  

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 and I did not know when I took  

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 this position back in 2003 it  

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 would be quite the challenge  

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 that it has become, but indeed  

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 it is.  

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 Tonight I've been asked to talk  

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 briefly about the state of  

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 Wisconsin's banking environment  

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 and to introduce our highly  

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 esteemed speaker.  

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 First, because I am the  

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 Commissioner of Banking for the  

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 state, I have to tell you that  

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 our banks are not exempt from  

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 the economic downturn.  

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 While the majority of our banks,  

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 we regulate 217 state chartered  

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 banks in the state, while the  

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 majority of them remain strong,  

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 many are experiencing a high  

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 percent of loan delinquencies  

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 caused by the decline in real  

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 estate values, and the increase  

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 in unemployment levels, which  

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 I'm sure is a surprise to none  

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 of you.  

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 Our average capital ratio, which  

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 is basically the capital in the  

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 bank divided by the total  

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 assets, is a respectable 9.8%  

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 and is actually better than  

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 the overall national average of  

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 all banks in the United States.  

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 However, our bank earnings are  

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 down.  

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 One out of five banks are now  

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 reporting negative earnings.  

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 Earnings have been under  

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 pressure due to the need for  

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 increased loan losses, because  

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 when a loss is taken, they have  

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 to put more in their loan loss  

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 reserves, tight net interest  

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 margins, and the increased cost  

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 of FDIC insurance premiums.  

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 The weakening economy has also  

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 reduced the number of qualified  

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 borrowers and has resulted in  

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 increased scrutiny by both the  

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 state and the Federal  

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 regulators.  

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 In Wisconsin, we actually  

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 partner with the Federal Reserve  

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 banks of Chicago and the one in  

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 Minneapolis to oversee the  

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 operations of our Fed member  

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 banks, and I know you're going  

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 to hear a little bit about the  

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 Fed today, so I thought I'd  

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 mention that.  

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 But we also partner with the  

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 FDIC as we co-examine many of  

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 the banks throughout the state  

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 of Wisconsin.  

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 I will point out, because I'm  

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 kind of a champion for the  

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 community bankers, that the  

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 life's work of many of our  

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 bankers in the state is being  

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 challenged by the costs of  

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 paying for the excesses of some  

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 "too big to fail" institutions.  

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 Wall Street is impacting  

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 Main Street.  

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 The result is a tightening of  

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 credit on businesses in our  

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 state at a time when the funding  

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 is needed the most.  

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 So as it was asked a little  

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 earlier, how did we get here?  

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 And that's what tonight's  

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 author, Liaquat Ahamed,  

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 is here to talk about.  

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 Quoted just over a year ago,  

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 Mr. Ahamed said that  

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 "nothing brings home the  

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 fragility of the banking system  

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 or the potency  

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 of the financial crisis  

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 more vividly than writing  

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 about these issues  

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 from the eye of the storm."  

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 These words really ring true  

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 today as our country moves  

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 forward with the repair and the  

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 recovery of our global financial  

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 system.  

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 Last year I believe Mr. Ahamed  

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 had a pretty busy year, it  

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 sounds like, from looking on  

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 your reviews on the website.  

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 When he was putting his  

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 finishing touches on his book,  

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 "Lords of Finance: The Bankers  

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 Who Broke the World," he talked  

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 about the book being about a  

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 story of four central bankers in  

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 the years after World War I  

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 and what Mr. Ahamed calls the  

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 "seminal economic event of the  

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 last century," the unprecedented  

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 breakdown of the global economy,  

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 or what is now known  

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 as the Great Depression.  

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 Mr. Ahamed's book, which is his  

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 first, I believe, has been  

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 universally praised and it has  

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 become a best-seller.  

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 The book has also won the  

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 Spear's Book Award for the best  

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 financial history book of the  

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 year.  

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 Mr. Ahamed will tell us tonight  

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 if he saw things coming, what he  

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 knew and when he knew it, and  

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 better yet, what he thinks will  

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 lie ahead.  

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 Known as a lover of words,  

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 a master storyteller, and a  

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 historian, Mr. Ahamed is all of  

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 these.  

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 But he has also been a  

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 professional investment manager  

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 for the past 25 years.  

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 He has worked at the World Bank  

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 in Washington DC.  

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 He served as the chief executive  

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 of a New York investment  

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 partnership, and he is currently  

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 not only an advisor to  

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 investment groups, but a  

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 director of the Aspen Insurance  

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 Company and is on the board of  

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 trustees for the very highly  

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 respected Brookings Institute.  

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 So with that, I would like to  

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 bring up Mr. Ahamed, who will  

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 talk about his book,  

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 "Lords of Finance: The Bankers  

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 Who Broke the World."  

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 (  applause  )  

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 >> Liaquat Ahamed: Well,  

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 thank you for those kind words,  

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 Secretary Heinemann.  

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 And thank you to the academy for  

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 inviting me to speak.  

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 I should just actually put one  

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 issue to rest, which is, I  

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 started writing this book about  

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 four or five years ago and it  

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 was published in January this  

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 year.  

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 And when it came out, a lot of  

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 my friends said, "You must be  

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 some sort of genius,  

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 you figured this out  

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 four or five years ago."  

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 They would always then end up  

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 by saying, "But if you'd figured  

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 it out that we were going to  

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 have this crash, why didn't you  

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 give us a call and let us know?"  

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 (  laughter  )  

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 So I didn't figure it out.  

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 We have just been through the  

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 worst financial crisis since the  

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 Great Depression.  

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 It may be of little comfort to  

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 know that financial crises are  

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 nothing new.  

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 Indeed, the first recorded  

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 financial crisis occurred  

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 in AD 33 when there was a run  

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 on the imperial banking system  

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 and the emperor Tiberius  

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 had to inject a million  

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 gold pieces to stabilize  

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 the Roman banking system.  

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 Not only have they been around  

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 for a very long time, but there  

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 have been a lot of them.  

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 In 1721 we had a thing called  

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 the South Sea Bubble, and that  

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 was the first time the word  

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 "bubble" was used to describe an  

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 out of control financial mania.  

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 But since then there have been,  

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 depending on how you count,  

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 anywhere from 40 to 50 different  

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 financial booms and crises.  

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 So I suppose the good news is  

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 that we've always recovered,  

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 because here we are.  

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 I suppose the bad news is that  

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 we keep on making the same  

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 mistakes over and over again.  

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 The frequency of these financial  

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 crises varies.  

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 Starting from the early 19th  

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 century and right through to the  

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 mid 20th century, they seem to  

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 occur every nine to ten years.  

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 In fact, if you're a reader of  

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 the New Yorker, there was an  

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 article, not last week, but the  

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 week before which described  

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 someone who is sort of an expert  

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 in financial cycles, and he  

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 computed that they occurred  

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 precisely every 8.6 years.  

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 The system then went dormant in  

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 the 1950s and '60s, and then  

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 suddenly in the early 1980s the  

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 volcano seemed to reactivate and  

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 we got a sequence of crises.  

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 We got 1982, emerging market  

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 crisis.  

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 1987, the stock market  

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 collapsed.  

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 1990, the SNL problem.  

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 1994, Mexico and the peso  

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 crisis.  

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 1997, 1998 was the Asian crisis,  

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 the Russian defaulted, long-term  

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 capital.  

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 And 2000 was the tech bubble.  

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 So first of all, it looked as if  

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 the frequency of these crises  

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 had increased and we were  

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 getting them every three to four  

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 years.  

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 And that's when I became  

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 interested.  

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 I was in the investment  

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 management industry and I began  

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 to read up about past crises in  

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 order to understand what drives  

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 them, why they start, how they  

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 develop, what to do about them.  

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 There's no better place, or  

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 there's nothing that provides as  

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 much food for thought as the  

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 mother of all crises, which is  

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 the Great Depression that  

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 started in 1929.  

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 Today, I'm not going to talk  

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 very much about my book.  

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 I'm going to really try to focus  

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 on the parallels between what  

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 happened then and what's just  

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 happened.  

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 I'll divide the chronology into  

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 three areas, the lead up, the  

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 handling of the crisis, and the  

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 recovery.  

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 So first the lead up.  

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 The similarities in the lead up  

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 to what has happened just now  

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 and what happened in 1929 are  

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 eerie.  

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 In both cases we had a bubble,  

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 and it was in the stock market,  

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 this time it was in real estate.  

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 In both cases, the bubble was  

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 created by a mistaken Fed  

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 policy, specifically over-easy  

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 credit.  

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 In both cases in my view, the  

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 mistake was exacerbated, if not  

284
00:10:02,000 --> 00:10:05,000
 caused, by a malfunctioning in  

285
00:10:05,000 --> 00:10:06,000
 the international financial  

286
00:10:06,000 --> 00:10:08,000
 system.  

287
00:10:08,000 --> 00:10:09,000
 Let me spend a couple of moments  

288
00:10:09,000 --> 00:10:11,000
 on this.  

289
00:10:11,000 --> 00:10:13,000
 In the 1920s, the problem was  

290
00:10:13,000 --> 00:10:17,000
 between Europe and the US.  

291
00:10:17,000 --> 00:10:19,000
 Many people forget, 1929  

292
00:10:19,000 --> 00:10:21,000
 occurred only ten years after  

293
00:10:21,000 --> 00:10:24,000
 the end of the first world war.  

294
00:10:24,000 --> 00:10:27,000
 The most expensive, costly war  

295
00:10:27,000 --> 00:10:29,000
 in history that essentially  

296
00:10:29,000 --> 00:10:32,000
 bankrupted Europe.  

297
00:10:32,000 --> 00:10:34,000
 For four years, the three major  

298
00:10:34,000 --> 00:10:37,000
 European powers, Britain,  

299
00:10:37,000 --> 00:10:39,000
 France, and Germany, spend 50%  

300
00:10:39,000 --> 00:10:42,000
 of their GDP per year fighting  

301
00:10:42,000 --> 00:10:46,000
 this sort of pointless war.  

302
00:10:46,000 --> 00:10:49,000
 They financed it by borrowing  

303
00:10:49,000 --> 00:10:52,000
 massive amounts both from their  

304
00:10:52,000 --> 00:10:56,000
 own citizens and from the US in  

305
00:10:56,000 --> 00:10:59,000
 the case of Britain and France,  

306
00:10:59,000 --> 00:11:02,000
 and ultimately by printing  

307
00:11:02,000 --> 00:11:04,000
 money.  

308
00:11:04,000 --> 00:11:05,000
 So they basically destroyed  

309
00:11:05,000 --> 00:11:08,000
 their financial system.  

310
00:11:08,000 --> 00:11:12,000
 In the ten years after 1919,  

311
00:11:12,000 --> 00:11:14,000
 Europe was trying to rebuild  

312
00:11:14,000 --> 00:11:18,000
 itself and in order to do that,  

313
00:11:18,000 --> 00:11:24,000
 the US kept credit easy, because  

314
00:11:24,000 --> 00:11:29,000
 Europe needed foreign financing  

315
00:11:29,000 --> 00:11:32,000
 in order to reconstruct.  

316
00:11:32,000 --> 00:11:33,000
 The Fed found itself with a  

317
00:11:33,000 --> 00:11:36,000
 dilemma.  

318
00:11:36,000 --> 00:11:37,000
 It had to keep credit easy in  

319
00:11:37,000 --> 00:11:39,000
 order to rebuild Europe.  

320
00:11:39,000 --> 00:11:41,000
 That easy credit provoked a  

321
00:11:41,000 --> 00:11:44,000
 bubble in the stock market.  

322
00:11:44,000 --> 00:11:46,000
 And as usual, when the Fed's  

323
00:11:46,000 --> 00:11:47,000
 trying to do too many things, it  

324
00:11:47,000 --> 00:11:49,000
 accomplished neither.  

325
00:11:49,000 --> 00:11:52,000
 So the easy credit designed to  

326
00:11:52,000 --> 00:11:54,000
 essentially revive Europe after  

327
00:11:54,000 --> 00:11:56,000
 the first world war was what  

328
00:11:56,000 --> 00:11:58,000
 provoked the stock market  

329
00:11:58,000 --> 00:12:00,000
 bubble.  

330
00:12:00,000 --> 00:12:03,000
 The more recent crisis, or this  

331
00:12:03,000 --> 00:12:07,000
 recent ten years, the bubble was  

332
00:12:07,000 --> 00:12:09,000
 associated with a slightly  

333
00:12:09,000 --> 00:12:12,000
 different imbalance, and the  

334
00:12:12,000 --> 00:12:14,000
 imbalance was between Asia and  

335
00:12:14,000 --> 00:12:17,000
 the US.  

336
00:12:17,000 --> 00:12:19,000
 There were two mechanisms that  

337
00:12:19,000 --> 00:12:21,000
 happened.  

338
00:12:21,000 --> 00:12:23,000
 Essentially, beginning in the  

339
00:12:23,000 --> 00:12:27,000
 early part of this decade, Asian  

340
00:12:27,000 --> 00:12:31,000
 currencies were undervalued.  

341
00:12:31,000 --> 00:12:32,000
 China embarked on a massive  

342
00:12:32,000 --> 00:12:36,000
 export push, the other Asian  

343
00:12:36,000 --> 00:12:39,000
 countries in response to the  

344
00:12:39,000 --> 00:12:43,000
 Asian crisis of 1997 decided  

345
00:12:43,000 --> 00:12:45,000
 that they wanted to accumulate a  

346
00:12:45,000 --> 00:12:48,000
 vast reservoir of dollars.  

347
00:12:48,000 --> 00:12:49,000
 They basically said, we never  

348
00:12:49,000 --> 00:12:51,000
 want to get into this position  

349
00:12:51,000 --> 00:12:52,000
 again.  

350
00:12:52,000 --> 00:12:54,000
 And so they went out of their  

351
00:12:54,000 --> 00:12:55,000
 way to accumulate a reservoir of  

352
00:12:55,000 --> 00:12:57,000
 US dollars.  

353
00:12:57,000 --> 00:12:58,000
 In order to do that, they  

354
00:12:58,000 --> 00:13:00,000
 undervalued their currencies and  

355
00:13:00,000 --> 00:13:02,000
 pushed exports out.  

356
00:13:02,000 --> 00:13:04,000
 That did two things.  

357
00:13:04,000 --> 00:13:08,000
 It, one, confused the Fed.  

358
00:13:08,000 --> 00:13:10,000
 What happened was that because  

359
00:13:10,000 --> 00:13:13,000
 of this export push from Asia,  

360
00:13:13,000 --> 00:13:15,000
 inflation was unusually low  

361
00:13:15,000 --> 00:13:18,000
 because the Asian countries were  

362
00:13:18,000 --> 00:13:22,000
 underpricing their goods.  

363
00:13:22,000 --> 00:13:24,000
 The Fed mistook the low  

364
00:13:24,000 --> 00:13:28,000
 inflation as a symptom of a  

365
00:13:28,000 --> 00:13:30,000
 domestic economy that was  

366
00:13:30,000 --> 00:13:32,000
 running out of steam.  

367
00:13:32,000 --> 00:13:34,000
 So, put its foot on the  

368
00:13:34,000 --> 00:13:36,000
 accelerator.  

369
00:13:36,000 --> 00:13:38,000
 In fact, what was happening was,  

370
00:13:38,000 --> 00:13:39,000
 we had a once in a lifetime  

371
00:13:39,000 --> 00:13:41,000
 expansion in the supply of goods  

372
00:13:41,000 --> 00:13:45,000
 and services coming out of Asia.  

373
00:13:45,000 --> 00:13:47,000
 If you like, it was good  

374
00:13:47,000 --> 00:13:48,000
 deflation and the Fed was  

375
00:13:48,000 --> 00:13:49,000
 worried about what it thought  

376
00:13:49,000 --> 00:13:52,000
 would be bad deflation.  

377
00:13:52,000 --> 00:13:54,000
 The second thing that happened  

378
00:13:54,000 --> 00:13:57,000
 was that the accumulation of  

379
00:13:57,000 --> 00:13:59,000
 dollars in the hands of Asian  

380
00:13:59,000 --> 00:14:02,000
 central banks overwhelmed the  

381
00:14:02,000 --> 00:14:04,000
 capacity of the financial system  

382
00:14:04,000 --> 00:14:06,000
 to handle it.  

383
00:14:06,000 --> 00:14:08,000
 So essentially these dollars  

384
00:14:08,000 --> 00:14:10,000
 were put into financial  

385
00:14:10,000 --> 00:14:15,000
 institutions who then ran out of  

386
00:14:15,000 --> 00:14:18,000
 lending opportunities and then  

387
00:14:18,000 --> 00:14:20,000
 channeled them into the worst  

388
00:14:20,000 --> 00:14:22,000
 sorts of lending, made some very  

389
00:14:22,000 --> 00:14:25,000
 poor lending decisions.  

390
00:14:25,000 --> 00:14:26,000
 So the combination of an over  

391
00:14:26,000 --> 00:14:29,000
 easy Fed and a massive amount of  

392
00:14:29,000 --> 00:14:31,000
 dollars swimming around the  

393
00:14:31,000 --> 00:14:33,000
 financial system provided the  

394
00:14:33,000 --> 00:14:38,000
 fuel for the real estate bubble.  

395
00:14:38,000 --> 00:14:40,000
 To go back to the story, in both  

396
00:14:40,000 --> 00:14:45,000
 cases, we had the same debate  

397
00:14:45,000 --> 00:14:46,000
 about how to react to the  

398
00:14:46,000 --> 00:14:48,000
 bubbles.  

399
00:14:48,000 --> 00:14:50,000
 During the real estate bubble  

400
00:14:50,000 --> 00:14:52,000
 that was occurring in the early  

401
00:14:52,000 --> 00:14:54,000
 part of this decade, Alan  

402
00:14:54,000 --> 00:14:55,000
 Greenspan, the chairman of the  

403
00:14:55,000 --> 00:14:58,000
 Fed, argued four things.  

404
00:14:58,000 --> 00:14:59,000
 One, that it was impossible for  

405
00:14:59,000 --> 00:15:01,000
 the Fed to identify bubbles  

406
00:15:01,000 --> 00:15:03,000
 exactly, that it could only tell  

407
00:15:03,000 --> 00:15:05,000
 if something was a bubble  

408
00:15:05,000 --> 00:15:09,000
 exposed, once it burst.  

409
00:15:09,000 --> 00:15:11,000
 Secondly, that bubbles are an  

410
00:15:11,000 --> 00:15:14,000
 inherent sort of part of a  

411
00:15:14,000 --> 00:15:17,000
 dynamic capitalist system, a  

412
00:15:17,000 --> 00:15:20,000
 product more of human psychology  

413
00:15:20,000 --> 00:15:21,000
 than easy credit and there was  

414
00:15:21,000 --> 00:15:23,000
 nothing the Fed could do about  

415
00:15:23,000 --> 00:15:25,000
 it.  

416
00:15:25,000 --> 00:15:26,000
 Thirdly, that if he tried to do  

417
00:15:26,000 --> 00:15:28,000
 anything about it, he would be  

418
00:15:28,000 --> 00:15:30,000
 overstepping his mandates and  

419
00:15:30,000 --> 00:15:31,000
 would get himself into a lot of  

420
00:15:31,000 --> 00:15:34,000
 political hot water.  

421
00:15:34,000 --> 00:15:36,000
 And fourthly, that the side  

422
00:15:36,000 --> 00:15:38,000
 effects of trying to deal with  

423
00:15:38,000 --> 00:15:41,000
 the bubble, side effects of the  

424
00:15:41,000 --> 00:15:43,000
 medicine, would be worse than  

425
00:15:43,000 --> 00:15:45,000
 the disease and that it was more  

426
00:15:45,000 --> 00:15:48,000
 efficient and less costly to  

427
00:15:48,000 --> 00:15:51,000
 deal with the after effects.  

428
00:15:51,000 --> 00:15:52,000
 In effect, let the bubble burst,  

429
00:15:52,000 --> 00:15:55,000
 burn itself out and burst, and  

430
00:15:55,000 --> 00:15:59,000
 then deal with the consequences.  

431
00:15:59,000 --> 00:16:02,000
 Every one of those arguments  

432
00:16:02,000 --> 00:16:03,000
 surfaced within in the Federal  

433
00:16:03,000 --> 00:16:06,000
 Reserve in the 1920s, so there  

434
00:16:06,000 --> 00:16:08,000
 was nothing new, and they made  

435
00:16:08,000 --> 00:16:10,000
 exactly the same decision.  

436
00:16:10,000 --> 00:16:11,000
 They made the same calculation  

437
00:16:11,000 --> 00:16:13,000
 that they would step aside and  

438
00:16:13,000 --> 00:16:17,000
 let it...  

439
00:16:17,000 --> 00:16:19,000
 I must learn not to mix  

440
00:16:19,000 --> 00:16:20,000
 my metaphors when I talk  

441
00:16:20,000 --> 00:16:22,000
 about bubbles.  

442
00:16:22,000 --> 00:16:25,000
 But let itself blow up.  

443
00:16:25,000 --> 00:16:27,000
 In both cases, both in the 1920s  

444
00:16:27,000 --> 00:16:30,000
 and now, we had excess leverage.  

445
00:16:30,000 --> 00:16:32,000
 In the 1920s there was  

446
00:16:32,000 --> 00:16:34,000
 development of what were known  

447
00:16:34,000 --> 00:16:37,000
 as investment trusts, which are  

448
00:16:37,000 --> 00:16:40,000
 real leverage closed-end funds.  

449
00:16:40,000 --> 00:16:43,000
 And there was a lot of leverage  

450
00:16:43,000 --> 00:16:46,000
 by a group of traders on Wall  

451
00:16:46,000 --> 00:16:49,000
 Street known as Pool Operators,  

452
00:16:49,000 --> 00:16:51,000
 who were like the hedge fund  

453
00:16:51,000 --> 00:16:54,000
 managers of the era, who  

454
00:16:54,000 --> 00:16:56,000
 borrowed extensively in the  

455
00:16:56,000 --> 00:16:58,000
 broker loan market and in those  

456
00:16:58,000 --> 00:17:00,000
 days, if you wanted to buy on  

457
00:17:00,000 --> 00:17:02,000
 margin, you only had to put 10  

458
00:17:02,000 --> 00:17:03,000
 cents down and you could borrow  

459
00:17:03,000 --> 00:17:05,000
 the other 90 cents and buy a  

460
00:17:05,000 --> 00:17:07,000
 dollar of stock.  

461
00:17:07,000 --> 00:17:09,000
 Recently, the leverage has  

462
00:17:09,000 --> 00:17:11,000
 occurred in the financial system  

463
00:17:11,000 --> 00:17:13,000
 and in particular what has come  

464
00:17:13,000 --> 00:17:14,000
 to be known as the shadow  

465
00:17:14,000 --> 00:17:16,000
 banking system.  

466
00:17:16,000 --> 00:17:18,000
 So what is the shadow banking  

467
00:17:18,000 --> 00:17:20,000
 system?  

468
00:17:20,000 --> 00:17:21,000
 If you take the total size of  

469
00:17:21,000 --> 00:17:23,000
 banks in the US, they amount to  

470
00:17:23,000 --> 00:17:26,000
 about $10 trillion compared to a  

471
00:17:26,000 --> 00:17:29,000
 GDP of about $15 trillion.  

472
00:17:29,000 --> 00:17:31,000
 In addition, though, to those  

473
00:17:31,000 --> 00:17:33,000
 banks, there are a whole series  

474
00:17:33,000 --> 00:17:37,000
 of other institutions that act  

475
00:17:37,000 --> 00:17:39,000
 like banks, but are not called  

476
00:17:39,000 --> 00:17:41,000
 banks.  

477
00:17:41,000 --> 00:17:42,000
 I'll give you an example that  

478
00:17:42,000 --> 00:17:44,000
 you all use, which is money  

479
00:17:44,000 --> 00:17:46,000
 market funds.  

480
00:17:46,000 --> 00:17:48,000
 What do money market funds do?  

481
00:17:48,000 --> 00:17:49,000
 You deposit your money in the  

482
00:17:49,000 --> 00:17:51,000
 money market fund, you often  

483
00:17:51,000 --> 00:17:53,000
 have check writing privileges,  

484
00:17:53,000 --> 00:17:54,000
 you can withdraw your money when  

485
00:17:54,000 --> 00:17:57,000
 you want.  

486
00:17:57,000 --> 00:17:59,000
 And what does the money market  

487
00:17:59,000 --> 00:18:01,000
 fund do?  

488
00:18:01,000 --> 00:18:02,000
 It invests that money in a whole  

489
00:18:02,000 --> 00:18:05,000
 series of investments, exactly  

490
00:18:05,000 --> 00:18:08,000
 like a bank does.  

491
00:18:08,000 --> 00:18:10,000
 Total size of money market funds  

492
00:18:10,000 --> 00:18:11,000
 is somewhere between  

493
00:18:11,000 --> 00:18:13,000
 $3 and $4 trillion,  

494
00:18:13,000 --> 00:18:16,000
 so it's almost half the size  

495
00:18:16,000 --> 00:18:18,000
 of the banking system.  

496
00:18:18,000 --> 00:18:21,000
 In addition, we had investment  

497
00:18:21,000 --> 00:18:25,000
 banks that operated like banks.  

498
00:18:25,000 --> 00:18:27,000
 They borrowed short-term and  

499
00:18:27,000 --> 00:18:28,000
 bought long-term assets.  

500
00:18:28,000 --> 00:18:31,000
 Total size of the balance sheet  

501
00:18:31,000 --> 00:18:34,000
 of investment banks was another  

502
00:18:34,000 --> 00:18:35,000
 $3 to $4 trillion.  

503
00:18:35,000 --> 00:18:37,000
 All of these institutions  

504
00:18:37,000 --> 00:18:40,000
 operated like banks without two  

505
00:18:40,000 --> 00:18:41,000
 things.  

506
00:18:41,000 --> 00:18:44,000
 One is the regulation that banks  

507
00:18:44,000 --> 00:18:45,000
 are subject to, and in  

508
00:18:45,000 --> 00:18:47,000
 particular, the capital adequacy  

509
00:18:47,000 --> 00:18:49,000
 requirements that banks are  

510
00:18:49,000 --> 00:18:54,000
 subject to.  

511
00:18:54,000 --> 00:18:56,000
 Secondly, without the sort of  

512
00:18:56,000 --> 00:18:58,000
 oversight of regulators looking  

513
00:18:58,000 --> 00:19:00,000
 at what they were doing.  

514
00:19:00,000 --> 00:19:02,000
 This became, this shadow banking  

515
00:19:02,000 --> 00:19:04,000
 system, became the most  

516
00:19:04,000 --> 00:19:06,000
 vulnerable part of the financial  

517
00:19:06,000 --> 00:19:08,000
 system.  

518
00:19:08,000 --> 00:19:10,000
 Okay, so, in both cases we had a  

519
00:19:10,000 --> 00:19:12,000
 bubble.  

520
00:19:12,000 --> 00:19:14,000
 In both cases, as they always  

521
00:19:14,000 --> 00:19:17,000
 do, the bubbles burst.  

522
00:19:17,000 --> 00:19:18,000
 And in both cases the bursting  

523
00:19:18,000 --> 00:19:22,000
 bubble led to a banking crisis.  

524
00:19:22,000 --> 00:19:24,000
 In the 1920s, it was a  

525
00:19:24,000 --> 00:19:26,000
 conventional banking crisis.  

526
00:19:26,000 --> 00:19:27,000
 You remember those grainy,  

527
00:19:27,000 --> 00:19:29,000
 black-and-white photographs of  

528
00:19:29,000 --> 00:19:31,000
 people lining up outside banks  

529
00:19:31,000 --> 00:19:35,000
 to take their money out.  

530
00:19:35,000 --> 00:19:36,000
 That was in the days before  

531
00:19:36,000 --> 00:19:38,000
 deposit insurance.  

532
00:19:38,000 --> 00:19:40,000
 Now that we have deposit  

533
00:19:40,000 --> 00:19:41,000
 insurance, there was very little  

534
00:19:41,000 --> 00:19:42,000
 of that, although we did get  

535
00:19:42,000 --> 00:19:44,000
 some cases.  

536
00:19:44,000 --> 00:19:45,000
 We got a run on a bank in  

537
00:19:45,000 --> 00:19:48,000
 California called IndyMac.  

538
00:19:48,000 --> 00:19:51,000
 We got a run on a UK bank called  

539
00:19:51,000 --> 00:19:53,000
 Northern Rock.  

540
00:19:53,000 --> 00:19:54,000
 We got a run on a Hong Kong bank  

541
00:19:54,000 --> 00:19:57,000
 called Bank of East Asia.  

542
00:19:57,000 --> 00:19:59,000
 This time, we had a run on the  

543
00:19:59,000 --> 00:20:01,000
 shadow banking system and it was  

544
00:20:01,000 --> 00:20:03,000
 actually more insidious and more  

545
00:20:03,000 --> 00:20:06,000
 dramatic because the shadow  

546
00:20:06,000 --> 00:20:10,000
 banking system, aside from money  

547
00:20:10,000 --> 00:20:12,000
 market funds, largely finances  

548
00:20:12,000 --> 00:20:14,000
 itself through wholesale sources  

549
00:20:14,000 --> 00:20:16,000
 of money, not retail sources of  

550
00:20:16,000 --> 00:20:18,000
 money.  

551
00:20:18,000 --> 00:20:20,000
 The run occurred, essentially it  

552
00:20:20,000 --> 00:20:22,000
 was a digital run.  

553
00:20:22,000 --> 00:20:23,000
 Institutions got on their  

554
00:20:23,000 --> 00:20:25,000
 computers and with a click of  

555
00:20:25,000 --> 00:20:27,000
 the mouse pulled out hundreds of  

556
00:20:27,000 --> 00:20:29,000
 millions of dollars out of  

557
00:20:29,000 --> 00:20:33,000
 financial institutions.  

558
00:20:33,000 --> 00:20:37,000
 So we've had a banking crisis.  

559
00:20:37,000 --> 00:20:42,000
 All financial crises seem to  

560
00:20:42,000 --> 00:20:46,000
 throw up a signature crook.  

561
00:20:46,000 --> 00:20:50,000
 This time, the signature crook  

562
00:20:50,000 --> 00:20:52,000
 is a man by the name of Bernie  

563
00:20:52,000 --> 00:20:55,000
 Madoff, you've probably been  

564
00:20:55,000 --> 00:20:57,000
 reading about Bernie's exploits.  

565
00:20:57,000 --> 00:20:59,000
 The Bernie Madoff of the 1920s  

566
00:20:59,000 --> 00:21:01,000
 was a man by the name of Ivar  

567
00:21:01,000 --> 00:21:03,000
 Kreuger.  

568
00:21:03,000 --> 00:21:07,000
 He was a Swede, he ran a match  

569
00:21:07,000 --> 00:21:11,000
 manufacturing company.  

570
00:21:11,000 --> 00:21:13,000
 Because of the conditions in the  

571
00:21:13,000 --> 00:21:18,000
 '20s, a lot of European  

572
00:21:18,000 --> 00:21:20,000
 countries, but a lot of  

573
00:21:20,000 --> 00:21:22,000
 countries in other places, had  

574
00:21:22,000 --> 00:21:24,000
 bankrupted themselves during the  

575
00:21:24,000 --> 00:21:26,000
 first world war.  

576
00:21:26,000 --> 00:21:28,000
 So Mr. Kreuger discovered that  

577
00:21:28,000 --> 00:21:31,000
 he could borrow on better terms  

578
00:21:31,000 --> 00:21:33,000
 than most countries.  

579
00:21:33,000 --> 00:21:34,000
 So he went into the  

580
00:21:34,000 --> 00:21:37,000
 international banking business,  

581
00:21:37,000 --> 00:21:38,000
 and what he would do was borrow  

582
00:21:38,000 --> 00:21:40,000
 money on Wall Street and lend it  

583
00:21:40,000 --> 00:21:41,000
 to countries.  

584
00:21:41,000 --> 00:21:43,000
 In return, he would demand a  

585
00:21:43,000 --> 00:21:45,000
 monopoly over match  

586
00:21:45,000 --> 00:21:48,000
 manufacturing.  

587
00:21:48,000 --> 00:21:50,000
 He did such deals in Ecuador,  

588
00:21:50,000 --> 00:21:53,000
 Peru, Poland, Greece, Hungary,  

589
00:21:53,000 --> 00:21:56,000
 Yugoslavia, Romania.  

590
00:21:56,000 --> 00:21:58,000
 In 1926 he did a deal like that  

591
00:21:58,000 --> 00:22:00,000
 in France, and most famously, in  

592
00:22:00,000 --> 00:22:03,000
 1929, in Germany.  

593
00:22:03,000 --> 00:22:04,000
 He made himself the third  

594
00:22:04,000 --> 00:22:07,000
 richest man in the world.  

595
00:22:07,000 --> 00:22:09,000
 He was a confirmed bachelor and  

596
00:22:09,000 --> 00:22:12,000
 he had six or seven residences  

597
00:22:12,000 --> 00:22:13,000
 around the world in which he  

598
00:22:13,000 --> 00:22:16,000
 installed different girlfriends.  

599
00:22:16,000 --> 00:22:18,000
 He went into the movie business  

600
00:22:18,000 --> 00:22:20,000
 and was responsible for  

601
00:22:20,000 --> 00:22:24,000
 discovering Greta Garbo.  

602
00:22:24,000 --> 00:22:26,000
 In 1932 he was found in his  

603
00:22:26,000 --> 00:22:29,000
 apartment in Paris with a bullet  

604
00:22:29,000 --> 00:22:32,000
 wound through his heart.  

605
00:22:32,000 --> 00:22:34,000
 Initially, everyone sort of felt  

606
00:22:34,000 --> 00:22:37,000
 very sorry for him, saw him as a  

607
00:22:37,000 --> 00:22:38,000
 victim of the tension of the  

608
00:22:38,000 --> 00:22:40,000
 time.  

609
00:22:40,000 --> 00:22:42,000
 It then turned out that he had  

610
00:22:42,000 --> 00:22:47,000
 borrowed money by forging  

611
00:22:47,000 --> 00:22:49,000
 government bonds and his last  

612
00:22:49,000 --> 00:22:52,000
 transaction had been to forge  

613
00:22:52,000 --> 00:22:55,000
 $100 million in Italian  

614
00:22:55,000 --> 00:22:57,000
 government bonds.  

615
00:22:57,000 --> 00:22:59,000
 Eventually, his bond holders  

616
00:22:59,000 --> 00:23:01,000
 lost a total of $400 million.  

617
00:23:01,000 --> 00:23:03,000
 Now, one way of converting  

618
00:23:03,000 --> 00:23:06,000
 amounts from the 1920s to now is  

619
00:23:06,000 --> 00:23:09,000
 to multiply by 200.  

620
00:23:09,000 --> 00:23:10,000
 That sort of adjusts for the  

621
00:23:10,000 --> 00:23:12,000
 size of the economy, so that  

622
00:23:12,000 --> 00:23:14,000
 works out to about $80 billion  

623
00:23:14,000 --> 00:23:16,000
 today.  

624
00:23:16,000 --> 00:23:18,000
 So I think he actually probably  

625
00:23:18,000 --> 00:23:21,000
 beat Bernie Madoff.  

626
00:23:21,000 --> 00:23:23,000
 He was interviewed by the  

627
00:23:23,000 --> 00:23:24,000
 Saturday Evening Post and they  

628
00:23:24,000 --> 00:23:26,000
 asked him, "Mr. Kreuger, what's  

629
00:23:26,000 --> 00:23:29,000
 the secret of your success?  

630
00:23:29,000 --> 00:23:30,000
 You're the third richest man  

631
00:23:30,000 --> 00:23:32,000
 in the world."  

632
00:23:32,000 --> 00:23:35,000
 And he said, "Three things.  

633
00:23:35,000 --> 00:23:36,000
 First is silence,  

634
00:23:36,000 --> 00:23:38,000
 the second is more silence,  

635
00:23:38,000 --> 00:23:40,000
 and the third  

636
00:23:40,000 --> 00:23:42,000
 is still more silence."  

637
00:23:42,000 --> 00:23:43,000
 You can see why I compare him  

638
00:23:43,000 --> 00:23:45,000
 to Bernie Madoff.  

639
00:23:45,000 --> 00:23:47,000
 Then as now, the bursting  

640
00:23:47,000 --> 00:23:49,000
 bubble, the banking crisis and  

641
00:23:49,000 --> 00:23:51,000
 the scandals brought discredit  

642
00:23:51,000 --> 00:23:53,000
 on all those involved in running  

643
00:23:53,000 --> 00:23:55,000
 and regulating financial  

644
00:23:55,000 --> 00:23:57,000
 institutions.  

645
00:23:57,000 --> 00:23:58,000
 If you think that outrage at the  

646
00:23:58,000 --> 00:24:00,000
 sort of so-called greed and  

647
00:24:00,000 --> 00:24:02,000
 excesses of Wall Street is  

648
00:24:02,000 --> 00:24:03,000
 something new, get this.  

649
00:24:03,000 --> 00:24:05,000
 In 1933, congress decided to  

650
00:24:05,000 --> 00:24:07,000
 hold hearings on the source of  

651
00:24:07,000 --> 00:24:10,000
 the financial problem.  

652
00:24:10,000 --> 00:24:14,000
 The hearings were led by a young  

653
00:24:14,000 --> 00:24:16,000
 district attorney from New York,  

654
00:24:16,000 --> 00:24:18,000
 Ferdinand Peccoro.  

655
00:24:18,000 --> 00:24:23,000
 He got all the chief executive  

656
00:24:23,000 --> 00:24:24,000
 officers of the major banks to  

657
00:24:24,000 --> 00:24:27,000
 come and testify, and we  

658
00:24:27,000 --> 00:24:29,000
 discovered the following.  

659
00:24:29,000 --> 00:24:31,000
 The president of Chase was a man  

660
00:24:31,000 --> 00:24:34,000
 by the name of Albert Wiggins.  

661
00:24:34,000 --> 00:24:36,000
 In October 1929 when the stock  

662
00:24:36,000 --> 00:24:39,000
 market crashed, he had made  

663
00:24:39,000 --> 00:24:40,000
 $4 million.  

664
00:24:40,000 --> 00:24:42,000
 Now remember, the way you  

665
00:24:42,000 --> 00:24:44,000
 convert it is to multiply by  

666
00:24:44,000 --> 00:24:46,000
 200, by shorting the stock of  

667
00:24:46,000 --> 00:24:48,000
 his own bank at the beginning of  

668
00:24:48,000 --> 00:24:50,000
 October.  

669
00:24:50,000 --> 00:24:51,000
 Talk about a conflict of  

670
00:24:51,000 --> 00:24:54,000
 interest.  

671
00:24:54,000 --> 00:24:56,000
 Charlie Mitchell, who was  

672
00:24:56,000 --> 00:24:58,000
 president of what is now  

673
00:24:58,000 --> 00:25:01,000
 CitiBank, and Jack Morgan, who  

674
00:25:01,000 --> 00:25:04,000
 was the head of JP Morgan, had  

675
00:25:04,000 --> 00:25:06,000
 both earned a million dollars a  

676
00:25:06,000 --> 00:25:08,000
 year for three years and neither  

677
00:25:08,000 --> 00:25:11,000
 had paid a cent of taxes.  

678
00:25:11,000 --> 00:25:13,000
 Bankers became nicknamed  

679
00:25:13,000 --> 00:25:15,000
 "banksters."  

680
00:25:15,000 --> 00:25:18,000
 In 1934, Andrew Mellon, who  

681
00:25:18,000 --> 00:25:20,000
 had been secretary of the  

682
00:25:20,000 --> 00:25:21,000
 treasury under three presidents  

683
00:25:21,000 --> 00:25:26,000
 and had been hailed as the  

684
00:25:26,000 --> 00:25:28,000
 greatest treasury secretary  

685
00:25:28,000 --> 00:25:30,000
 since Alexander Hamilton, was  

686
00:25:30,000 --> 00:25:33,000
 indicted for tax evasion.  

687
00:25:33,000 --> 00:25:36,000
 The treasury department demanded  

688
00:25:36,000 --> 00:25:39,000
 $2 million of back taxes.  

689
00:25:39,000 --> 00:25:40,000
 He, by the way, was the third  

690
00:25:40,000 --> 00:25:43,000
 richest man in the country.  

691
00:25:43,000 --> 00:25:44,000
 He eventually settled for  

692
00:25:44,000 --> 00:25:47,000
 $600,000 and agreed to donate  

693
00:25:47,000 --> 00:25:48,000
 his paintings to the national  

694
00:25:48,000 --> 00:25:50,000
 gallery.  

695
00:25:50,000 --> 00:25:51,000
 (  laughter  )  

696
00:25:51,000 --> 00:25:53,000
 So we got something out of it.  

697
00:25:53,000 --> 00:25:55,000
 There are many echoes of the  

698
00:25:55,000 --> 00:25:57,000
 past in today's headlines of  

699
00:25:57,000 --> 00:26:00,000
 Wall Street's excesses.  

700
00:26:00,000 --> 00:26:02,000
 So if you'd taken a snapshot of  

701
00:26:02,000 --> 00:26:06,000
 the world, about 16 months into  

702
00:26:06,000 --> 00:26:08,000
 the Great Depression in the  

703
00:26:08,000 --> 00:26:10,000
 beginning of 1931, this is what  

704
00:26:10,000 --> 00:26:12,000
 you would have found.  

705
00:26:12,000 --> 00:26:15,000
 Stock market was down about 50%,  

706
00:26:15,000 --> 00:26:18,000
 profits were down about 50%,  

707
00:26:18,000 --> 00:26:20,000
 global industrial production was  

708
00:26:20,000 --> 00:26:23,000
 down anywhere from 15% to 20%.  

709
00:26:23,000 --> 00:26:25,000
 Well, guess what.  

710
00:26:25,000 --> 00:26:27,000
 In May of this year, if you'd  

711
00:26:27,000 --> 00:26:29,000
 taken the same snapshot, again  

712
00:26:29,000 --> 00:26:32,000
 about 15 months into this  

713
00:26:32,000 --> 00:26:36,000
 current recession, you'd have  

714
00:26:36,000 --> 00:26:37,000
 found the stock market was down  

715
00:26:37,000 --> 00:26:39,000
 about 50%, profits were down  

716
00:26:39,000 --> 00:26:42,000
 about 50%, and global industrial  

717
00:26:42,000 --> 00:26:44,000
 production was down somewhere  

718
00:26:44,000 --> 00:26:47,000
 between 15% and 20%.  

719
00:26:47,000 --> 00:26:49,000
 The difference, of course, is,  

720
00:26:49,000 --> 00:26:51,000
 in the subsequent 18 months,  

721
00:26:51,000 --> 00:26:54,000
 from January 1931 to June of  

722
00:26:54,000 --> 00:26:56,000
 1932, the bottom fell out of the  

723
00:26:56,000 --> 00:26:59,000
 world economy.  

724
00:26:59,000 --> 00:27:02,000
 Stocks ended up down, in the US,  

725
00:27:02,000 --> 00:27:04,000
 down 89% eventually.  

726
00:27:04,000 --> 00:27:07,000
 World industrial production fell  

727
00:27:07,000 --> 00:27:09,000
 another 20%, so it went down 40%  

728
00:27:09,000 --> 00:27:12,000
 all together.  

729
00:27:12,000 --> 00:27:14,000
 That is not happening this time.  

730
00:27:14,000 --> 00:27:15,000
 In fact, we're getting a  

731
00:27:15,000 --> 00:27:17,000
 recovery.  

732
00:27:17,000 --> 00:27:19,000
 So, what's the difference?  

733
00:27:19,000 --> 00:27:21,000
 What happened in the 1920s was,  

734
00:27:21,000 --> 00:27:23,000
 they took, the authorities took  

735
00:27:23,000 --> 00:27:27,000
 a very sick patient and gave it  

736
00:27:27,000 --> 00:27:30,000
 exactly the wrong medicine.  

737
00:27:30,000 --> 00:27:33,000
 They did three things.  

738
00:27:33,000 --> 00:27:34,000
 First is, they let the banking  

739
00:27:34,000 --> 00:27:36,000
 system go under.  

740
00:27:36,000 --> 00:27:38,000
 They essentially argued, the Fed  

741
00:27:38,000 --> 00:27:40,000
 argued, that our job is to  

742
00:27:40,000 --> 00:27:42,000
 provide temporary loans to deal  

743
00:27:42,000 --> 00:27:44,000
 with the liquidity crisis, not  

744
00:27:44,000 --> 00:27:48,000
 to compensate you for the bad  

745
00:27:48,000 --> 00:27:52,000
 investments and mistakes that  

746
00:27:52,000 --> 00:27:53,000
 you've made, not to compensate  

747
00:27:53,000 --> 00:27:56,000
 bankers.  

748
00:27:56,000 --> 00:28:00,000
 The problem is that in a  

749
00:28:00,000 --> 00:28:03,000
 depression, the distinction  

750
00:28:03,000 --> 00:28:05,000
 between what is known as a  

751
00:28:05,000 --> 00:28:06,000
 liquidity problem, which is,  

752
00:28:06,000 --> 00:28:09,000
 you need temporary money,  

753
00:28:09,000 --> 00:28:10,000
 and a solvency problem, i.e.,  

754
00:28:10,000 --> 00:28:12,000
 you made bad loans,  

755
00:28:12,000 --> 00:28:14,000
 begins to erode.  

756
00:28:14,000 --> 00:28:15,000
 Essentially, if everyone has a  

757
00:28:15,000 --> 00:28:16,000
 liquidity problem, everyone's  

758
00:28:16,000 --> 00:28:18,000
 trying to dump assets at the  

759
00:28:18,000 --> 00:28:19,000
 same time and you convert what  

760
00:28:19,000 --> 00:28:21,000
 is a liquidity problem into a  

761
00:28:21,000 --> 00:28:23,000
 solvency problem.  

762
00:28:23,000 --> 00:28:24,000
 So, the Fed let the banking  

763
00:28:24,000 --> 00:28:27,000
 system go under.  

764
00:28:27,000 --> 00:28:28,000
 Secondly, they tried to cut  

765
00:28:28,000 --> 00:28:30,000
 budget deficits by raising  

766
00:28:30,000 --> 00:28:32,000
 taxes.  

767
00:28:32,000 --> 00:28:34,000
 1932, Hoover, they believed that  

768
00:28:34,000 --> 00:28:35,000
 budget deficits were always a  

769
00:28:35,000 --> 00:28:38,000
 bad thing.  

770
00:28:38,000 --> 00:28:41,000
 In 1932, Hoover raised taxes.  

771
00:28:41,000 --> 00:28:42,000
 And the third thing, the height  

772
00:28:42,000 --> 00:28:45,000
 of all folly, they even raised  

773
00:28:45,000 --> 00:28:47,000
 interest rates in the middle of  

774
00:28:47,000 --> 00:28:49,000
 the Great Depression.  

775
00:28:49,000 --> 00:28:51,000
 In 1931, Germany raised interest  

776
00:28:51,000 --> 00:28:57,000
 rates from 4% to 15%.  

777
00:28:57,000 --> 00:29:00,000
 The UK followed a month later  

778
00:29:00,000 --> 00:29:01,000
 and the US even raised interest  

779
00:29:01,000 --> 00:29:05,000
 rates from 2% to 5%.  

780
00:29:05,000 --> 00:29:07,000
 You ask yourself, why on earth  

781
00:29:07,000 --> 00:29:09,000
 would they do that?  

782
00:29:09,000 --> 00:29:11,000
 Well, it was the gold standard.  

783
00:29:11,000 --> 00:29:12,000
 Essentially what happened was,  

784
00:29:12,000 --> 00:29:14,000
 the run on the banks caused a  

785
00:29:14,000 --> 00:29:15,000
 lot of gold to leave the banking  

786
00:29:15,000 --> 00:29:17,000
 system and all these countries  

787
00:29:17,000 --> 00:29:20,000
 started scrambling for gold.  

788
00:29:20,000 --> 00:29:23,000
 The way they competed with each  

789
00:29:23,000 --> 00:29:24,000
 other was to raise interest  

790
00:29:24,000 --> 00:29:26,000
 rates to try to attract gold.  

791
00:29:26,000 --> 00:29:28,000
 It was actually a slightly  

792
00:29:28,000 --> 00:29:30,000
 crazier system than that.  

793
00:29:30,000 --> 00:29:33,000
 Gold is incredibly heavy and  

794
00:29:33,000 --> 00:29:36,000
 expensive to transport.  

795
00:29:36,000 --> 00:29:38,000
 A cube of about 18 inches  

796
00:29:38,000 --> 00:29:42,000
 by 18 inches ways about a ton.  

797
00:29:42,000 --> 00:29:44,000
 Countries, instead of shipping  

798
00:29:44,000 --> 00:29:46,000
 gold around the world, decided,  

799
00:29:46,000 --> 00:29:48,000
 what we'll do is, we'll just  

800
00:29:48,000 --> 00:29:50,000
 keep it in one place and just,  

801
00:29:50,000 --> 00:29:53,000
 by a bit of bookkeeping, move it  

802
00:29:53,000 --> 00:29:55,000
 around.  

803
00:29:55,000 --> 00:29:57,000
 So, when Britain lost gold to  

804
00:29:57,000 --> 00:29:59,000
 France, what would happen is, a  

805
00:29:59,000 --> 00:30:01,000
 guy would go down into the  

806
00:30:01,000 --> 00:30:03,000
 vaults of the Bank of England,  

807
00:30:03,000 --> 00:30:06,000
 two guys, and they would go to  

808
00:30:06,000 --> 00:30:08,000
 the vault, and they'd go to one  

809
00:30:08,000 --> 00:30:10,000
 side of the vault and they'd  

810
00:30:10,000 --> 00:30:12,000
 load all these ingots on and  

811
00:30:12,000 --> 00:30:13,000
 they'd put it on a little cart.  

812
00:30:13,000 --> 00:30:15,000
 Then they'd trundle the cart  

813
00:30:15,000 --> 00:30:17,000
 over to the other side of the  

814
00:30:17,000 --> 00:30:18,000
 vault and they'd offload it and  

815
00:30:18,000 --> 00:30:20,000
 they'd stick a little flag in it  

816
00:30:20,000 --> 00:30:21,000
 saying, "This now belongs  

817
00:30:21,000 --> 00:30:23,000
 to France."  

818
00:30:23,000 --> 00:30:25,000
 So you had this absurd system  

819
00:30:25,000 --> 00:30:26,000
 where Britain was causing mass  

820
00:30:26,000 --> 00:30:29,000
 unemployment, raising interest  

821
00:30:29,000 --> 00:30:30,000
 rates, causing mass  

822
00:30:30,000 --> 00:30:32,000
 unemployment, because there was  

823
00:30:32,000 --> 00:30:33,000
 not enough gold on one side of  

824
00:30:33,000 --> 00:30:35,000
 its vaults and too much on the  

825
00:30:35,000 --> 00:30:37,000
 other.  

826
00:30:37,000 --> 00:30:38,000
 It was clearly an absurd system  

827
00:30:38,000 --> 00:30:40,000
 which then collapsed.  

828
00:30:40,000 --> 00:30:42,000
 What I do is, I liken these  

829
00:30:42,000 --> 00:30:48,000
 officials to 18th century  

830
00:30:48,000 --> 00:30:50,000
 doctors, who thought the cure  

831
00:30:50,000 --> 00:30:52,000
 for illness was to draw blood  

832
00:30:52,000 --> 00:30:55,000
 from the patient.  

833
00:30:55,000 --> 00:30:56,000
 And we haven't learned many  

834
00:30:56,000 --> 00:30:58,000
 things in economics, but we have  

835
00:30:58,000 --> 00:31:01,000
 learned that when you've got a  

836
00:31:01,000 --> 00:31:04,000
 patient who's sick, the cure for  

837
00:31:04,000 --> 00:31:06,000
 their disease is not to draw  

838
00:31:06,000 --> 00:31:08,000
 blood.  

839
00:31:08,000 --> 00:31:10,000
 So we're now doing none of those  

840
00:31:10,000 --> 00:31:11,000
 things.  

841
00:31:11,000 --> 00:31:13,000
 No one is letting the banking  

842
00:31:13,000 --> 00:31:14,000
 system go under.  

843
00:31:14,000 --> 00:31:16,000
 We briefly, for one day,  

844
00:31:16,000 --> 00:31:18,000
 experimented with letting a bank  

845
00:31:18,000 --> 00:31:20,000
 go under, and look at the  

846
00:31:20,000 --> 00:31:21,000
 consequences.  

847
00:31:21,000 --> 00:31:23,000
 So we have thrown unprecedented  

848
00:31:23,000 --> 00:31:25,000
 amounts in to support the  

849
00:31:25,000 --> 00:31:27,000
 banking system.  

850
00:31:27,000 --> 00:31:30,000
 Secondly, no one thinks that we  

851
00:31:30,000 --> 00:31:32,000
 should be trying to raise taxes  

852
00:31:32,000 --> 00:31:34,000
 or cut the budget deficit at the  

853
00:31:34,000 --> 00:31:35,000
 moment.  

854
00:31:35,000 --> 00:31:37,000
 Indeed, we've expanded  

855
00:31:37,000 --> 00:31:39,000
 collectively, countries have  

856
00:31:39,000 --> 00:31:41,000
 expanded their budget deficits  

857
00:31:41,000 --> 00:31:43,000
 around the world by about 5% of  

858
00:31:43,000 --> 00:31:45,000
 GDP.  

859
00:31:45,000 --> 00:31:46,000
 And no one's planning to raise  

860
00:31:46,000 --> 00:31:47,000
 interest rates.  

861
00:31:47,000 --> 00:31:48,000
 No one has raised interest  

862
00:31:48,000 --> 00:31:50,000
 rates, and no one's planning to  

863
00:31:50,000 --> 00:31:51,000
 raise interest rates.  

864
00:31:51,000 --> 00:31:53,000
 Indeed, they've intervened to  

865
00:31:53,000 --> 00:31:57,000
 try to get long-term rates down.  

866
00:31:57,000 --> 00:31:59,000
 The lead up was eerily similar.  

867
00:31:59,000 --> 00:32:02,000
 How they handled the crisis was  

868
00:32:02,000 --> 00:32:05,000
 very different.  

869
00:32:05,000 --> 00:32:06,000
 Let me spend the last few  

870
00:32:06,000 --> 00:32:09,000
 moments on the recovery.  

871
00:32:09,000 --> 00:32:11,000
 Contrary to what most  

872
00:32:11,000 --> 00:32:14,000
 conservatives argue, the  

873
00:32:14,000 --> 00:32:17,000
 recovery after 1933 was very  

874
00:32:17,000 --> 00:32:19,000
 strong.  

875
00:32:19,000 --> 00:32:20,000
 Industrial production doubled in  

876
00:32:20,000 --> 00:32:22,000
 a four-year period in the US as  

877
00:32:22,000 --> 00:32:24,000
 it did in Germany.  

878
00:32:24,000 --> 00:32:26,000
 The first Roosevelt term  

879
00:32:26,000 --> 00:32:29,000
 represents the strongest  

880
00:32:29,000 --> 00:32:33,000
 peacetime presidential term of  

881
00:32:33,000 --> 00:32:37,000
 economic growth.  

882
00:32:37,000 --> 00:32:40,000
 Where the conservatives are  

883
00:32:40,000 --> 00:32:43,000
 right is that unemployment  

884
00:32:43,000 --> 00:32:47,000
 remained obstinately high.  

885
00:32:47,000 --> 00:32:50,000
 Employment lagged behind, in  

886
00:32:50,000 --> 00:32:52,000
 part because many of the New  

887
00:32:52,000 --> 00:32:54,000
 Deal policies in effect raised  

888
00:32:54,000 --> 00:32:57,000
 the cost of labor so employers  

889
00:32:57,000 --> 00:32:59,000
 found it more profitable to  

890
00:32:59,000 --> 00:33:02,000
 expand production without having  

891
00:33:02,000 --> 00:33:05,000
 more workers.  

892
00:33:05,000 --> 00:33:07,000
 Second thing, contrary to  

893
00:33:07,000 --> 00:33:10,000
 popular myth, the recovery  

894
00:33:10,000 --> 00:33:12,000
 across the world, particularly  

895
00:33:12,000 --> 00:33:14,000
 in the US and Britain, had very  

896
00:33:14,000 --> 00:33:16,000
 little to do with deficit  

897
00:33:16,000 --> 00:33:19,000
 spending or Keynesian policies.  

898
00:33:19,000 --> 00:33:21,000
 Roosevelt was a victim of the  

899
00:33:21,000 --> 00:33:23,000
 same dogma at the time, that he  

900
00:33:23,000 --> 00:33:24,000
 thought budget deficits were a  

901
00:33:24,000 --> 00:33:26,000
 bad thing.  

902
00:33:26,000 --> 00:33:28,000
 So while the New Deal policies  

903
00:33:28,000 --> 00:33:30,000
 did cause some modest increase  

904
00:33:30,000 --> 00:33:32,000
 in public expenditure, it was  

905
00:33:32,000 --> 00:33:35,000
 financed by raising taxes.  

906
00:33:35,000 --> 00:33:37,000
 The only place where we got  

907
00:33:37,000 --> 00:33:39,000
 massive public works financed by  

908
00:33:39,000 --> 00:33:41,000
 government borrowing was in  

909
00:33:41,000 --> 00:33:44,000
 Germany, which is the only place  

910
00:33:44,000 --> 00:33:46,000
 which had essentially pursued  

911
00:33:46,000 --> 00:33:49,000
 Keynesian policies and, by the  

912
00:33:49,000 --> 00:33:50,000
 way, was the only place that did  

913
00:33:50,000 --> 00:33:53,000
 not face an employment problem  

914
00:33:53,000 --> 00:33:56,000
 during the 1930s.  

915
00:33:56,000 --> 00:33:57,000
 So what happened?  

916
00:33:57,000 --> 00:33:59,000
 Most countries recognized that  

917
00:33:59,000 --> 00:34:00,000
 the gold standard had become a  

918
00:34:00,000 --> 00:34:02,000
 straitjacket and broke with  

919
00:34:02,000 --> 00:34:03,000
 gold.  

920
00:34:03,000 --> 00:34:04,000
 This allowed them to massively  

921
00:34:04,000 --> 00:34:08,000
 cut interest rates.  

922
00:34:08,000 --> 00:34:09,000
 Now, one problem with relying on  

923
00:34:09,000 --> 00:34:12,000
 easy money around the world as a  

924
00:34:12,000 --> 00:34:15,000
 way of promoting recovery is, it  

925
00:34:15,000 --> 00:34:17,000
 works in part by causing your  

926
00:34:17,000 --> 00:34:21,000
 currency to fall, thus stealing  

927
00:34:21,000 --> 00:34:23,000
 markets from your neighbors.  

928
00:34:23,000 --> 00:34:25,000
 We got a spiral of  

929
00:34:25,000 --> 00:34:27,000
 beggar-thy-neighbor policies and  

930
00:34:27,000 --> 00:34:30,000
 competitive devaluations.  

931
00:34:30,000 --> 00:34:33,000
 In response to these competitive  

932
00:34:33,000 --> 00:34:35,000
 devaluations, plus the high  

933
00:34:35,000 --> 00:34:37,000
 unemployment, countries  

934
00:34:37,000 --> 00:34:40,000
 responded by hunkering down  

935
00:34:40,000 --> 00:34:43,000
 behind high tariff barriers,  

936
00:34:43,000 --> 00:34:45,000
 imposing import controls, and  

937
00:34:45,000 --> 00:34:47,000
 putting restrictions on capital  

938
00:34:47,000 --> 00:34:48,000
 flows.  

939
00:34:48,000 --> 00:34:50,000
 So the gold standard, which had  

940
00:34:50,000 --> 00:34:51,000
 been a very rigid sort of  

941
00:34:51,000 --> 00:34:52,000
 straitjacket, and obviously  

942
00:34:52,000 --> 00:34:54,000
 needed to be replaced, was  

943
00:34:54,000 --> 00:34:56,000
 replaced by a sort of chaotic  

944
00:34:56,000 --> 00:34:58,000
 and disorganized system of  

945
00:34:58,000 --> 00:34:59,000
 floating exchange rates.  

946
00:34:59,000 --> 00:35:01,000
 Countries lost confidence in the  

947
00:35:01,000 --> 00:35:05,000
 international system's ability  

948
00:35:05,000 --> 00:35:07,000
 to reconcile their conflicting  

949
00:35:07,000 --> 00:35:09,000
 interests and ambitions.  

950
00:35:09,000 --> 00:35:11,000
 There was a disastrous backlash  

951
00:35:11,000 --> 00:35:14,000
 against globalization, and it  

952
00:35:14,000 --> 00:35:16,000
 was a time of the worst sort of  

953
00:35:16,000 --> 00:35:19,000
 populism and nationalism.  

954
00:35:19,000 --> 00:35:21,000
 So far we seem to have learned  

955
00:35:21,000 --> 00:35:23,000
 the lessons of the 1930s.  

956
00:35:23,000 --> 00:35:25,000
 We've been, first of all, far  

957
00:35:25,000 --> 00:35:27,000
 more willing to rely on fiscal  

958
00:35:27,000 --> 00:35:29,000
 policy, i.e.,  

959
00:35:29,000 --> 00:35:31,000
 expanding budget deficits  

960
00:35:31,000 --> 00:35:34,000
 as a stimulus mechanism.  

961
00:35:34,000 --> 00:35:36,000
 In contrast to monetary easing,  

962
00:35:36,000 --> 00:35:38,000
 which works by in effect trying  

963
00:35:38,000 --> 00:35:40,000
 to steal markets from your  

964
00:35:40,000 --> 00:35:42,000
 neighbors, fiscal expansion  

965
00:35:42,000 --> 00:35:43,000
 actually has positive spillover  

966
00:35:43,000 --> 00:35:45,000
 effects.  

967
00:35:45,000 --> 00:35:47,000
 If you spend money, it causes  

968
00:35:47,000 --> 00:35:48,000
 your imports to go up and that  

969
00:35:48,000 --> 00:35:50,000
 helps your trading partners.  

970
00:35:50,000 --> 00:35:52,000
 There's much more cooperation.  

971
00:35:52,000 --> 00:35:54,000
 There's much less competition  

972
00:35:54,000 --> 00:35:56,000
 this time.  

973
00:35:56,000 --> 00:35:57,000
 There are, however, three  

974
00:35:57,000 --> 00:36:01,000
 parallels, and these are enough  

975
00:36:01,000 --> 00:36:04,000
 to keep you worried.  

976
00:36:04,000 --> 00:36:08,000
 The first is, it's clear in both  

977
00:36:08,000 --> 00:36:10,000
 cases, global financial  

978
00:36:10,000 --> 00:36:11,000
 arrangements have become  

979
00:36:11,000 --> 00:36:13,000
 unsustainable.  

980
00:36:13,000 --> 00:36:15,000
 In the 1930s, the weak link was  

981
00:36:15,000 --> 00:36:17,000
 Europe versus the US.  

982
00:36:17,000 --> 00:36:19,000
 A Europe that had become way too  

983
00:36:19,000 --> 00:36:22,000
 dependent on US lending and when  

984
00:36:22,000 --> 00:36:25,000
 the music stopped collapsed.  

985
00:36:25,000 --> 00:36:28,000
 This time, the weak link is at  

986
00:36:28,000 --> 00:36:31,000
 home, is the US consumer who's  

987
00:36:31,000 --> 00:36:33,000
 run out of borrowing room.  

988
00:36:33,000 --> 00:36:38,000
 That means that the Asian  

989
00:36:38,000 --> 00:36:40,000
 countries that have centrally  

990
00:36:40,000 --> 00:36:42,000
 relied on an export-led  

991
00:36:42,000 --> 00:36:47,000
 industrialization pattern into  

992
00:36:47,000 --> 00:36:51,000
 the US will have to reevaluate  

993
00:36:51,000 --> 00:36:54,000
 their strategy.  

994
00:36:54,000 --> 00:36:56,000
 The danger is, if someone like  

995
00:36:56,000 --> 00:36:57,000
 China finds it too politically  

996
00:36:57,000 --> 00:37:01,000
 costly to restructure, we're  

997
00:37:01,000 --> 00:37:05,000
 going to get trade wars.  

998
00:37:05,000 --> 00:37:06,000
 Second parallel.  

999
00:37:06,000 --> 00:37:09,000
 Charles Kindelberger, the  

1000
00:37:09,000 --> 00:37:11,000
 economic historian, wrote a book  

1001
00:37:11,000 --> 00:37:13,000
 where he said, the Great  

1002
00:37:13,000 --> 00:37:15,000
 Depression really came out of a  

1003
00:37:15,000 --> 00:37:17,000
 failure of economic leadership  

1004
00:37:17,000 --> 00:37:20,000
 on the world stage.  

1005
00:37:20,000 --> 00:37:22,000
 By that he meant that what we  

1006
00:37:22,000 --> 00:37:24,000
 needed, the world economy  

1007
00:37:24,000 --> 00:37:27,000
 required a leader.  

1008
00:37:27,000 --> 00:37:29,000
 What he meant by leader was, a  

1009
00:37:29,000 --> 00:37:30,000
 country that was willing to do  

1010
00:37:30,000 --> 00:37:32,000
 more than its fair share.  

1011
00:37:32,000 --> 00:37:34,000
 Stress on "more."  

1012
00:37:34,000 --> 00:37:36,000
 More than its fair share as  

1013
00:37:36,000 --> 00:37:37,000
 the supplier of capital of last  

1014
00:37:37,000 --> 00:37:40,000
 resort during the crisis and  

1015
00:37:40,000 --> 00:37:43,000
 acting as the economic  

1016
00:37:43,000 --> 00:37:46,000
 locomotive.  

1017
00:37:46,000 --> 00:37:48,000
 Excepting the fact that small  

1018
00:37:48,000 --> 00:37:51,000
 countries will freeload off you.  

1019
00:37:51,000 --> 00:37:53,000
 So being a leader means that you  

1020
00:37:53,000 --> 00:37:54,000
 know that people are freeloading  

1021
00:37:54,000 --> 00:37:56,000
 off you.  

1022
00:37:56,000 --> 00:37:58,000
 In the 19th century, Britain had  

1023
00:37:58,000 --> 00:38:00,000
 served that role.  

1024
00:38:00,000 --> 00:38:02,000
 First world war bankrupted  

1025
00:38:02,000 --> 00:38:04,000
 Britain, it was unable to.  

1026
00:38:04,000 --> 00:38:05,000
 The mantle should have passed to  

1027
00:38:05,000 --> 00:38:07,000
 the US.  

1028
00:38:07,000 --> 00:38:09,000
 The US, though, was run by a  

1029
00:38:09,000 --> 00:38:12,000
 group of very parochial,  

1030
00:38:12,000 --> 00:38:14,000
 insolent men, and refused to  

1031
00:38:14,000 --> 00:38:16,000
 accept that mantle, and  

1032
00:38:16,000 --> 00:38:17,000
 essentially we got a vacuum of  

1033
00:38:17,000 --> 00:38:19,000
 world leadership.  

1034
00:38:19,000 --> 00:38:21,000
 After 1945, the US took on that  

1035
00:38:21,000 --> 00:38:24,000
 mantle and for a good 50 years  

1036
00:38:24,000 --> 00:38:26,000
 has essentially acted as the  

1037
00:38:26,000 --> 00:38:29,000
 leader.  

1038
00:38:29,000 --> 00:38:32,000
 The question is now, are we at a  

1039
00:38:32,000 --> 00:38:34,000
 similar transition point in  

1040
00:38:34,000 --> 00:38:35,000
 world leadership?  

1041
00:38:35,000 --> 00:38:38,000
 Has the US been so damaged by  

1042
00:38:38,000 --> 00:38:40,000
 its cumulative borrowings  

1043
00:38:40,000 --> 00:38:43,000
 abroad, the fact that it's had a  

1044
00:38:43,000 --> 00:38:46,000
 banking debacle, its foreign  

1045
00:38:46,000 --> 00:38:49,000
 policy reversals, that it's no  

1046
00:38:49,000 --> 00:38:50,000
 longer able to act as the  

1047
00:38:50,000 --> 00:38:52,000
 leader?  

1048
00:38:52,000 --> 00:38:53,000
 If it can't, who can?  

1049
00:38:53,000 --> 00:38:55,000
 China's too small.  

1050
00:38:55,000 --> 00:38:57,000
 The good thing is, we have more  

1051
00:38:57,000 --> 00:38:59,000
 of a tradition of  

1052
00:38:59,000 --> 00:39:00,000
 multilateralism and countries  

1053
00:39:00,000 --> 00:39:03,000
 acting together, but there's  

1054
00:39:03,000 --> 00:39:06,000
 enough here to keep you worried.  

1055
00:39:06,000 --> 00:39:09,000
 And the third thing is that in  

1056
00:39:09,000 --> 00:39:12,000
 this recession, in contrast to  

1057
00:39:12,000 --> 00:39:15,000
 many other recessions,  

1058
00:39:15,000 --> 00:39:17,000
 unemployment has gone up as much  

1059
00:39:17,000 --> 00:39:20,000
 as output has fallen.  

1060
00:39:20,000 --> 00:39:23,000
 I.e., companies have used this  

1061
00:39:23,000 --> 00:39:26,000
 opportunity to lay off workers  

1062
00:39:26,000 --> 00:39:28,000
 in an unprecedented way.  

1063
00:39:28,000 --> 00:39:30,000
 There used to be a thing that  

1064
00:39:30,000 --> 00:39:32,000
 economists used to refer to  

1065
00:39:32,000 --> 00:39:33,000
 called Okun's Law, which is,  

1066
00:39:33,000 --> 00:39:35,000
 during a recession, for every 2%  

1067
00:39:35,000 --> 00:39:37,000
 fall in output, employment fell  

1068
00:39:37,000 --> 00:39:39,000
 1%.  

1069
00:39:39,000 --> 00:39:40,000
 This time, the relationship is  

1070
00:39:40,000 --> 00:39:43,000
 one for one.  

1071
00:39:43,000 --> 00:39:45,000
 Those are all three things to  

1072
00:39:45,000 --> 00:39:48,000
 worry about.  

1073
00:39:48,000 --> 00:39:50,000
 Ultimately, though, the real  

1074
00:39:50,000 --> 00:39:53,000
 challenge comes from those  

1075
00:39:53,000 --> 00:39:55,000
 aspects of the situation where  

1076
00:39:55,000 --> 00:39:57,000
 we find ourselves in uncharted  

1077
00:39:57,000 --> 00:40:00,000
 territory, where the experience  

1078
00:40:00,000 --> 00:40:03,000
 of the 1920s or '30s or any  

1079
00:40:03,000 --> 00:40:05,000
 other period just cannot provide  

1080
00:40:05,000 --> 00:40:06,000
 any lessons because the world is  

1081
00:40:06,000 --> 00:40:08,000
 so different.  

1082
00:40:08,000 --> 00:40:10,000
 Let me give you one example.  

1083
00:40:10,000 --> 00:40:12,000
 In 1929, the banking system was  

1084
00:40:12,000 --> 00:40:15,000
 about $50 billion and GDP was  

1085
00:40:15,000 --> 00:40:17,000
 $100 billion, so it was about  

1086
00:40:17,000 --> 00:40:19,000
 50% of GDP.  

1087
00:40:19,000 --> 00:40:22,000
 Now, if you take the same  

1088
00:40:22,000 --> 00:40:25,000
 statistics, the banking system  

1089
00:40:25,000 --> 00:40:28,000
 accounts for $20 trillion, which  

1090
00:40:28,000 --> 00:40:31,000
 is about 150% of GDP.  

1091
00:40:31,000 --> 00:40:34,000
 So it's three times as large.  

1092
00:40:34,000 --> 00:40:38,000
 Half of it is securitized, a  

1093
00:40:38,000 --> 00:40:39,000
 system of credit that is now  

1094
00:40:39,000 --> 00:40:41,000
 broken.  

1095
00:40:41,000 --> 00:40:43,000
 We've sort of created a  

1096
00:40:43,000 --> 00:40:45,000
 financial Frankenstein where  

1097
00:40:45,000 --> 00:40:47,000
 we've got a financial system  

1098
00:40:47,000 --> 00:40:48,000
 that's too large, a good part of  

1099
00:40:48,000 --> 00:40:50,000
 it is broken and we don't know  

1100
00:40:50,000 --> 00:40:52,000
 how to fix it.  

1101
00:40:52,000 --> 00:40:54,000
 And unfortunately, the past  

1102
00:40:54,000 --> 00:40:57,000
 offers few lessons.  

1103
00:40:57,000 --> 00:40:59,000
 An important theme in my book is  

1104
00:40:59,000 --> 00:41:01,000
 that the mistakes made during  

1105
00:41:01,000 --> 00:41:05,000
 the 1920s and '30s by central  

1106
00:41:05,000 --> 00:41:08,000
 bankers did not stem from  

1107
00:41:08,000 --> 00:41:10,000
 venality or malevolence or  

1108
00:41:10,000 --> 00:41:12,000
 stupidity.  

1109
00:41:12,000 --> 00:41:14,000
 Their primary problem was, faced  

1110
00:41:14,000 --> 00:41:17,000
 with new realities, they were  

1111
00:41:17,000 --> 00:41:18,000
 unable to break free from the  

1112
00:41:18,000 --> 00:41:21,000
 dogmas of the past.  

1113
00:41:21,000 --> 00:41:23,000
 And that is the challenge that  

1114
00:41:23,000 --> 00:41:26,000
 the authorities face at the  

1115
00:41:26,000 --> 00:41:27,000
 moment.  

1116
00:41:27,000 --> 00:41:29,000
 They're dealing with totally  

1117
00:41:29,000 --> 00:41:31,000
 novel problems and we have to  

1118
00:41:31,000 --> 00:41:32,000
 hope that they have the  

1119
00:41:32,000 --> 00:41:34,000
 imagination and inventiveness to  

1120
00:41:34,000 --> 00:41:36,000
 deal with them.  

1121
00:41:36,000 --> 00:41:37,000
 Thank you.  

1122
00:41:37,000 --> 00:41:40,000
 (  applause  )  

1123
00:41:52,000 --> 00:41:54,000
 >> We're going to give  

1124
00:41:54,000 --> 00:41:56,000
 Mr. Ahamed just a minute here to  

1125
00:41:56,000 --> 00:41:58,000
 catch his breath while you're  

1126
00:41:58,000 --> 00:42:00,000
 thinking of questions and get  

1127
00:42:00,000 --> 00:42:03,000
 our computers linked to our live  

1128
00:42:03,000 --> 00:42:04,000
 audience so if there are any  

1129
00:42:04,000 --> 00:42:07,000
 questions that are coming in,  

1130
00:42:07,000 --> 00:42:09,000
 they can be sent to  

1131
00:42:09,000 --> 00:42:12,000
 questions@wisconsinacademy.org  

1132
00:42:12,000 --> 00:42:15,000
 and we can ask those as well.  

1133
00:42:15,000 --> 00:42:16,000
 I might just take this quick  

1134
00:42:16,000 --> 00:42:19,000
 opportunity to also call your  

1135
00:42:19,000 --> 00:42:20,000
 attention to the yellow cards  

1136
00:42:20,000 --> 00:42:22,000
 that you received on your way  

1137
00:42:22,000 --> 00:42:23,000
 in.  

1138
00:42:23,000 --> 00:42:24,000
 If you fill those out and leave  

1139
00:42:24,000 --> 00:42:27,000
 your email with us, you are  

1140
00:42:27,000 --> 00:42:30,000
 eligible for a door prize, which  

1141
00:42:30,000 --> 00:42:32,000
 I think I had, a copy of the  

1142
00:42:32,000 --> 00:42:35,000
 book by the Halversons, who are  

1143
00:42:35,000 --> 00:42:39,000
 going to be our next speakers.  

1144
00:42:39,000 --> 00:42:41,000
 I'm told it's right here.  

1145
00:42:41,000 --> 00:42:43,000
 There we go.  

1146
00:42:43,000 --> 00:42:46,000
 So please help us out and fill  

1147
00:42:46,000 --> 00:42:48,000
 out those cards and share with  

1148
00:42:48,000 --> 00:42:49,000
 us future speakers and topics  

1149
00:42:49,000 --> 00:42:51,000
 that you would like to hear  

1150
00:42:51,000 --> 00:42:53,000
 from.  

1151
00:42:53,000 --> 00:42:56,000
 At this time, are there  

1152
00:42:56,000 --> 00:42:58,000
 questions for Mr. Ahamed?  

1153
00:42:58,000 --> 00:43:00,000
 Also, you should know, he will  

1154
00:43:00,000 --> 00:43:01,000
 be available in the lobby after  

1155
00:43:01,000 --> 00:43:03,000
 this presentation if you should  

1156
00:43:03,000 --> 00:43:06,000
 like to have a copy of his book.  

1157
00:43:06,000 --> 00:43:07,000
 Very good.  

1158
00:43:07,000 --> 00:43:09,000
 I will let you repeat the  

1159
00:43:09,000 --> 00:43:11,000
 questions so that our listening  

1160
00:43:11,000 --> 00:43:13,000
 audience can hear, and there  

1161
00:43:13,000 --> 00:43:14,000
 should be plenty of time for  

1162
00:43:14,000 --> 00:43:15,000
 questions, but please use the  

1163
00:43:15,000 --> 00:43:17,000
 microphone so that all can hear.  

1164
00:43:17,000 --> 00:43:19,000
 Thank you.  

1165
00:43:22,000 --> 00:43:24,000
 >> (  inaudible  )  

1166
00:43:41,000 --> 00:43:42,000
 >> Ahamed: Yeah, I would draw a  

1167
00:43:42,000 --> 00:43:45,000
 distinction between the  

1168
00:43:45,000 --> 00:43:48,000
 financial crisis, which was sort  

1169
00:43:48,000 --> 00:43:50,000
 of the financial system seizing  

1170
00:43:50,000 --> 00:43:53,000
 up, and we're past that.  

1171
00:43:53,000 --> 00:43:56,000
 That started, gradually building  

1172
00:43:56,000 --> 00:44:00,000
 up from the beginning of 2008,  

1173
00:44:00,000 --> 00:44:03,000
 hit a sort of crescendo in  

1174
00:44:03,000 --> 00:44:05,000
 September 2008 with the failure  

1175
00:44:05,000 --> 00:44:07,000
 of Lehman.  

1176
00:44:07,000 --> 00:44:11,000
 And we're over it now.  

1177
00:44:11,000 --> 00:44:13,000
 All indications are that  

1178
00:44:13,000 --> 00:44:14,000
 confidence in the financial  

1179
00:44:14,000 --> 00:44:17,000
 system has returned.  

1180
00:44:17,000 --> 00:44:20,000
 Banks are lending to each other,  

1181
00:44:20,000 --> 00:44:22,000
 no one's sort of rushing to pull  

1182
00:44:22,000 --> 00:44:25,000
 their money out of banks.  

1183
00:44:25,000 --> 00:44:27,000
 We're now dealing with the  

1184
00:44:27,000 --> 00:44:30,000
 economic aftermath, which is the  

1185
00:44:30,000 --> 00:44:33,000
 real economy.  

1186
00:44:33,000 --> 00:44:37,000
 There it's a mixed picture.  

1187
00:44:37,000 --> 00:44:39,000
 We probably are out of the  

1188
00:44:39,000 --> 00:44:40,000
 recession.  

1189
00:44:40,000 --> 00:44:42,000
 That probably ended,  

1190
00:44:42,000 --> 00:44:45,000
 technically, in June.  

1191
00:44:45,000 --> 00:44:49,000
 Production has started going up.  

1192
00:44:49,000 --> 00:44:51,000
 It's not, as I said, it's not  

1193
00:44:51,000 --> 00:44:53,000
 feeding through to employment  

1194
00:44:53,000 --> 00:44:56,000
 and the most worrying aspect of  

1195
00:44:56,000 --> 00:44:59,000
 this whole thing is that  

1196
00:44:59,000 --> 00:45:04,000
 employment is, unemployment's  

1197
00:45:04,000 --> 00:45:06,000
 going to keep rising and the  

1198
00:45:06,000 --> 00:45:09,000
 sort of social compact between  

1199
00:45:09,000 --> 00:45:12,000
 companies and workers seems to  

1200
00:45:12,000 --> 00:45:14,000
 have broken or seems to have  

1201
00:45:14,000 --> 00:45:16,000
 changed.  

1202
00:45:16,000 --> 00:45:17,000
 In part because companies can  

1203
00:45:17,000 --> 00:45:19,000
 now go and hire in India or  

1204
00:45:19,000 --> 00:45:22,000
 China, wherever.  

1205
00:45:22,000 --> 00:45:28,000
 So it's a mixed picture.  

1206
00:45:28,000 --> 00:45:32,000
 That's where we stand.  

1207
00:45:32,000 --> 00:45:33,000
 I'm not sure where we're going.  

1208
00:45:33,000 --> 00:45:35,000
 (  laughs  )  

1209
00:45:35,000 --> 00:45:36,000
 And I'm much better  

1210
00:45:36,000 --> 00:45:37,000
 on the past than the future.  

1211
00:45:37,000 --> 00:45:39,000
 (  laughter  )  

1212
00:45:45,000 --> 00:45:46,000
 >> I'm aware of the fact,  

1213
00:45:46,000 --> 00:45:48,000
 everything you buy seems to be  

1214
00:45:48,000 --> 00:45:50,000
 made in China.  

1215
00:45:50,000 --> 00:45:54,000
 Doesn't that have tremendous  

1216
00:45:54,000 --> 00:45:57,000
 ramifications in our economy?  

1217
00:45:57,000 --> 00:45:58,000
 I would think that our  

1218
00:45:58,000 --> 00:46:00,000
 dependency on China making  

1219
00:46:00,000 --> 00:46:04,000
 everything is just killing our  

1220
00:46:04,000 --> 00:46:06,000
 economic system.  

1221
00:46:06,000 --> 00:46:11,000
 >> Ahamed: Well, you do want  

1222
00:46:11,000 --> 00:46:13,000
 trade.  

1223
00:46:13,000 --> 00:46:15,000
 So, we definitely don't want to  

1224
00:46:15,000 --> 00:46:17,000
 make everything ourselves  

1225
00:46:17,000 --> 00:46:18,000
 because we wouldn't do it very  

1226
00:46:18,000 --> 00:46:20,000
 well.  

1227
00:46:20,000 --> 00:46:22,000
 We clearly want trade.  

1228
00:46:22,000 --> 00:46:25,000
 The question then is, are the  

1229
00:46:25,000 --> 00:46:28,000
 Chinese somehow competing in an  

1230
00:46:28,000 --> 00:46:31,000
 unfair way?  

1231
00:46:31,000 --> 00:46:33,000
 I have to say that my view is  

1232
00:46:33,000 --> 00:46:40,000
 that their currency policy,  

1233
00:46:40,000 --> 00:46:42,000
 essentially, underprices their  

1234
00:46:42,000 --> 00:46:44,000
 goods.  

1235
00:46:44,000 --> 00:46:48,000
 We benefited for a long time,  

1236
00:46:48,000 --> 00:46:50,000
 which is that we got cheap  

1237
00:46:50,000 --> 00:46:53,000
 goods.  

1238
00:46:53,000 --> 00:46:55,000
 It had some terrible side  

1239
00:46:55,000 --> 00:47:01,000
 effects both on their economy  

1240
00:47:01,000 --> 00:47:03,000
 and on the global financial  

1241
00:47:03,000 --> 00:47:05,000
 system.  

1242
00:47:05,000 --> 00:47:06,000
 On their economy, it made them  

1243
00:47:06,000 --> 00:47:09,000
 incredibly vulnerable.  

1244
00:47:09,000 --> 00:47:11,000
 In the last six months of last  

1245
00:47:11,000 --> 00:47:15,000
 year, or the six months starting  

1246
00:47:15,000 --> 00:47:19,000
 September 2008, their exports  

1247
00:47:19,000 --> 00:47:21,000
 fell 20%.  

1248
00:47:21,000 --> 00:47:23,000
 25 million people lost jobs in  

1249
00:47:23,000 --> 00:47:25,000
 southern China as these  

1250
00:47:25,000 --> 00:47:28,000
 factories closed down or had to  

1251
00:47:28,000 --> 00:47:30,000
 cut production.  

1252
00:47:30,000 --> 00:47:32,000
 They have temporarily dealt with  

1253
00:47:32,000 --> 00:47:35,000
 it by a massive program of  

1254
00:47:35,000 --> 00:47:37,000
 government expenditure and by  

1255
00:47:37,000 --> 00:47:40,000
 opening up the spigots of  

1256
00:47:40,000 --> 00:47:42,000
 credit.  

1257
00:47:42,000 --> 00:47:43,000
 That's purely a temporary  

1258
00:47:43,000 --> 00:47:45,000
 mechanism.  

1259
00:47:45,000 --> 00:47:48,000
 They clearly have to reassess  

1260
00:47:48,000 --> 00:47:52,000
 how much they can depend on a US  

1261
00:47:52,000 --> 00:47:55,000
 consumer that's sort of going to  

1262
00:47:55,000 --> 00:47:58,000
 be the locomotive.  

1263
00:47:58,000 --> 00:48:03,000
 The side effect in the US that  

1264
00:48:03,000 --> 00:48:06,000
 was detrimental is that because  

1265
00:48:06,000 --> 00:48:09,000
 of the import competition, the  

1266
00:48:09,000 --> 00:48:13,000
 Fed overeased and kept credit  

1267
00:48:13,000 --> 00:48:16,000
 too easy for too long.  

1268
00:48:16,000 --> 00:48:19,000
 The result was, the US consumer  

1269
00:48:19,000 --> 00:48:22,000
 went into great debt.  

1270
00:48:22,000 --> 00:48:25,000
 And the US consumer is now  

1271
00:48:25,000 --> 00:48:28,000
 probably tapped out.  

1272
00:48:28,000 --> 00:48:30,000
 So for a variety of reasons, I  

1273
00:48:30,000 --> 00:48:32,000
 don't think, we can't go back to  

1274
00:48:32,000 --> 00:48:35,000
 where we were.  

1275
00:48:35,000 --> 00:48:36,000
 After this crisis, we're not  

1276
00:48:36,000 --> 00:48:38,000
 going to go back to where we  

1277
00:48:38,000 --> 00:48:39,000
 were.  

1278
00:48:39,000 --> 00:48:41,000
 Quite how that plays out, I  

1279
00:48:41,000 --> 00:48:44,000
 don't know.  

1280
00:48:44,000 --> 00:48:47,000
 China is going to have to  

1281
00:48:47,000 --> 00:48:50,000
 somehow restructure its economy.  

1282
00:48:50,000 --> 00:48:52,000
 That does not mean we won't be  

1283
00:48:52,000 --> 00:48:54,000
 importing lots of Chinese goods,  

1284
00:48:54,000 --> 00:48:56,000
 we probably should.  

1285
00:48:56,000 --> 00:48:58,000
 We shouldn't be quite so  

1286
00:48:58,000 --> 00:49:02,000
 dependent as we have been.  

1287
00:49:02,000 --> 00:49:03,000
 >> I was wondering if you could  

1288
00:49:03,000 --> 00:49:05,000
 comment on the intersection of  

1289
00:49:05,000 --> 00:49:06,000
 individual personalities and  

1290
00:49:06,000 --> 00:49:08,000
 events.  

1291
00:49:08,000 --> 00:49:09,000
 One thing I was struck by when I  

1292
00:49:09,000 --> 00:49:10,000
 was reading your book was some  

1293
00:49:10,000 --> 00:49:12,000
 of the sketches of guys like  

1294
00:49:12,000 --> 00:49:14,000
 Montagu Norman in Britain and  

1295
00:49:14,000 --> 00:49:18,000
 Benjamin Strong in the US.  

1296
00:49:18,000 --> 00:49:20,000
 These are men of real both  

1297
00:49:20,000 --> 00:49:22,000
 physical and emotional frailties  

1298
00:49:22,000 --> 00:49:24,000
 and challenges and at certain  

1299
00:49:24,000 --> 00:49:26,000
 key points, they would take  

1300
00:49:26,000 --> 00:49:29,000
 breaks for months at a time.  

1301
00:49:29,000 --> 00:49:34,000
 Benjamin Strong died in October  

1302
00:49:34,000 --> 00:49:35,000
 of '28, which is interesting.  

1303
00:49:35,000 --> 00:49:37,000
 I was wondering if you see any  

1304
00:49:37,000 --> 00:49:38,000
 parallels.  

1305
00:49:38,000 --> 00:49:40,000
 The quirks of their  

1306
00:49:40,000 --> 00:49:41,000
 personalities fed into events at  

1307
00:49:41,000 --> 00:49:43,000
 that time, and if you have any  

1308
00:49:43,000 --> 00:49:45,000
 hunches as to the quirks of  

1309
00:49:45,000 --> 00:49:47,000
 individual leaders, of Ben  

1310
00:49:47,000 --> 00:49:48,000
 Bernanke, of Timothy Geitner or  

1311
00:49:48,000 --> 00:49:50,000
 someone else, where it's more  

1312
00:49:50,000 --> 00:49:53,000
 that sort of these huge forces  

1313
00:49:53,000 --> 00:49:55,000
 at work around the globe.  

1314
00:49:55,000 --> 00:49:56,000
 Sometimes it just happens to  

1315
00:49:56,000 --> 00:49:58,000
 boil down to what this  

1316
00:49:58,000 --> 00:50:00,000
 particular person is like and  

1317
00:50:00,000 --> 00:50:01,000
 something about their emotional,  

1318
00:50:01,000 --> 00:50:04,000
 mental makeup that somehow can  

1319
00:50:04,000 --> 00:50:05,000
 have really far-reaching  

1320
00:50:05,000 --> 00:50:07,000
 ramifications.  

1321
00:50:07,000 --> 00:50:09,000
 >> Ahamed: Yeah, I'd be happy to  

1322
00:50:09,000 --> 00:50:11,000
 talk about that.  

1323
00:50:11,000 --> 00:50:13,000
 You got the point of my book  

1324
00:50:13,000 --> 00:50:15,000
 exactly, which is that  

1325
00:50:15,000 --> 00:50:19,000
 personality is a very large part  

1326
00:50:19,000 --> 00:50:21,000
 of the story.  

1327
00:50:21,000 --> 00:50:23,000
 I don't think they're quite like  

1328
00:50:23,000 --> 00:50:24,000
 the 1920 central bankers, I  

1329
00:50:24,000 --> 00:50:26,000
 should say that the main  

1330
00:50:26,000 --> 00:50:28,000
 character in my book is a man by  

1331
00:50:28,000 --> 00:50:30,000
 the name of Montagu Norman, who  

1332
00:50:30,000 --> 00:50:32,000
 was the head of the Bank of  

1333
00:50:32,000 --> 00:50:33,000
 England, and he was quite a  

1334
00:50:33,000 --> 00:50:35,000
 quirky guy.  

1335
00:50:35,000 --> 00:50:37,000
 But he suffered from one major  

1336
00:50:37,000 --> 00:50:39,000
 deficiency as the head of the  

1337
00:50:39,000 --> 00:50:41,000
 central bank.  

1338
00:50:41,000 --> 00:50:42,000
 He was a manic depressive who  

1339
00:50:42,000 --> 00:50:44,000
 would have nervous breakdowns at  

1340
00:50:44,000 --> 00:50:45,000
 times of great tension.  

1341
00:50:45,000 --> 00:50:47,000
 (  laughter  )  

1342
00:50:47,000 --> 00:50:48,000
 I can tell you, I don't need  

1343
00:50:48,000 --> 00:50:49,000
 to tell you, that's not  

1344
00:50:49,000 --> 00:50:51,000
 a good attribute  

1345
00:50:51,000 --> 00:50:53,000
 for a central banker.  

1346
00:50:53,000 --> 00:50:55,000
 I don't think any of our guys  

1347
00:50:55,000 --> 00:50:56,000
 are quite like that.  

1348
00:50:56,000 --> 00:50:58,000
 Here's my reading of the  

1349
00:50:58,000 --> 00:51:01,000
 personalities.  

1350
00:51:01,000 --> 00:51:06,000
 Let's start with Alan Greenspan.  

1351
00:51:06,000 --> 00:51:07,000
 One of the major problems of  

1352
00:51:07,000 --> 00:51:12,000
 Alan Greenspan was that we put  

1353
00:51:12,000 --> 00:51:14,000
 him on a pedestal and he started  

1354
00:51:14,000 --> 00:51:16,000
 believing it.  

1355
00:51:16,000 --> 00:51:18,000
 (  laughter  )  

1356
00:51:18,000 --> 00:51:21,000
 (  someone applauds  )  

1357
00:51:21,000 --> 00:51:23,000
 The way he conducted policy at  

1358
00:51:23,000 --> 00:51:25,000
 the Fed was, if you disagreed  

1359
00:51:25,000 --> 00:51:27,000
 with him, you suddenly found  

1360
00:51:27,000 --> 00:51:30,000
 yourself on the outs.  

1361
00:51:30,000 --> 00:51:34,000
 So he created a climate where  

1362
00:51:34,000 --> 00:51:38,000
 basically the chairman was  

1363
00:51:38,000 --> 00:51:41,000
 everything.  

1364
00:51:41,000 --> 00:51:43,000
 He did not foster a sort of  

1365
00:51:43,000 --> 00:51:46,000
 atmosphere of debate.  

1366
00:51:46,000 --> 00:51:47,000
 Alan Blinder disagreed with him  

1367
00:51:47,000 --> 00:51:50,000
 and found that he was suddenly  

1368
00:51:50,000 --> 00:51:53,000
 not invited to critical meetings  

1369
00:51:53,000 --> 00:51:54,000
 and basically resigned and went  

1370
00:51:54,000 --> 00:51:57,000
 back to Princeton.  

1371
00:51:57,000 --> 00:51:59,000
 That is precisely the sort of  

1372
00:51:59,000 --> 00:52:03,000
 atmosphere that leads to old  

1373
00:52:03,000 --> 00:52:06,000
 dogmas driving policy.  

1374
00:52:06,000 --> 00:52:08,000
 That's the first, that's Alan  

1375
00:52:08,000 --> 00:52:11,000
 Greenspan.  

1376
00:52:11,000 --> 00:52:13,000
 I think the fascinating  

1377
00:52:13,000 --> 00:52:16,000
 interaction was between Hank  

1378
00:52:16,000 --> 00:52:21,000
 Paulson and Ben Bernanke.  

1379
00:52:21,000 --> 00:52:22,000
 If you remember, last year the  

1380
00:52:22,000 --> 00:52:27,000
 crisis sort of seemed to hit  

1381
00:52:27,000 --> 00:52:31,000
 sort of a peak in March, when  

1382
00:52:31,000 --> 00:52:34,000
 Bear Stearns went under.  

1383
00:52:34,000 --> 00:52:36,000
 At that point, the Fed did  

1384
00:52:36,000 --> 00:52:38,000
 something that it really  

1385
00:52:38,000 --> 00:52:41,000
 shouldn't have done, which is,  

1386
00:52:41,000 --> 00:52:42,000
 the Fed is there to provide  

1387
00:52:42,000 --> 00:52:45,000
 short term loans.  

1388
00:52:45,000 --> 00:52:46,000
 What it did was provide equity  

1389
00:52:46,000 --> 00:52:51,000
 capital to JP Morgan, who bought  

1390
00:52:51,000 --> 00:52:53,000
 Bear Stearns.  

1391
00:52:53,000 --> 00:52:54,000
 It did this in a sort of sneaky  

1392
00:52:54,000 --> 00:52:56,000
 way.  

1393
00:52:56,000 --> 00:52:58,000
 It created a special purpose  

1394
00:52:58,000 --> 00:53:00,000
 vehicle called Maiden Lane and  

1395
00:53:00,000 --> 00:53:02,000
 it lent money to Maiden Lane  

1396
00:53:02,000 --> 00:53:04,000
 which then took on the equity  

1397
00:53:04,000 --> 00:53:06,000
 risk.  

1398
00:53:06,000 --> 00:53:07,000
 But they were doing exactly what  

1399
00:53:07,000 --> 00:53:09,000
 we've been accusing the banks of  

1400
00:53:09,000 --> 00:53:11,000
 doing, which is parking things  

1401
00:53:11,000 --> 00:53:13,000
 off balance sheet and disguising  

1402
00:53:13,000 --> 00:53:15,000
 the risks through various  

1403
00:53:15,000 --> 00:53:18,000
 accounting ruses.  

1404
00:53:18,000 --> 00:53:20,000
 They did that really because  

1405
00:53:20,000 --> 00:53:23,000
 they had no alternative.  

1406
00:53:23,000 --> 00:53:25,000
 There was a window from March to  

1407
00:53:25,000 --> 00:53:29,000
 September where the Fed now, the  

1408
00:53:29,000 --> 00:53:31,000
 authorities, I think, though  

1409
00:53:31,000 --> 00:53:33,000
 maybe not Hank Paulson,  

1410
00:53:33,000 --> 00:53:35,000
 understood that they were facing  

1411
00:53:35,000 --> 00:53:36,000
 a solvency problem, not a  

1412
00:53:36,000 --> 00:53:39,000
 liquidity problem.  

1413
00:53:39,000 --> 00:53:40,000
 A solvency problem cannot be  

1414
00:53:40,000 --> 00:53:43,000
 handled by short term loans by  

1415
00:53:43,000 --> 00:53:44,000
 the Fed.  

1416
00:53:44,000 --> 00:53:46,000
 And yet that's what they  

1417
00:53:46,000 --> 00:53:50,000
 continued to do for six months.  

1418
00:53:50,000 --> 00:53:52,000
 That window of opportunity I  

1419
00:53:52,000 --> 00:53:54,000
 think arose because Hank Paulson  

1420
00:53:54,000 --> 00:53:58,000
 had a sort of, well, there are  

1421
00:53:58,000 --> 00:54:00,000
 two possible interpretations.  

1422
00:54:00,000 --> 00:54:03,000
 Either he really did believe it  

1423
00:54:03,000 --> 00:54:06,000
 was a liquidity problem and sort  

1424
00:54:06,000 --> 00:54:09,000
 of miscalculated and thought,  

1425
00:54:09,000 --> 00:54:11,000
 let the Fed do the lending and  

1426
00:54:11,000 --> 00:54:12,000
 eventually they'll get their  

1427
00:54:12,000 --> 00:54:14,000
 money back and everything will  

1428
00:54:14,000 --> 00:54:21,000
 be okay.  

1429
00:54:21,000 --> 00:54:23,000
 Or he was sort of afraid, didn't  

1430
00:54:23,000 --> 00:54:24,000
 think he could get the votes in  

1431
00:54:24,000 --> 00:54:26,000
 congress and in effect was  

1432
00:54:26,000 --> 00:54:27,000
 bypassing the political system  

1433
00:54:27,000 --> 00:54:28,000
 because he didn't have the  

1434
00:54:28,000 --> 00:54:30,000
 political courage to confront  

1435
00:54:30,000 --> 00:54:35,000
 it.  

1436
00:54:35,000 --> 00:54:36,000
 Or he was being sort of very  

1437
00:54:36,000 --> 00:54:38,000
 astute and figured, I'll let a  

1438
00:54:38,000 --> 00:54:40,000
 real crisis develop and that way  

1439
00:54:40,000 --> 00:54:42,000
 congress will give me the $700  

1440
00:54:42,000 --> 00:54:46,000
 billion that I eventually need.  

1441
00:54:46,000 --> 00:54:48,000
 He was only able to do that  

1442
00:54:48,000 --> 00:54:50,000
 because he was able to bully Ben  

1443
00:54:50,000 --> 00:54:52,000
 Bernanke.  

1444
00:54:52,000 --> 00:54:53,000
 Ben Bernanke, I think, saved the  

1445
00:54:53,000 --> 00:54:56,000
 world in September, but was a  

1446
00:54:56,000 --> 00:54:59,000
 bully-able sort of guy.  

1447
00:54:59,000 --> 00:55:02,000
 There was an article in the New  

1448
00:55:02,000 --> 00:55:06,000
 Yorker about four weeks back by  

1449
00:55:06,000 --> 00:55:09,000
 James Stewart on that whole week  

1450
00:55:09,000 --> 00:55:14,000
 and it describes sort of finally  

1451
00:55:14,000 --> 00:55:16,000
 Ben Bernanke losing his temper  

1452
00:55:16,000 --> 00:55:17,000
 and saying, "Hank, I've run out  

1453
00:55:17,000 --> 00:55:21,000
 of ammunition."  

1454
00:55:21,000 --> 00:55:23,000
 And Paulson didn't get it, and  

1455
00:55:23,000 --> 00:55:25,000
 so all the Fed guys got together  

1456
00:55:25,000 --> 00:55:28,000
 and agreed the next morning to  

1457
00:55:28,000 --> 00:55:30,000
 again sort of shout at Hank  

1458
00:55:30,000 --> 00:55:33,000
 Paulson, and Ben Bernanke sort  

1459
00:55:33,000 --> 00:55:35,000
 of screamed at him.  

1460
00:55:35,000 --> 00:55:37,000
 Eventually, that's what got the  

1461
00:55:37,000 --> 00:55:39,000
 $700 billion.  

1462
00:55:39,000 --> 00:55:41,000
 I don't know, those are my  

1463
00:55:41,000 --> 00:55:42,000
 little insights into the quirks  

1464
00:55:42,000 --> 00:55:44,000
 of personality and how they  

1465
00:55:44,000 --> 00:55:48,000
 played out.  

1466
00:55:48,000 --> 00:55:50,000
 >> Mr. Ahamed, I have a question  

1467
00:55:50,000 --> 00:55:53,000
 from an online viewer.  

1468
00:55:53,000 --> 00:55:55,000
 Zack Jones writes in, "How would  

1469
00:55:55,000 --> 00:55:57,000
 you evaluate the impact of the  

1470
00:55:57,000 --> 00:55:59,000
 fiscal stimulus in the US in  

1471
00:55:59,000 --> 00:56:00,000
 response to the current  

1472
00:56:00,000 --> 00:56:02,000
 recession, and also, what are  

1473
00:56:02,000 --> 00:56:04,000
 your thoughts on the proposals  

1474
00:56:04,000 --> 00:56:11,000
 for further stimulus?"  

1475
00:56:11,000 --> 00:56:12,000
 >> Ahamed: By the way,  

1476
00:56:12,000 --> 00:56:13,000
 I should say,  

1477
00:56:13,000 --> 00:56:14,000
 I'm not an economist.  

1478
00:56:14,000 --> 00:56:16,000
 (  laughs  )  

1479
00:56:16,000 --> 00:56:19,000
 But I can pretend to be one.  

1480
00:56:19,000 --> 00:56:24,000
 Look, the stimulus package  

1481
00:56:24,000 --> 00:56:27,000
 clearly has made that difference  

1482
00:56:27,000 --> 00:56:33,000
 between -3% growth and +1% that  

1483
00:56:33,000 --> 00:56:35,000
 we're going to have this  

1484
00:56:35,000 --> 00:56:37,000
 quarter.  

1485
00:56:37,000 --> 00:56:39,000
 It really only had to operate at  

1486
00:56:39,000 --> 00:56:41,000
 the margin, but seems to have  

1487
00:56:41,000 --> 00:56:44,000
 worked at the margin.  

1488
00:56:44,000 --> 00:56:49,000
 We're a $15 trillion economy.  

1489
00:56:49,000 --> 00:56:51,000
 Of the stimulus package, we've  

1490
00:56:51,000 --> 00:56:54,000
 probably spent, in the second  

1491
00:56:54,000 --> 00:56:57,000
 and third quarter, $200 billion.  

1492
00:56:57,000 --> 00:57:01,000
 That's a tiny amount in a $15  

1493
00:57:01,000 --> 00:57:04,000
 trillion economy, but is just  

1494
00:57:04,000 --> 00:57:06,000
 the amount that you require to  

1495
00:57:06,000 --> 00:57:09,000
 turn from being -3% to +1% or  

1496
00:57:09,000 --> 00:57:11,000
 whatever.  

1497
00:57:11,000 --> 00:57:12,000
 That's the sort of impact it  

1498
00:57:12,000 --> 00:57:15,000
 had.  

1499
00:57:15,000 --> 00:57:17,000
 The goal is, think of these  

1500
00:57:17,000 --> 00:57:21,000
 stimulus packages as, you drive  

1501
00:57:21,000 --> 00:57:23,000
 yourself into a ditch and you  

1502
00:57:23,000 --> 00:57:25,000
 need a tow truck to get yourself  

1503
00:57:25,000 --> 00:57:26,000
 out.  

1504
00:57:26,000 --> 00:57:28,000
 They should be temporary and  

1505
00:57:28,000 --> 00:57:29,000
 they are designed to be tow  

1506
00:57:29,000 --> 00:57:32,000
 trucks to get us out.  

1507
00:57:32,000 --> 00:57:34,000
 It seems to be working.  

1508
00:57:34,000 --> 00:57:38,000
 We've got one wheel out.  

1509
00:57:38,000 --> 00:57:42,000
 We definitely don't want to  

1510
00:57:42,000 --> 00:57:44,000
 rely, again, you're not going to  

1511
00:57:44,000 --> 00:57:46,000
 get in your car and rely on tow  

1512
00:57:46,000 --> 00:57:49,000
 trucks to pull you around.  

1513
00:57:49,000 --> 00:57:51,000
 So I would be against another  

1514
00:57:51,000 --> 00:57:53,000
 stimulus package for another  

1515
00:57:53,000 --> 00:57:56,000
 reason, which is that these  

1516
00:57:56,000 --> 00:57:59,000
 aren't free.  

1517
00:57:59,000 --> 00:58:01,000
 This is not free money and this  

1518
00:58:01,000 --> 00:58:06,000
 is going to cost us in terms of  

1519
00:58:06,000 --> 00:58:08,000
 government interest and  

1520
00:58:08,000 --> 00:58:09,000
 eventually we're going to have  

1521
00:58:09,000 --> 00:58:11,000
 to raise our taxes to pay for  

1522
00:58:11,000 --> 00:58:13,000
 the interest on this debt.  

1523
00:58:13,000 --> 00:58:17,000
 Now, luckily, there's one big  

1524
00:58:17,000 --> 00:58:18,000
 worry when the government  

1525
00:58:18,000 --> 00:58:22,000
 borrows money, which is that for  

1526
00:58:22,000 --> 00:58:24,000
 every dollar the government  

1527
00:58:24,000 --> 00:58:26,000
 borrows, it takes away money  

1528
00:58:26,000 --> 00:58:27,000
 from the private sector.  

1529
00:58:27,000 --> 00:58:29,000
 That's the big worry.  

1530
00:58:29,000 --> 00:58:31,000
 That's not happening.  

1531
00:58:31,000 --> 00:58:33,000
 The first sign that you'll see  

1532
00:58:33,000 --> 00:58:36,000
 that that's happening is if the  

1533
00:58:36,000 --> 00:58:38,000
 government starts competing with  

1534
00:58:38,000 --> 00:58:39,000
 the private sector for money,  

1535
00:58:39,000 --> 00:58:40,000
 you'll see interest rates going  

1536
00:58:40,000 --> 00:58:42,000
 up.  

1537
00:58:42,000 --> 00:58:44,000
 That's the first signal that  

1538
00:58:44,000 --> 00:58:47,000
 this stuff is not working.  

1539
00:58:47,000 --> 00:58:49,000
 We're not there yet.  

1540
00:58:49,000 --> 00:58:51,000
 On the other hand, we could get  

1541
00:58:51,000 --> 00:58:53,000
 there.  

1542
00:58:53,000 --> 00:58:54,000
 So that's what I would keep my  

1543
00:58:54,000 --> 00:58:58,000
 eye on.  

1544
00:58:58,000 --> 00:59:00,000
 That basically, you've exhausted  

1545
00:59:00,000 --> 00:59:02,000
 my macro economics.  

1546
00:59:06,000 --> 00:59:08,000
 >> (  inaudible  )  

1547
00:59:15,000 --> 00:59:16,000
 >> Ahamed: Look, I think that  

1548
00:59:16,000 --> 00:59:20,000
 deregulation was, or maybe not  

1549
00:59:20,000 --> 00:59:24,000
 deregulation, but inadequate  

1550
00:59:24,000 --> 00:59:25,000
 regulation of the financial  

1551
00:59:25,000 --> 00:59:27,000
 system that had completely  

1552
00:59:27,000 --> 00:59:30,000
 changed over a 20 year period  

1553
00:59:30,000 --> 00:59:32,000
 was at the heart of this  

1554
00:59:32,000 --> 00:59:33,000
 problem, or converted what  

1555
00:59:33,000 --> 00:59:35,000
 should have been a manageable  

1556
00:59:35,000 --> 00:59:37,000
 problem into a problem that  

1557
00:59:37,000 --> 00:59:42,000
 almost brought the Western  

1558
00:59:42,000 --> 00:59:46,000
 financial system to a halt.  

1559
00:59:46,000 --> 00:59:47,000
 On the other hand, I don't  

1560
00:59:47,000 --> 00:59:50,000
 believe that we can go back to  

1561
00:59:50,000 --> 00:59:52,000
 where we used to be.  

1562
00:59:52,000 --> 00:59:55,000
 It used to be, the two central  

1563
00:59:55,000 --> 00:59:57,000
 things that prevented banking  

1564
00:59:57,000 --> 01:00:00,000
 crises and instability during  

1565
01:00:00,000 --> 01:00:02,000
 the '50s and '60s, were two  

1566
01:00:02,000 --> 01:00:04,000
 things.  

1567
01:00:04,000 --> 01:00:06,000
 One was Glass-Steagall, which  

1568
01:00:06,000 --> 01:00:08,000
 separated commercial banks and  

1569
01:00:08,000 --> 01:00:11,000
 investment banks and made sure  

1570
01:00:11,000 --> 01:00:13,000
 that commercial banks, which  

1571
01:00:13,000 --> 01:00:15,000
 keep our deposits, could only do  

1572
01:00:15,000 --> 01:00:19,000
 very safe things and treated  

1573
01:00:19,000 --> 01:00:20,000
 commercial banks like utilities,  

1574
01:00:20,000 --> 01:00:22,000
 almost.  

1575
01:00:22,000 --> 01:00:25,000
 The problem is, one, we've got a  

1576
01:00:25,000 --> 01:00:26,000
 whole lot of new institutions  

1577
01:00:26,000 --> 01:00:29,000
 like money market funds.  

1578
01:00:29,000 --> 01:00:31,000
 And secondly, the distinction  

1579
01:00:31,000 --> 01:00:33,000
 between loans and securities has  

1580
01:00:33,000 --> 01:00:35,000
 disappeared.  

1581
01:00:35,000 --> 01:00:37,000
 So it's very hard to say, this  

1582
01:00:37,000 --> 01:00:39,000
 is an investment bank that owns  

1583
01:00:39,000 --> 01:00:40,000
 securities and this is a  

1584
01:00:40,000 --> 01:00:42,000
 commercial bank that makes  

1585
01:00:42,000 --> 01:00:44,000
 loans, because loans can be  

1586
01:00:44,000 --> 01:00:48,000
 converted into securities.  

1587
01:00:48,000 --> 01:00:51,000
 So my view there is that we need  

1588
01:00:51,000 --> 01:00:54,000
 to, we just need to make sure  

1589
01:00:54,000 --> 01:00:56,000
 that people who go into the  

1590
01:00:56,000 --> 01:00:58,000
 financial business have capital  

1591
01:00:58,000 --> 01:01:01,000
 and that they don't leverage  

1592
01:01:01,000 --> 01:01:03,000
 themselves 30 or 40 to one.  

1593
01:01:03,000 --> 01:01:06,000
 In the '50s, a typical financial  

1594
01:01:06,000 --> 01:01:09,000
 institution held 10% of its  

1595
01:01:09,000 --> 01:01:11,000
 assets in the form of equity  

1596
01:01:11,000 --> 01:01:13,000
 capital.  

1597
01:01:13,000 --> 01:01:15,000
 We have allowed those numbers to  

1598
01:01:15,000 --> 01:01:17,000
 go down to 4% and then we allow  

1599
01:01:17,000 --> 01:01:19,000
 financial institutions to put  

1600
01:01:19,000 --> 01:01:21,000
 things off balance sheet and  

1601
01:01:21,000 --> 01:01:23,000
 have a second set of books where  

1602
01:01:23,000 --> 01:01:25,000
 they had no capital.  

1603
01:01:25,000 --> 01:01:26,000
 I think it's crazy.  

1604
01:01:26,000 --> 01:01:29,000
 That's the single most important  

1605
01:01:29,000 --> 01:01:33,000
 thing.  

1606
01:01:33,000 --> 01:01:35,000
 There are other things that we  

1607
01:01:35,000 --> 01:01:38,000
 should do, like on derivatives  

1608
01:01:38,000 --> 01:01:42,000
 put them on an exchange.  

1609
01:01:42,000 --> 01:01:44,000
 There are some very simple  

1610
01:01:44,000 --> 01:01:46,000
 things we can do to make the  

1611
01:01:46,000 --> 01:01:50,000
 system much more stable.  

1612
01:01:50,000 --> 01:01:52,000
 >> You had talked earlier about  

1613
01:01:52,000 --> 01:01:53,000
 unemployment and the fact that  

1614
01:01:53,000 --> 01:01:55,000
 we've had a rather severe rise  

1615
01:01:55,000 --> 01:01:57,000
 in unemployment this time,  

1616
01:01:57,000 --> 01:01:58,000
 perhaps a little faster than  

1617
01:01:58,000 --> 01:02:00,000
 expected and it's not expected  

1618
01:02:00,000 --> 01:02:02,000
 to go down dramatically in the  

1619
01:02:02,000 --> 01:02:04,000
 near future.  

1620
01:02:04,000 --> 01:02:06,000
 My question is related to the  

1621
01:02:06,000 --> 01:02:09,000
 debate about national healthcare  

1622
01:02:09,000 --> 01:02:11,000
 going on now.  

1623
01:02:11,000 --> 01:02:13,000
 Can this country continue to  

1624
01:02:13,000 --> 01:02:16,000
 grow its employment base without  

1625
01:02:16,000 --> 01:02:18,000
 doing something about the  

1626
01:02:18,000 --> 01:02:21,000
 problems with the cost of health  

1627
01:02:21,000 --> 01:02:23,000
 insurance on the employer, and  

1628
01:02:23,000 --> 01:02:24,000
 how much effect do you think  

1629
01:02:24,000 --> 01:02:26,000
 that might have on our recovery  

1630
01:02:26,000 --> 01:02:28,000
 vis-a-vis other countries in the  

1631
01:02:28,000 --> 01:02:30,000
 world that we're competing  

1632
01:02:30,000 --> 01:02:31,000
 against who don't seem to have  

1633
01:02:31,000 --> 01:02:35,000
 that problem?  

1634
01:02:35,000 --> 01:02:38,000
 >> Ahamed: Well, it certainly,  

1635
01:02:38,000 --> 01:02:40,000
 just anecdotally, it's certainly  

1636
01:02:40,000 --> 01:02:41,000
 clear whenever you talk to  

1637
01:02:41,000 --> 01:02:44,000
 people about the key things they  

1638
01:02:44,000 --> 01:02:45,000
 worry about when they hire  

1639
01:02:45,000 --> 01:02:47,000
 permanent workers, in  

1640
01:02:47,000 --> 01:02:49,000
 particular, is the benefits  

1641
01:02:49,000 --> 01:02:50,000
 they're required to provide, and  

1642
01:02:50,000 --> 01:02:52,000
 the most important benefit is  

1643
01:02:52,000 --> 01:02:54,000
 obviously healthcare.  

1644
01:02:54,000 --> 01:02:56,000
 It's one of the reasons you see  

1645
01:02:56,000 --> 01:02:57,000
 such a move toward part-time  

1646
01:02:57,000 --> 01:03:00,000
 work, because companies are  

1647
01:03:00,000 --> 01:03:02,000
 required to provide fewer  

1648
01:03:02,000 --> 01:03:03,000
 benefits.  

1649
01:03:03,000 --> 01:03:05,000
 I think that's an element of the  

1650
01:03:05,000 --> 01:03:06,000
 equation.  

1651
01:03:06,000 --> 01:03:10,000
 I think there's an element of  

1652
01:03:10,000 --> 01:03:12,000
 globalization.  

1653
01:03:12,000 --> 01:03:14,000
 I think companies, someone like  

1654
01:03:14,000 --> 01:03:17,000
 Intel, is an American company  

1655
01:03:17,000 --> 01:03:21,000
 and it appears in the S&P 500.  

1656
01:03:21,000 --> 01:03:23,000
 I'd be interested to know where  

1657
01:03:23,000 --> 01:03:25,000
 most of the employees who work  

1658
01:03:25,000 --> 01:03:27,000
 for Intel, including if you  

1659
01:03:27,000 --> 01:03:29,000
 traced it through the supply  

1660
01:03:29,000 --> 01:03:34,000
 chains, where they're based.  

1661
01:03:34,000 --> 01:03:35,000
 Are the majority of them in the  

1662
01:03:35,000 --> 01:03:37,000
 US?  

1663
01:03:37,000 --> 01:03:39,000
 So what is a company, what is an  

1664
01:03:39,000 --> 01:03:41,000
 American company?  

1665
01:03:41,000 --> 01:03:43,000
 The definitions of those things  

1666
01:03:43,000 --> 01:03:45,000
 have changed so dramatically  

1667
01:03:45,000 --> 01:03:47,000
 that it's not always clear that  

1668
01:03:47,000 --> 01:03:49,000
 the categories we used to use  

1669
01:03:49,000 --> 01:03:53,000
 are appropriate or useful in  

1670
01:03:53,000 --> 01:03:56,000
 understanding it.  

1671
01:03:56,000 --> 01:04:00,000
 I can't say I know the solution  

1672
01:04:00,000 --> 01:04:01,000
 to the employment problem.  

1673
01:04:01,000 --> 01:04:02,000
 I just observe it.  

1674
01:04:02,000 --> 01:04:05,000
 But I think it is, one, there's  

1675
01:04:05,000 --> 01:04:07,000
 something about this business  

1676
01:04:07,000 --> 01:04:10,000
 cycle which has been  

1677
01:04:10,000 --> 01:04:13,000
 particularly bad for workers.  

1678
01:04:13,000 --> 01:04:17,000
 And secondly, just my reading of  

1679
01:04:17,000 --> 01:04:19,000
 history is, if an economic  

1680
01:04:19,000 --> 01:04:21,000
 system finds it difficult to  

1681
01:04:21,000 --> 01:04:25,000
 provide full employment, you'd  

1682
01:04:25,000 --> 01:04:27,000
 better watch out.  

1683
01:04:30,000 --> 01:04:32,000
 >> I just had a quick question.  

1684
01:04:32,000 --> 01:04:34,000
 I'm aware of the WPA program  

1685
01:04:34,000 --> 01:04:36,000
 that was implemented during the  

1686
01:04:36,000 --> 01:04:38,000
 Great Depression.  

1687
01:04:38,000 --> 01:04:39,000
 I was wondering, I know it's  

1688
01:04:39,000 --> 01:04:41,000
 often compared to the current  

1689
01:04:41,000 --> 01:04:43,000
 stimulus package.  

1690
01:04:43,000 --> 01:04:45,000
 Do you think that the same  

1691
01:04:45,000 --> 01:04:47,000
 strategy that was used would  

1692
01:04:47,000 --> 01:04:50,000
 work today?  

1693
01:04:50,000 --> 01:04:52,000
 >> Ahamed: The interesting thing  

1694
01:04:52,000 --> 01:04:55,000
 about Roosevelt's New Deal, a  

1695
01:04:55,000 --> 01:04:57,000
 couple of interesting things.  

1696
01:04:57,000 --> 01:04:59,000
 One is, he was clearly a  

1697
01:04:59,000 --> 01:05:02,000
 fantastic publicist.  

1698
01:05:02,000 --> 01:05:04,000
 We had this exaggerated notion  

1699
01:05:04,000 --> 01:05:08,000
 of what the New Deal did.  

1700
01:05:08,000 --> 01:05:10,000
 Actually, in terms of public  

1701
01:05:10,000 --> 01:05:14,000
 expenditure, it was relatively  

1702
01:05:14,000 --> 01:05:16,000
 modest.  

1703
01:05:16,000 --> 01:05:17,000
 There were some public  

1704
01:05:17,000 --> 01:05:19,000
 employment schemes, including  

1705
01:05:19,000 --> 01:05:23,000
 the WPA, which did get some  

1706
01:05:23,000 --> 01:05:27,000
 people back to work, and  

1707
01:05:27,000 --> 01:05:32,000
 unemployment then was 25%.  

1708
01:05:32,000 --> 01:05:34,000
 It's now, even if you count  

1709
01:05:34,000 --> 01:05:36,000
 discouraged workers, it's more  

1710
01:05:36,000 --> 01:05:38,000
 like 15%.  

1711
01:05:38,000 --> 01:05:41,000
 We're only half the way there.  

1712
01:05:41,000 --> 01:05:45,000
 I don't think it's applicable.  

1713
01:05:45,000 --> 01:05:47,000
 The thing that I do think is  

1714
01:05:47,000 --> 01:05:49,000
 sort of striking about Roosevelt  

1715
01:05:49,000 --> 01:05:51,000
 and the New Deal was, he seemed  

1716
01:05:51,000 --> 01:05:54,000
 to figure out, or he seemed to  

1717
01:05:54,000 --> 01:05:56,000
 be very skeptical that anyone  

1718
01:05:56,000 --> 01:05:58,000
 knew anything.  

1719
01:05:58,000 --> 01:06:00,000
 And so he was willing to  

1720
01:06:00,000 --> 01:06:01,000
 experiment and try lots of  

1721
01:06:01,000 --> 01:06:03,000
 things.  

1722
01:06:03,000 --> 01:06:06,000
 Essentially, he stumbled into  

1723
01:06:06,000 --> 01:06:08,000
 getting off the gold standard.  

1724
01:06:08,000 --> 01:06:12,000
 He was listening to this  

1725
01:06:12,000 --> 01:06:15,000
 crankpot economist who was at  

1726
01:06:15,000 --> 01:06:17,000
 Cornell, and all his advisors,  

1727
01:06:17,000 --> 01:06:20,000
 all these Wall Street guys.  

1728
01:06:20,000 --> 01:06:22,000
 He decided, why don't we try  

1729
01:06:22,000 --> 01:06:24,000
 that?  

1730
01:06:24,000 --> 01:06:26,000
 So he sauntered into his office,  

1731
01:06:26,000 --> 01:06:28,000
 well, he didn't saunter,  

1732
01:06:28,000 --> 01:06:29,000
 he came into his office...  

1733
01:06:29,000 --> 01:06:32,000
 (  laughter  )  

1734
01:06:32,000 --> 01:06:33,000
 And sort of off the top  

1735
01:06:33,000 --> 01:06:34,000
 of his head said, "By the way,  

1736
01:06:34,000 --> 01:06:37,000
 we're off the gold standard."  

1737
01:06:37,000 --> 01:06:38,000
 All of his advisors  

1738
01:06:38,000 --> 01:06:41,000
 were incredibly shocked.  

1739
01:06:41,000 --> 01:06:43,000
 One guy was James Warburg of the  

1740
01:06:43,000 --> 01:06:48,000
 Warburg family and he declared,  

1741
01:06:48,000 --> 01:06:49,000
 "This is the end  

1742
01:06:49,000 --> 01:06:51,000
 of Western civilization."  

1743
01:06:51,000 --> 01:06:53,000
 (  laughter  )  

1744
01:06:53,000 --> 01:06:55,000
 It wasn't, obviously.  

1745
01:06:55,000 --> 01:06:57,000
 I really got to admire, reading  

1746
01:06:57,000 --> 01:06:59,000
 up on this book, I really got to  

1747
01:06:59,000 --> 01:07:01,000
 admire this sort of capacity for  

1748
01:07:01,000 --> 01:07:04,000
 Roosevelt to try lots of things.  

1749
01:07:04,000 --> 01:07:06,000
 There were two New Deals.  

1750
01:07:06,000 --> 01:07:08,000
 There was the first New Deal,  

1751
01:07:08,000 --> 01:07:10,000
 which did a reasonable job in  

1752
01:07:10,000 --> 01:07:13,000
 stabilizing the banks, got the  

1753
01:07:13,000 --> 01:07:15,000
 economy going, but didn't get  

1754
01:07:15,000 --> 01:07:17,000
 employment going, and did some  

1755
01:07:17,000 --> 01:07:19,000
 stupid things, like raised  

1756
01:07:19,000 --> 01:07:24,000
 prices and raised wages and all  

1757
01:07:24,000 --> 01:07:26,000
 sorts of things which were  

1758
01:07:26,000 --> 01:07:28,000
 completely counterproductive.  

1759
01:07:28,000 --> 01:07:29,000
 Then he came up with the second  

1760
01:07:29,000 --> 01:07:31,000
 New Deal, in which we got social  

1761
01:07:31,000 --> 01:07:33,000
 security, for example.  

1762
01:07:33,000 --> 01:07:36,000
 It's that sort of openness to  

1763
01:07:36,000 --> 01:07:40,000
 new ideas, skepticism about all  

1764
01:07:40,000 --> 01:07:42,000
 of these so-called experts who  

1765
01:07:42,000 --> 01:07:46,000
 tell you they know how it works,  

1766
01:07:46,000 --> 01:07:47,000
 because we've just discovered  

1767
01:07:47,000 --> 01:07:50,000
 that very few people do.  

1768
01:07:50,000 --> 01:07:53,000
 >> Last question.  

1769
01:07:53,000 --> 01:07:55,000
 >> We in the medical profession  

1770
01:07:55,000 --> 01:07:57,000
 live by sort of a central rule,  

1771
01:07:57,000 --> 01:07:58,000
 and that is "primum non nocere,"  

1772
01:07:58,000 --> 01:08:00,000
 above all else, do no harm.  

1773
01:08:00,000 --> 01:08:02,000
 With that in mind, I'd like to  

1774
01:08:02,000 --> 01:08:05,000
 ask, in your view, what is the  

1775
01:08:05,000 --> 01:08:06,000
 stupidest thing our political  

1776
01:08:06,000 --> 01:08:08,000
 leaders could do given the  

1777
01:08:08,000 --> 01:08:09,000
 current situation?  

1778
01:08:09,000 --> 01:08:16,000
 (  Ahamed laughs  )  

1779
01:08:16,000 --> 01:08:17,000
 >> Ahamed: Well,  

1780
01:08:17,000 --> 01:08:19,000
 the stupidest thing would be  

1781
01:08:19,000 --> 01:08:20,000
 to raise taxes to try  

1782
01:08:20,000 --> 01:08:22,000
 and control the budget deficit  

1783
01:08:22,000 --> 01:08:24,000
 at this moment.  

1784
01:08:24,000 --> 01:08:26,000
 They did that in 1937.  

1785
01:08:26,000 --> 01:08:29,000
 We got this fantastic recovery,  

1786
01:08:29,000 --> 01:08:34,000
 and then in 1936, 1937, the Fed  

1787
01:08:34,000 --> 01:08:37,000
 decided to raise interest rates  

1788
01:08:37,000 --> 01:08:39,000
 because it said, we've changed  

1789
01:08:39,000 --> 01:08:42,000
 the price of gold, now banks are  

1790
01:08:42,000 --> 01:08:45,000
 so flush with cash, this is  

1791
01:08:45,000 --> 01:08:47,000
 bound to lead to inflation, even  

1792
01:08:47,000 --> 01:08:49,000
 though there wasn't a single  

1793
01:08:49,000 --> 01:08:50,000
 sign of inflation.  

1794
01:08:50,000 --> 01:08:53,000
 So they tightened credit, and at  

1795
01:08:53,000 --> 01:08:57,000
 the same time, there had been a  

1796
01:08:57,000 --> 01:08:59,000
 temporary blip up in the budget  

1797
01:08:59,000 --> 01:09:02,000
 deficit in 1936, and I can't  

1798
01:09:02,000 --> 01:09:04,000
 remember why, I think it was the  

1799
01:09:04,000 --> 01:09:05,000
 introduction of social security  

1800
01:09:05,000 --> 01:09:07,000
 or something.  

1801
01:09:07,000 --> 01:09:10,000
 They raised taxes in 1937.  

1802
01:09:10,000 --> 01:09:12,000
 The combination of the two drove  

1803
01:09:12,000 --> 01:09:15,000
 the economy back into recession.  

1804
01:09:15,000 --> 01:09:17,000
 The stock market went down 30%  

1805
01:09:17,000 --> 01:09:19,000
 in one year.  

1806
01:09:19,000 --> 01:09:20,000
 That would be the most stupid  

1807
01:09:20,000 --> 01:09:22,000
 thing to do.  

1808
01:09:22,000 --> 01:09:23,000
 I'm sure if you gave me enough  

1809
01:09:23,000 --> 01:09:24,000
 time I could think of some other  

1810
01:09:24,000 --> 01:09:26,000
 stupid things.  

1811
01:09:26,000 --> 01:09:30,000
 (  applause  )