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cc

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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

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caused, by a malfunctioning in

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the international financial

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system.

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Let me spend a couple of moments

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on this.

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In the 1920s, the problem was

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between Europe and the US.

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Many people forget, 1929

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occurred only ten years after

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the end of the first world war.

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The most expensive, costly war

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in history that essentially

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bankrupted Europe.

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For four years, the three major

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European powers, Britain,

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France, and Germany, spend 50%

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of their GDP per year fighting

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this sort of pointless war.

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They financed it by borrowing

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massive amounts both from their

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own citizens and from the US in

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the case of Britain and France,

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and ultimately by printing

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money.

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So they basically destroyed

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their financial system.

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In the ten years after 1919,

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Europe was trying to rebuild

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itself and in order to do that,

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the US kept credit easy, because

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Europe needed foreign financing

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in order to reconstruct.

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The Fed found itself with a

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dilemma.

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It had to keep credit easy in

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order to rebuild Europe.

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That easy credit provoked a

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bubble in the stock market.

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And as usual, when the Fed's

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trying to do too many things, it

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accomplished neither.

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So the easy credit designed to

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essentially revive Europe after

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the first world war was what

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provoked the stock market

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bubble.

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The more recent crisis, or this

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recent ten years, the bubble was

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associated with a slightly

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different imbalance, and the

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imbalance was between Asia and

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the US.

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There were two mechanisms that

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happened.

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Essentially, beginning in the

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early part of this decade, Asian

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currencies were undervalued.

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China embarked on a massive

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export push, the other Asian

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countries in response to the

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Asian crisis of 1997 decided

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that they wanted to accumulate a

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vast reservoir of dollars.

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They basically said, we never

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want to get into this position

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again.

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And so they went out of their

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way to accumulate a reservoir of

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US dollars.

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In order to do that, they

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undervalued their currencies and

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pushed exports out.

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That did two things.

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It, one, confused the Fed.

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What happened was that because

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of this export push from Asia,

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inflation was unusually low

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because the Asian countries were

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underpricing their goods.

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The Fed mistook the low

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inflation as a symptom of a

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domestic economy that was

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running out of steam.

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So, put its foot on the

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accelerator.

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In fact, what was happening was,

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we had a once in a lifetime

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expansion in the supply of goods

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and services coming out of Asia.

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If you like, it was good

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deflation and the Fed was

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worried about what it thought

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would be bad deflation.

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The second thing that happened

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was that the accumulation of

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dollars in the hands of Asian

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central banks overwhelmed the

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capacity of the financial system

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to handle it.

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So essentially these dollars

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were put into financial

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institutions who then ran out of

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lending opportunities and then

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channeled them into the worst

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sorts of lending, made some very

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poor lending decisions.

14:25.000 --> 14:26.000
So the combination of an over

14:26.000 --> 14:29.000
easy Fed and a massive amount of

14:29.000 --> 14:31.000
dollars swimming around the

14:31.000 --> 14:33.000
financial system provided the

14:33.000 --> 14:38.000
fuel for the real estate bubble.

14:38.000 --> 14:40.000
To go back to the story, in both

14:40.000 --> 14:45.000
cases, we had the same debate

14:45.000 --> 14:46.000
about how to react to the

14:46.000 --> 14:48.000
bubbles.

14:48.000 --> 14:50.000
During the real estate bubble

14:50.000 --> 14:52.000
that was occurring in the early

14:52.000 --> 14:54.000
part of this decade, Alan

14:54.000 --> 14:55.000
Greenspan, the chairman of the

14:55.000 --> 14:58.000
Fed, argued four things.

14:58.000 --> 14:59.000
One, that it was impossible for

14:59.000 --> 15:01.000
the Fed to identify bubbles

15:01.000 --> 15:03.000
exactly, that it could only tell

15:03.000 --> 15:05.000
if something was a bubble

15:05.000 --> 15:09.000
exposed, once it burst.

15:09.000 --> 15:11.000
Secondly, that bubbles are an

15:11.000 --> 15:14.000
inherent sort of part of a

15:14.000 --> 15:17.000
dynamic capitalist system, a

15:17.000 --> 15:20.000
product more of human psychology

15:20.000 --> 15:21.000
than easy credit and there was

15:21.000 --> 15:23.000
nothing the Fed could do about

15:23.000 --> 15:25.000
it.

15:25.000 --> 15:26.000
Thirdly, that if he tried to do

15:26.000 --> 15:28.000
anything about it, he would be

15:28.000 --> 15:30.000
overstepping his mandates and

15:30.000 --> 15:31.000
would get himself into a lot of

15:31.000 --> 15:34.000
political hot water.

15:34.000 --> 15:36.000
And fourthly, that the side

15:36.000 --> 15:38.000
effects of trying to deal with

15:38.000 --> 15:41.000
the bubble, side effects of the

15:41.000 --> 15:43.000
medicine, would be worse than

15:43.000 --> 15:45.000
the disease and that it was more

15:45.000 --> 15:48.000
efficient and less costly to

15:48.000 --> 15:51.000
deal with the after effects.

15:51.000 --> 15:52.000
In effect, let the bubble burst,

15:52.000 --> 15:55.000
burn itself out and burst, and

15:55.000 --> 15:59.000
then deal with the consequences.

15:59.000 --> 16:02.000
Every one of those arguments

16:02.000 --> 16:03.000
surfaced within in the Federal

16:03.000 --> 16:06.000
Reserve in the 1920s, so there

16:06.000 --> 16:08.000
was nothing new, and they made

16:08.000 --> 16:10.000
exactly the same decision.

16:10.000 --> 16:11.000
They made the same calculation

16:11.000 --> 16:13.000
that they would step aside and

16:13.000 --> 16:17.000
let it...

16:17.000 --> 16:19.000
I must learn not to mix

16:19.000 --> 16:20.000
my metaphors when I talk

16:20.000 --> 16:22.000
about bubbles.

16:22.000 --> 16:25.000
But let itself blow up.

16:25.000 --> 16:27.000
In both cases, both in the 1920s

16:27.000 --> 16:30.000
and now, we had excess leverage.

16:30.000 --> 16:32.000
In the 1920s there was

16:32.000 --> 16:34.000
development of what were known

16:34.000 --> 16:37.000
as investment trusts, which are

16:37.000 --> 16:40.000
real leverage closed-end funds.

16:40.000 --> 16:43.000
And there was a lot of leverage

16:43.000 --> 16:46.000
by a group of traders on Wall

16:46.000 --> 16:49.000
Street known as Pool Operators,

16:49.000 --> 16:51.000
who were like the hedge fund

16:51.000 --> 16:54.000
managers of the era, who

16:54.000 --> 16:56.000
borrowed extensively in the

16:56.000 --> 16:58.000
broker loan market and in those

16:58.000 --> 17:00.000
days, if you wanted to buy on

17:00.000 --> 17:02.000
margin, you only had to put 10

17:02.000 --> 17:03.000
cents down and you could borrow

17:03.000 --> 17:05.000
the other 90 cents and buy a

17:05.000 --> 17:07.000
dollar of stock.

17:07.000 --> 17:09.000
Recently, the leverage has

17:09.000 --> 17:11.000
occurred in the financial system

17:11.000 --> 17:13.000
and in particular what has come

17:13.000 --> 17:14.000
to be known as the shadow

17:14.000 --> 17:16.000
banking system.

17:16.000 --> 17:18.000
So what is the shadow banking

17:18.000 --> 17:20.000
system?

17:20.000 --> 17:21.000
If you take the total size of

17:21.000 --> 17:23.000
banks in the US, they amount to

17:23.000 --> 17:26.000
about $10 trillion compared to a

17:26.000 --> 17:29.000
GDP of about $15 trillion.

17:29.000 --> 17:31.000
In addition, though, to those

17:31.000 --> 17:33.000
banks, there are a whole series

17:33.000 --> 17:37.000
of other institutions that act

17:37.000 --> 17:39.000
like banks, but are not called

17:39.000 --> 17:41.000
banks.

17:41.000 --> 17:42.000
I'll give you an example that

17:42.000 --> 17:44.000
you all use, which is money

17:44.000 --> 17:46.000
market funds.

17:46.000 --> 17:48.000
What do money market funds do?

17:48.000 --> 17:49.000
You deposit your money in the

17:49.000 --> 17:51.000
money market fund, you often

17:51.000 --> 17:53.000
have check writing privileges,

17:53.000 --> 17:54.000
you can withdraw your money when

17:54.000 --> 17:57.000
you want.

17:57.000 --> 17:59.000
And what does the money market

17:59.000 --> 18:01.000
fund do?

18:01.000 --> 18:02.000
It invests that money in a whole

18:02.000 --> 18:05.000
series of investments, exactly

18:05.000 --> 18:08.000
like a bank does.

18:08.000 --> 18:10.000
Total size of money market funds

18:10.000 --> 18:11.000
is somewhere between

18:11.000 --> 18:13.000
$3 and $4 trillion,

18:13.000 --> 18:16.000
so it's almost half the size

18:16.000 --> 18:18.000
of the banking system.

18:18.000 --> 18:21.000
In addition, we had investment

18:21.000 --> 18:25.000
banks that operated like banks.

18:25.000 --> 18:27.000
They borrowed short-term and

18:27.000 --> 18:28.000
bought long-term assets.

18:28.000 --> 18:31.000
Total size of the balance sheet

18:31.000 --> 18:34.000
of investment banks was another

18:34.000 --> 18:35.000
$3 to $4 trillion.

18:35.000 --> 18:37.000
All of these institutions

18:37.000 --> 18:40.000
operated like banks without two

18:40.000 --> 18:41.000
things.

18:41.000 --> 18:44.000
One is the regulation that banks

18:44.000 --> 18:45.000
are subject to, and in

18:45.000 --> 18:47.000
particular, the capital adequacy

18:47.000 --> 18:49.000
requirements that banks are

18:49.000 --> 18:54.000
subject to.

18:54.000 --> 18:56.000
Secondly, without the sort of

18:56.000 --> 18:58.000
oversight of regulators looking

18:58.000 --> 19:00.000
at what they were doing.

19:00.000 --> 19:02.000
This became, this shadow banking

19:02.000 --> 19:04.000
system, became the most

19:04.000 --> 19:06.000
vulnerable part of the financial

19:06.000 --> 19:08.000
system.

19:08.000 --> 19:10.000
Okay, so, in both cases we had a

19:10.000 --> 19:12.000
bubble.

19:12.000 --> 19:14.000
In both cases, as they always

19:14.000 --> 19:17.000
do, the bubbles burst.

19:17.000 --> 19:18.000
And in both cases the bursting

19:18.000 --> 19:22.000
bubble led to a banking crisis.

19:22.000 --> 19:24.000
In the 1920s, it was a

19:24.000 --> 19:26.000
conventional banking crisis.

19:26.000 --> 19:27.000
You remember those grainy,

19:27.000 --> 19:29.000
black-and-white photographs of

19:29.000 --> 19:31.000
people lining up outside banks

19:31.000 --> 19:35.000
to take their money out.

19:35.000 --> 19:36.000
That was in the days before

19:36.000 --> 19:38.000
deposit insurance.

19:38.000 --> 19:40.000
Now that we have deposit

19:40.000 --> 19:41.000
insurance, there was very little

19:41.000 --> 19:42.000
of that, although we did get

19:42.000 --> 19:44.000
some cases.

19:44.000 --> 19:45.000
We got a run on a bank in

19:45.000 --> 19:48.000
California called IndyMac.

19:48.000 --> 19:51.000
We got a run on a UK bank called

19:51.000 --> 19:53.000
Northern Rock.

19:53.000 --> 19:54.000
We got a run on a Hong Kong bank

19:54.000 --> 19:57.000
called Bank of East Asia.

19:57.000 --> 19:59.000
This time, we had a run on the

19:59.000 --> 20:01.000
shadow banking system and it was

20:01.000 --> 20:03.000
actually more insidious and more

20:03.000 --> 20:06.000
dramatic because the shadow

20:06.000 --> 20:10.000
banking system, aside from money

20:10.000 --> 20:12.000
market funds, largely finances

20:12.000 --> 20:14.000
itself through wholesale sources

20:14.000 --> 20:16.000
of money, not retail sources of

20:16.000 --> 20:18.000
money.

20:18.000 --> 20:20.000
The run occurred, essentially it

20:20.000 --> 20:22.000
was a digital run.

20:22.000 --> 20:23.000
Institutions got on their

20:23.000 --> 20:25.000
computers and with a click of

20:25.000 --> 20:27.000
the mouse pulled out hundreds of

20:27.000 --> 20:29.000
millions of dollars out of

20:29.000 --> 20:33.000
financial institutions.

20:33.000 --> 20:37.000
So we've had a banking crisis.

20:37.000 --> 20:42.000
All financial crises seem to

20:42.000 --> 20:46.000
throw up a signature crook.

20:46.000 --> 20:50.000
This time, the signature crook

20:50.000 --> 20:52.000
is a man by the name of Bernie

20:52.000 --> 20:55.000
Madoff, you've probably been

20:55.000 --> 20:57.000
reading about Bernie's exploits.

20:57.000 --> 20:59.000
The Bernie Madoff of the 1920s

20:59.000 --> 21:01.000
was a man by the name of Ivar

21:01.000 --> 21:03.000
Kreuger.

21:03.000 --> 21:07.000
He was a Swede, he ran a match

21:07.000 --> 21:11.000
manufacturing company.

21:11.000 --> 21:13.000
Because of the conditions in the

21:13.000 --> 21:18.000
'20s, a lot of European

21:18.000 --> 21:20.000
countries, but a lot of

21:20.000 --> 21:22.000
countries in other places, had

21:22.000 --> 21:24.000
bankrupted themselves during the

21:24.000 --> 21:26.000
first world war.

21:26.000 --> 21:28.000
So Mr. Kreuger discovered that

21:28.000 --> 21:31.000
he could borrow on better terms

21:31.000 --> 21:33.000
than most countries.

21:33.000 --> 21:34.000
So he went into the

21:34.000 --> 21:37.000
international banking business,

21:37.000 --> 21:38.000
and what he would do was borrow

21:38.000 --> 21:40.000
money on Wall Street and lend it

21:40.000 --> 21:41.000
to countries.

21:41.000 --> 21:43.000
In return, he would demand a

21:43.000 --> 21:45.000
monopoly over match

21:45.000 --> 21:48.000
manufacturing.

21:48.000 --> 21:50.000
He did such deals in Ecuador,

21:50.000 --> 21:53.000
Peru, Poland, Greece, Hungary,

21:53.000 --> 21:56.000
Yugoslavia, Romania.

21:56.000 --> 21:58.000
In 1926 he did a deal like that

21:58.000 --> 22:00.000
in France, and most famously, in

22:00.000 --> 22:03.000
1929, in Germany.

22:03.000 --> 22:04.000
He made himself the third

22:04.000 --> 22:07.000
richest man in the world.

22:07.000 --> 22:09.000
He was a confirmed bachelor and

22:09.000 --> 22:12.000
he had six or seven residences

22:12.000 --> 22:13.000
around the world in which he

22:13.000 --> 22:16.000
installed different girlfriends.

22:16.000 --> 22:18.000
He went into the movie business

22:18.000 --> 22:20.000
and was responsible for

22:20.000 --> 22:24.000
discovering Greta Garbo.

22:24.000 --> 22:26.000
In 1932 he was found in his

22:26.000 --> 22:29.000
apartment in Paris with a bullet

22:29.000 --> 22:32.000
wound through his heart.

22:32.000 --> 22:34.000
Initially, everyone sort of felt

22:34.000 --> 22:37.000
very sorry for him, saw him as a

22:37.000 --> 22:38.000
victim of the tension of the

22:38.000 --> 22:40.000
time.

22:40.000 --> 22:42.000
It then turned out that he had

22:42.000 --> 22:47.000
borrowed money by forging

22:47.000 --> 22:49.000
government bonds and his last

22:49.000 --> 22:52.000
transaction had been to forge

22:52.000 --> 22:55.000
$100 million in Italian

22:55.000 --> 22:57.000
government bonds.

22:57.000 --> 22:59.000
Eventually, his bond holders

22:59.000 --> 23:01.000
lost a total of $400 million.

23:01.000 --> 23:03.000
Now, one way of converting

23:03.000 --> 23:06.000
amounts from the 1920s to now is

23:06.000 --> 23:09.000
to multiply by 200.

23:09.000 --> 23:10.000
That sort of adjusts for the

23:10.000 --> 23:12.000
size of the economy, so that

23:12.000 --> 23:14.000
works out to about $80 billion

23:14.000 --> 23:16.000
today.

23:16.000 --> 23:18.000
So I think he actually probably

23:18.000 --> 23:21.000
beat Bernie Madoff.

23:21.000 --> 23:23.000
He was interviewed by the

23:23.000 --> 23:24.000
Saturday Evening Post and they

23:24.000 --> 23:26.000
asked him, "Mr. Kreuger, what's

23:26.000 --> 23:29.000
the secret of your success?

23:29.000 --> 23:30.000
You're the third richest man

23:30.000 --> 23:32.000
in the world."

23:32.000 --> 23:35.000
And he said, "Three things.

23:35.000 --> 23:36.000
First is silence,

23:36.000 --> 23:38.000
the second is more silence,

23:38.000 --> 23:40.000
and the third

23:40.000 --> 23:42.000
is still more silence."

23:42.000 --> 23:43.000
You can see why I compare him

23:43.000 --> 23:45.000
to Bernie Madoff.

23:45.000 --> 23:47.000
Then as now, the bursting

23:47.000 --> 23:49.000
bubble, the banking crisis and

23:49.000 --> 23:51.000
the scandals brought discredit

23:51.000 --> 23:53.000
on all those involved in running

23:53.000 --> 23:55.000
and regulating financial

23:55.000 --> 23:57.000
institutions.

23:57.000 --> 23:58.000
If you think that outrage at the

23:58.000 --> 24:00.000
sort of so-called greed and

24:00.000 --> 24:02.000
excesses of Wall Street is

24:02.000 --> 24:03.000
something new, get this.

24:03.000 --> 24:05.000
In 1933, congress decided to

24:05.000 --> 24:07.000
hold hearings on the source of

24:07.000 --> 24:10.000
the financial problem.

24:10.000 --> 24:14.000
The hearings were led by a young

24:14.000 --> 24:16.000
district attorney from New York,

24:16.000 --> 24:18.000
Ferdinand Peccoro.

24:18.000 --> 24:23.000
He got all the chief executive

24:23.000 --> 24:24.000
officers of the major banks to

24:24.000 --> 24:27.000
come and testify, and we

24:27.000 --> 24:29.000
discovered the following.

24:29.000 --> 24:31.000
The president of Chase was a man

24:31.000 --> 24:34.000
by the name of Albert Wiggins.

24:34.000 --> 24:36.000
In October 1929 when the stock

24:36.000 --> 24:39.000
market crashed, he had made

24:39.000 --> 24:40.000
$4 million.

24:40.000 --> 24:42.000
Now remember, the way you

24:42.000 --> 24:44.000
convert it is to multiply by

24:44.000 --> 24:46.000
200, by shorting the stock of

24:46.000 --> 24:48.000
his own bank at the beginning of

24:48.000 --> 24:50.000
October.

24:50.000 --> 24:51.000
Talk about a conflict of

24:51.000 --> 24:54.000
interest.

24:54.000 --> 24:56.000
Charlie Mitchell, who was

24:56.000 --> 24:58.000
president of what is now

24:58.000 --> 25:01.000
CitiBank, and Jack Morgan, who

25:01.000 --> 25:04.000
was the head of JP Morgan, had

25:04.000 --> 25:06.000
both earned a million dollars a

25:06.000 --> 25:08.000
year for three years and neither

25:08.000 --> 25:11.000
had paid a cent of taxes.

25:11.000 --> 25:13.000
Bankers became nicknamed

25:13.000 --> 25:15.000
"banksters."

25:15.000 --> 25:18.000
In 1934, Andrew Mellon, who

25:18.000 --> 25:20.000
had been secretary of the

25:20.000 --> 25:21.000
treasury under three presidents

25:21.000 --> 25:26.000
and had been hailed as the

25:26.000 --> 25:28.000
greatest treasury secretary

25:28.000 --> 25:30.000
since Alexander Hamilton, was

25:30.000 --> 25:33.000
indicted for tax evasion.

25:33.000 --> 25:36.000
The treasury department demanded

25:36.000 --> 25:39.000
$2 million of back taxes.

25:39.000 --> 25:40.000
He, by the way, was the third

25:40.000 --> 25:43.000
richest man in the country.

25:43.000 --> 25:44.000
He eventually settled for

25:44.000 --> 25:47.000
$600,000 and agreed to donate

25:47.000 --> 25:48.000
his paintings to the national

25:48.000 --> 25:50.000
gallery.

25:50.000 --> 25:51.000
(laughter)

25:51.000 --> 25:53.000
So we got something out of it.

25:53.000 --> 25:55.000
There are many echoes of the

25:55.000 --> 25:57.000
past in today's headlines of

25:57.000 --> 26:00.000
Wall Street's excesses.

26:00.000 --> 26:02.000
So if you'd taken a snapshot of

26:02.000 --> 26:06.000
the world, about 16 months into

26:06.000 --> 26:08.000
the Great Depression in the

26:08.000 --> 26:10.000
beginning of 1931, this is what

26:10.000 --> 26:12.000
you would have found.

26:12.000 --> 26:15.000
Stock market was down about 50%,

26:15.000 --> 26:18.000
profits were down about 50%,

26:18.000 --> 26:20.000
global industrial production was

26:20.000 --> 26:23.000
down anywhere from 15% to 20%.

26:23.000 --> 26:25.000
Well, guess what.

26:25.000 --> 26:27.000
In May of this year, if you'd

26:27.000 --> 26:29.000
taken the same snapshot, again

26:29.000 --> 26:32.000
about 15 months into this

26:32.000 --> 26:36.000
current recession, you'd have

26:36.000 --> 26:37.000
found the stock market was down

26:37.000 --> 26:39.000
about 50%, profits were down

26:39.000 --> 26:42.000
about 50%, and global industrial

26:42.000 --> 26:44.000
production was down somewhere

26:44.000 --> 26:47.000
between 15% and 20%.

26:47.000 --> 26:49.000
The difference, of course, is,

26:49.000 --> 26:51.000
in the subsequent 18 months,

26:51.000 --> 26:54.000
from January 1931 to June of

26:54.000 --> 26:56.000
1932, the bottom fell out of the

26:56.000 --> 26:59.000
world economy.

26:59.000 --> 27:02.000
Stocks ended up down, in the US,

27:02.000 --> 27:04.000
down 89% eventually.

27:04.000 --> 27:07.000
World industrial production fell

27:07.000 --> 27:09.000
another 20%, so it went down 40%

27:09.000 --> 27:12.000
all together.

27:12.000 --> 27:14.000
That is not happening this time.

27:14.000 --> 27:15.000
In fact, we're getting a

27:15.000 --> 27:17.000
recovery.

27:17.000 --> 27:19.000
So, what's the difference?

27:19.000 --> 27:21.000
What happened in the 1920s was,

27:21.000 --> 27:23.000
they took, the authorities took

27:23.000 --> 27:27.000
a very sick patient and gave it

27:27.000 --> 27:30.000
exactly the wrong medicine.

27:30.000 --> 27:33.000
They did three things.

27:33.000 --> 27:34.000
First is, they let the banking

27:34.000 --> 27:36.000
system go under.

27:36.000 --> 27:38.000
They essentially argued, the Fed

27:38.000 --> 27:40.000
argued, that our job is to

27:40.000 --> 27:42.000
provide temporary loans to deal

27:42.000 --> 27:44.000
with the liquidity crisis, not

27:44.000 --> 27:48.000
to compensate you for the bad

27:48.000 --> 27:52.000
investments and mistakes that

27:52.000 --> 27:53.000
you've made, not to compensate

27:53.000 --> 27:56.000
bankers.

27:56.000 --> 28:00.000
The problem is that in a

28:00.000 --> 28:03.000
depression, the distinction

28:03.000 --> 28:05.000
between what is known as a

28:05.000 --> 28:06.000
liquidity problem, which is,

28:06.000 --> 28:09.000
you need temporary money,

28:09.000 --> 28:10.000
and a solvency problem, i.e.,

28:10.000 --> 28:12.000
you made bad loans,

28:12.000 --> 28:14.000
begins to erode.

28:14.000 --> 28:15.000
Essentially, if everyone has a

28:15.000 --> 28:16.000
liquidity problem, everyone's

28:16.000 --> 28:18.000
trying to dump assets at the

28:18.000 --> 28:19.000
same time and you convert what

28:19.000 --> 28:21.000
is a liquidity problem into a

28:21.000 --> 28:23.000
solvency problem.

28:23.000 --> 28:24.000
So, the Fed let the banking

28:24.000 --> 28:27.000
system go under.

28:27.000 --> 28:28.000
Secondly, they tried to cut

28:28.000 --> 28:30.000
budget deficits by raising

28:30.000 --> 28:32.000
taxes.

28:32.000 --> 28:34.000
1932, Hoover, they believed that

28:34.000 --> 28:35.000
budget deficits were always a

28:35.000 --> 28:38.000
bad thing.

28:38.000 --> 28:41.000
In 1932, Hoover raised taxes.

28:41.000 --> 28:42.000
And the third thing, the height

28:42.000 --> 28:45.000
of all folly, they even raised

28:45.000 --> 28:47.000
interest rates in the middle of

28:47.000 --> 28:49.000
the Great Depression.

28:49.000 --> 28:51.000
In 1931, Germany raised interest

28:51.000 --> 28:57.000
rates from 4% to 15%.

28:57.000 --> 29:00.000
The UK followed a month later

29:00.000 --> 29:01.000
and the US even raised interest

29:01.000 --> 29:05.000
rates from 2% to 5%.

29:05.000 --> 29:07.000
You ask yourself, why on earth

29:07.000 --> 29:09.000
would they do that?

29:09.000 --> 29:11.000
Well, it was the gold standard.

29:11.000 --> 29:12.000
Essentially what happened was,

29:12.000 --> 29:14.000
the run on the banks caused a

29:14.000 --> 29:15.000
lot of gold to leave the banking

29:15.000 --> 29:17.000
system and all these countries

29:17.000 --> 29:20.000
started scrambling for gold.

29:20.000 --> 29:23.000
The way they competed with each

29:23.000 --> 29:24.000
other was to raise interest

29:24.000 --> 29:26.000
rates to try to attract gold.

29:26.000 --> 29:28.000
It was actually a slightly

29:28.000 --> 29:30.000
crazier system than that.

29:30.000 --> 29:33.000
Gold is incredibly heavy and

29:33.000 --> 29:36.000
expensive to transport.

29:36.000 --> 29:38.000
A cube of about 18 inches

29:38.000 --> 29:42.000
by 18 inches ways about a ton.

29:42.000 --> 29:44.000
Countries, instead of shipping

29:44.000 --> 29:46.000
gold around the world, decided,

29:46.000 --> 29:48.000
what we'll do is, we'll just

29:48.000 --> 29:50.000
keep it in one place and just,

29:50.000 --> 29:53.000
by a bit of bookkeeping, move it

29:53.000 --> 29:55.000
around.

29:55.000 --> 29:57.000
So, when Britain lost gold to

29:57.000 --> 29:59.000
France, what would happen is, a

29:59.000 --> 30:01.000
guy would go down into the

30:01.000 --> 30:03.000
vaults of the Bank of England,

30:03.000 --> 30:06.000
two guys, and they would go to

30:06.000 --> 30:08.000
the vault, and they'd go to one

30:08.000 --> 30:10.000
side of the vault and they'd

30:10.000 --> 30:12.000
load all these ingots on and

30:12.000 --> 30:13.000
they'd put it on a little cart.

30:13.000 --> 30:15.000
Then they'd trundle the cart

30:15.000 --> 30:17.000
over to the other side of the

30:17.000 --> 30:18.000
vault and they'd offload it and

30:18.000 --> 30:20.000
they'd stick a little flag in it

30:20.000 --> 30:21.000
saying, "This now belongs

30:21.000 --> 30:23.000
to France."

30:23.000 --> 30:25.000
So you had this absurd system

30:25.000 --> 30:26.000
where Britain was causing mass

30:26.000 --> 30:29.000
unemployment, raising interest

30:29.000 --> 30:30.000
rates, causing mass

30:30.000 --> 30:32.000
unemployment, because there was

30:32.000 --> 30:33.000
not enough gold on one side of

30:33.000 --> 30:35.000
its vaults and too much on the

30:35.000 --> 30:37.000
other.

30:37.000 --> 30:38.000
It was clearly an absurd system

30:38.000 --> 30:40.000
which then collapsed.

30:40.000 --> 30:42.000
What I do is, I liken these

30:42.000 --> 30:48.000
officials to 18th century

30:48.000 --> 30:50.000
doctors, who thought the cure

30:50.000 --> 30:52.000
for illness was to draw blood

30:52.000 --> 30:55.000
from the patient.

30:55.000 --> 30:56.000
And we haven't learned many

30:56.000 --> 30:58.000
things in economics, but we have

30:58.000 --> 31:01.000
learned that when you've got a

31:01.000 --> 31:04.000
patient who's sick, the cure for

31:04.000 --> 31:06.000
their disease is not to draw

31:06.000 --> 31:08.000
blood.

31:08.000 --> 31:10.000
So we're now doing none of those

31:10.000 --> 31:11.000
things.

31:11.000 --> 31:13.000
No one is letting the banking

31:13.000 --> 31:14.000
system go under.

31:14.000 --> 31:16.000
We briefly, for one day,

31:16.000 --> 31:18.000
experimented with letting a bank

31:18.000 --> 31:20.000
go under, and look at the

31:20.000 --> 31:21.000
consequences.

31:21.000 --> 31:23.000
So we have thrown unprecedented

31:23.000 --> 31:25.000
amounts in to support the

31:25.000 --> 31:27.000
banking system.

31:27.000 --> 31:30.000
Secondly, no one thinks that we

31:30.000 --> 31:32.000
should be trying to raise taxes

31:32.000 --> 31:34.000
or cut the budget deficit at the

31:34.000 --> 31:35.000
moment.

31:35.000 --> 31:37.000
Indeed, we've expanded

31:37.000 --> 31:39.000
collectively, countries have

31:39.000 --> 31:41.000
expanded their budget deficits

31:41.000 --> 31:43.000
around the world by about 5% of

31:43.000 --> 31:45.000
GDP.

31:45.000 --> 31:46.000
And no one's planning to raise

31:46.000 --> 31:47.000
interest rates.

31:47.000 --> 31:48.000
No one has raised interest

31:48.000 --> 31:50.000
rates, and no one's planning to

31:50.000 --> 31:51.000
raise interest rates.

31:51.000 --> 31:53.000
Indeed, they've intervened to

31:53.000 --> 31:57.000
try to get long-term rates down.

31:57.000 --> 31:59.000
The lead up was eerily similar.

31:59.000 --> 32:02.000
How they handled the crisis was

32:02.000 --> 32:05.000
very different.

32:05.000 --> 32:06.000
Let me spend the last few

32:06.000 --> 32:09.000
moments on the recovery.

32:09.000 --> 32:11.000
Contrary to what most

32:11.000 --> 32:14.000
conservatives argue, the

32:14.000 --> 32:17.000
recovery after 1933 was very

32:17.000 --> 32:19.000
strong.

32:19.000 --> 32:20.000
Industrial production doubled in

32:20.000 --> 32:22.000
a four-year period in the US as

32:22.000 --> 32:24.000
it did in Germany.

32:24.000 --> 32:26.000
The first Roosevelt term

32:26.000 --> 32:29.000
represents the strongest

32:29.000 --> 32:33.000
peacetime presidential term of

32:33.000 --> 32:37.000
economic growth.

32:37.000 --> 32:40.000
Where the conservatives are

32:40.000 --> 32:43.000
right is that unemployment

32:43.000 --> 32:47.000
remained obstinately high.

32:47.000 --> 32:50.000
Employment lagged behind, in

32:50.000 --> 32:52.000
part because many of the New

32:52.000 --> 32:54.000
Deal policies in effect raised

32:54.000 --> 32:57.000
the cost of labor so employers

32:57.000 --> 32:59.000
found it more profitable to

32:59.000 --> 33:02.000
expand production without having

33:02.000 --> 33:05.000
more workers.

33:05.000 --> 33:07.000
Second thing, contrary to

33:07.000 --> 33:10.000
popular myth, the recovery

33:10.000 --> 33:12.000
across the world, particularly

33:12.000 --> 33:14.000
in the US and Britain, had very

33:14.000 --> 33:16.000
little to do with deficit

33:16.000 --> 33:19.000
spending or Keynesian policies.

33:19.000 --> 33:21.000
Roosevelt was a victim of the

33:21.000 --> 33:23.000
same dogma at the time, that he

33:23.000 --> 33:24.000
thought budget deficits were a

33:24.000 --> 33:26.000
bad thing.

33:26.000 --> 33:28.000
So while the New Deal policies

33:28.000 --> 33:30.000
did cause some modest increase

33:30.000 --> 33:32.000
in public expenditure, it was

33:32.000 --> 33:35.000
financed by raising taxes.

33:35.000 --> 33:37.000
The only place where we got

33:37.000 --> 33:39.000
massive public works financed by

33:39.000 --> 33:41.000
government borrowing was in

33:41.000 --> 33:44.000
Germany, which is the only place

33:44.000 --> 33:46.000
which had essentially pursued

33:46.000 --> 33:49.000
Keynesian policies and, by the

33:49.000 --> 33:50.000
way, was the only place that did

33:50.000 --> 33:53.000
not face an employment problem

33:53.000 --> 33:56.000
during the 1930s.

33:56.000 --> 33:57.000
So what happened?

33:57.000 --> 33:59.000
Most countries recognized that

33:59.000 --> 34:00.000
the gold standard had become a

34:00.000 --> 34:02.000
straitjacket and broke with

34:02.000 --> 34:03.000
gold.

34:03.000 --> 34:04.000
This allowed them to massively

34:04.000 --> 34:08.000
cut interest rates.

34:08.000 --> 34:09.000
Now, one problem with relying on

34:09.000 --> 34:12.000
easy money around the world as a

34:12.000 --> 34:15.000
way of promoting recovery is, it

34:15.000 --> 34:17.000
works in part by causing your

34:17.000 --> 34:21.000
currency to fall, thus stealing

34:21.000 --> 34:23.000
markets from your neighbors.

34:23.000 --> 34:25.000
We got a spiral of

34:25.000 --> 34:27.000
beggar-thy-neighbor policies and

34:27.000 --> 34:30.000
competitive devaluations.

34:30.000 --> 34:33.000
In response to these competitive

34:33.000 --> 34:35.000
devaluations, plus the high

34:35.000 --> 34:37.000
unemployment, countries

34:37.000 --> 34:40.000
responded by hunkering down

34:40.000 --> 34:43.000
behind high tariff barriers,

34:43.000 --> 34:45.000
imposing import controls, and

34:45.000 --> 34:47.000
putting restrictions on capital

34:47.000 --> 34:48.000
flows.

34:48.000 --> 34:50.000
So the gold standard, which had

34:50.000 --> 34:51.000
been a very rigid sort of

34:51.000 --> 34:52.000
straitjacket, and obviously

34:52.000 --> 34:54.000
needed to be replaced, was

34:54.000 --> 34:56.000
replaced by a sort of chaotic

34:56.000 --> 34:58.000
and disorganized system of

34:58.000 --> 34:59.000
floating exchange rates.

34:59.000 --> 35:01.000
Countries lost confidence in the

35:01.000 --> 35:05.000
international system's ability

35:05.000 --> 35:07.000
to reconcile their conflicting

35:07.000 --> 35:09.000
interests and ambitions.

35:09.000 --> 35:11.000
There was a disastrous backlash

35:11.000 --> 35:14.000
against globalization, and it

35:14.000 --> 35:16.000
was a time of the worst sort of

35:16.000 --> 35:19.000
populism and nationalism.

35:19.000 --> 35:21.000
So far we seem to have learned

35:21.000 --> 35:23.000
the lessons of the 1930s.

35:23.000 --> 35:25.000
We've been, first of all, far

35:25.000 --> 35:27.000
more willing to rely on fiscal

35:27.000 --> 35:29.000
policy, i.e.,

35:29.000 --> 35:31.000
expanding budget deficits

35:31.000 --> 35:34.000
as a stimulus mechanism.

35:34.000 --> 35:36.000
In contrast to monetary easing,

35:36.000 --> 35:38.000
which works by in effect trying

35:38.000 --> 35:40.000
to steal markets from your

35:40.000 --> 35:42.000
neighbors, fiscal expansion

35:42.000 --> 35:43.000
actually has positive spillover

35:43.000 --> 35:45.000
effects.

35:45.000 --> 35:47.000
If you spend money, it causes

35:47.000 --> 35:48.000
your imports to go up and that

35:48.000 --> 35:50.000
helps your trading partners.

35:50.000 --> 35:52.000
There's much more cooperation.

35:52.000 --> 35:54.000
There's much less competition

35:54.000 --> 35:56.000
this time.

35:56.000 --> 35:57.000
There are, however, three

35:57.000 --> 36:01.000
parallels, and these are enough

36:01.000 --> 36:04.000
to keep you worried.

36:04.000 --> 36:08.000
The first is, it's clear in both

36:08.000 --> 36:10.000
cases, global financial

36:10.000 --> 36:11.000
arrangements have become

36:11.000 --> 36:13.000
unsustainable.

36:13.000 --> 36:15.000
In the 1930s, the weak link was

36:15.000 --> 36:17.000
Europe versus the US.

36:17.000 --> 36:19.000
A Europe that had become way too

36:19.000 --> 36:22.000
dependent on US lending and when

36:22.000 --> 36:25.000
the music stopped collapsed.

36:25.000 --> 36:28.000
This time, the weak link is at

36:28.000 --> 36:31.000
home, is the US consumer who's

36:31.000 --> 36:33.000
run out of borrowing room.

36:33.000 --> 36:38.000
That means that the Asian

36:38.000 --> 36:40.000
countries that have centrally

36:40.000 --> 36:42.000
relied on an export-led

36:42.000 --> 36:47.000
industrialization pattern into

36:47.000 --> 36:51.000
the US will have to reevaluate

36:51.000 --> 36:54.000
their strategy.

36:54.000 --> 36:56.000
The danger is, if someone like

36:56.000 --> 36:57.000
China finds it too politically

36:57.000 --> 37:01.000
costly to restructure, we're

37:01.000 --> 37:05.000
going to get trade wars.

37:05.000 --> 37:06.000
Second parallel.

37:06.000 --> 37:09.000
Charles Kindelberger, the

37:09.000 --> 37:11.000
economic historian, wrote a book

37:11.000 --> 37:13.000
where he said, the Great

37:13.000 --> 37:15.000
Depression really came out of a

37:15.000 --> 37:17.000
failure of economic leadership

37:17.000 --> 37:20.000
on the world stage.

37:20.000 --> 37:22.000
By that he meant that what we

37:22.000 --> 37:24.000
needed, the world economy

37:24.000 --> 37:27.000
required a leader.

37:27.000 --> 37:29.000
What he meant by leader was, a

37:29.000 --> 37:30.000
country that was willing to do

37:30.000 --> 37:32.000
more than its fair share.

37:32.000 --> 37:34.000
Stress on "more."

37:34.000 --> 37:36.000
More than its fair share as

37:36.000 --> 37:37.000
the supplier of capital of last

37:37.000 --> 37:40.000
resort during the crisis and

37:40.000 --> 37:43.000
acting as the economic

37:43.000 --> 37:46.000
locomotive.

37:46.000 --> 37:48.000
Excepting the fact that small

37:48.000 --> 37:51.000
countries will freeload off you.

37:51.000 --> 37:53.000
So being a leader means that you

37:53.000 --> 37:54.000
know that people are freeloading

37:54.000 --> 37:56.000
off you.

37:56.000 --> 37:58.000
In the 19th century, Britain had

37:58.000 --> 38:00.000
served that role.

38:00.000 --> 38:02.000
First world war bankrupted

38:02.000 --> 38:04.000
Britain, it was unable to.

38:04.000 --> 38:05.000
The mantle should have passed to

38:05.000 --> 38:07.000
the US.

38:07.000 --> 38:09.000
The US, though, was run by a

38:09.000 --> 38:12.000
group of very parochial,

38:12.000 --> 38:14.000
insolent men, and refused to

38:14.000 --> 38:16.000
accept that mantle, and

38:16.000 --> 38:17.000
essentially we got a vacuum of

38:17.000 --> 38:19.000
world leadership.

38:19.000 --> 38:21.000
After 1945, the US took on that

38:21.000 --> 38:24.000
mantle and for a good 50 years

38:24.000 --> 38:26.000
has essentially acted as the

38:26.000 --> 38:29.000
leader.

38:29.000 --> 38:32.000
The question is now, are we at a

38:32.000 --> 38:34.000
similar transition point in

38:34.000 --> 38:35.000
world leadership?

38:35.000 --> 38:38.000
Has the US been so damaged by

38:38.000 --> 38:40.000
its cumulative borrowings

38:40.000 --> 38:43.000
abroad, the fact that it's had a

38:43.000 --> 38:46.000
banking debacle, its foreign

38:46.000 --> 38:49.000
policy reversals, that it's no

38:49.000 --> 38:50.000
longer able to act as the

38:50.000 --> 38:52.000
leader?

38:52.000 --> 38:53.000
If it can't, who can?

38:53.000 --> 38:55.000
China's too small.

38:55.000 --> 38:57.000
The good thing is, we have more

38:57.000 --> 38:59.000
of a tradition of

38:59.000 --> 39:00.000
multilateralism and countries

39:00.000 --> 39:03.000
acting together, but there's

39:03.000 --> 39:06.000
enough here to keep you worried.

39:06.000 --> 39:09.000
And the third thing is that in

39:09.000 --> 39:12.000
this recession, in contrast to

39:12.000 --> 39:15.000
many other recessions,

39:15.000 --> 39:17.000
unemployment has gone up as much

39:17.000 --> 39:20.000
as output has fallen.

39:20.000 --> 39:23.000
I.e., companies have used this

39:23.000 --> 39:26.000
opportunity to lay off workers

39:26.000 --> 39:28.000
in an unprecedented way.

39:28.000 --> 39:30.000
There used to be a thing that

39:30.000 --> 39:32.000
economists used to refer to

39:32.000 --> 39:33.000
called Okun's Law, which is,

39:33.000 --> 39:35.000
during a recession, for every 2%

39:35.000 --> 39:37.000
fall in output, employment fell

39:37.000 --> 39:39.000
1%.

39:39.000 --> 39:40.000
This time, the relationship is

39:40.000 --> 39:43.000
one for one.

39:43.000 --> 39:45.000
Those are all three things to

39:45.000 --> 39:48.000
worry about.

39:48.000 --> 39:50.000
Ultimately, though, the real

39:50.000 --> 39:53.000
challenge comes from those

39:53.000 --> 39:55.000
aspects of the situation where

39:55.000 --> 39:57.000
we find ourselves in uncharted

39:57.000 --> 40:00.000
territory, where the experience

40:00.000 --> 40:03.000
of the 1920s or '30s or any

40:03.000 --> 40:05.000
other period just cannot provide

40:05.000 --> 40:06.000
any lessons because the world is

40:06.000 --> 40:08.000
so different.

40:08.000 --> 40:10.000
Let me give you one example.

40:10.000 --> 40:12.000
In 1929, the banking system was

40:12.000 --> 40:15.000
about $50 billion and GDP was

40:15.000 --> 40:17.000
$100 billion, so it was about

40:17.000 --> 40:19.000
50% of GDP.

40:19.000 --> 40:22.000
Now, if you take the same

40:22.000 --> 40:25.000
statistics, the banking system

40:25.000 --> 40:28.000
accounts for $20 trillion, which

40:28.000 --> 40:31.000
is about 150% of GDP.

40:31.000 --> 40:34.000
So it's three times as large.

40:34.000 --> 40:38.000
Half of it is securitized, a

40:38.000 --> 40:39.000
system of credit that is now

40:39.000 --> 40:41.000
broken.

40:41.000 --> 40:43.000
We've sort of created a

40:43.000 --> 40:45.000
financial Frankenstein where

40:45.000 --> 40:47.000
we've got a financial system

40:47.000 --> 40:48.000
that's too large, a good part of

40:48.000 --> 40:50.000
it is broken and we don't know

40:50.000 --> 40:52.000
how to fix it.

40:52.000 --> 40:54.000
And unfortunately, the past

40:54.000 --> 40:57.000
offers few lessons.

40:57.000 --> 40:59.000
An important theme in my book is

40:59.000 --> 41:01.000
that the mistakes made during

41:01.000 --> 41:05.000
the 1920s and '30s by central

41:05.000 --> 41:08.000
bankers did not stem from

41:08.000 --> 41:10.000
venality or malevolence or

41:10.000 --> 41:12.000
stupidity.

41:12.000 --> 41:14.000
Their primary problem was, faced

41:14.000 --> 41:17.000
with new realities, they were

41:17.000 --> 41:18.000
unable to break free from the

41:18.000 --> 41:21.000
dogmas of the past.

41:21.000 --> 41:23.000
And that is the challenge that

41:23.000 --> 41:26.000
the authorities face at the

41:26.000 --> 41:27.000
moment.

41:27.000 --> 41:29.000
They're dealing with totally

41:29.000 --> 41:31.000
novel problems and we have to

41:31.000 --> 41:32.000
hope that they have the

41:32.000 --> 41:34.000
imagination and inventiveness to

41:34.000 --> 41:36.000
deal with them.

41:36.000 --> 41:37.000
Thank you.

41:37.000 --> 41:40.000
(applause)

41:52.000 --> 41:54.000
>> We're going to give

41:54.000 --> 41:56.000
Mr. Ahamed just a minute here to

41:56.000 --> 41:58.000
catch his breath while you're

41:58.000 --> 42:00.000
thinking of questions and get

42:00.000 --> 42:03.000
our computers linked to our live

42:03.000 --> 42:04.000
audience so if there are any

42:04.000 --> 42:07.000
questions that are coming in,

42:07.000 --> 42:09.000
they can be sent to

42:09.000 --> 42:12.000
questions@wisconsinacademy.org

42:12.000 --> 42:15.000
and we can ask those as well.

42:15.000 --> 42:16.000
I might just take this quick

42:16.000 --> 42:19.000
opportunity to also call your

42:19.000 --> 42:20.000
attention to the yellow cards

42:20.000 --> 42:22.000
that you received on your way

42:22.000 --> 42:23.000
in.

42:23.000 --> 42:24.000
If you fill those out and leave

42:24.000 --> 42:27.000
your email with us, you are

42:27.000 --> 42:30.000
eligible for a door prize, which

42:30.000 --> 42:32.000
I think I had, a copy of the

42:32.000 --> 42:35.000
book by the Halversons, who are

42:35.000 --> 42:39.000
going to be our next speakers.

42:39.000 --> 42:41.000
I'm told it's right here.

42:41.000 --> 42:43.000
There we go.

42:43.000 --> 42:46.000
So please help us out and fill

42:46.000 --> 42:48.000
out those cards and share with

42:48.000 --> 42:49.000
us future speakers and topics

42:49.000 --> 42:51.000
that you would like to hear

42:51.000 --> 42:53.000
from.

42:53.000 --> 42:56.000
At this time, are there

42:56.000 --> 42:58.000
questions for Mr. Ahamed?

42:58.000 --> 43:00.000
Also, you should know, he will

43:00.000 --> 43:01.000
be available in the lobby after

43:01.000 --> 43:03.000
this presentation if you should

43:03.000 --> 43:06.000
like to have a copy of his book.

43:06.000 --> 43:07.000
Very good.

43:07.000 --> 43:09.000
I will let you repeat the

43:09.000 --> 43:11.000
questions so that our listening

43:11.000 --> 43:13.000
audience can hear, and there

43:13.000 --> 43:14.000
should be plenty of time for

43:14.000 --> 43:15.000
questions, but please use the

43:15.000 --> 43:17.000
microphone so that all can hear.

43:17.000 --> 43:19.000
Thank you.

43:22.000 --> 43:24.000
>> (inaudible)

43:41.000 --> 43:42.000
>> Ahamed: Yeah, I would draw a

43:42.000 --> 43:45.000
distinction between the

43:45.000 --> 43:48.000
financial crisis, which was sort

43:48.000 --> 43:50.000
of the financial system seizing

43:50.000 --> 43:53.000
up, and we're past that.

43:53.000 --> 43:56.000
That started, gradually building

43:56.000 --> 44:00.000
up from the beginning of 2008,

44:00.000 --> 44:03.000
hit a sort of crescendo in

44:03.000 --> 44:05.000
September 2008 with the failure

44:05.000 --> 44:07.000
of Lehman.

44:07.000 --> 44:11.000
And we're over it now.

44:11.000 --> 44:13.000
All indications are that

44:13.000 --> 44:14.000
confidence in the financial

44:14.000 --> 44:17.000
system has returned.

44:17.000 --> 44:20.000
Banks are lending to each other,

44:20.000 --> 44:22.000
no one's sort of rushing to pull

44:22.000 --> 44:25.000
their money out of banks.

44:25.000 --> 44:27.000
We're now dealing with the

44:27.000 --> 44:30.000
economic aftermath, which is the

44:30.000 --> 44:33.000
real economy.

44:33.000 --> 44:37.000
There it's a mixed picture.

44:37.000 --> 44:39.000
We probably are out of the

44:39.000 --> 44:40.000
recession.

44:40.000 --> 44:42.000
That probably ended,

44:42.000 --> 44:45.000
technically, in June.

44:45.000 --> 44:49.000
Production has started going up.

44:49.000 --> 44:51.000
It's not, as I said, it's not

44:51.000 --> 44:53.000
feeding through to employment

44:53.000 --> 44:56.000
and the most worrying aspect of

44:56.000 --> 44:59.000
this whole thing is that

44:59.000 --> 45:04.000
employment is, unemployment's

45:04.000 --> 45:06.000
going to keep rising and the

45:06.000 --> 45:09.000
sort of social compact between

45:09.000 --> 45:12.000
companies and workers seems to

45:12.000 --> 45:14.000
have broken or seems to have

45:14.000 --> 45:16.000
changed.

45:16.000 --> 45:17.000
In part because companies can

45:17.000 --> 45:19.000
now go and hire in India or

45:19.000 --> 45:22.000
China, wherever.

45:22.000 --> 45:28.000
So it's a mixed picture.

45:28.000 --> 45:32.000
That's where we stand.

45:32.000 --> 45:33.000
I'm not sure where we're going.

45:33.000 --> 45:35.000
(laughs)

45:35.000 --> 45:36.000
And I'm much better

45:36.000 --> 45:37.000
on the past than the future.

45:37.000 --> 45:39.000
(laughter)

45:45.000 --> 45:46.000
>> I'm aware of the fact,

45:46.000 --> 45:48.000
everything you buy seems to be

45:48.000 --> 45:50.000
made in China.

45:50.000 --> 45:54.000
Doesn't that have tremendous

45:54.000 --> 45:57.000
ramifications in our economy?

45:57.000 --> 45:58.000
I would think that our

45:58.000 --> 46:00.000
dependency on China making

46:00.000 --> 46:04.000
everything is just killing our

46:04.000 --> 46:06.000
economic system.

46:06.000 --> 46:11.000
>> Ahamed: Well, you do want

46:11.000 --> 46:13.000
trade.

46:13.000 --> 46:15.000
So, we definitely don't want to

46:15.000 --> 46:17.000
make everything ourselves

46:17.000 --> 46:18.000
because we wouldn't do it very

46:18.000 --> 46:20.000
well.

46:20.000 --> 46:22.000
We clearly want trade.

46:22.000 --> 46:25.000
The question then is, are the

46:25.000 --> 46:28.000
Chinese somehow competing in an

46:28.000 --> 46:31.000
unfair way?

46:31.000 --> 46:33.000
I have to say that my view is

46:33.000 --> 46:40.000
that their currency policy,

46:40.000 --> 46:42.000
essentially, underprices their

46:42.000 --> 46:44.000
goods.

46:44.000 --> 46:48.000
We benefited for a long time,

46:48.000 --> 46:50.000
which is that we got cheap

46:50.000 --> 46:53.000
goods.

46:53.000 --> 46:55.000
It had some terrible side

46:55.000 --> 47:01.000
effects both on their economy

47:01.000 --> 47:03.000
and on the global financial

47:03.000 --> 47:05.000
system.

47:05.000 --> 47:06.000
On their economy, it made them

47:06.000 --> 47:09.000
incredibly vulnerable.

47:09.000 --> 47:11.000
In the last six months of last

47:11.000 --> 47:15.000
year, or the six months starting

47:15.000 --> 47:19.000
September 2008, their exports

47:19.000 --> 47:21.000
fell 20%.

47:21.000 --> 47:23.000
25 million people lost jobs in

47:23.000 --> 47:25.000
southern China as these

47:25.000 --> 47:28.000
factories closed down or had to

47:28.000 --> 47:30.000
cut production.

47:30.000 --> 47:32.000
They have temporarily dealt with

47:32.000 --> 47:35.000
it by a massive program of

47:35.000 --> 47:37.000
government expenditure and by

47:37.000 --> 47:40.000
opening up the spigots of

47:40.000 --> 47:42.000
credit.

47:42.000 --> 47:43.000
That's purely a temporary

47:43.000 --> 47:45.000
mechanism.

47:45.000 --> 47:48.000
They clearly have to reassess

47:48.000 --> 47:52.000
how much they can depend on a US

47:52.000 --> 47:55.000
consumer that's sort of going to

47:55.000 --> 47:58.000
be the locomotive.

47:58.000 --> 48:03.000
The side effect in the US that

48:03.000 --> 48:06.000
was detrimental is that because

48:06.000 --> 48:09.000
of the import competition, the

48:09.000 --> 48:13.000
Fed overeased and kept credit

48:13.000 --> 48:16.000
too easy for too long.

48:16.000 --> 48:19.000
The result was, the US consumer

48:19.000 --> 48:22.000
went into great debt.

48:22.000 --> 48:25.000
And the US consumer is now

48:25.000 --> 48:28.000
probably tapped out.

48:28.000 --> 48:30.000
So for a variety of reasons, I

48:30.000 --> 48:32.000
don't think, we can't go back to

48:32.000 --> 48:35.000
where we were.

48:35.000 --> 48:36.000
After this crisis, we're not

48:36.000 --> 48:38.000
going to go back to where we

48:38.000 --> 48:39.000
were.

48:39.000 --> 48:41.000
Quite how that plays out, I

48:41.000 --> 48:44.000
don't know.

48:44.000 --> 48:47.000
China is going to have to

48:47.000 --> 48:50.000
somehow restructure its economy.

48:50.000 --> 48:52.000
That does not mean we won't be

48:52.000 --> 48:54.000
importing lots of Chinese goods,

48:54.000 --> 48:56.000
we probably should.

48:56.000 --> 48:58.000
We shouldn't be quite so

48:58.000 --> 49:02.000
dependent as we have been.

49:02.000 --> 49:03.000
>> I was wondering if you could

49:03.000 --> 49:05.000
comment on the intersection of

49:05.000 --> 49:06.000
individual personalities and

49:06.000 --> 49:08.000
events.

49:08.000 --> 49:09.000
One thing I was struck by when I

49:09.000 --> 49:10.000
was reading your book was some

49:10.000 --> 49:12.000
of the sketches of guys like

49:12.000 --> 49:14.000
Montagu Norman in Britain and

49:14.000 --> 49:18.000
Benjamin Strong in the US.

49:18.000 --> 49:20.000
These are men of real both

49:20.000 --> 49:22.000
physical and emotional frailties

49:22.000 --> 49:24.000
and challenges and at certain

49:24.000 --> 49:26.000
key points, they would take

49:26.000 --> 49:29.000
breaks for months at a time.

49:29.000 --> 49:34.000
Benjamin Strong died in October

49:34.000 --> 49:35.000
of '28, which is interesting.

49:35.000 --> 49:37.000
I was wondering if you see any

49:37.000 --> 49:38.000
parallels.

49:38.000 --> 49:40.000
The quirks of their

49:40.000 --> 49:41.000
personalities fed into events at

49:41.000 --> 49:43.000
that time, and if you have any

49:43.000 --> 49:45.000
hunches as to the quirks of

49:45.000 --> 49:47.000
individual leaders, of Ben

49:47.000 --> 49:48.000
Bernanke, of Timothy Geitner or

49:48.000 --> 49:50.000
someone else, where it's more

49:50.000 --> 49:53.000
that sort of these huge forces

49:53.000 --> 49:55.000
at work around the globe.

49:55.000 --> 49:56.000
Sometimes it just happens to

49:56.000 --> 49:58.000
boil down to what this

49:58.000 --> 50:00.000
particular person is like and

50:00.000 --> 50:01.000
something about their emotional,

50:01.000 --> 50:04.000
mental makeup that somehow can

50:04.000 --> 50:05.000
have really far-reaching

50:05.000 --> 50:07.000
ramifications.

50:07.000 --> 50:09.000
>> Ahamed: Yeah, I'd be happy to

50:09.000 --> 50:11.000
talk about that.

50:11.000 --> 50:13.000
You got the point of my book

50:13.000 --> 50:15.000
exactly, which is that

50:15.000 --> 50:19.000
personality is a very large part

50:19.000 --> 50:21.000
of the story.

50:21.000 --> 50:23.000
I don't think they're quite like

50:23.000 --> 50:24.000
the 1920 central bankers, I

50:24.000 --> 50:26.000
should say that the main

50:26.000 --> 50:28.000
character in my book is a man by

50:28.000 --> 50:30.000
the name of Montagu Norman, who

50:30.000 --> 50:32.000
was the head of the Bank of

50:32.000 --> 50:33.000
England, and he was quite a

50:33.000 --> 50:35.000
quirky guy.

50:35.000 --> 50:37.000
But he suffered from one major

50:37.000 --> 50:39.000
deficiency as the head of the

50:39.000 --> 50:41.000
central bank.

50:41.000 --> 50:42.000
He was a manic depressive who

50:42.000 --> 50:44.000
would have nervous breakdowns at

50:44.000 --> 50:45.000
times of great tension.

50:45.000 --> 50:47.000
(laughter)

50:47.000 --> 50:48.000
I can tell you, I don't need

50:48.000 --> 50:49.000
to tell you, that's not

50:49.000 --> 50:51.000
a good attribute

50:51.000 --> 50:53.000
for a central banker.

50:53.000 --> 50:55.000
I don't think any of our guys

50:55.000 --> 50:56.000
are quite like that.

50:56.000 --> 50:58.000
Here's my reading of the

50:58.000 --> 51:01.000
personalities.

51:01.000 --> 51:06.000
Let's start with Alan Greenspan.

51:06.000 --> 51:07.000
One of the major problems of

51:07.000 --> 51:12.000
Alan Greenspan was that we put

51:12.000 --> 51:14.000
him on a pedestal and he started

51:14.000 --> 51:16.000
believing it.

51:16.000 --> 51:18.000
(laughter)

51:18.000 --> 51:21.000
(someone applauds)

51:21.000 --> 51:23.000
The way he conducted policy at

51:23.000 --> 51:25.000
the Fed was, if you disagreed

51:25.000 --> 51:27.000
with him, you suddenly found

51:27.000 --> 51:30.000
yourself on the outs.

51:30.000 --> 51:34.000
So he created a climate where

51:34.000 --> 51:38.000
basically the chairman was

51:38.000 --> 51:41.000
everything.

51:41.000 --> 51:43.000
He did not foster a sort of

51:43.000 --> 51:46.000
atmosphere of debate.

51:46.000 --> 51:47.000
Alan Blinder disagreed with him

51:47.000 --> 51:50.000
and found that he was suddenly

51:50.000 --> 51:53.000
not invited to critical meetings

51:53.000 --> 51:54.000
and basically resigned and went

51:54.000 --> 51:57.000
back to Princeton.

51:57.000 --> 51:59.000
That is precisely the sort of

51:59.000 --> 52:03.000
atmosphere that leads to old

52:03.000 --> 52:06.000
dogmas driving policy.

52:06.000 --> 52:08.000
That's the first, that's Alan

52:08.000 --> 52:11.000
Greenspan.

52:11.000 --> 52:13.000
I think the fascinating

52:13.000 --> 52:16.000
interaction was between Hank

52:16.000 --> 52:21.000
Paulson and Ben Bernanke.

52:21.000 --> 52:22.000
If you remember, last year the

52:22.000 --> 52:27.000
crisis sort of seemed to hit

52:27.000 --> 52:31.000
sort of a peak in March, when

52:31.000 --> 52:34.000
Bear Stearns went under.

52:34.000 --> 52:36.000
At that point, the Fed did

52:36.000 --> 52:38.000
something that it really

52:38.000 --> 52:41.000
shouldn't have done, which is,

52:41.000 --> 52:42.000
the Fed is there to provide

52:42.000 --> 52:45.000
short term loans.

52:45.000 --> 52:46.000
What it did was provide equity

52:46.000 --> 52:51.000
capital to JP Morgan, who bought

52:51.000 --> 52:53.000
Bear Stearns.

52:53.000 --> 52:54.000
It did this in a sort of sneaky

52:54.000 --> 52:56.000
way.

52:56.000 --> 52:58.000
It created a special purpose

52:58.000 --> 53:00.000
vehicle called Maiden Lane and

53:00.000 --> 53:02.000
it lent money to Maiden Lane

53:02.000 --> 53:04.000
which then took on the equity

53:04.000 --> 53:06.000
risk.

53:06.000 --> 53:07.000
But they were doing exactly what

53:07.000 --> 53:09.000
we've been accusing the banks of

53:09.000 --> 53:11.000
doing, which is parking things

53:11.000 --> 53:13.000
off balance sheet and disguising

53:13.000 --> 53:15.000
the risks through various

53:15.000 --> 53:18.000
accounting ruses.

53:18.000 --> 53:20.000
They did that really because

53:20.000 --> 53:23.000
they had no alternative.

53:23.000 --> 53:25.000
There was a window from March to

53:25.000 --> 53:29.000
September where the Fed now, the

53:29.000 --> 53:31.000
authorities, I think, though

53:31.000 --> 53:33.000
maybe not Hank Paulson,

53:33.000 --> 53:35.000
understood that they were facing

53:35.000 --> 53:36.000
a solvency problem, not a

53:36.000 --> 53:39.000
liquidity problem.

53:39.000 --> 53:40.000
A solvency problem cannot be

53:40.000 --> 53:43.000
handled by short term loans by

53:43.000 --> 53:44.000
the Fed.

53:44.000 --> 53:46.000
And yet that's what they

53:46.000 --> 53:50.000
continued to do for six months.

53:50.000 --> 53:52.000
That window of opportunity I

53:52.000 --> 53:54.000
think arose because Hank Paulson

53:54.000 --> 53:58.000
had a sort of, well, there are

53:58.000 --> 54:00.000
two possible interpretations.

54:00.000 --> 54:03.000
Either he really did believe it

54:03.000 --> 54:06.000
was a liquidity problem and sort

54:06.000 --> 54:09.000
of miscalculated and thought,

54:09.000 --> 54:11.000
let the Fed do the lending and

54:11.000 --> 54:12.000
eventually they'll get their

54:12.000 --> 54:14.000
money back and everything will

54:14.000 --> 54:21.000
be okay.

54:21.000 --> 54:23.000
Or he was sort of afraid, didn't

54:23.000 --> 54:24.000
think he could get the votes in

54:24.000 --> 54:26.000
congress and in effect was

54:26.000 --> 54:27.000
bypassing the political system

54:27.000 --> 54:28.000
because he didn't have the

54:28.000 --> 54:30.000
political courage to confront

54:30.000 --> 54:35.000
it.

54:35.000 --> 54:36.000
Or he was being sort of very

54:36.000 --> 54:38.000
astute and figured, I'll let a

54:38.000 --> 54:40.000
real crisis develop and that way

54:40.000 --> 54:42.000
congress will give me the $700

54:42.000 --> 54:46.000
billion that I eventually need.

54:46.000 --> 54:48.000
He was only able to do that

54:48.000 --> 54:50.000
because he was able to bully Ben

54:50.000 --> 54:52.000
Bernanke.

54:52.000 --> 54:53.000
Ben Bernanke, I think, saved the

54:53.000 --> 54:56.000
world in September, but was a

54:56.000 --> 54:59.000
bully-able sort of guy.

54:59.000 --> 55:02.000
There was an article in the New

55:02.000 --> 55:06.000
Yorker about four weeks back by

55:06.000 --> 55:09.000
James Stewart on that whole week

55:09.000 --> 55:14.000
and it describes sort of finally

55:14.000 --> 55:16.000
Ben Bernanke losing his temper

55:16.000 --> 55:17.000
and saying, "Hank, I've run out

55:17.000 --> 55:21.000
of ammunition."

55:21.000 --> 55:23.000
And Paulson didn't get it, and

55:23.000 --> 55:25.000
so all the Fed guys got together

55:25.000 --> 55:28.000
and agreed the next morning to

55:28.000 --> 55:30.000
again sort of shout at Hank

55:30.000 --> 55:33.000
Paulson, and Ben Bernanke sort

55:33.000 --> 55:35.000
of screamed at him.

55:35.000 --> 55:37.000
Eventually, that's what got the

55:37.000 --> 55:39.000
$700 billion.

55:39.000 --> 55:41.000
I don't know, those are my

55:41.000 --> 55:42.000
little insights into the quirks

55:42.000 --> 55:44.000
of personality and how they

55:44.000 --> 55:48.000
played out.

55:48.000 --> 55:50.000
>> Mr. Ahamed, I have a question

55:50.000 --> 55:53.000
from an online viewer.

55:53.000 --> 55:55.000
Zack Jones writes in, "How would

55:55.000 --> 55:57.000
you evaluate the impact of the

55:57.000 --> 55:59.000
fiscal stimulus in the US in

55:59.000 --> 56:00.000
response to the current

56:00.000 --> 56:02.000
recession, and also, what are

56:02.000 --> 56:04.000
your thoughts on the proposals

56:04.000 --> 56:11.000
for further stimulus?"

56:11.000 --> 56:12.000
>> Ahamed: By the way,

56:12.000 --> 56:13.000
I should say,

56:13.000 --> 56:14.000
I'm not an economist.

56:14.000 --> 56:16.000
(laughs)

56:16.000 --> 56:19.000
But I can pretend to be one.

56:19.000 --> 56:24.000
Look, the stimulus package

56:24.000 --> 56:27.000
clearly has made that difference

56:27.000 --> 56:33.000
between -3% growth and +1% that

56:33.000 --> 56:35.000
we're going to have this

56:35.000 --> 56:37.000
quarter.

56:37.000 --> 56:39.000
It really only had to operate at

56:39.000 --> 56:41.000
the margin, but seems to have

56:41.000 --> 56:44.000
worked at the margin.

56:44.000 --> 56:49.000
We're a $15 trillion economy.

56:49.000 --> 56:51.000
Of the stimulus package, we've

56:51.000 --> 56:54.000
probably spent, in the second

56:54.000 --> 56:57.000
and third quarter, $200 billion.

56:57.000 --> 57:01.000
That's a tiny amount in a $15

57:01.000 --> 57:04.000
trillion economy, but is just

57:04.000 --> 57:06.000
the amount that you require to

57:06.000 --> 57:09.000
turn from being -3% to +1% or

57:09.000 --> 57:11.000
whatever.

57:11.000 --> 57:12.000
That's the sort of impact it

57:12.000 --> 57:15.000
had.

57:15.000 --> 57:17.000
The goal is, think of these

57:17.000 --> 57:21.000
stimulus packages as, you drive

57:21.000 --> 57:23.000
yourself into a ditch and you

57:23.000 --> 57:25.000
need a tow truck to get yourself

57:25.000 --> 57:26.000
out.

57:26.000 --> 57:28.000
They should be temporary and

57:28.000 --> 57:29.000
they are designed to be tow

57:29.000 --> 57:32.000
trucks to get us out.

57:32.000 --> 57:34.000
It seems to be working.

57:34.000 --> 57:38.000
We've got one wheel out.

57:38.000 --> 57:42.000
We definitely don't want to

57:42.000 --> 57:44.000
rely, again, you're not going to

57:44.000 --> 57:46.000
get in your car and rely on tow

57:46.000 --> 57:49.000
trucks to pull you around.

57:49.000 --> 57:51.000
So I would be against another

57:51.000 --> 57:53.000
stimulus package for another

57:53.000 --> 57:56.000
reason, which is that these

57:56.000 --> 57:59.000
aren't free.

57:59.000 --> 58:01.000
This is not free money and this

58:01.000 --> 58:06.000
is going to cost us in terms of

58:06.000 --> 58:08.000
government interest and

58:08.000 --> 58:09.000
eventually we're going to have

58:09.000 --> 58:11.000
to raise our taxes to pay for

58:11.000 --> 58:13.000
the interest on this debt.

58:13.000 --> 58:17.000
Now, luckily, there's one big

58:17.000 --> 58:18.000
worry when the government

58:18.000 --> 58:22.000
borrows money, which is that for

58:22.000 --> 58:24.000
every dollar the government

58:24.000 --> 58:26.000
borrows, it takes away money

58:26.000 --> 58:27.000
from the private sector.

58:27.000 --> 58:29.000
That's the big worry.

58:29.000 --> 58:31.000
That's not happening.

58:31.000 --> 58:33.000
The first sign that you'll see

58:33.000 --> 58:36.000
that that's happening is if the

58:36.000 --> 58:38.000
government starts competing with

58:38.000 --> 58:39.000
the private sector for money,

58:39.000 --> 58:40.000
you'll see interest rates going

58:40.000 --> 58:42.000
up.

58:42.000 --> 58:44.000
That's the first signal that

58:44.000 --> 58:47.000
this stuff is not working.

58:47.000 --> 58:49.000
We're not there yet.

58:49.000 --> 58:51.000
On the other hand, we could get

58:51.000 --> 58:53.000
there.

58:53.000 --> 58:54.000
So that's what I would keep my

58:54.000 --> 58:58.000
eye on.

58:58.000 --> 59:00.000
That basically, you've exhausted

59:00.000 --> 59:02.000
my macro economics.

59:06.000 --> 59:08.000
>> (inaudible)

59:15.000 --> 59:16.000
>> Ahamed: Look, I think that

59:16.000 --> 59:20.000
deregulation was, or maybe not

59:20.000 --> 59:24.000
deregulation, but inadequate

59:24.000 --> 59:25.000
regulation of the financial

59:25.000 --> 59:27.000
system that had completely

59:27.000 --> 59:30.000
changed over a 20 year period

59:30.000 --> 59:32.000
was at the heart of this

59:32.000 --> 59:33.000
problem, or converted what

59:33.000 --> 59:35.000
should have been a manageable

59:35.000 --> 59:37.000
problem into a problem that

59:37.000 --> 59:42.000
almost brought the Western

59:42.000 --> 59:46.000
financial system to a halt.

59:46.000 --> 59:47.000
On the other hand, I don't

59:47.000 --> 59:50.000
believe that we can go back to

59:50.000 --> 59:52.000
where we used to be.

59:52.000 --> 59:55.000
It used to be, the two central

59:55.000 --> 59:57.000
things that prevented banking

59:57.000 --> 01:00:00.000
crises and instability during

01:00:00.000 --> 01:00:02.000
the '50s and '60s, were two

01:00:02.000 --> 01:00:04.000
things.

01:00:04.000 --> 01:00:06.000
One was Glass-Steagall, which

01:00:06.000 --> 01:00:08.000
separated commercial banks and

01:00:08.000 --> 01:00:11.000
investment banks and made sure

01:00:11.000 --> 01:00:13.000
that commercial banks, which

01:00:13.000 --> 01:00:15.000
keep our deposits, could only do

01:00:15.000 --> 01:00:19.000
very safe things and treated

01:00:19.000 --> 01:00:20.000
commercial banks like utilities,

01:00:20.000 --> 01:00:22.000
almost.

01:00:22.000 --> 01:00:25.000
The problem is, one, we've got a

01:00:25.000 --> 01:00:26.000
whole lot of new institutions

01:00:26.000 --> 01:00:29.000
like money market funds.

01:00:29.000 --> 01:00:31.000
And secondly, the distinction

01:00:31.000 --> 01:00:33.000
between loans and securities has

01:00:33.000 --> 01:00:35.000
disappeared.

01:00:35.000 --> 01:00:37.000
So it's very hard to say, this

01:00:37.000 --> 01:00:39.000
is an investment bank that owns

01:00:39.000 --> 01:00:40.000
securities and this is a

01:00:40.000 --> 01:00:42.000
commercial bank that makes

01:00:42.000 --> 01:00:44.000
loans, because loans can be

01:00:44.000 --> 01:00:48.000
converted into securities.

01:00:48.000 --> 01:00:51.000
So my view there is that we need

01:00:51.000 --> 01:00:54.000
to, we just need to make sure

01:00:54.000 --> 01:00:56.000
that people who go into the

01:00:56.000 --> 01:00:58.000
financial business have capital

01:00:58.000 --> 01:01:01.000
and that they don't leverage

01:01:01.000 --> 01:01:03.000
themselves 30 or 40 to one.

01:01:03.000 --> 01:01:06.000
In the '50s, a typical financial

01:01:06.000 --> 01:01:09.000
institution held 10% of its

01:01:09.000 --> 01:01:11.000
assets in the form of equity

01:01:11.000 --> 01:01:13.000
capital.

01:01:13.000 --> 01:01:15.000
We have allowed those numbers to

01:01:15.000 --> 01:01:17.000
go down to 4% and then we allow

01:01:17.000 --> 01:01:19.000
financial institutions to put

01:01:19.000 --> 01:01:21.000
things off balance sheet and

01:01:21.000 --> 01:01:23.000
have a second set of books where

01:01:23.000 --> 01:01:25.000
they had no capital.

01:01:25.000 --> 01:01:26.000
I think it's crazy.

01:01:26.000 --> 01:01:29.000
That's the single most important

01:01:29.000 --> 01:01:33.000
thing.

01:01:33.000 --> 01:01:35.000
There are other things that we

01:01:35.000 --> 01:01:38.000
should do, like on derivatives

01:01:38.000 --> 01:01:42.000
put them on an exchange.

01:01:42.000 --> 01:01:44.000
There are some very simple

01:01:44.000 --> 01:01:46.000
things we can do to make the

01:01:46.000 --> 01:01:50.000
system much more stable.

01:01:50.000 --> 01:01:52.000
>> You had talked earlier about

01:01:52.000 --> 01:01:53.000
unemployment and the fact that

01:01:53.000 --> 01:01:55.000
we've had a rather severe rise

01:01:55.000 --> 01:01:57.000
in unemployment this time,

01:01:57.000 --> 01:01:58.000
perhaps a little faster than

01:01:58.000 --> 01:02:00.000
expected and it's not expected

01:02:00.000 --> 01:02:02.000
to go down dramatically in the

01:02:02.000 --> 01:02:04.000
near future.

01:02:04.000 --> 01:02:06.000
My question is related to the

01:02:06.000 --> 01:02:09.000
debate about national healthcare

01:02:09.000 --> 01:02:11.000
going on now.

01:02:11.000 --> 01:02:13.000
Can this country continue to

01:02:13.000 --> 01:02:16.000
grow its employment base without

01:02:16.000 --> 01:02:18.000
doing something about the

01:02:18.000 --> 01:02:21.000
problems with the cost of health

01:02:21.000 --> 01:02:23.000
insurance on the employer, and

01:02:23.000 --> 01:02:24.000
how much effect do you think

01:02:24.000 --> 01:02:26.000
that might have on our recovery

01:02:26.000 --> 01:02:28.000
vis-a-vis other countries in the

01:02:28.000 --> 01:02:30.000
world that we're competing

01:02:30.000 --> 01:02:31.000
against who don't seem to have

01:02:31.000 --> 01:02:35.000
that problem?

01:02:35.000 --> 01:02:38.000
>> Ahamed: Well, it certainly,

01:02:38.000 --> 01:02:40.000
just anecdotally, it's certainly

01:02:40.000 --> 01:02:41.000
clear whenever you talk to

01:02:41.000 --> 01:02:44.000
people about the key things they

01:02:44.000 --> 01:02:45.000
worry about when they hire

01:02:45.000 --> 01:02:47.000
permanent workers, in

01:02:47.000 --> 01:02:49.000
particular, is the benefits

01:02:49.000 --> 01:02:50.000
they're required to provide, and

01:02:50.000 --> 01:02:52.000
the most important benefit is

01:02:52.000 --> 01:02:54.000
obviously healthcare.

01:02:54.000 --> 01:02:56.000
It's one of the reasons you see

01:02:56.000 --> 01:02:57.000
such a move toward part-time

01:02:57.000 --> 01:03:00.000
work, because companies are

01:03:00.000 --> 01:03:02.000
required to provide fewer

01:03:02.000 --> 01:03:03.000
benefits.

01:03:03.000 --> 01:03:05.000
I think that's an element of the

01:03:05.000 --> 01:03:06.000
equation.

01:03:06.000 --> 01:03:10.000
I think there's an element of

01:03:10.000 --> 01:03:12.000
globalization.

01:03:12.000 --> 01:03:14.000
I think companies, someone like

01:03:14.000 --> 01:03:17.000
Intel, is an American company

01:03:17.000 --> 01:03:21.000
and it appears in the S&P 500.

01:03:21.000 --> 01:03:23.000
I'd be interested to know where

01:03:23.000 --> 01:03:25.000
most of the employees who work

01:03:25.000 --> 01:03:27.000
for Intel, including if you

01:03:27.000 --> 01:03:29.000
traced it through the supply

01:03:29.000 --> 01:03:34.000
chains, where they're based.

01:03:34.000 --> 01:03:35.000
Are the majority of them in the

01:03:35.000 --> 01:03:37.000
US?

01:03:37.000 --> 01:03:39.000
So what is a company, what is an

01:03:39.000 --> 01:03:41.000
American company?

01:03:41.000 --> 01:03:43.000
The definitions of those things

01:03:43.000 --> 01:03:45.000
have changed so dramatically

01:03:45.000 --> 01:03:47.000
that it's not always clear that

01:03:47.000 --> 01:03:49.000
the categories we used to use

01:03:49.000 --> 01:03:53.000
are appropriate or useful in

01:03:53.000 --> 01:03:56.000
understanding it.

01:03:56.000 --> 01:04:00.000
I can't say I know the solution

01:04:00.000 --> 01:04:01.000
to the employment problem.

01:04:01.000 --> 01:04:02.000
I just observe it.

01:04:02.000 --> 01:04:05.000
But I think it is, one, there's

01:04:05.000 --> 01:04:07.000
something about this business

01:04:07.000 --> 01:04:10.000
cycle which has been

01:04:10.000 --> 01:04:13.000
particularly bad for workers.

01:04:13.000 --> 01:04:17.000
And secondly, just my reading of

01:04:17.000 --> 01:04:19.000
history is, if an economic

01:04:19.000 --> 01:04:21.000
system finds it difficult to

01:04:21.000 --> 01:04:25.000
provide full employment, you'd

01:04:25.000 --> 01:04:27.000
better watch out.

01:04:30.000 --> 01:04:32.000
>> I just had a quick question.

01:04:32.000 --> 01:04:34.000
I'm aware of the WPA program

01:04:34.000 --> 01:04:36.000
that was implemented during the

01:04:36.000 --> 01:04:38.000
Great Depression.

01:04:38.000 --> 01:04:39.000
I was wondering, I know it's

01:04:39.000 --> 01:04:41.000
often compared to the current

01:04:41.000 --> 01:04:43.000
stimulus package.

01:04:43.000 --> 01:04:45.000
Do you think that the same

01:04:45.000 --> 01:04:47.000
strategy that was used would

01:04:47.000 --> 01:04:50.000
work today?

01:04:50.000 --> 01:04:52.000
>> Ahamed: The interesting thing

01:04:52.000 --> 01:04:55.000
about Roosevelt's New Deal, a

01:04:55.000 --> 01:04:57.000
couple of interesting things.

01:04:57.000 --> 01:04:59.000
One is, he was clearly a

01:04:59.000 --> 01:05:02.000
fantastic publicist.

01:05:02.000 --> 01:05:04.000
We had this exaggerated notion

01:05:04.000 --> 01:05:08.000
of what the New Deal did.

01:05:08.000 --> 01:05:10.000
Actually, in terms of public

01:05:10.000 --> 01:05:14.000
expenditure, it was relatively

01:05:14.000 --> 01:05:16.000
modest.

01:05:16.000 --> 01:05:17.000
There were some public

01:05:17.000 --> 01:05:19.000
employment schemes, including

01:05:19.000 --> 01:05:23.000
the WPA, which did get some

01:05:23.000 --> 01:05:27.000
people back to work, and

01:05:27.000 --> 01:05:32.000
unemployment then was 25%.

01:05:32.000 --> 01:05:34.000
It's now, even if you count

01:05:34.000 --> 01:05:36.000
discouraged workers, it's more

01:05:36.000 --> 01:05:38.000
like 15%.

01:05:38.000 --> 01:05:41.000
We're only half the way there.

01:05:41.000 --> 01:05:45.000
I don't think it's applicable.

01:05:45.000 --> 01:05:47.000
The thing that I do think is

01:05:47.000 --> 01:05:49.000
sort of striking about Roosevelt

01:05:49.000 --> 01:05:51.000
and the New Deal was, he seemed

01:05:51.000 --> 01:05:54.000
to figure out, or he seemed to

01:05:54.000 --> 01:05:56.000
be very skeptical that anyone

01:05:56.000 --> 01:05:58.000
knew anything.

01:05:58.000 --> 01:06:00.000
And so he was willing to

01:06:00.000 --> 01:06:01.000
experiment and try lots of

01:06:01.000 --> 01:06:03.000
things.

01:06:03.000 --> 01:06:06.000
Essentially, he stumbled into

01:06:06.000 --> 01:06:08.000
getting off the gold standard.

01:06:08.000 --> 01:06:12.000
He was listening to this

01:06:12.000 --> 01:06:15.000
crankpot economist who was at

01:06:15.000 --> 01:06:17.000
Cornell, and all his advisors,

01:06:17.000 --> 01:06:20.000
all these Wall Street guys.

01:06:20.000 --> 01:06:22.000
He decided, why don't we try

01:06:22.000 --> 01:06:24.000
that?

01:06:24.000 --> 01:06:26.000
So he sauntered into his office,

01:06:26.000 --> 01:06:28.000
well, he didn't saunter,

01:06:28.000 --> 01:06:29.000
he came into his office...

01:06:29.000 --> 01:06:32.000
(laughter)

01:06:32.000 --> 01:06:33.000
And sort of off the top

01:06:33.000 --> 01:06:34.000
of his head said, "By the way,

01:06:34.000 --> 01:06:37.000
we're off the gold standard."

01:06:37.000 --> 01:06:38.000
All of his advisors

01:06:38.000 --> 01:06:41.000
were incredibly shocked.

01:06:41.000 --> 01:06:43.000
One guy was James Warburg of the

01:06:43.000 --> 01:06:48.000
Warburg family and he declared,

01:06:48.000 --> 01:06:49.000
"This is the end

01:06:49.000 --> 01:06:51.000
of Western civilization."

01:06:51.000 --> 01:06:53.000
(laughter)

01:06:53.000 --> 01:06:55.000
It wasn't, obviously.

01:06:55.000 --> 01:06:57.000
I really got to admire, reading

01:06:57.000 --> 01:06:59.000
up on this book, I really got to

01:06:59.000 --> 01:07:01.000
admire this sort of capacity for

01:07:01.000 --> 01:07:04.000
Roosevelt to try lots of things.

01:07:04.000 --> 01:07:06.000
There were two New Deals.

01:07:06.000 --> 01:07:08.000
There was the first New Deal,

01:07:08.000 --> 01:07:10.000
which did a reasonable job in

01:07:10.000 --> 01:07:13.000
stabilizing the banks, got the

01:07:13.000 --> 01:07:15.000
economy going, but didn't get

01:07:15.000 --> 01:07:17.000
employment going, and did some

01:07:17.000 --> 01:07:19.000
stupid things, like raised

01:07:19.000 --> 01:07:24.000
prices and raised wages and all

01:07:24.000 --> 01:07:26.000
sorts of things which were

01:07:26.000 --> 01:07:28.000
completely counterproductive.

01:07:28.000 --> 01:07:29.000
Then he came up with the second

01:07:29.000 --> 01:07:31.000
New Deal, in which we got social

01:07:31.000 --> 01:07:33.000
security, for example.

01:07:33.000 --> 01:07:36.000
It's that sort of openness to

01:07:36.000 --> 01:07:40.000
new ideas, skepticism about all

01:07:40.000 --> 01:07:42.000
of these so-called experts who

01:07:42.000 --> 01:07:46.000
tell you they know how it works,

01:07:46.000 --> 01:07:47.000
because we've just discovered

01:07:47.000 --> 01:07:50.000
that very few people do.

01:07:50.000 --> 01:07:53.000
>> Last question.

01:07:53.000 --> 01:07:55.000
>> We in the medical profession

01:07:55.000 --> 01:07:57.000
live by sort of a central rule,

01:07:57.000 --> 01:07:58.000
and that is "primum non nocere,"

01:07:58.000 --> 01:08:00.000
above all else, do no harm.

01:08:00.000 --> 01:08:02.000
With that in mind, I'd like to

01:08:02.000 --> 01:08:05.000
ask, in your view, what is the

01:08:05.000 --> 01:08:06.000
stupidest thing our political

01:08:06.000 --> 01:08:08.000
leaders could do given the

01:08:08.000 --> 01:08:09.000
current situation?

01:08:09.000 --> 01:08:16.000
(Ahamed laughs)

01:08:16.000 --> 01:08:17.000
>> Ahamed: Well,

01:08:17.000 --> 01:08:19.000
the stupidest thing would be

01:08:19.000 --> 01:08:20.000
to raise taxes to try

01:08:20.000 --> 01:08:22.000
and control the budget deficit

01:08:22.000 --> 01:08:24.000
at this moment.

01:08:24.000 --> 01:08:26.000
They did that in 1937.

01:08:26.000 --> 01:08:29.000
We got this fantastic recovery,

01:08:29.000 --> 01:08:34.000
and then in 1936, 1937, the Fed

01:08:34.000 --> 01:08:37.000
decided to raise interest rates

01:08:37.000 --> 01:08:39.000
because it said, we've changed

01:08:39.000 --> 01:08:42.000
the price of gold, now banks are

01:08:42.000 --> 01:08:45.000
so flush with cash, this is

01:08:45.000 --> 01:08:47.000
bound to lead to inflation, even

01:08:47.000 --> 01:08:49.000
though there wasn't a single

01:08:49.000 --> 01:08:50.000
sign of inflation.

01:08:50.000 --> 01:08:53.000
So they tightened credit, and at

01:08:53.000 --> 01:08:57.000
the same time, there had been a

01:08:57.000 --> 01:08:59.000
temporary blip up in the budget

01:08:59.000 --> 01:09:02.000
deficit in 1936, and I can't

01:09:02.000 --> 01:09:04.000
remember why, I think it was the

01:09:04.000 --> 01:09:05.000
introduction of social security

01:09:05.000 --> 01:09:07.000
or something.

01:09:07.000 --> 01:09:10.000
They raised taxes in 1937.

01:09:10.000 --> 01:09:12.000
The combination of the two drove

01:09:12.000 --> 01:09:15.000
the economy back into recession.

01:09:15.000 --> 01:09:17.000
The stock market went down 30%

01:09:17.000 --> 01:09:19.000
in one year.

01:09:19.000 --> 01:09:20.000
That would be the most stupid

01:09:20.000 --> 01:09:22.000
thing to do.

01:09:22.000 --> 01:09:23.000
I'm sure if you gave me enough

01:09:23.000 --> 01:09:24.000
time I could think of some other

01:09:24.000 --> 01:09:26.000
stupid things.

01:09:26.000 --> 01:09:30.000
(applause)