>> thankses everybody for coming me out and thanking for inviting me here. i've been thinking about writing a book about how the market fell for men areas, and my wife said nobody would buy a book with such a negative title. but after the financial crisis, i thought i should just sit down and write this book. there's so many economic problems out there, from inequality, poverty, repeated financial crisis, global warming, urban blight, you name it. a lot of problems that rarely get addressed in economic books.

so, i thought, you know, definite lay market there for a more -- definite lay a market for a more skeptical look at the economy. and providing an historic example of marketing failing. been various explanations put forward for what happened over the last couple of years. i would say probably three or four of them. the most common one is that it was all criminality, greed, making large, bunch of greedy wall street bankers took the economy down with them. the second theory is that this was some sort of a mass psychosis, sort of outbreak of collective insanity. some respected behavioral economists have made this suggestion, that psychologyat

traits involving herd behavior which help explain this. people in the housing market forgot the idea that prices could go down. people on wall street turning a blind eye to risks. an exercise in crowd psychology. the third thing that is being put forward, mostly on the right, this was essentially ghost government failure and it all goes back to the community reinvestment act, and then administrations put pressure on fannie mae and freddie mac the other agencies to buy up subprime mortgage securities. so the argument is ultimately the government distorting the housing market is the problem. those are the three main theories of what happened. i don't think any of those is particularly persuasive.

there's an element in each of them and none is completely true. there is some criminality, some people have gone to jail and probably more should be september to jail. and clearly -- sent to jail, and of course there was some overconfidence and disaster myopia. i think the government role has been exaggerated. it's a way out for the right, and people who defend the free market, gives them an excuse. it wasn't the market, it was the government. but if you look at the studies, they show only 10% of the sub prime mortgages had anything to do with freddy may or freddie f- fannie mae or freddie mac. this is a private sector phenomenon. 90% of the mortgages were sold on wall street. so it was a private sector phenomenon more than anything

else. my theory, as i say, is a said, this is basically an enormous market failure, and a failure of ideas and misapplication of market ideas. the way i frame it in the book, i start off with alan greenspan, who -- appearing before congress this time last year, and admitting he did have an ideology and it was free market ideology, anybody who has read any of my stuff would know that i make links to ayn rand. he said, this was my ideology, and in this instance it failed. i relied on the bankers and other people in the financial community to not get us in this mess. and the financial market is

self-regulating because it's in the interests of bankers to avoid this blowup we have had. it ultimately failed. so, my book is an attempt to explain why it failed, and i -- the way i do this, seeing it as ultimate lay failure of ideas, i trace the free market ideology, where did it come from and how can we explain the crisis through it. so the first part of the book is a history of free market thought, goal -- going all the way back to adam smith. people who studied economics in college and made it through graduate school and graduate school without reading "the wealth of nations. "although everybody claims to have read it but it's 1200 pages of dense prose.

but i went back to the source and read it. and i came back with a new-found admiration for smith. the free market idea, there's a lot in it. this is not a book that wants to abolish free markets. but they do a better job than any other system we have for creating wealth. not very good at distributing wallet, -- distributing wealth. if you get one guy make a nail, might take him all week. if you get 20 workers all specializing in one of the individual taxts, such as

cutting the metal, sharpening the end, putting the head on it, you have enormous productivity and you can make tens of thousands of weeai the division of labor spread cries the entire economy has produced enormous productivity growth. you get rewarded for success and punished for failure. but always on wall street, doesn't necessarily work out like that. you often get rewarded for failure. but in general if a business produces things, a restaurant produces meals, a hotel, if they produce good products, they stay in business. so, if you put those two things together, they from

the profit motive and division of labor, you get a productivity growth machine, and if you back to the early 19th century, people were worried about mass starvation. and people think, how could you possibly think that but a lot of people thought that because there was no sign of this productivity growth, which is the basis of a modern civilization. so free markets basically are good for producing wealth. we have seen that in recent years for the shift in india and china. the latest world bank figures are that 600 million people since 1995 have been dragged out of poverty in those two nations. now we can argue about the poverty -- whether it's too high or too low, but beyond doubt there has been enormous economic growth in those two countries and a lot of people have been

taken out of poverty. so that's sort of two strikes for adam smith. what i also discovered? smith, he was actually very skeptical of some elements of the free market, especially bankers, which i had never seen. he described a bank in scotland which lent money to local business men, and little schemes that didn't have any basis to them. the went south, couldn't repay their loans, the bank went bankrupt, and threw the entire local economy into recession, which is actually what happened on a global scale. so smith said, because of that, even though he was in general against -- generally laissez-faire, he made an exception for banking, and i will read a quote from him which

sort of shocked me when i read it. he said -- he said such regulations may no doubt be considered in some respects a violation of natural liberty but these exertions of natural liberty might endanger society and ought to be restrained by the laws of government. the obligation of building party walls to prevent the communication of fire is a violation of natural liberty, as well as violations of the banking trade that is equally justified. so there was smith making an argument in 1776 for strict financial regulation. what happens, i think, -- he also made arguments for government promoting public works and defending the country. the financial regular laying -- regulation isn't very well known.

his ideas were perverted over the course of a couple of centuries. i won't go into details, but taking you through the growth of the economy, general equilibrium theory, which is very boring and dense, and then the chicago school, which is a bit less boring and dense, and i will spend a little time on that. milton freeman, he actually says most of these ideas are in adam smith and i'm just rejudge tating them. what freedman did and his followers, they took them too far. two specific examples of this, the efficient markets hypothesis, which is the financial markets always get things right, and the other is that everybody is smart enough to foresee the future and they don't make errors. those quite complicated

mathematical theories took over the economics in the late 60s, # 0s, and 80s and hat -- had a lot of influence of policy. the fact that they're self-regulating, the intellectual underpinning of that idea is the chicago school efficient markets theory. so i spend a bit of time explaining that in the second -- i call that tradition i call utopian economics. is not based on reality, it's based on a utopian theory. and then i have what i called reality based economics. the fact that economies can fail is not new. smith said the banking sector can fail. but throughout history or the last 100 years, a lot of economists have also come up with various theories of how markets fail.

i start off with a couple of examples. global warming. most people don't think of that as an economic problem. it's a technological problem or geographical problem -- i guess not -- mainly technological. actually, it's basically an economic problem. what's the problem? goes back to an english economist, cecil purdue, who came up with an idea of economic spillovers, which is the idea that what happens in one market can affect what happens elsewhere. the example he used, early 20th century, railway setting up between new york and boston. that provides a lot of valuable services to the people riding it, and that determines the prices of the tickets they charge. the private benefits of the people riding on the train are reflected in the price. in those days in the steam

trains. but what about if the steam train is going through the country and sparks fly off and sets the fields ablaze. who pays the cost of that? the local farmer. the spillover of the cost is not in the price system. that was a small example, but it's actually very profound because what it says is that private markets are very good at balancing private costs and private benefits but very bad at balancing social costs and social benefits. that's where we have in climate change, although people are burning the green house gasses, power stations, suv owners, they're paying the full private cost of their activities. they have to buy the fuels, et cetera. the market does a good job of reflecting private costs. but the social costs of their actions, i.e., the scientific

consensus about global warming is correct, the social costs in terms of rising terms which will be borne by future generations -- the private market misses those completely. so what purdue said was that what we need -- the way to address that is to basically used taxis. -- using taxes by forcing the polluters to pay some of the costs of their business. if they face high carbon taxes they're going to cut down on carbon emissions. so that's a form of market failure and the solution. there's lots of other forms and lots of them have to do with information problems. health care is a topical example. what's wrong with health care? there's a lot wrong, but two things that can be traced to basic economic problems. one, there's an information asymmetry. the people -- if you try to buy coverage on an individual basis, you know a lot more about your

health care, your health record than the company does who you're trying to buy the policy from. they suspect you're either chronically ill or have a good likelihood if you're out there trying to buy individual coverage. very hard for you to persuade them that's not the case. so as a result of that asymmetry, corporations are in the business of making money, and they're reluctant to take on individuals as a cost elm that's why private insurance for individuals is so high. they fear the risk pool of individuals will we tainted and they try all they cannot to offer individual coverage. they only offer it at an ex-extortional rate. the other side of the market is an issue of moral hazard. that means once you're insured for anything you don't have any incentive to worry about the

costs and that's essential to any system. once you have paid your health premiums or somebody else paid it for you, if your employer based, we have very little incentive to worry about the cost of treatment. if you have a headache, and you go to the doctor, and he says it's a migraine, and you're worried about cancer, and you want a scan. and the doctor isn't paying for it either so they go long with it. so turns out there's massive use of medical resources and massive cost inflation. they're both economically driven problems. so global warming, health care, and of course, the financial crisis. so, the third part of the book -- the second part i go through a history of providing the famous economists have come up with various theories of market failure. i also focus on john maynard

canes, and this has to do with my theory of what went on in the financial markets. my basic their of what went wrong is what i call rational irrationality at work. it means that the people involved in the subprime industry, from the start of the chain, the people taking out mortgages, right through the people who issued the mortgages to the wall street firms securitizing the mortgages, and the bond raters, and the investors who were buying the securities, all of those people were acting rationally in their own self-interest, given the incentives they faced. so, from an individual basis, it's rational, i argue, but it adds up to collective insanity. we got in an enormous credit

bubble which burst and plunged the global economy into the biggest recession since then 1930s. so rationally irrational. so you can trace this idea back -- the actual idea itself is quite an old one and goes back to cains, who compared a lot of investing and activities in the financial markets to beauty contests. this is a bit of a sexist analysis. in those days they used to print pages of photographs of pretty girls, and you wrote in who you thought was the prettiest, and if your choice was the most popular, you won a prize. so, how do you play that game? if you're a neoclassic economist, you look at thewoman

on the bay is so of who is the prettiest. that won't win you the prize. what you have to think is which woman is the average opinion going to think the prettiest. so you think how other people play the game. then you think about not how average opinion, you have to think what average opinion thinks that average opinion is going to be the prettiest. and then you can have -- as cains said, some people play though fifth and sixth degree. the whole free market idea is people buy stocks and bonds based on fundmental values, and if things move out of whack with economic reality, average prices come in and push prices back to their market levels. what some people at harvard

formalized was this idea that it can be rational to surf the bubble if you're an investor, rather than if you think you're a hedge funder or just some rich guy trying to make money -- which are essentially the same thing -- when you see the stock market going up and it's a overrecall valued, you can sell out and push prices back to reality, or you can say chances are, this is a bubble forming, it's much smart tore buy in smarter to buy in now and then sell out before the fools fine out, and you buy and then sell to a greater fool. and it helps explain a lot of what was happening in the market. seems to me the wall street banks weren't stupid and they weren't necessarily evil. just given the incentives they faced, it was very difficult for them to stay out of the market.

the case i cite is citigroup. from 2000 to 2005, they acted actually quite responsibly. wasn't a big player in subprime mortgages. it had a small subprime division. that caused it problems because they were incredibly profitable, and its rivals started making profits. and the board of directors came to the chairman of the company, chuck prince and said, chuck week falling behind. we need to increase our risk profile. that's where the profits are. we can't be left behind. what could prince have done at that stage? he could have said, look, citigroup is just to august, to great an institution to risk the entire future of the company on issuing loans to people who basically can't afford them. it's all going to come a cropper. but that wasn't an option for him because, a., he was already

under pressure because they were falling behind, and he was innocentized with these enormous stock option packages. so all he really cared about was getting the stock price up for the next few quarters. in that sort of environment, this sort of -- the rational thing to do is go with the herd and join in. it's almost impossible to stay outside. we saw that about the internet stock bubble. there were analysts who thought they were overpriced, and by the time the bubble burst almost all of them had lost their jobs because telling the investors to stay out of the market was a terrible business decision because they just moved to their rival. so basically as this inner logic of the market which drives it to craziness is my argument.

and at the end of the book, having sort of laid out that argument, i try and say a few things about, what should be done about it, and i'm happy to take more questions about this. but the basic -- the two basic points i made, number one, whatever regulations you set up or system you set up, we need -- the fundamental need is a counterrevolution. we need to overturn this proposition which somehow has been entrenched for the last 20 or 30 years that the market always gets things right. i think the market sometimes gets things right, and sometimes does a very good job, but there's a big difference between sometimes and always. so, just seems to be, as they say in washington -- when you talk to economists, they say, we always knew about market fall our, but they didn't do a very good job of telling the politicians about this, because

they're trying to argue against the greenspan language is very, very difficult. it was just sort of intellectual consensus that the market got things right. so that's what we basically have to change and this book is an attempt to try and contribute to that change. the second thing is just, we have to -- whateverty the policies -- whatever policies are introduced, you have to take account of incentives. the whole problem is that the market sometimes gives bad incentives. adam smith, milton freedman were completely right when they said the essence of free market is that the prices react to signals and people react to incentives. where they got it wrong was that -- i read article about the market telecommunication systems and the prices of signals. and he what exactly right. the problem is the signals

sometimes are the wrong ones. once prices depart from reality, the signal is that you should join in this insanity rather than trying to correct it. we see that in he -- the housing market. when house prices start rising, we get jealous of our neighbors who are making quick killings, and the thought is, join in and take advantage. so any form of regulation or laws have got to take that into account. there's no use just saying, we're going ban this. these guys on wall street and other places are smart and will come around with ways to game most regulations. we have to think carefully how it will affect the incentive structure. that pretty much it. i'm happy to take questions about what obama is doing, what

the fed is doing. the book is mainly a battle of ideas but i have views on moe specific -- more specific things. if you could just use the microphone. >> i think you're the perfect person to ask this practical question. intmt orere in charge of not, what would you decide and why? >> very good question. okay. i will respeak the the question. the question is, does ben bernanke deserve reappoint as federal chairman. cassidy votes, 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 argue ament that you should keep interest rates go, the real problem was coming from

china, and that's why the interest rates were low. that what is the rational the fed used for keeping interest rates too long, kept mortgage rates down, caused the speculative bubble from which everything else flowed. so bernanke failed the mid-term but passed the final. once they realized that the entire financial system was in danger, he basically threw the rule book out the window and tried a whole series of things. pumping money interest the company -- economy was standard practice. all these special lending programs he introduced, which actually turned out to be quite effective -- they hadn't been tried before so he did a reasonable job of preventing

whole sale calamity. so you would say, it's 50-50. the reason i think he deserves re-appointment i think he is actually repentant for the past mistakes and is determined to introduce regulations. i think he wants it to be his legacy as the fed chairman who cleaned up wall street a bit. might not be able to do that, but given that he did a good job over the last year or so, we should give him a 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 can get in and out quick enough that -- before it bursts and it doesn't matter? >> well, the question is, why does it make individual sense to participate in the bubble? is it because you can get in and out before it bursts. the answer on an individual level is, yes. most people think they can.

if everybody tries to get in and out at the same time the bubble collapses. that is what happens at the end. there is a period in which you can get in and out. chuck prince -- go back to the chairman of citigroup. he interviewed before the bubble burst and said things are getting a bit shaky. he said, as long as the music is playing, we have to keep dancing. what he was saying is that basically investing or wall street management is a form of musical chairs which cains also said. ...

>> really gives people in some sense apap to easily. just a couple of counterexamples, which is during the dot com boom, and these are perhaps exceptions, but warren buffett did not invest in dot com stocks. fidelity contra fund, when it became fabulously successful, eventually closed to new investment monies, even though you could get higher fees by increasing the number of investors.

by the fund manager said basically, once you reach a certain size, profitable opportunities vanish for the kind of rates that was attracting. all these people coming in. and everybody would know, you know, in financial markets there are only a certain number of 100-dollar bill lying on the ground for people to pick up, so once you've gone through the creditworthy bars in the housing market you're going to be dippinto the pe that are not credit worthy. so you know, on the one hand there are people who resist. now maybe buffett and the head of the contra fund are so big that the analyst is under pressure. but you know, how do you really, you know, square those two problems? i think people, you know, were rational stupid people. all at the same time. >> it's easy for warren buffett to sit out the bubble because he's already a billionaire.

another billion or here or there doesn't matter to him. if you're a mexican immigrant in east l.a. with a very low-paying job, certainly you have the chance to buy a home for $300,000 with zero down, you know, you have basically been given an option on the bank on the rising housing market. it seems to me they're getting a 90% loan plus 10% piggyback loan to pay the equity, what are you risking? you know. [inaudible] >> you're right. whether he would have been the champion of citigroup when the bubble burst i don't know. he would now look like a hero, i would agree. fidelity is an interesting case because at the same time the contra fund was sitting out on the bubble, jeff who was managing the magellan fund went heavily into tech stocks. and he also went into heavily tech stocks. that was the end of the magellan fund when it collapsed in 2002.

so you know, sure, sensible statesmen should stay out of the market but i think what you find is there aren't many of them around once the bubble really gets going. >> you mention regulation, and when this happened and looked on awful lot like a coup, like goldman sachs there, even economists, raise their eyebrows. although we're used to them revolving in and out of the government. but in this kind of thing where financial sector is just so powerful, and you have a very integrated world, financially, can you regulate these people? >> is a very good question. when i said bernanke and the fed did a good job i don't mean they got everything right. i think the strategic choice to bail out the banks was the right one. just because we tried going the other way in the 1930s and we

also tried it with lehman brothers. things did look very good and they certainly didn't turn out well in the '30s. so the option of just -- some people in chicago, we should let the whole system collapse and everything would've been fine in a few weeks. maybe they are right but i'm glad we didn't run that social experiment. and the '30s didn't work out very well. but question is, how do you bail out wall street? there treasury and fed both, you know, they deserve a lot of the criticism they've got. that had a lot more leverage than they realize. the banks were frustrated. golden was about to go out of business. they were all about to go out of business if they couldn't raise money. attacks therefore providing them a lifeline and we should have charged more than we did. so i think that's a legitimate argument. the banks are now repaying their loans and they're claiming we gave taxpayers a good deal.

they may 10, 20 percent on their investment over a year. that's completely fallacious argument. at the time they got these, the tart money they could raise money anywhere else. the implicit interest rate they would have faced was infinity. so 10 or 20% is nothing. the fed should have said, what they did in england, the british government i think they took a much tougher approach. they said we will bail you out by the taxpayers going to take 60, 70 percent of the bank and they're going to hold onto it for a long time. so when the shares come back, the taxpayer will benefit. i think we should have bailed out wall street but i think we should have been a lot tougher about it. bernanke and geithner say is the time it was such a big crisis they did know what they were doing. you know, things are happening so quickly, it was all snowballing. i think that's a bit of a copout. especially in the aig case, the famous aig case where they agreed to pay everybody out of

power on the cbs's -- sorry, for the job and basically agreed to bail out all the people who were inhofe to aig at 100%. i think they could've easily given them 50%, for example. and it turns out the golden was one of the big beneficiaries, so that's caused all this conspiracy theories. i just don't know if there was a conspiracy. it was a bad financial decision by the government, i think. >> in the more? sure. >> bernanke is being blamed these days for not having seen all this and forestalled its occurrence. after march of this year, barney frank and paul were a dialogue in the kennedy library, and each person's opening statement was comical, i didn't see this coming. which is something to conjure with. and i asked mr. frank if he could rerun the tape, what would

he have had in place. and he said well, we didn't have the regulate the things that went awry, cause all this. with those things that were lacking for mr. frank's observation, would they be forthcoming? >> well, to some extent. i think what he's referring to probably for various things which were not in place which frank's legislation and the obama legislation to put in place that the abilio wind down big banks, the fdic didn't really have their big commercial banks they could do it, but lehman brothers, or goldman sachs, or morgan stanley. [inaudible] >> those are various ones. they didn't have that capacity. that's why they had to bail them out that there was a special bankruptcy provision which government control bankruptcy. you're right, there were large elements of financial system which were just outside the

regular choices to. derivatives being one example, but also mortgages largely were not regulated either because they were regulated at the state level. the state regulators were completely over man. california i think there were 11 regulators, regulating the entire mortgage industry. that's where most of the big mortgage companies like ameriquest and ameritrade -- new century and countrywide. they were enormous in california. the reason they were there because they realize the state legislation was so weak. so that will change under the legislation. mortgages will be overseen by this new consumer product safety commission did so i think that's a good idea. derivatives, they go some of the way towards regulated. bernanke is given wall street a pass on some of it. hytner has given wall street a pass on some of the other counter derivatives. the more competent was that they can still trade those among themselves. i think those exceptions should

be i think they should all be forced to trade over-the-counter. if you're asked me basically do i think the regulations go far enough, my answer is no, i don't. i tend to be of the paul volcker view, that we should see a split up of the financial system. not really a return to glass-steagall that sort of a 21st century version of glass-steagall where would you have a save financial sector, which is sort of oversaw consumer deposits, brokerage account, etc. that would be government guaranteed if those companies got into trouble, there would be sort of an explicit or semi-explicit government guarantee they could go bankrupt or interned for that they would be heavily regulated. they would have high capital requirements that they would regulate it like a utility. so you have a utility system. on the other side people i goldman sachs say we don't want anything to do with that, fine. what do people call casinos. the casino aspect of the banking system that they would be

allowed to carry on but there would be an explicit sort of lossing there's no bailouts. again, you get in trouble by yourselves. [inaudible] >> is probably not going to happen. i think it might be credible because the financial market, if people really believed they had a chance to go under, they would be much more reluctant to lend the money. so goldman would have trouble spending to balance sheets in this way. it's not going to happen because of lobbying obvious he. but if you ask a person what i think should be done, we should appoint paul volcker as the new treasury secretary. and let him take over. what else? going back to the previous question, you know, if it is bernanke or someone else, bernanke or bring back paul volcker, i will take paul volcker back. i don't think a lot of this would've happened if bulger was still the fed chairman.

you need -- he's a banker so he understood -- you need a feed to a sort of catch a thief sort of thing. in the 1930s we brought in ackles who ran a bank in ohio. and turn that one of the greatest fed chairman ever. so if you can find someone by that, by all means. [inaudible] >> possibly. i think he's a bit -- he's certainly want to consider. i have some reservations about his role as sec chairman. but anyway, if they could find somebody like that i would agree. but i should say realistically that's not going to happen i don't think. and with all the political impetus being on health care, i think we will be lucky if we get any sort of financial regulation through next year. so this stage i'm thinking, well, if obama's -- it's been like health care. if it's obama's legislation or nothing, i'm in favor of obama's

legislation. >> the question of jobless recoveries, globalization off shoring of jobs here just a couple -- on manufacturing jobs and financial jobs are everything that i think the ratio used to be the other way around. >> it's an interesting case, and i've done traveling around the country to publicize this book. a lot of people have made it largely to me, what's happened to our manufacturing base. i think the financial sector has gotten too big that nobody said that in the u.s. in the u.k. some very eminent people make is argued, including the governor of the bank of england. and the head of the financial systems of authority. you know, at 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, if i were larry summers, i would say,

well, okay, you know, these guys may be put into much. but where's our competitive advantage these days. and he would argue that america's competitive advantage is in financial products and financial engineering. and that these banks do produce a lot of foreign armies for the u.s. and if we start really knocking down wall street, which is getting competitive advantage to the germans, british, japanese or whoever, i don't agree with that. but you know, i think it underlies a lot of the reluctance of the administration to really get to too tough with wall street that they say it's like yesterday was good for general motors is good for america. now it's what's good for goldman sachs is good for america. not necessary goal but because they are so unpopular. but what's good for jpmorgan chase is good for america.

>> no line has been drawn. there's been no edition. basically mathematics. so therefore says that as it may be, deficit. since we are tiptoeing past the cemetery nobody wants to do the math. >> there are some people, the argument here is that banks haven't dealt with a bad debt problem. they're still sitting on their balance sheet so we will end up like japan presumably. i think there is very respected people, i was on a panel with carmen, an economist in maryland that she made this argument. i think there's something in there. they allow them to and not put all these assets to market. it started a downward spiral because you mark to market an initial capital so they have to sell, prices keep going down. you can get it down to spiral

with mark to market. you need somewhere in between. may be a country free suspension of mark to market. sort of common and these people, i think th the government recapitalization of the banking system is proven effective. it's not a very preprocessed to watch, because all these guys who got us into the mess are now making big bonuses again. but the government, they don't say out loud but the fed and the treasury, their entire policy is based on allowing the 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 another credit crisis. and that's accurate, they aren't lending. they are rebuilding their capital ratios quite effectively. largely due to money policy that they can borrow the money from the fed at 0%. and invest it in treasury at

3.5%. that's why bankamerica can't afford to repay the government because the government is basically giving them the money. it's a freaking. to cut a long story short i think the banking sector in the u.s. will recover more rapidly than the japanese sector, and that's why we will not have 10 years of japanese problem. my words are more on the other side that it will prove too successful and will get another bubble because interest rates are too low and there's lots of free money running around. so i'm on sort of the inflation side of things rather than the deflation. anybody else? >> we haven't heard a lot about hedge funds and what was the role of hedge funds in this? >> good question. the question is, what was the role of hedge funds in his. we haven't heard much of him since long-term capital crisis

in 1998. he's right, the hedge funds were not particularly acted in subprime mortgage securities. they didn't have the distribution capacity, some hedge funds obviously hedge funds some of the great hedge funds blew up because they were buying subprime. these products were not distributed through the hedge funds. now, does that mean hedge funds are fine? no, i think what happened effectively is the wall street banks turned into hedge funds. i remembered writing about lots of capital and it was considered the greatest scandal at that stage, that it was geared 28 to one i think that was. best earnings in 2007 was geared like 35 to one. merrill lynch was geared 30 to one. these wall street banks had effectively turned themselves into hedge funds. so there was a hedge fund crisis, they were just hedge funds disguised as investment banks. i think is, so you know, the

leverage with the big problem. it just came about in, came about in the inside of the financial system rather than on the progress. [inaudible] >> but they were customers. not enormous. the biggest buyers ironically of a lot of these turned out to be european banks. because for some complicated regular toy reason, they didn't have to take the capital charges for buying subprime loans under the capital ruled. so that's why it's been a mystery, until i realized why when the subprime market collapse did first bank that that went under was a german bank. and it's because it was financially in their interest to buy all the securities. so what was happening merrill lynch, goldman sachs, whoever were buying all these mortgages from florida, california, wherever, turn them into

securities and sent them to europe to sell into german bankers. was very clever, you know. lucrative. i think we're out of time. thanks very much, everybody. [applause] >> if anybody would like to buy a book, i would be happy to sign it. >> the original is on display in the jefferson building in the great hall. if you have been over there to see it already i strongly urge you to do it. there's nothing like face time with the real think that there's only one copy that survived in the world. it's this one.

it's probably about that big that it's 8 feet by four and at the. that's a reasonable facsimile of the real thing. so please go over there at some point. i didn't know anything about this map or the history of cartography when i started. in 2003, when i was in it and it rider opening my mail i came across a press release from the library announcing that for $10 million it had bought what it called america's pull certificate. dematha gave america its name. that $10 million was the most libra had ever spent on anything. it was also almost $2 million more than had recently been paid for a copy of the declaration of independence. i've never heard of them that. but the library seemed to think it was the most viable peace and the market even seem to think that it was worth more than an original copy of the declaration

of independence. so i want to find out more. and at this point i was thinking maybe i would do an article, a short piece for the atlantic. so i did some research, and got the basics of the story pretty quickly. early in the 1500s, in the eastern part of france, there was a small group of scholars. among them, the map maker came across letters by amerigo vespucci and at least one early sales chart showing the coastlines of the new world. and they decided that what they're reading about and what they're saying on these charts was a part of asia as most people had assumed it was. but in fact it was a new continent. people traditionally have thought of the world as having three parts. europe, asia and africa. they decided this was a fourth part of the world. hence, the title of the book.

because they made that decision, it seemed to represent a fourth part of the world it needed a name, jusco lents had named. and they came up with the name of america in honor of amerigo vespucci. it's a great story. there's a lot more to it than that and will get into more of it later. but as i was looking to the map i learned pretty quickly it is also significant for other reasons, not just for the naming of america. if you look on the left there, that's the new world, south america and with north america about it. this is the first map to show north and south america unambiguously surrounded by water. not at some undefined part of asia, or just some undefined place that isn't identified at all. because it shows north and south america surrounded by water, it's really the first map to suggest the existence of the pacific ocean. this is something of mr. guith europeans are supposed to know about the pacific ocean and mountaintop.alboa caught sight so that's something that brings

a lot of people back to the map, something that peter has written about extensively. it's not something i'd will on a whole lot in the book because i felt the ministry is almost more fun to leave as a try to resolve the. but it's a great part o story. there's more that is very, very significant about the map. if you look at africa, for example, this is one of their first printed maps of africa that showed a full coastline. africa had 11 circumnavigated by the portuguese pulled in 1497. maps are only beginning to show all of it. the frame at the bottom of the map is broken. it would have been easy to push the frame down a bit. i think the point is pretty clear, this is new knowledge and it is exciting. t.thibly to log is more exciting people tend to forget that. this is a great discovery because it means you can sail from europe around africa and

into the indian ocean and beyond. even beyond that fact is the fact the map shows a full 360 degrees longitude. it's one of the very first to do that as well. maps product of this would have tended to leave a certain portion of the globe unmapped, kind of implied on the back of the map as it were. and the implication was generally that it was kind of uncharted oceanic space and you didn't need to try to depict it. here, is one of the very first pictures of world laid out a full-page 360 degrees. what we're seeing therefore is a picture of the world roughly as we know today. it's obviously not fully correct that it is distorted and full of misconceptions and deliberately odd justifications. that to me was really what struck me that this is not just

a map announcing the existence of the new world. it's a map that is declaring we can now see the whole world for the first time in. so great story. i thought this would be a great article. i put some clippings in a folder that i kept, and then i got sidetracked by other things for a couple of years. and only in 2005, when word came down the atlantic was going to be moved from washington. that i start to try to think about the map again. and i did because i wanted to make a living in boston and not move to washington. [laughter] >> excuse me. and when it went back to my folder i had a brilliant idea. i would write a little book about the making of this map, and it would come out in 2007, timed perfectly to coincide with the 500th anniversary of the naming of america. and i barely made it to 2009. [laughter] >> what happened? why did it take me longer than i

expected? the simple answer is i just got sucked in. and i thought when i came to the map that i was going to be focusing on the new world and particularly this naming of america. very quickly, as john suggested, i started just seeing more and more in the map and feeling as though there was an opportunity to do a much more comprehends a book that would survey the map as a whole and could be an excuse for doing a kind of geographical and intellectual adventure story, with a mad kind of as the backdrop. so what struck me most was it wasn't just one world that's depicted here. it's actually many worlds. if you just change your perspective is what i do, it's kind of like a kaleidoscope. you can tease out different stories, different coalitions of ideas, different ministries as well. and i wanted to do something sort of complex enough that it would do the map and full

justice. even if you've never seen this man before or don't know maps of this period, it's pretty easy i think you see what we're looking at. north is at the top. and in the spirit that wasn't necessarily always the case. [inaudible] >> this is china, india, central asia, middle east. africa, and then this is the most famous part of the map. north america appear, mexico here, these are the islands of the caribbean. this is the region columbus explored. and then there's landmass. the dominant visual impression you get from looking at the new

world is this giant southern place. and that's really what was making an impression on europeans in the early days of discovery. it wasn't so much the westin is of the new world. it was obviously, columbus had pioneered a new route across the lack that he thought he had reached asia. so he had just about everybody thought he had confirmed old geographical ideas. south america, which amerigo vespucci wrote about in the late 1490s and early 1500s, extended far into the south into a part of the globe that people tended to think there wasn't any land in. and that made a big impression. and we'll get back to that in a minute. what dominates the map that is the southern part, and that's why the cartographer put the word america on the southern continent along with the shorts that