>> it's a staging ground for invasions. but, anyway, the same colonel that made the agreement with general wilkinson, he's the one who hosted mr. pike at his house when he was captured. pike writes about it in his journal. he said that colonel said that he was very worried about making that pie for the agreement. but then he was congratulated by his superior officers for doing, for disobeying their orders. what it was about in my opinion is that they were working with the french, french revolution now.

so you see wilkinson did us all a favor by busting aaron burr. there's the, he did bus many conspiracy. >> the stars weren't right. they really did want him out of the way. they wanted him to leave st. louis. they wouldn't have murdered him if he just went away. they didn't want him interfering with all of the plans. >> we're out of time. we will be signing books following this event. [applause]

[inaudible conversations] >> kira and her husband traveled from canadian to new orleans. for more information, visit death-march weatherlewis.com. the world affairs institution in san francisco is the host of this event. it's about an hour. >> i thought they'd start about answering a question. what just happened. i was thinking about it for a

white this afternoon. i came up with a two-sentence answer. financial markets around the world stop working last fall. and this had a dramatic effect on the real economy, a bad effect. there was a very strange mortgage market that we developed in the u.s. with so many support for the concept of home ownership, that sometimes evolved into government support for really lax lending standards. i'm not going to argue that the government response to the initial problems that begin almost exactly two years ago this week. they weren't disjointed and ensign, and in some cases, probably made things worse. but you still can't deny.

i'm with the camp. there's no way to prove this. but it seems like the more responsible explanation. that without the government and intervention we had last fall, however, clunky and unfair -- well, goldman sachs friendly it was, has left us substantially better off than we would have that if government hasn't stepped in last fall. financial markets failed, they seized up, they stopped working, they went kaput. whatever verbal you want to use. here's the interesting thing. the dominant academy theories of how government works doesn't leave any room.

that explains why suddenly markets keep trading with each other. everything seems to be on the verge of breaking down. i will say there are lots of people and professors who are studying their things and have the theories of it. in terms of thinking about the financial markets that's involved, that just doesn't happen. i got a very long e-mail today from a finance professor, mark rubenstein who made the excellent point, i never define in the book exactly what i mean by a rational market. so i'm going to make an attempt here. it's not any formal definition.

we had the initial title arguing the markets. my publicker came up with the rational myth of the investurers. and i thought no, it's the market we're talking about. not individual investors. so at one level it's a marketing device. it's not a brand new theory of the world. but at the same time, i'm pretty -- i'm very convinced from the years i sent studying this and also just watching the reactions of the regulators. they were right. they could be relied on. they could brave in this calmly responsible manner most of the time. and so the question is whether did that idea come from? there's been an awful lot of

episodes of markets not doing that. going back to the dutch and their tulips years ago. he came up with the whole theory about how it has to be something with sun spots. then right around when he died in the 1870s, it was on the 11-year cycle with the sun spots. after that it went off the cycle and never quite came back. so we've had these bubbles and crashes all this time. with why did we come up with this theory of how markets work that didn't have any room for them? and that's what a lot of my book is about. and what i was trying, what it is, i think, in a lot of ways,

that people's ideas are the product of their time. memories of 1929 crash and the subsequent, the market kept crashing for several years, and the depression was starting to fade. markets did pretty calmly in those days. and it just seemed for certain purposes, and it is for certain purposes perfectly valid to just assume that, okay. markets can be thought of as these rationally functioning entities. another really big reason why this came along, and the idea that markets work pretty well, not just financial markets but all markets for products and services, everything else. that's been part of economics since the beginning. it's a valid idea. markets are brilliant at aggregating information. and at making decisions quickly. and just figuring out what we should make more and less of.

but this new -- nor careful and dogmatic version of the theory of markets grew up after world war ii. i think a lot of the reason was during world war world war ii, economics was changed into a much more mathematical and statistically oriented discipline. partly because economist were involved in the war effort in these remarkable ways using statistics to help beat the bad guys. one of my favorite stories i learned in the course of this book, there was this organization called the statistical research group at columbia university. it was this amazing group of young statisticians and economist, including the father of one of our audience members here. and including paul's dad as well. and including milton friedman. and one of the questions that they were -- that they dealt with was with artillery shells.

i'm not gunnery expert. if there are any here who want to correct me on the detail. you spore them to determine how many pieces. if you only spore them into a few pieces opinion if you hit your target, you hit it with more and cause more damage. but if you get lots of pieces, you cause less damage, but you are more likely to hit. so the calculating of what's the optimal level of fracturing that you want were done up at columbia. and friedman would go down to washington and meet up with general -- not general lower officers from that from the artillery officers who were midst of fighting the battles. they came to get as advice on how to manage their ammunition. that can't help but make you more confident in your capabilities and what statistics and math can do for you. and i think there was just this

dramatic development in the years immediately after the war where economics in the u.s. went from this still largely literary pursuit where people would talk about what had happened in the past, it was very historical oriented to something that was dominated by mathematical modeling. and when you were looking at the real world by a very statistical mindset. and a so it was sort of natural that in the 50s chart reading in the stock market was very fashionable. it was seen as the little guys way to making money. if you knew how to read the charts, you could predict the future and make money without having any inside sources or spends lots of money doing research. and so some of the finance professors, they could immediately see that most of these chart patterns could just as easily been generated by totally random processes.

there was the movement around m.i.t. and the university of chicago to sort of prove the random, not prove it but explore the randomness of the market. people would talk about the random walk high thought -- pie thought -- hypothesis, there is no secret to what it's going to do. this is pretty sensible. it's not absolutely true. it turns out. but it's pretty sensible idea. and at m.i.t. where it really first took hold, all of the m.i.t. thought that markets were hard to predict. they would find tiny ways to beat the market for a little bit, using the advanced knowledge the famous textbook author and economist. then the interesting happened.

people were finding ways to beat the market and with money. this whole randomness line of research collided led by milton friedman. and it became much more than a project to show that financial markets worked very well. and didn't need regulation to the extent that it was thought. it's out of chicago in the late '60s that sort of the most famous part of the whole rational market idea called the efficient market hypothesis came. a lot of people know who cames to believe say that all it really means it you just don't know if the market is too high or too low. that's part of it. but it was meant as this attempt to find a way of showing that

the prices prevailing in the market were right. that markets were right. and if you just look at the way things developed in the 1970s, this idea that markets were right, combined with the some new thoughts about, well, we got to give some advice to the world. these finance professors were thinking. so they decided that they couldn't predict where prices were going to go. so you got the grand theory of the world. in which there was no point trying to beat the market. but you could by properly balancing the risk come up with the right portfolio and the right approach to things. and this -- so basically this was the rational market. this is this market where there is -- where prices are basically right. and there is a simple, straightforward way to dealing

with the market. and the name that it got. we can quantify risk. the first one was news ways of measuring weather. say the market was getting beat or taking excessive risks like sharp ratios and alpha, and they are still a big deal in institutional investing. index fund came out of the whole movement. there are a lot of good reasons that i can talk about this. why index funds are a good idea. the whole option prices theory, and world of derivatives. there are other ways you can get to it. besides believing that markets arer rationallal. the prices are right. therefore, we can build cool near res based upon the prices.

running the corporation should be about increasing shareholder value, which you could measure pretty easily by looking at your stock price going up or not. financial deregular grace came about. clearly if markets are right and rational, and it made sense to let them free to a certain extent. most of all, there was the financialization of american life that began in the '70s. and it began in many cases for the reasons because the old days weren't working were sell. we went from the savings account at s & l to having a money market by mutual fund company. we went from having pensions to many cases have 401(k) where you were completely exposed to market risk. these ideas really started permeating american life. what's interesting is tarting in the 1980s, whether really in

terms of politics and general popular belief, this idea that the market could be trusted was really starting to research its peak. back on campus, some young professors trying to make a name for themselves started pointing out all of these problems with the whole elegant view of the rational market world. some of these people are pretty famous now, robert shiller, he's a professor at yale. he has a new book out called "animal spirits." he made the point that prices sure seemed to jump around a lot more than any of the fundamental data about corporations. so markets are more volatile that seems to make sense. larry summers who is now running our economy in the white house. he basically made the point that, okay, it's impossible to

tell what the random market and some of the m.i.t. people from anker rationallal one. that was no way to tell if they already rational orer rationallal. some of the same people that came up with the idea, cheap stocks do better than others. it's likely to do the next until it stops. that's the problem with trying to make money off of them. then the '87 crash happened. it just absolutely didn't fit any of the risk models that any of the professors come up with. even more interesting, you could argue that it was partly caused by a risk management dreamed up by a couple of finance professors, including one of the ones that sent me an e-mail today. it was this idea to reduce the

risk of investing that involved them making deals with mention funds and other money managers to sell off their stocks once prices started dropping. that can work for one individual investors or a small part of the market. this became so popular and so fashionable that prices started dropping in october '87. and suddenly all of these people were out getting their portfolio insurance programs on to the market. selling stocks to avoid losses which then cause more selling and more selling and was probably, no one can prove it, probably the main factor in the downward tick turned into the one-day crash. they were obviously a lot of problems with this whole idea of financial markets as the things we should allow to rule our world.

then the '90ed -- '90s happened. the berlin wall fell. the economy started to not form around communism. like the u.s. and the other angelo saxon countries give an exalted role, other countries, germany and japan, in the late '80s there was a lot of people saying we need a system like that. by the mid 50*e -- '90s, u.s. was being better. i know i bought into it pretty much. the idea that markets will take care of it.

financial markets will take care of it. and you can see it sort of in the way discourse changed. up until about the mid '90s if you talked about about how big a corporation was, how important it was, you always talked about either it's revenues, overall sales, or earnings. those are both clearly incomplete measures. partly because they are incomplete, but partly because the infactuation, it made the switch in the mid '90s, and basically all people talked about what the market cap. it's how much of the stock of the corporation is worth. and that became the ultimate measure of how important you were. it was pretty clear to a lot of people that pets.com wasn't really more important than deltaairlines.com. although considering that delta has gone bankrupt a couple of times since then. maybe it was a valid market

cap. but the tech bubble was something that would not be explained very well by any theory that market prices were becaused on a rational assessment of future earnings power. eugene, a professor from chicago, that offered the original hypothesis, he made the valued attempt that basically there's lots of uncertainty with these internet stocks. it's entirely possible that one or two will become the next microsoft, so assign high values. that makes sense with the sort of start-up level companies. clearly google wasn't out there during the bubble. it wasn't there. new companies can come aa long and grow big. the problem was even the big companies were valued at the levels. cisco was the levels that required them to keep doubling in size every year for the next 30 years for the evaluation to make sense. so that caused a lot of

questioning monofinance professors and economist about this idea that they didn't have to think -- that bubbles weren't really an issue, that markets could be relied on to get prices right. but the aftermath wasn't that bad. in large part because the fed came in pretty aggressively. and kept the subsequent downturn from turning into a very deep one at all. and it was kind of amazing that as housing prices rose, you heard a lot of the same arguments made to justify the higher prices that you heard for text stocks in the late '90s. and it also interestingly, the loudest voice saying they were crazy was robert shiller who had covered the book in 2000 called irrational exuberance from the point that yes, stock markets have a habit of going in the waves of optimism and pessimism. he put a whole new chapter on

real estate in 2005. but the response for most of the economic profession and finance academics, and alan greenspan was that, you know, markets know what they are doing. yes, there are some new stuff happening in the housing market. but we have all of these new instruments, they are going to spread the risk and take care of everything. then we all fell apart. greenspan made his famous admission last fall. the world was less scary than it was last november. where he said my world view didn't work anymore. the whole intellectual edifice, he was referring to pricing. hi made the idea that financial markets can work everything out has collapsed. i wrote this book, it's not a argument, it's the story of the rise and fall of this idea.

but obviously i short of feel compelled to say, well, so what do we do now? i don't have particularly good answers. but financial markets are not perfectly rational. we shouldn't allow them to determine everything in -- that our society does. problem is governments are made up of people too. financial markets are better than changing their mind that governments are sometimes. it's not as simple as we need government to play a bigger role and regulate more. it does seem, one really obviously thing is that financial market bubbles that are built on debt are a lot more dangerous than ones that aren't. putting their own money at risk with no obligation to get it back.

and housing market was people lending money with the expectations to get it back. when they don't get repaid, it's a much bigger deal. than if it goes from 200 to 0. there's got to be some better way to not get rid of it, you know, obviously debt has fueled our economy for hundreds of years. but realize that when it's growing really fast that something might be wrong. i think there are a lot of people at the fed who agree with that now. that doesn't mean they'll get in the right in the future, or it maybe 50 years before something happen again. all of the ones that come to the realization will be long gone by then. but the other issue is just that markets are flawed, governments are flawed, individuals are flawed, religious institutions are flawed. we're all flawed. but we all have -- all of these institutions have strength. i think a society works better when you don't put one completely in charge.

it's pretty clear that entirely government-run economy is a disaster. it's a little less that entirely market run is. although we don't have one in the u.s. we have mixed one already. but i think just acknowledging that there's something positive about the mix. even if the government policies aren't optimal. even if people behave irrationally. it's nice to have different courses and not everything determined by the prices prevailing on wall street. and with that, not very conclusive conclusion, i'm going to come sit down. and we're going to go to questions. [applause] >> thank you. this is the part of the program where you take questions from the audience. please note it on the blue cards that should have on adjacent seat. you should be able to hand them to a council member to bring

up. let me start with a clarifying question. previous market downturns were called panics. well, this one will it be called the panic of 2008? >> i, on my blog i had a contest. i think it was before last fall though. what we should call the crease -- crisis. although it went to such a level in 2008 that we should call it that. my favorite name for it, there's no way it's going to catch on, it's the blogger duncan black called itgay. whichwhich -- calls it jenga. he was playing it on the "daily show" a few weeks ago. you stack up a bunch of blocks high. then you start pulling them out until you see when it's going to collapse. that's clearly not going to catch on.

panic of '08 is okay. i don't think it's a bad name for it. but it has -- it's not absolutely clear what the name is going to be. which is kind of interesting. maybe because people are afraid something is still going to happen this year. >> so there are a couple of questions that relate to milton friedman's theories. i think it summed up best with this question. are the theories essentially dead? crane is definitely back in vouge. i don't think because friedman came from a bunch of different places. there's milton friedman the libertarian. at some level all he was arguing as a lib -- friedman, i had this conversation with him before he died up in his apartment. it was just over that side of town. he lived on the 17th floor. had plastic over all of the furniture. and, well, at least in the living room. he didn't in his study.

i got to sit on a real chair. but he never believed markets were perfectly efficient. he just really distrust government. and he also believes that one thing that had gotten shortchanged in the new deal was this idea that economic liberty ies, the freedom to make risk is a form of liberty. those ideas survive really strongly. i also think friedman's monetary economics. what he wanted to do was to replace the federal reserve, that spewed out money at fixed rate. that has never really worked in in part because it's really hard to really how much money? but the basic idea that monetary policy is very important. and preventing both inflation and deflation, that's what the feds been trying on the

deflation side on the past two years. it seems to have succeeded. whereas, and cain didn't disagree. like in the '30s, when things got bad, you needed more than just money. you needed government to spend it. i think that's working too. but i guess my thought is i don't think there's this huge dichotomy between cain and friedman, i think it's between cain and friedman and this sort of super extreme verbal of macropicks that arose at chicago basically around when milton friedman moved out here to the area in the 1970s. i think that whole theory is in big trouble. i don't think all of friedman's monetary theories necessary are. >> terrific.

>> there are a couple of questions that looked to our ability to learn from the current environment. and so i -- i think the way to think about this is have we learned anything? and 10 or 20 years forward from today, are we going to essentially repeat the same mistakes, same lines of thinking and reasonabling that we're in today? >> i don't they'll be the same. and i think definitely there's been the short-term learns on the individual level that, gee, debt can be dangerous. and i think that's probably the biggest learning so far. and it would be nice if that became sort of institutionized as well. that it -- my problem is i don't have the definition of what -- how you define how much debt is too much. when people are getting over indebted. but i do think any time over the pasta years.

we've had this really dramatic increase in especially consumer indebtedness since the early 1980s. that any time anybody worried about it, and there were many books and magazines articles written over the year worried about the phenomenon. there's always been a economist that said it's what the market determined. it's going to be fine. clearly at some point it stopped being right. it probably was right until 1994. every since then -- that's the problem. it's hard to say what's the right level. in terms of other learnings, it's hard because it seems like about six months ago that this was the such a shocking occurrence. and everything was going to change. and nothing was going to work the same. and it doesn't feel like that anymore. i mean wall street is back to making money. and people are back to screaming at obama about health care reform. we've gone very quickly back to

where we were beforehand. and so i would think that even without any change in regulation and government behavior that just the fact that there will still be lots of people around and active in financial markets for the next 10 or 15 years will keep it from happening for 10 or 15 years. but after that, i don't know. >> so given -- and you just touch on this, given the increasing number of people who are participating in the financial markets. and the increasing role it has in their savings. and such. can you speak to the role that psychology plays in the markets now? and in particular with the rise of behavioral economist points of view. >> when i first started working on this book, i thought it was the really simple story of the rise and fall of this rational view of how markets work. and it's replacement by behavioral financial -- behavioral economics, the ideas

coming more out of psychology. as i got into it, that wasn't what has happened at all. basically, all of these lessons about human behaviors that have been studied and learned, the people seen to have started the whole line of thought, the couple of israeli psychologist who ended up teaching in the bay area. and he won the nobel a few years. one had died, so he couldn't. these ideas are incredibly useful when looking at individual behavior and how you ought to design a 401(k) program. and we've been influential. to reflect how to structure them has the huge impact on how people behavior. there's a lot to be said for pricking the defects that are more or less okay and steering people into that.

the amount money they save. how the money is allotted. give people the choice to change that if they want. otherwise not. it's a huge impact on both what individuals can learn about their own investing. about flaws that all of us have in dealing with money in the future. it's really what the comment is made. but in figuring out how markets work. it's interesting than it's been kind of, the impact has limited. there aren't any behavioral theories that explain what just happened over the last few years. there aren't any super great -- nonbehavioral theories that explain it either. but it's not like somebody has come along and said, i can using the lessons of cognizant psychology explain everything that happened. i think at the chapter and the reviced second edition of his book that claims to do that. but i don't think he really manages it. >> so on that very point, people maybe wondering at this point in

the conversation do we actually need a grand unified theory to explain the markets? and what would be the done side of not having one now that we've seen the downside of having some that may not be perfectly accurate. >> the problem is it's hard to knock an existing theory off if you don't have a new one. maybe that's okay. i would think of a much more losely understand and losely defined version of the whole rational market. it wouldn't be the worse thing in the world. but it does seem that what makes market work is diversity of opinion. if you don't have lots of people with different models of how they think the world works. then i think -- i mean i think it's everybody agreeing that we need to buy houses in california that causes markets to go crazy.

it's disagreement actually makes market work better. so i'm fine with there not being the brand new theory. but i do think that's one the reasons that some ideas that don't work very well sort of stayed in the textbooks and elsewhere. because their grand theory, and there's nothing to replace them. >> so on the topic of grand theories, can you give your opinion of all of the governments spending that has been allocated to help the u.s. economy and some the thinking that may be driving obama's current financial agenda. >> well, obviously, the initial big government action was just to throw a bunch of money at the financial system so that money would with keep coming out of the atms. you can never tell if we really were at risk of the complete financial breakdown, where banks stopped giving people money. but that was the fear. that's why they acted like that. it didn't happen. that was the first. it was probably a hugely inefficient use of money.

but it did seem to work. the second part is stimulus. and the idea behind stimulus is just when everybody is feeling blue and not wanting to spent that if somebody will do it. and that somebody, the only one left in a time when everybody's animal spirits are downtrod, that's usually the government, that can keep the economy going in a way. and that's another thing. in terms of -- as far as sort of rational expectations, macroeconomics goes, stimulus can't work. but you sort of watch what's happened. and it seems to be working a little bit. obviously with cars were clunkers. all of these people are rushing out to buy the cars. at some point when it expires, there's a dropoff in car sales. but in the mean time, you have gotten money flowing through the economy again. you've gotten car makers starting to tool up for new models.

you've gotten people starting to spend on other things. maybe it works. there's not really any deeply sophisticated economic theory behind all of the stimulus stuff. it's basically that world war ii, the u.s. government spent just vastly more money than it took in. it was the most dramatic economic stimulus ever, as far as i know. and it worked. and that's basically all that economist can say. well, it seemed to work in world war ii. let's try it again on a slightly smaller scale. >> looking at your son, i have a question that relates to him. so when he's in his college economic classes, what do you think the dominant theories of the day will be that will drive those studies? >> as it stands now, i bet they will be pretty similar to the ones that we have now. the one area, and thai been

people talking it up for 20 years is that their insights is coming mostly out of physics. but also other sciences about complexity, and evolutionary dynamics, and nonlinear equations. it can lead to how economies work. i'm all for that. it's just hasn't happened yet. as far as i know. the long comment on my blog the other day from a professor in peaking who says i was unfair in evolutionary dynamics. maybe there'll be more of that. but i'm getting a lot of these really basic economic theories. the stuff that's thought in econ 101. it doesn't date back just to the '50s. it dates back 200 years. the bulk of it was sort of formulated in the late 1800s. there was valuable insights. i guess the question is how

strictly you apply it. this is again is something i've heard from sam savages. all models are wrong. some models are useful. it's sort of determining what's useful under what circumstances. so i would love if it's presented in a way that's more, okay, here are these theories. we use them -- we stick with them for these reasons. but they don't describe everything that happens. >> just to follow up, is there any specific theory that you feel have truly justified being thrown out the door at this point in time. >> well, i mean the clearest one. i don't know that anyone ever really stated this as a theory. it was convenient to do. it is to assume that risk in financial markets works on a beller, that you have the scatter graph of lots of potential events. most of them will cluster

towards the mean. and then you sort of goes down. you'll have a few extreme events. but you won't have super extreme events on if on the average day, the stock market only moves 1%, you won't have a day where it moves 25% like it did in october '87. and that's wrong. it's clearly wrong. it's a wrong way of viewing the world. the people that use the stuff, it's wrong. when somebody calculates the mutual fund which is the risk of performance measure. they are using bell curve measures of risk. those morning star are based on the sharp ratio exactly. they are very convenient and very useful and therefore they keep getting used even though they are existing. as far as financial markets goes completely wrong.

>> there's some interest in how to think about the derivatives market. can you talk about whether you feel derivatives and other second-order financial instruments generally make financial markets more stable or unstable. and is the recent volatility that we saw, the tech boom best, and the recent crisis. are these normal if you have a long enough time arising? >> well, that's a -- i mean that's one of the great things about the whole efficient irrational market world view. over a long enough time, it's right. on average, markets are correct. over hundreds of years. or even dozens -- scores of years. as far as derivatives, it's actually, i think the only answer i can give is i don't know. i don't know if derivatives make markets more involvetive or less involvetive. the story i tell in my book is

about holbrooke working whoever this professor at stanford for years and years at the food research institute at stanford. he did some the earliest research in the futures market and how efficient they were. but he was always really interested in that question, do future markets make the underlying markets more or less volatile. so he got the task case in the early '60s when congress banned futures trading in onion onions. there had been an onion futures market. i guess what happened in the '30s when they started doing the big futures markets were in dairy products and eggs as well as wheat. in '30s with the dairy price, the chicago exchanges lost a bunch of their business. they are this come with up new products to trade futures in. they thought will go onions. it went along for a while.

at that point, the market was -- this was the chicago change. they were very small. dominated by small members of traders. a couple of traders in the early '60s decide to corner the onion market. so you have the incredible onion bubble and collapse. and all of these onion farmers who should have just taken advantage of the bubble to like sell. say, okay, i'll deliver my onions at that insane price. they all started joining in on the market and buying the futures themselves. so all of these onion farmers were wiped out. they got congress to ban the onion future's trading. if you could just look at onion prices before and after market then you could learn something. and so initially when the legislation first came in, you thought let's look back to onion markets before and after they had onion future's trading in the first place. and sort of inconclusive. and then the first task in the

'60s seem to show much less volatility before the ban than after the ban. so it seemed to give evidence that things worked better with futures trading. but then somebody else did a study in the early '70s with a full decade. and it was the at least volatile onion price period ever. that's basically what other research caused more volatility than light. they are kind of inconclusive. they don't seem to ruin the world. but at the same time, it's not clear that they make it all that much better. so i -- the theory behind why derivatives, especially the explosion of different kinds we've had over the past quarter century would make the world safer is basically there's this kind of -- thee perfect theory of the of perfect market. which a couple of di bro who ended up at berkeley and

stanford came up with this in the '50s. they sort of envisioned that you would have -- the venn hissable hand would work perfectly even in an uncertain world. if you have securities market that is covered ever possible future outcome. and so the argument that people made, and it was a student of arrows who went on to be a derivatives theorist at m.i.t., steve ross, what made this in the early '70ed, well, that means the more new derivatives, the better off and more stable our world will be. and the i just, i don't know that it's worked that well. it seems like, yes, in some perfect theoretical world that's true. but in the real world where any time you come up with a new financial product, lots of people don't understand it and misuse it and mess up, you may be creating lots of new volatility at the same time. i wish i had an answer on derivatives. but i think sort of the confident pronouncements that

alan greenspan in particular used to make over the past decade about how much they allowed us to decrease the riskiness of the world. those haven't really panned out. >> on a related note, there's been a lot in the press recently about the growth in the use of exchange traded funds, and then thing that is are called inverse exchange rated funds that take positions on those markets. you also have -- so you have a lot of new product innovation in the space which you eluded to, for example, with the onion market. and then you also have a lot of technology, flash trading and very quick trading by large institutional firms. can you talk about how the roll of product innovation and technology innovation are driving the markets, and whether theory can keep pace with both. >> first of all, i should point

out that future trading in onions is still banned. so don't try it, anybody. the thing about all of these innovation in financial market is clearly it's a good thing over the long run. the issue seems to be that a new financial product needs to be tested through one cycle, one market cycle before you know that it's worth anything or not. and so the issue is always that there's just -- since the early '70s, there's been the incredible boom in financial innovation. and a bunch of the innovation has turned out to be completely useless or maybe just design the wrong. so i guess the fear with all of these things. i just wrote my column this week. i wrote it next to the pool at my parents house. so if you have problems with it, that's probably why. but i wrote any column about this whole high frequency

trading controversy. when you start looking at it, the reason that it's happening is because we know how the competitive environment with lots of different exchanges competing with new york stock exchange and nasdaq. they all need volume to make money. the new traders come along. they make new trades. and all of the changes are catering to them and trying to do whatever they can do to trade even more. it's some -- it's clearly a much better system than when it was one exchange, basically the new york stock exchange through the early '70s that dominated everything, that charged huge commission, the specialist made tons of money using their private information that other people couldn't get at. and now the transaction cost you pay to buy and sell stocks are lower. from that sense, innovation has been great. the question that nobody really knows the answer to is there something about this that's

goingth -- to two off the rail. more than you can hope to keep up with. and nobody knows the answer. i talked to this guy, fuss write -- fuzzy. he's totally freaked out by it. maybe it's just fear of the unknown. i also think financial innovation and increased speed in the transactions, it's a mixed blessings. so let me build on that with a pretty clear-cut question. how fearful are you about the save of a market capitalist system. especially given what you know, talking about the pace and nature of the innovation. >> i'm a -- i mean i -- i'm not that fearful. i think we'll puzzle it out one way or the orr. and i got to say at some level, we don't want to completely. we're going to have financial bubbles and crashes.

and that's okay. it's just i think we should structure our society and financial regulation in a way that we can survive them. and i think we have to a certain extent. we are surviving the crisis. that's easier for me to say. i still have my job. there's been a lot of damage that didn't have to happen. but i -- i guess it's just in the category of i don't know what the alternative will be. right now, china is very fashionable. and it probably should be among other emerging market countries. there's something to be said when you are playing catchup for just sort of identifying what worked for other people, and what technologies are in other considerates, and just copying them. but it's much harder when you are one of the world's richest and most developed economies for any government official or anybody else to sort of say, okay. this is the path. things are going to take. therefore, we should allocate resources this way. so i don't see any.

clearly right now we're doing more of that than we have in a while. especially with alternative energy. and there's a lot to be said for that. just because you look at -- there seem to be real costs to our current energy system. and energy usage that it would be nice if somebody would step in and assign them to the right people. so they would behave differently. so i think we can always find smarter ways to intervene here and there in the market economy. but no, i don't think market capitalism is headed for a bust. >> okay. i'd like to shift course and talk about your column. and i'm curious if you could share with us when you think preand post all of the events that we're talking about now. how have reactions changed on the part of people who were reading the column. how has the nature of what you cover changed.

and how does that play out in the real time every day interaction that you get from readers online. >> i mean the big thing that's changed is i seem to write about financial stuff 90% of the time. despite the fact that i wrote this book about financial things, i never really thought of myself as a financial writer. when i first started writing the column, i wanted it to range. i keep saying next, next month. that's when i'll get back to not writing about banks anymore. in terms of the reactions, one the things that's really interesting is my column in the magazine, i mostly -- i see it. it's opinionated. but it's mostly an explanatory column. i'm not trying to raise hell. and maybe it's kind of one the reasons that's just the kind of person i am. but it's also that when i got to time, my column was often the only economic coverage in the issue of a magazine. it seems inappropriate. nowadays there's loot of other

economic coverages in there too. sometimes i wonder if i should pick more fights. so i don't get huge amounts of reaction to my column. i think it's because of that. i'm trying to explain stuff. not telling people how to think. on the blog, you just get a lot of -- i get a lot of reaction. but it's really i have the loyal group of about 10 or 15 people. partly because we make the sign-in process difficult. i like it that way. because i'll read some story on yahoo finance. and it'll have 500 comments and 497 are idiotic. where my blog is pretty smart. i engage and go back and forth. a lot of real questioning about are we going about this whole financial rescue and financial reregulation the right way. i don't know what the answer

is. i get a lot of push, i would say most the pushback is people who think we are being way too kind wall street. but i have no idea if that's representative. that might just be the people who happen to read the blog. so i love the feedback. because it forces me to be clearer in in -- well, sometimes it just corrects mistakes. sometime it forces me to be clearer. but i have no idea than it represents anyone more than the 10 or 15 regular commentators on my blog. >> on the subject of feedback, can you talk about the feedback that you are getting from economist and the general public to your book? >> um, i've started just in the last couple of weeks the very long e-mails from finance professors that started to arrive. and one of the -- i mean i've sort of cringed at the prospect. i really wanted, when i wrote the book, to have a bunch of time when i finished and when it

was moving on to publication to show it to a bunch of scholars. and it just -- it didn't happen. suddenly i finally got to the point whether i was happy in the manuscript. the publisher is like we have to get going with this thing. the couple of professors i got it to never got around to reading it in time. now i'm getting. for the most part, there's some factual errors here and there that nowadays book publishes don't like to print new copies at one. each one is a little bit more correct. led me see if that has the fixes in it yet. no, there is the rare original edition. with all of the typos. and so i mean the reality -- one reaction is, well, you sure neglected this particular line of restroom. and my response to that is, yeah, you are right. sorry. and i'm sure my decision to