>> a computer programmer asks a related question granted we were saying about the importance of the boycott did the zionist cooperate too soon and 42 little? . .

and we have the ability to circumvent that, so from the nazi's point of view they were dividing the jewish community with the agreement as well as a serving of these other interests that i have discovered. no, they didn't do too little, too soon. they did as much as they could sns they could but they did it in a different set of modalities. >> a student asks, did the zionist think jewish palestine would be safe from the nazis or were they afraid that given hitler's designs on the middle east as well that that would also be a dangerous time? >> i think it was always understood by many that hitler thought of palestine as a great big prison camp for a great big

prison camp for the jews. they would be put in palestine and then they could take over the middle east, but i think the zionist thought let's save the jews on monday and figure out what happens on friday. it has always been a jewish desperation, we don't want to be killed before shah this. >> finished with a last question from joseph myers, a retired teacher here in montreal. how did you work on the transfer, how did you work on the transformation agreement affected personally endwise this one event in washington your only event when you speak so often on your other books? >> it is inappropriate final question. it affected me personally. and that it set me off on a circumnavigation of the world of evil. and, as circumnavigating the

world of evil and injustice against the jews and other groups, the further i go the more i end up at the same point. and i always end up where i started. so it has done that to me. as to why this is my only event, because i choose to. >> i want to thank rabbi weinblatt flory stimulating discussion and a very importantr as you say, still covers and offers a very powerful message for us. >> thank you. thank you. thank you.

>> edwin black is the author of many books including ibm and the holocaust, the war against the weekend inteal combustion. he is the editor of the cutting edge news. for more information that the transfer agreement.com. john cassidy, a frequent contributor to the new york review of books argues free-market economic theories failed to take into account how hu decision-making. the harvard book store in cambridge, massachusetts hosts the 50 minute event. >> thanks very much everybody

for coming out on actually quite pleasant winter afternoon and thanks very much for harvard bookstore for inviting me here. i have been thinking about writing a book on how markets fail for many years but my wife always put me off say nobody is going to buy a book with that negative of the title. [laughter] she may be right, we'll see but after the financial crisis a couple of years ago i thought i should sit down and write this book. aftra there are so many economic problems out there from inequality come up polity, repeated financial crises, global warming, urban blight, you name it and there are lots of problems which rarely get addressed and straightforward economics of the sort that i learned, economics at that i am sure some of you did so i thought there is definitely a market there for a more skeptical view of the economy and then it seemed to me the financial crisis itself provided a sort of historic example of

markets failing. there have been various explanations put forth through what happened over the last couple of years. i would say there are probably three or four of them. the most common one from the perspective is i would say this all criminality, greed, sort of made ofism grit-- writ large, the bunch of wall street bankers took the economy down with them. the second theory being footboard is this is some sort of mass psychosis, sort of outbreak of collective insanity. some very respected behavioral economist of sort of made this suggestion, that a lot of psychological traits involving herd behavior and collectively rationality which helped explain people in the housing market. the idea that prices could never go down, people on wall street turned a blind eye to the rifted etc. it was basically an exercising a

crowd psychology at work. the third theory that is being put forward mostly on the right is that this was essentially a government failure. there are various forms of this theory. the most common one is that it all goes back to the government intervening in the housing market but in 1979 the community reinvestment act and the bush administration joined the clinton administration both put pressure on fannie mae and freddie mac and the other agencies to buy sub-prime mortgage securities of the argument is ultimately was the government distorting the housing market that was the problem. they are the three main theories they think of what happened. i don't think any of those is particularly persuasive. i think there's an element of each of them and none of them is completely untrue but we have seen the worst of criminality. we have been seeing people sent to jail for criminality and more of them should be sent to jail. and clearly there was some sort

of overconfidence in what economists call disaster my ops so psychological factors did play a role. i think the government's role has been exaggerated. i think it is sort of way out for the right and people who defend the free market it gives them an excuse. if you go and actually look at the studies they show that only 10% of the sub-prime mortgages had anything to do with fannie mae and freddie mac. they did not buy any more or guarantee them. this was overwhelmingly a private sector phenomenon. 90% of the sub-prime securities were originated by private companies, sold on wall street to private investors. it was a private sector phenomenon more than anything else so i don't find that persuasive the there. my theory as i have party said this this was basically an enormous market failure and a failure of ideas really, ultimately the failure of misapplied free market ideas. so the way i frame it in the

book is, i start off in alan greenspan who came to be the sort of apotheosis of this free-market ideology. start off with him appearing before congress at this time last year remitting that he did have an ideology and that was a free market ideology at least in one would know that because i've written extensively about this link to ayn rand etc. said everybody has an ideology. this was my ideology and in this instance it failed. relied on the self-interest of the bankers and other people in the financial community to not get into this sort of mess. the argument was financial markets are self regulating because it is in the etesse of bank its to avoid the blow up we have had. greenspan said i believe that was certainly well for 30 years but it ultimately failed so my book is an attempt to explain why it failed hand-- my

apologies-- bayway i do this is it is seen as essentially a failure of ideas. i try and trace this free-market ideology, where does a come from, what is the miss out and where can they explain the crisis through so the first of the book is taken with the history of free market thought going all the way back to adam smith. like many other people who studied economics in college and manage to get the undergraduate school and graduate school reading the wealth of nations although everybody pretends they have read it, but its you actually sit down and read it you will find 1200 pages of pretty dense prose and their short summaries you can read but i go back to the source zirin actually readed so i read it pretty much back to front and they came away actually with a new found, not newfound but a lot of admiration for smith. the basic free-market idea, there's a lot in it. this is not a book saying we

need to abolish capitalism or free markets. i think smith explained in 23 very pet delays wife premarket ultimately probably do a better job than any other system we have come up with for just creating wealth. i'm not saying very good at distributing wealth but creating wealth. the first one is the division of labor which smith talked about a pin factory. if you get one guy to try to make it nail, a pen or a nail, i have been in america so long i don't know which is british and american anymore but anyway he called it a pen factory. if you get one worker to try to make it nail it might take him all week with its 20 workers specializing in one individual tests such as cutting the metal, sharpening the end and attaching the ped you get enormous increase in productivity and only a few people can make tens of thousands of nails and a week so it is a simple example but the division of labor spread across the entire economy has

produced enormous productivity growth. the other aspect of free market which smith identified in which again i think is true is that you get rewarded for success and punished for failure. not always. on wall street it doesn't necessarily work out that way. in general that the business produces things, a restaurant produces provided good service they do well when they can make profits. if they do badly and produce shoddy goods they got a business. that is the simple feedback mechanism but something lacking in other systems like felo is a more common in some. the feedback mechanism from the profit motive and the division of labor, what you get is this incredible productivity growth machine and then at the go back to the early 19th century people were very worried about mass starvation. people thought, how could that possibly think that at the time

but lots of people thought that at the time because there was no sign of this incredible burst of productivity growth which is the basis of basic modern civilization i think. so, the free-market as they say basically is good for producing wealth. we have seen that in recent years through the shift in india and china towards free markets. i think the latest oil bank figures out that 600 million people since 1995 have been dragged out of polity in those two nations. nelly can argue about the poverty where there is too high or too low but it is beyond a doubt the enormous economic growth in both of those countries and a lot of people have been taken out of poverty. so that is sort of two strikes for adam smith. but, what i also discovered in smith which i hadn't realized is he was actually skeptical of the free market. especially bankers, which for some reason i have never seen

referred to anywhere. he actually has a section where he describes a local bank in scotland where he was from which led to money-- to much money to the local businessmen and then went out and lots of local businessmen would have they scheme which didn't have any basis to them. they went south and couldn't repay their loans. the bank went bankrupt and to the entire local economy into recession-- recession. which is what happened on a global scale and the last couple of years so smith said because of that, even though he was in general against, a generally in favor of laissez-faire lead the market to that market devices he made an exception for banking and i will read a quote from him which as they say sort of shocked me when i read it. he said he favored banking regulatory. such regulation meneau dep become some respects a violation of natural liberty but these exertions of national endangering the security of the

whole society are and ought to be restrained by the laws of all governments of the most free as well this the most despotic geppart of the obligation of bill lynn party wulsin nord to prevent the communication is a violation of natural liberty exactly the same kind in relation to the banking trade which are here proposed but equally justified so there was smith basically making an argument in 17764 quite strict financial regulation. what happened i think after he also made arguments for the government promoting public works and defending the country but that was pretty well-known. the financial regulation argument i don't think is very well-known. what they do is then try to explain how his ideas which i think basically were quite sensible were sort of over the course of a couple of centuries. i want to into details but taking you through the growth of what economists call a general equilibrium. which is very boring in dense

and the chicago school which has been less boring in dense, i will spend a bit of time on that. milton friedman, the reed friedman he will see he actually says most of these ideas are adam smith. i am just regurgitating them but i think what he did, what friedman did and his followers is they took him too far. the two specific examples of this which again are quite complicated but is one theory called efficient market hypothesis which is basically the financial markets always get things right. the second theory called rational expectations hypothesis is the hypothesis that everyone is smart enough to foresee the future or systematically foresee the future. those quite complicated mathematical theories took over a lot of economics in this sort of late '60s, '70s and '80s and had a lot of influence on policy. the whole idea of the financial markets of self regulating can be left to their own devices.

the intellectual underpinning of that idea is the chicago school efficient markets they are easily spend a bit of time explaining that, and then the second. i call the tradition utopian economics. it seems to me this not largely based on reality. the second third of the buchheit then switch and and try and trace an alternative sort of economic history of economic thought, what i call reality based economics. the reality that markets can-- he said the banking sector can fail but throughout history also a lot of economists many of them who taught across the road, have also come up with various theories of how markets fail. i start off with just a couple of examples. global warming. most people don't think of global warming is an economic problem. they think of it as a technological problem or may be a geographical problem or

something. mainly technology, but actually is based in an economic problem and what is the economic problem? it goes back to an inglis economist at the start of our century the came up with this idea of the economic spillover which is the idea that what happens in one market can affect what happens elsewhere. the example he used was of obviously their early 20s sentry was of a real way setting up say between new york and boston that provides a lot of valuable services to the people writing it, and that determines the prices of the tickets they charge. the private benefits of the people writing on the train are reflected in the system. that is all well and good. the problem is, what of the steam train is going to the countryside which i came to this morning and sparks fly often set the whole local woodland or local fields ablaze. who bears the cost of that? the local farmer or whoever it is. the cost of the spillover from

the railways activity is not incorporated in the price system is the basic problem. that was a small example, but it is actually a very profound because what it says is the private market is very good at balancing private cost and private benefits but terry batted balancing social costs and social benefits and that is what we have in climate change, all the people burning greenhouse gases, power stations, s.c. the owners of etc they are paying the full private cost of their activities. they have to buy the fuels' that sector. the market as a good job of reflecting the private cost but the social cost of their actions eide i am assuming fernald the scientific consensus about global warming is correct, the social costs in terms of rising temperatures which are going to be borne by future generations the private market misses those out completely. so what magoo said was what we

need, the way to address that is basically use taxes. he called them extraordinary restraint but especially a way of correcting the market failure by forcing the polluters, in this case, to pay some of the costs of their business. they are going to cut down on carbon emissions so that is a form of market failure and a solution there. but there are lots of other forms. lots of them have to do with information problems and health care for example. it topical example. what is wrong with health care? we see a lot wrong with that but two things that come to basic economic problems. one is an informational asymmetry. people buying coverage come at you try to buy coverage on an individual basis you know more about your health record then the company does who you were trying to buy the policy from. they therefore suspect you were electronically are a good likelihood of becoming electronically if you are out there trying to buy coverage.

so as a result of that informational asymmetry, corporations lauren the business of making profit from selling health insurance are very reluctant to take on individuals at reasonable cost. that is the basic reason why private insurance for individuals is so high. they fear the risk pool of individuals is going to be very tainted and they basically try all the cannot to offer individual coverage. they will only effort at end extortioner rate. the other side of the market there is an issue of moral hazard which is another piece of economic jargon but basically what that means is once you are insured for anything you don't have the incentive to worry about the costs and that is essential to any insurance system. think about health care, once you've paid your health premiums or someone else is paid them for you if it is employer-based, as most of us who are the fortunate ones do we have little incentive to worry about the cost of treatment so if you have a

headache and go to the doctor and he says i think it is a migraine, you say it might be brain cancer and why not get a scanner just in case? the doctor is not paying for its of you will probably go along with that. it turns out this sort of system we have over use of medical resources and massive cost inflation. they are both economically driven problems, both forms of market failure so we have gone global warming. we have health care, and of course of financial crisis. so the third part of the buck, i go through history of providing a famous economist who have come up with various market failure, and the do and i also focus on john maynard keynes and hyman minsky. this goes to my sort of theory of what went on in the financial markets. how we doing? about five minutes? my basic theory of what went wrong is that it is what i call

rational rationality at work. what does that mean? it means people involved in sub-prime industry from the start of the-- people taking out mortgages right to the people issuing the mortgages to the wall street firms who were securitizing the mortgages to the credit rating agencies who were raiding the bonds, to the investors at this end of the chain where buying securities. all of those people were quite rational in their own self-interest, given the incentives they faced. so, from an individual basis it is rational i argue but collective insanity believe have been enormous property bubble in an enormous credit bubble which burrs and plunges the global economy into the biggest recession since the 1930's otis collectively irrational, so that is the idea, irrational irrationality. you can trace this idea back.

the phrase them have come up with, the idea itself is actually quite an old one and goes back to keynes as i say, who compared a lot of investing and activities in the financial markets to a beauty contest. this is a bit of a sexist analogy but england in the 1930's was sexist. in those days they used to have newspapers anisse to print pages full of photographs of pretty girls and as a contest to rodin and felt he was the prettiest and if your choice was the most popular you won a prize. so how do you play that game? if you are a near classical economists what you would do is look at the women and decide on the basis of how the book, who is the prettiest but actually that is not going to win the prize. what you have to think is which woman is the average opinion going to think of the producer you were thinking about how other people are going to play the game and then if you are really smart you think i'm not

going to think about how average opinion, who is the pretty is. you have to think about what average opinion thinks average opinion is going to be the prettiest and then you can have an infinite recursion. some people play to the fifth than the 6 degrees. instead of the whole free market ideas that people buy stocks, bonds with ever on the basis of fundamental values and if things move out of whack with reality, with the economic brutality arbitrage comes in and pushes it back to the proper levels. this is the hypothesis in a nutshell. what kaine said and people at harvard formalized in the 1990's and larry summers although he seems to have forgotten it since then, was this idea that it can be rational to serve the bubble if you are an investor. rather then if you think-- a hedge fund are rich guy trying to make money which the two of those things are essentially the

same thing, when you see the stock market going up and you think it is overvalued you can either sell out now and pushed prices back to reality or you can say chances are this looks like there is a bubble forming. people are getting excited bed nets in the papers. buy-in now and sellout before the fool's find out. there is a name for this on wall street, called the greater fool theory, you buy and sell it to a greater fool and it explains a lot of what was happening in the market. it seems to me the wall street banks word stupid and they were necessarily evil. just given the incentives they face it was difficult for them to stay out of the market. an example eyesight is citigroup which is now a basket case obviously but from 2000 to about 2,005 citigroup acted quite responsibly. it was in the big player in sub-prime mortgages.

it did have a small sub-prime division but much smaller than its rivals because problems because this market was incredibly profitable for years all its rivals were making big profits. at the start of 2005 the board of directors came to the chairman of the company, chuck brentson said look, we are falling behind. we need to increase our risk profile get into risky areas where the profits are. we can be left behind. what could prince have done at that stage? he could have said look, is too great institution to risk the entire future of the company on issuing loans to people who cannot afford them. does all going to become-- but that was not an option because he was already a, already ander pressure because they were falling behind everybody else in b he was incentivized as everybody else on wall street with his enormous stock option packages of his-- getting the stock price up for the next few

quarters. and that sort of environment, this sort of rational thing to do is to go with their heard and join in. it is almost impossible to stay out site. we saw that in the technology bubble, my earlier book about the stock market with the analyst. there were analysts on wall street who thought these stocks were crazily overprize but by the time the bubble burst almost all of them have lost their jobs. because telling the investors to stay at of the market was a terrible business decision for the individual firm because they would just move to their arrival so basically the into the logic of the market would drive craziness want to get a speculative episode going is my argument. gannett the end of the book, having laid out that argument, and say a few things about what should be done about it and i am happy to take some more questions about this but the two basic points that will make.

number one, whatever regulations to set up or whatever system you set up, we need the fundamental need for an intellectual counterrevolution i think. we need to overturn this proposition which somehow has been in trends for the last 20 or 30 years where the market always gets things right. i think the market sometimes gets things right and sometimes does it very good job but there's a big difference between some times and always. so, it just seems to be as i say when you talk to professional economist they say we always knew about market failure of course but they didn't do a good job of telling the politicians about this because whenever especially in the financial sector, they tend to argue against the greenspan was difficult as the found out myself for ten years are so. it was just the sort of intellectual consensus that the market got things right so that is what they have to change in

this book is an attempt to try and contribute to that change. the second thing is just whatever the policies are that are introduced they have to take account of incentives. the whole problem is that the market sometimes gets that incentives. adam smith, milton friedman and hayek were completely right when they said the essence of free market is the prizes act as signals and people act to incentives. where they got it wrong i think was in saying pricing those who were not always the right one. friedrich hayek fu wrote an article that years ago called the telecommunications system and the prices are the signals and the think he was exactly right. the problem is the signals as i say sometimes of the wrong ones. once prizes the part they signal a sense that niching join in this insana to read it and try to correct. we see that in the housing market for example. once house prices start rising,

i've dennis myself costarred getting jealous about members who are making quick killings and the temptation is to join in. if there is easy money to be made. so it is very difficult to overcome that so i think any form of regulation or new laws have got to take that into account. there is no use saying we are going to ban this idea. these guys on wall street and other places are smart and they will come up with ideas for ways to game this regulation a we have to think carefully how is going to affect the incentive structure. ssa i'm quite happy to take questions on any individuals, what obama is doing, what the fed is doing, anything more concrete. the book as i say is mainly a battle of ideas but i do have the use on your specific things. if you could just use the microphone.

>> i think you were the perfect person to ask this practical question. if you were in charge of bernanke's appointment your reappointment what would you decide and why? >> a very good question. i will repeat the question. the question is this ben bernanke the server reappointing as the german? yes he does. why is that? i think bernanke did a terrible job between 2005 and 2007. he basically followed greenspan's policies. he was one of the architects of the credit bubble. he made the argument back in 2003 and 2004 that we should keep interest rates low, that the real problem was coming from china to have an excess supply of savings of that was why interest rates were low. that was the rationale the fed used for keeping interest rates too low for too long. i.t. cause beckett they have bubble from which everything else flowed, so bernanke failed

i believe but i think he did pass the final. once they realize the entire financial system was in danger he basically through the rule book out the window and tried a whole series of what for the fed were quite controversial things. the idea of reducing interest rates and pumping money into the economy, that was just dandridge vet practice but all these special lending programs that he introduced, which actually turned out to be quite effective, they haven't been tried before so i think he did a reasonable job of preventing wholesale calamity and they think the other phase and i think he deserves, did a good job would say is 50/50, the reason i think he deserves reappointing is the thing he is actually sort of repenting for the past mistakes and i think he is determined to introduce some regulations.

i think he wanted to be a legacy is the fed chairman who cleaned up wall street a bit. he may not be able to do that but doing a good job in the last year or so, we should give him another chance. >> you said that the individual is different than the collective, that individually it made sense to keep the bubble going. is that because you quick enougt bursts it doesn't matter? >> well, the question is why does it make individual sent to participate in the bubble? is it because you can get in and out before verse? the answer on an individual answer is yes. most people think they can. ducey if everybody tries to get in and out of the same time the bubble collapses. that is what happens in the end that there is a period, there is a period in which you can get in and out. going back to the chairman of

city-- cid geek, things are looking a bit shaky are you going to be pulling back from the markets and he said no, as long as the music is playing we have to keep dancing. what he was saying basically investing for wall street management is a form of musical chairs which keynes also said. i don't know friends was directly quoting kaine search as telling him but once one of these bubbles get going is like a game of musical chairs. you can get the seats out there available for some of the time so a lot of people made a lot of money on the upside and got out in time. samet the technology bubble. they got out before the bus so that is why i think it is rational on some level to participate as an individual. >> i wanted to follow-up on that. it seems that this field, which

others have articulated about the individual rationalities really gives people some sense of pass to easily. just a couple counterexamples, which is during the dotcom boom in these are perhaps exceptions to the roebuck warren buffett did not invest in.com stocks. fidelity contrare fund when it became so fabulously successful eventually closed to new investment money is coming even though you could get higher fees by increasing the number of investors, but the funding managers said basically once you reach a certain size profitable opportunities vanish for the kind of rates that were attracting all these people coming in. everybody would know that in financial markets, they are only

a certain number of 100-dollar bills lying on the ground for people to pick up so once you have gone to the credit worry burroughs the workload to be dipping into the people better not creditworthy, so on the one hand there people who resist. now maybe buffett in the head of the contra funder so big and the analysts' under pressure can lose his job and the other people but how do you you square those two problems? i think people were rational, stip bin evil, so all of the same time. >> it is easy for warren buffett to sit out the bubble because he is always a billionaire. if you are a mexican immigrant in east l.a. with a very low-paying job and suddenly you have the chance to buy a home for $300,000 with zero down, you

are basically being given an option by the bank on the rising housing market. it seems to me they are giving you a 90% lung plus a 10% piggyback loan to pay the equity, what are you risking? [inaudible] >> whether he would have been a city of chairman when the bubble burst, i don't know. fidelity is an interesting case because at the same time the contra fund was sitting out the bubble, jeff was managing the magellan fund was heavily into text box and to kobo went heavily into tech stocks and that was basically the end of the medillin fund when it collapsed in 2002, so sure, sensible statesmen should stay out of the market but i think what we find is there aren't many of them around once the bubble really gets going. the lady here.

>> you mentioned regulation, and when this happened, it looked an awful lot like kaku bike goldman sachs there. i think even economists sort of raise their eyebrows there revolving in and out of government. but in this kind of thing where the financial sector is just so powerful, and you have a very integrated world financially, can you regulate these people? >> it is a very good question and what i said bernanke and the fed did a good job i don't mean they did everything right. i think the strategic choice to bail out the banks was the right one just because we tried going the of the way in the 1930's and we also tried it with lehman brothers and things didn't look very good and certainly didn't turn out very well in the '30's. some people in chicago synced we should let the whole system collapse and everything with

confine in a few weeks. maybe they were right but i'm glad we did not run that social experiment. to some extent in the 30's when the government allowed the banks to collapse it did not work out very well but the question then is how do you bailout walls treen there i think treasury and the fed both, they deserve criticism because they had a lot more leverage than they realize. the banks and they were about to go out of business if they couldn't raise money. we the taxpayer were providing them a lifeline in we should have charged them a lot more for it than we did so i think that is a legitimate argument. the bankston are now reaping their loans in clamming, we gave the tax there goodale. they made ten, 20% on their investment over the year. that is a completely fallacious argument. by the time they got the t.a.r.p. money they couldn't raise money anywhere else. the implicit interest rate they face was infinity ivan r. dee a

20% is nothing. the taxpayers, the fed should it said we are going to, what they did in england, to be fair to the british government, we will bill you up the taxpayer is going to take 60 or 70% of the bank can hold onto it for a long time so of the shares come back the tax there will benefit so i think that is, i think we shouldn't build up wall street but i think we should've been tougher about it. what bernanke and geithner especially say is that the time there was such a big crisis, things were happening so quickly it was all snowballing. i think that is a bit of a cop-out. especially in the aig case, the famous asg case where they agreed to take everybody out of power on their cbs -- sorry for the jargon but they agree to pay the people who were in hock to the ag at 100%. i think they could've easily given them 50% for example and it turns out the government was

one of the big beneficiaries of that caused all of these conspiracy theories. i just don't know the answer to whether it was a conspiracy but it was a bad financial decision by the government i think. anymore? sure. >> mr. bernanke is being-- blamed these days for not having seen all this and forestall this occurrence. after march of this year, barney frank and paul krugman four and a dialogue at the kennedy library in each person's opening statement was quote, i didn't see this coming which is something to conjure with. i asked mr. frank of he could run the tape, what would he have had in place and he said well we didn't have the ability to regulate the things that by the rye and costello this. no, well those things which were lacking for mr. franks

observation, will they be forthcoming? >> to some extent. i think what he is referring to probably wear various things which were in in place, which franks legislation in the obama legislation to put in place, the ability to wind down big banks, the fdic didn't really have their big commercial banks that could do it but lehman brothers or goldman sachs or morgan stanley. no, there were various one so they didn't have that capacity. that is why have they had to bail them out. there was a special bankruptcy, a government controlled bankruptcy. in terms of regulatory oversight you are right there were large elements in the financial system outside of the regulation system derivatives being one example but also mortgages because they were regulated at the state level, and the state regulators are completely overmanned. and california i think there were 11 regulators regulating

the entire mortgage industry and that is where most of the big mortgage companies like ameriquest and ameritrade-- new century and countrywide, they were enormous and california and the reason they inc. was the real-estate legislation was so weak, so that will change under the legislation. mortgages will be overseen by this new silver product safety commission so i think that is a good idea. it derivatives go some of the way towards regulating but bernanke is giving wall street a pass-- geithner is giving wall street the pass on some of them, i.e. the more complicated ones that can still trade among themselves. i think those exceptions, i think they should all be forced to trade over. if you are asking me basically to think the proposed regulations go far enough my answer is no, i don't. i tend to be of the paul volcker view that we should consider a

split up of the financial system. not really glass-steagall but it 21st century version of glass-steagall where you have a safe financial sector, which sort of oversight of consumer deposits, brokerage accounts in several. that would the government guarantee that those companies go into trouble. there would be an explicit or semiexplicit government guarantee that they couldn't go bankrupt but in return they would be heavily regulated, have high capital requirements. you have the utility banking system and on the other side people like goldman sachs say we don't want anything to do with that. find. they could, what people call casinos, the cassino aspect of the system. they would be allowed to carry on but there would be inexplicit loss. there are no bailout. if you get into trouble you were by yourself. it might not be credible you say? it is probably not going to

happen but the question is whether it will be credible. i think it would be credible because, if people really believe they had a chance to go under they would be much more reluctant to lend money so people would have trouble expanding their balance sheets in this way. is not going to be happening obviously but it u. s. mint personally what i think should be done i think we should sort of a point paul volcker as the new treasury secretary. he is still in pretty good shape. or else, i mean going back to the previous question it is phys bernanke's somebody else come if bernanke or bring back paul bull gravel tick paul. don't think anything this would have happened if paul volcker was still the chairman. he is a banker said he understood. you need a thief to catch a thief. he understand help banking works. and the 1930's we brought in eckels who ran a bank and ohio. it turned up to be one of the

greatest fed chairman severs so we could find somebody like that by all means. [inaudible] possibly. i think he is a bit, i mean he is certainly one to consider. i have some reservations about his role as sec chairman but any way of a could find somebody like that i would agree, but as we say imperialistically that is not going to happen i think in with all the political health care we will be lucky if we get any financial regulation through early next year, so at this stage i am thinking well, it is a bit like health care. aidid this obama's regulations are nothing i am in favor of obama's regulations. >> the question on jobless recoveries and the globalization of showing of jobs. just a question of people out of work and where you think the jobs are?

also they look down on manufacturing jobs than they think the racial used to be the other way around before. any thoughts? >> it is an interesting case and i have been actually traveling around the country a better. a lot of people of made that argument. cercla was hepting to our manufacturing base. i think the financial sector has gotten too big. in the u.k. m&m people's made this argument including the bank of england and the head of the financial services authority, that's you know its some point the financial sector rather than serving the rest of the economy starts to sort of feed upon it and i think we have gotten to that stage in some ways. the problem with it is, as far as larry summers i would say well, okay there may be too much but where's our competitive advantage these days? he would argue that america's competitive advantage is in financial engineering, that you

know these banks to produce a lot of foreign earnings for the u.s. and it is a mercantilist argument. so, if we start really knocking down wall street, we will this be giving competitive that bannack should the germans, the british, the japanese or whoever. i don't agree with that but you know, i think it underlies a lot of reluctance of the administration to really get too tough with wall street. they say it is like it used to be general motors is good for america, notice what is good for goldman sachs is good for america. not necessarily goldman because they are so popular but jpmorgan chase. [inaudible] has been drawn and there has been no addition so therefore with that asset in the deficit,. [inaudible]

>> there are some people some of the argument sorry here is the bang seven actually dealt with the problem and they are still sitting on their balance sheets like japan presumably. i think there are some very respected people. i was on a panel with carmen reinhart and she made this argument. i think there's something in that. clearly there was an accounting dodge when they allowed them to mark all of these assets to market but mark-to-market was having disastrous effects because it starts a done red spiral because mark-to-market is short of capital so they have to sell and prices keep going down so you can get a downward spiral with mark-to-market. you need somewhere in between, and maybe a temporary extension of mark-to-market. my argument why i'm not quite so pessimistic of carmen rideout,

paul krugman and these people is i think the government's recapitalization of the banking system is proving quite effective. it is not a pretty process to watch because of these guys the goddess into the mess are making big bonuses again but the government, they don't say out loud but the fed and the treasury, their entire policy is allowing banks to make big profits again so they can rebuild the capital ratios so they can again go out and lend to people so we don't get into the credit crisis. they are landing any, but they are rebuilding their capital issues quite effectively. largely due to monetary policy. they can borrow money from the vetted 0%, and then invested in treasurys at 3.5%. that is why bank of america can afford to read by the government because the government is giving them the money. it is a free thing. to make a long story short it think the banking sector will recover more rapidly than the

japanese banking sector and that is why we want to have ten years of japanese-- but my worry some more on the other side that it will prove to successful and people get another bubble and something or another because interest rates are too low and there's lots of free money running around so i am on the inflation side rather than the deflation side. anybody else? in the back. >> we haven't heard a lot about hedge was the world hedge fund in this? >> good question. the question is, what was the role of hedge funds in this? we have not heard since the capital management crisis back in 1998. he is right. the hedge funds were not particularly active in sub-prime mortgage securities. they didn't have the distribution capacity and some hedge funds obviously, some of the credit hedge funds blew up

because they were buying sub-prime but these products were distributed to the hedge funds. now, does that make hedge funds fine? no, i think would happen effectively as the wall street banks turned in the hedge funds. i remember writing about long-term capital and it was considered a great scandal at that stage that ltcm was-- i think it was. merrill lynch was geared. these big wall street banks that turn themselves into a hedge funds other was a hedge fund crisis. hedge funds were disguised as investment banks i think would be my answer. so, you know, leverage with the big problem. it just came about, came about in the inside of the financial system rather on the periphery is.

>> customers. >> they were but not enormous. the biggest buyers ironically of a lot of these securities turned out to be european banks because for some complicated regulatory reason they didn't have to take big capital charges for buying sub-prime loans under the capital rules so that is why there has been a mystery and the realize when the sub-prime market collapse was the german lenders bank and it is because it was financially in their interest to buy the securities so what was happening is, merrill lynch, goldman sachs of weber were buying all of these mortgages from florida, california whereever turn them into securities incense them to europe to sell them to german bankers. it was very clever while the last. it was very lucrative. i think we are out of town so thanks very much everybody for showing up.

if anybody would like to buy a book, i would be happy to sign it. john cassidy writes for "the new yorker" and sifry krin kojeve gidget to the new york review of books. he is the author of.com how america lost its mind in money in the internet era. for more information visit u.s. macmillan.com/how markets fail.

>> every year the national press club has an authors night. tonight author of 14 books including warriors of god and god's of war. he is a new book about called attenders a faith charles the feth in the battle for europe,

1520 to 1536. let's start with the basic question, who is charles the dip then who was sulemon the magnificent? >> charles v was the holy roman emperor ansel leamond the magnificent was they tense saltz on of the ottoman empire, and it's too caymen to clash in vienna in 1527 and 1532, and it really was a clash of empires and a clash of civilizations and a clash of religions. so we think after 9/11 we were the only ones that never have this experience of jihad versus brisé, but this is what i have been really doing for the last four books, is reminding people of the episodes in history where christianity and islam came into conflict. >> what was the result of this battle? >> the result was that the ottoman turks, the islamic forces were stopped at the end

of and had they not been stopped what sulamon the magnificent want to do was go alta way to the rhine river so heady prevailed that the anna, europe would have been islamic to the rhine river in 1527 and so it is a major turning point in history. >> when you are working on this ancient history, what are your sources? >> i have an office at the library of congress and the library of congress is the best library in the world by far, so there are always i found with this book and others in medieval history that there are contemporary news chronicles and those are the most immediate sources, those are the ones that are then there is that people who were there, so that is what we always look for. >> talked about the correlation between 9/11 in this period in history. when you are doing this history area quonset lee remind them that? >> i've never done any history that wasn't in some way relevant to the current day.

that is the kind of litmus test for me and it just seemed to me after 9/11 what was really important for americans to understand that they were not the first ones to have this kind of clash with the islamic world, and it is important for them to know also with the pipe dreams are of the islamic world and who their heroes were. and sulamon the magnificent and i've written about saletan in the third crusade is well, these are important stories to know. >> what has your eye right now in regard to your interests? >> well, i could tell you but then i would have to kill you. defenders of faith. thank you very much. >> thank you.