we don't save institutions that are too big to fail. unless you go back to history, you won't know that these are new and controversial views. your irony -- your sense of irony won't work for you. and there is irony. the view about deposit insurance until just a few decades ago was that it should be limited as recently as 1989 the head of citicorp john reed was warning we had to cut back deposit insurance. have less or we would have financial crises including for his bank later. ...

>> it's wrong to have czars sitting on throws to make the kingdom more nervous. we will let her ladies out for you, and then howard will help nicole to questions. welcome, maestro. [applause]

>> thank you, amity, for that generous introduction. and limiting deposit insurance to actually insured deposits is a radical concept. going with amity's chanel metaphor, coco chanel said in the 1920s, that simplicity is the keynote of elegance. she was not talking about financial markets, but she may as well have been. as hopefully, if i do my job right, you will see at the end of my little talk. so a failure of free markets, that is what the last two years look like too many people. we've had the financial system destroy itself so thoroughly that the government had to come along and provided with essentially nationalization of all of its risk, so that money

and credit would not disintegrate. now we have unemployment and underemployment at 17.5%, but yet goldman sachs says that it has to pay at least $16.5 billion worth of bonuses so that its own employees don't leave the firm. now goldmans seems to feel bad about this. it wants to donate $500 million to small businesses. what kind of free markets do we have when small businesses have to depend on a rich companies treating it as a hobby and order to get capital financing? but this, in fact, has not been a failure of free markets. the past 25 years are the story of what happened when government does not understand its proper role in the free markets. and that is to provide a level, predictable, consistent system of prudent regulation so that markets can discipline

themselves without causing unacceptable harm and destruction to the broader economy. now we know how to do this. we did this for 50 years, more or less well, from the 1930s until the 1980s. how did we learn how to do this? we learn the lessons of the 1920s. now the '20s were wonderful, innovative decade, as amity has noted in her own work. the problem with the '20s as it relates to financial markets is that innovation creates optimism. optimism creates excess optimism. and when you have financial markets that don't have any meaningful regulation, other than monetary policy, you have financial firms and regular people borrowing against every last dollar of optimism projected decades into the future. you've got layer upon layer of death upon layer upon layer of

assumption, going out into the future. and that means when you have the slightest falter in profit expectations, or some other expectation of the future, you've got -- you're pulling out one level of assumption your the whole power of assumptions and debt collapses, and then you have so much unpaid debt that the banking system is effectively bankrupt. we saw this happen in the early 1930s, not just with borrowing against the stock market of course, but against all kinds of asset markets. and what did we learn from this? we learn that markets have to discipline themselves, but not at the price of unacceptable distraction in the economy. so the first elegant solution to this puzzle of how to allow market discipline without economic destruction was the fdic. this is acceptable, moral hazard. were fdr and his policymakers decided we can't eliminate panic

-- reduce panic in the financial system by protecting small depositors, but we're not going to protect bad banks against their mistakes that they can still fail. it's just that the small depositors will be protected so that we will not seek the distraction of money and credit again. but the most important thing that fdr realized was that you don't want to eliminate risk in the financial markets. you just want to protect the economy against the natural, inevitable excesses of optimism and pessimism. how do you do that? you limit borrowing first of all. and you limit borrowing, predictably and consistently. fdr did not set up a systemic stock regulators to figure out which stocks are safe, which are not, which once you can borrow against come unlimited ago and which would you. instead, they said that the fed and the sec would say you can only borrow half the price of a stock. you can speculate all you want, pick your own risk, but when

you're wrong you will lose but the economy will not be bankrupt. and then they also said you've got to consistently report market activities, corporate activities, so that people have a level fighting chance of understanding what risk is out there, if they choose to do so. now the system worked well, again, until the 1980s. and then the financial system started to escape prudent regulations, and escape market discipline. and we're going through the result of that right now. so how did this happen? we go back to 1984, may of 1984, a bank called continental illinois. this was the eighth largest bank in the country at the time, and continental illinois was a pioneer of sorts in the banking industry. continental was a pioneer in that it did not follow a

business model of solely keeping long-term loans on its books, booking the profits as people and companies repaid the loans and having a very slow business model, insulated for the most part, from acute panics and fluctuations in prices and security markets. instead, continental purchase loans that had been securitized. that meant that they were bulbul to fluctuations in prices, day today. and transcendent book of the profits from the fluctuations in those prices. that's one way that they made themselves and they made multiplied over many financial institutions in the future, they made a system of credit more vulnerable to financial excesses. the other way was that they depended on short-term financing, uninsured short-term lenders provided a good deal of their money. so they made themselves vulnerable to short-term panic

in a segue because the short-term lenders could pull their money out overnight in a crisis. now, the government in 1984, the markets start to panic in the spring once they got wind that some of the securities that continental had we're going bad. the government decided that continental could not fail, that the price would be too high for the national and indeed, the global financial and and economic system. so the reagan administration did something that was unprecedented at the time. they came out, the fdic, treasury, came out and said that none of continental illinois bondholders, the uninsured bondholders, they would not take any losses in the continental failure. this engendered quite a debate within the reagan administration. don regan who was at the time the treasury secretary, said

come he wrote this to his college we believe it is bad public policy, would be seen to be unfair and represents an unauthorized and on legislative expansion of federal guarantees and conservation of executive branch policy. so he was against this. president reagan himself never said much publicly about the bailout, but an unnamed white house official said that the president's thinking was he agreed with regulators compelling argument that the only other choice was to risk worldwide financial havoc. so this is a sign of things to come. at the time, fed chairman paul volcker said this bailout would not set a precedence. but the markets know it set a precedent. we got a new freeze any financial industry, if not yet in the public lexicon, which was too big to fail. in the independent bankers association, which represented small banks, understood the implications of this. its presence at the time warned

these big banks have the ultimate anti-competitive government subsidy. they are too big to fail, and regardless of how mismanaged they may become, the buck will stop with the taxpayer. so when the government wants more of something, it subsidizes it. if you want more corn, subsidized corn. if you want a financial crisis built up over decades based on banks and other financial companies borrowing for the purpose of reckless speculation, and subsidized banks and other financial companies borrowing for the purpose of reckless speculation. and that is exactly what the government did with this new policy. banks and later other financial institutions could borrow at rates that they could not have otherwise borrowed at, because they're lenders knew this was in effect lending to the government, but at a higher interest rate. so this was the first limited to commercial banks.

but investment banks, of course, had to compete with these commercial banks so they created their own too big to fail. this was too complicated to fail. when we hear about exotic financial instruments, credit default swaps, everything else, these are not so complicated. many of them have good innovations to be sure and are beneficial to the economy and market signals, and all kinds of other things. but one of the reasons for their creation is to escape, or was to escape these reasonable consistent limits on borrowing. credit default swaps, speculative -- this is a way to speculate without having to put cash down. the same with securitizations, creating complex financial structures so that banks and other investors could achieve these aaa ratings in invest securities without putting a consistent amount of money down to protect them in the economy

from any mistakes in their assumptions. with triple-a securitized mortgage loan or mortgage bonds, for example, banks could purchase these bonds with just one eighth of the cash that would normally be set aside for any mistakes in their assumptions. so by doing this, we made the entire financial system much more vulnerable to mistakes and these assumptions, just as we have done in the 1920s. now sometimes the federal officials recognize that we were not applying the old rules to new markets, and they did just that. they apply to the old rules to new markets. and will example of this is in the 1980s when paul volcker, the fed chairman at the time, recognize that the junk bond markets were getting ahead of themselves, speculatively. and he simply got the fed to put the old rules regulating how

much borrowing that people could do for stock speculation onto this new market, which was effectively the same thing, saying that takeover of companies could only bar half of the price for a takeover. now this provoked a tremendous outcry, but it did mean that when the junk bond markets went through its turbulence, downturn in the late '80s, early '90s, the economy did not suffer the kind of catastrophe that we have suffered today. unfortunately, most of the time the government and financial institutions did the opposite. they confuse what kind of risk-taking needed clear, consistent limits on borrowing and what kind of risk-taking just needed discretionary surveillance. they in effect for the financial industry had identified and cordite all risk with no risk left come you didn't need these old limits. and that's exactly what alan

greenspan did in 2000, when he said you don't need the old fashion regulations for the newfangled unregulated derivatives market, including what would later become the credit default swap market. this was how half a decade later, aig could make $500 billion worth of promises without putting -- or with putting negligible cash down, leaving itself again no room for error if it made a mistake in these assumptions. now and run -- before get into enron, two examples of how these reasonable, prudent regulations had a road so thoroughly that the financial system just was left without any market discipline to govern at by the time he got into the 2000s. 1990, drexel burnham laimbeer went bankrupt through the normal bankruptcy process. greenspan was called before congress to testify about this.

he said that it would be inconceivable that we would ever apply to big to fail to an investment bank. five years later, investment bank in britain went bankrupt through a bad derivatives bets. it could go bankrupt through the normal bankruptcy process with its lenders taking their losses, because it had made these bets on regulated markets where it had put cash down and the markets understood where the risk life. just three years later, a hedge fund, long term capital management could not go bankrupt through the normal bankruptcy process because it had made the same derivatives bets on unregulated markets without putting any cash down. so it's bankruptcy could have blown up the economy, that's what regulars worried about, they engineered a bank bailout of this hedge funds protecting its lenders. the last mile post on our way to 2007 and 2008 was enron.

enron was very neat distillation of the entire financial industry in that its business model was barkley missed amounts of money, use that money to purchase its own assets from itself at ever higher prices, this allowed it to have tremendous profits which allowed it to borrow more money. why could borrow my money? because it said it had ensured its own debt and made it risk free. now, this was a strange and fascinating business model. but by definition, enron was saying if we go bankrupt, don't worry, we will pay for it. but the strangest -- [laughter] >> the strangest and most fascinating thing about enron was that the banks that enron did business with, bear stearns, lehman brothers, citigroup, did not think this business model was very strange at all. and when people say, could we have avert this crisis by doing

something different with bear stearns in 2007, by bailing out lehman, the last time to do anything about this was enron. after that, these regulations had so be loaded, the markets, financial markets were not subject to any reasonable discipline because they knew that market disappointment economic catastrophe. and that is how we get from there to 2007, 2008 when the markets finally did correct the excesses just as they had in the late '20s, but they could not do so without creating another great depression. and that is how we got the nationalization of all risk in the financial industry. the opposite of prudent regulation and market discipline and finance is not freer markets as we've seen. it is nationalization of one of the most important elements of the economy, who decides which businesses get investment capital and on what terms.

it's fashionable to say the crisis has been a "black swan." something that we could not have anticipated, one in every 100 year event. the real "black swan" would be if we had gotten rid of every prudent regulation and all market discipline of finance and we haven't had historic financial crisis. what does that mean? it's good news in the way. we know second what we have to do. we have to go back and apply the old principles to new markets. we don't need huge baraka cities, micromanagement of finance on the government, consumer financial protection agency's, systemic risk regulation. we don't need any of that to do that. if we had a systemic risk regulation five years ago, the regular would have said these aaa mortgages are just fine. these are perfectly safe. there is no crisis, nothing to see here.

on a mission regular she cannot do any better than free markets at predicting and preventing financial crisis. in fact, it hurts the markets ability to do that because they do not operate under the threat of failure. all we need to do is go back to what the lesson we learned 50 years ago, consistent, predictable borrowing limits across financial instruments that are similar to one another. regardless of what the financial industry thinks of the risk. the government should not be assessing risk from the top down, which is effectively what they have been doing. the financial industry should be assessing risk from the bottom of, with the government setting consistent limits on borrowing so when they are wrong, these firms can go bankrupt and the economy does not explode. if we had had these limits in place five years ago, aig, -- we can look at this from the supply-side and the demand-side. from the supply-side of

providing financing, aig could not have insured $500 billion worth of mortgage related securities and other securities while putting very little cash down if they had had to put 10, 20% down. they would have thought twice. if they didn't think twice, they could have gone under and the economy would've had some protection, just as with barings 15 years ago. from the demand-side, if you had limits on borrowing to new speculative markets, the housing market became a speculative market. you have to put 10, 20% down payment down. this market would not have gotten away from itself the way that it ended up doing because as prices rose, people would not have had the cash to keep up with these rising prices. dampening demand across all price levels. with these simple rules in place, we can go back to a consistent predictable system

where financial firms, and global investors know that everyone is playing on the same level playing field, with a fair chance and was the most important regulation of all, market discipline, once again governing the financial industry. you can't just say you're in a too big to fail. the markets will know you haven't done it, as long as 50 means politically and socially unacceptable, economic catastrophe. now what does failure protect that is important, economically? to think. one, that businesses and bad ideas should not survive into the future with government money. you have a company like aig, has a very good division, the corporate structure failed and using these good divisions to make these tremendous batch that ended up going bad. sell these divisions off to someone who can manage them

better. don't have a government-backed insurance company competing against the rest of the insurance business. and the second thing is fairness. the public can see that this is an unfair system. the public has been against the bailout every step of the way, even bailouts me to help out their own neighbors. this is not mindless, heartless populism. the public can see this is not a free market. the public is angry at goldman sachs, not because people don't like rich people. they don't want people to do well. it's just because they can see this is unfair and the public is right. that goldman is operating with an implicit government guarantee. and it does not end the problem for these banks to pay back their t.a.r.p. money. in fact, in some ways it makes it worse because at least with t.a.r.p., people know there's government money there. now we have again an unseen government presence distorting this economy. however, this is not something that the public can do by itself. we do need political leadership

here. for washington to realize that reasonable regulation with the into being fair, consistent financial market discipline that this is not a barrier to free market capitalism. that this is in the and necessary prerequisite to free market capitalism. so with that, i am very happy to take questions. thank you very much. [applause] >> i am howard, and my job here today is to point out questioners for nicole. if i might start, nicole, on your point about extending simple rules to new markets, do you have some feeling -- there's a lot of legislation now being considered in washington both on the house and senate side.

is any of it consisted with a prescription you've offered this morning? >> no. [laughter] >> the one thing that is consistent was one of the first bills that came out, which was put unregulated derivatives on the regulated markets. however, that seems to have disappeared somewhere, and now we have chris dodd and senator dodd and representative barney frank going with this idea from president obama to create the systemic risk regulation. dot spokesperson said just the other day, we need a system that predicts and prevents future crises. that is an impossible goal. all they can do is protect against the effects of future crises. >> okay. the house rules are, keep it short, keep it in the form of a question. tell us who you are, and wait for the microphone.

i will start with a gentleman on the far right the. wait for the microphone, please. >> thank you. my name is roger. i would like to ask about three specific remedies to see if you are for any of them. bringing back glass-steagall, breaking up the big banks, and imposing leverage requirements. >> okay. i would do the first to first, roger, because those two go together. imposing leverage requirements and breaking up the big banks. another part of one of these bills coming out of congress is an amendment to allow regulators to identify too big to fill financial institutions and force them to break up. but we can't tell which of these institutions are too big to fail and advanced. few people would've said that bear stearns was too big to fail, seven years ago. which is how far in advance you need to do these things. if we credibly and too big to

fail by protecting the economy from failure. and if we put insistence borrowing limits across financial instruments in financial institutions, no matter what they call themselves, leverage will take care of itself through reasonable regulations, and through market forces. because lenders will know they no longer have an implicit government guarantee. they will care more what they are doing with their money. the same thing with too big to fail financial institutions. lenders will do their own surveillance here, if they know that these institutions can fail without taking the economy hostage. glass-steagall, we are used to living in a mark to market world. we are not going back to holding loans on books for 30 years and booking the profits slowly. investors want to know what's going on.

a better solution than going back to glass-steagall is to better protect the economy from prices, fluctuating prices and securitization markets. because that is what kills credit or makes credit to excessive. one way of doing that is a varying capital requirements with liabilities. one of the most acute dangers is financial firms relying on short-term, overnight lending. make them hold more capital proportionate to the amount of short-term spending that they have. you've better protected the economy. and this idea comes from alan greenspan. in 1984, before he was fed chairman, he was on an economist panel after the continental illinois rescue. and he said that banks should hold against the losses depending on the type of liabilities that they have.

>> do any of the regulators currently have the power to implement the kinds of solutions that you are abdicating? >> well, they -- in the '80s, paul volcker had the power in a convincing clout to convince the fed's to put the old borrowing limits on the junk markets. in the '90s, alan greenspan had so much clout in congress that they took his word for whether unregulated derivatives needed to be regulated or not. so in effect, the fed has been a systemic risk regulator for two decades. where they had a discussion, sometimes they use it properly and sometimes they didn't. where they didn't, they have plenty of gravitas to go to congress and asked for a. so it's not a matter of not enough power. it's a matter of failing to recognize that we need these consistent rules.

>> imt in this over with research magazine. what do you think about ron paul's effort to audit the fed and then more portly, abolish the fed? >> well, he sold more books than me so far. [laughter] >> i think this is an example of why, if reasonable politicians on both sides of the aisle they'll come up with reasonable solutions, people are going to gravitate towards these unreasonable solutions. we don't need to get rid of the fed. what we can't depend on monetary policy is her only regulatory tool, which is effectively what we've done for 20 years. monetary policy is wrong. it's the human condition for monetary policy to be wrong, but we need limits on borrowing so that mistakes in monetary policy don't create any asset bubbles

in one particular asset class that becomes so big that it can't fix itself without destroying the rest of the economy. and of course, we need to do better with monetary policy. but focusing on the fed and what it's done right or wrong there is a distraction, in my view. thank you. >> hi. what about getting rid of some of the regulations that i would've you've sort of part of the root cause of the problem? and really in the '30s, the guarantees of mortgage loans, creation of fannie mae and freddie mac. securitization was created by the federal government, and why not get rid of that? i think that led to over borrowing. cannot have your thoughts on that? >> i agree with you wholeheartedly. the government should create the consistent environment for these

financial firms to do their business. not force certain classes of lending at the expense of free and for and prudent market, which is what they've done, sometimes with worse effect than at other times. this idea of mortgages with no down payments, barring 120 percent of the value of the home, there's a sort of myth that fannie and freddie made the banks do this. but fannie and freddie certainly didn't help. they allowed, the government said it was okay, therefore it must okay. fannie and freddie were too big to fail. does as a whole other area that goes along with inappropriate government distortion. thanks, ray. >> janet norman.

how do you see citibank's future? >> i thank. >> i used to work at citibank. citibank's future -- they cannot succeed without market discipline. and right now they operate without market discipline. and just as importantly, they are distorting what other firms do, because they have got to compete against it actively a government-subsidized bank. so again, this is a place just like aig where you've got great business lines, great people at some places, but you've got to unlock these people and put them in the hands of managers who know how to manage the company. and you've got to do that at the expense of bondholders, who freely lend money to the company, and should take a loss when their prospects turn out to be not with the lenders have

thought. there's no justification for not having bondholders to the financial system take losses. then you're just back to the problem of too much debt that no regulation in the world can overcome this subsidy. >> hi, i am mark green. what do you think -- how do you think the too big to fail issue can be solved with the concentration of assets? seven largest financial institutions in the country control over 70 percent of all the total assets and have a very big competitive advantage over the other 10000. >> the first thing is to not make the problem worse which is what we've been doing over the past two years with the failed banks, largely being bought by these too big to fail financial institutions. and beyond that, this is a place

where you will be a very slow evolution. we did not build up too big to fail overnight. we won't ended overnight. but once the government put in place a credible system for failure, lenders will provide market discipline and push these firms to break themselves up. otherwise, they will have to pay much more for their financing commensurate with the prospects for failure. and for mismanagement as well. lenders will forgiveness management when they know that they are being subsidized by the government. days into the government directly and put up with plenty of mismanagement there. >> when one considers that not only the debt holders of large investment banks, but the equity holders were essentially made

whole, one can surmise that it wasn't just the threat of systemic failure that induce the government to support those institutions. do you think that eliminating the risk of systemic failure, through limits on leverage, will eliminate the temptation to bail out those institutions for other, perhaps, more parochial consideration? >> well, they wouldn't have the excuse. and not that it's an excuse. there was the old obviously risk and reality of systemic failure, but they could not go to the public or to congress and credibly say, we've got to pay everyone 100 percent on the dollar on aig's credit default swaps or the whole system will collapse. so when you got a predictable consistent system of bankruptcy, or some other resolution as the

fdic does, you eliminate the cover for doing anything for any of the reasons. or for the perception that you've done it for other reasons, which is just as important. and tim geithner could learn a lesson from dubai. dubai is saying why should we bailout dubai world which is effectively a bailout of sophisticated banks. we did the same thing with aig. because or partly because we were under this systemic pressure. >> your limits on borrowing apply just to financial firms would insure depositories? or to the whole economy? and if so, what's the philosophical justification for the interference in the right of contract of a willing lender to

loan as much money as he wants to, to a borrower? >> banks. the justification is that your right to lend o'barr on an unlimited basis and/or your ability to hold the entire economy hostage begins. multiplied across the economy borrowing without any room for error just results in nationalization. we saw this in the 30. we saw it again over the past two years. and we can't -- one of the lessons of the modern way of creating credit through securities is you can't protect credit from the excesses of speculation just through the uninsured deposits. we have to have some consistent limits across these financial instruments, because these are the instruments of credit. now you still have fluctuation,

optimism, pessimism, and you should. but you can't hold the economy hostage. we've always had limits on borrowing, even outside of insured deposits. margin requirements for stocks and for regular derivatives hold whether these are held by firms with insured deposits or not. >> robert george, new york post. forgive me if i didn't hear this -- if you answered this in the previous question, but you said that you didn't like the idea of getting rid of the fed. what about the idea though of auditing it, which again, somebody pointed out a fringe thing from ron paul and now it's got i think a majority of signatures in the house. >> one of the problems with all of the bailout's that we've done

over the past 18 months is we have this secrecy, where you have the fed and the treasury, pressuring bank of america, possibly, not to talk about the losses that it could incur with the purchase of merrill lynch. so all of his backroom secrecy, this idea that big government and big banks are colluding to hide information from investors has led to these proposals to audit the fed, all kinds of other things. i think if we get out of the bailout business, people will feel more comfortable that there is transparency, consistent release of information. that the government isn't using its powers to favor certain institutions over others. so some of this pressure will go away. as for this specific proposal of auditing the bed, i don't think it's helpful because it looks like congress has -- the fed is

always politicized. the congress obviously votes on the fed chairman, but we don't need more day-to-day political interference if there are auditing monetary policy, it confuses the markets as to what the fed is -- is it making its decisions based on the merits or based on its congressional audit. thank you. >> henry stern, new york specific. nicole, what you say seems eminently sensible to me, and i think to a lot of people in this room. is there anyone in washington who believes the way you do? and is there anyone advising president obama who thinks that way? >> the problem with the president's advisers is, they've lived for too big to fail for so long, that some of them just

can't conceive of another system. they think this is how things should be. and you read this in the op ads that they right for the ft and other papers, that the answer is to figure out how to make a better too big to fail rather than into. and they have lived in the system where you don't have any consistent limits to protect you from your inevitable mistakes. they just think they are not going to make mistakes. and money do, they think they are so smart that they managed to extricate themselves from those mistakes that there's no reason to protect themselves from their future mistakes. you know, what is the lesson we're learning from this crisis? it's the same lesson unfortunately from washington's perspective that we learn from long-term capital management. boy, we are so smart that we've figured out how to get out of this. now they are saying, look at us. we figured out how to prevent a depression. so they are not humbled by this.

>> i quite agree. it sounds plausible what you're saying, but i'm wondering, where do you actually set these reasonable limits to borrowing? i heard you say 50% margin for stocks. later on used a 10% would have been fine for aig to put down on credit default swaps. most people think 80% is a reasonable margin for mortgages. 20% down. is their way to set this without too much protection to? >> it should be consistent across any one asset class for investment class or anything that mimics that investment class. so 50% margin requirement on stocks, i don't think the number -- you know, could they have done it 50 years ago?

40%, 60%? the consistency that matter so you don't game the system. and the lower requirements on the futures markets, these have been in place for a long time. seem to have worked reasonably well for decades. so i would submit that derivatives that act like these derivatives with the lower margin requirements should also have those requirements, as long as they are consistent across the asset class. and poorhouses, this -- anything that is above 20% you are just making the problems that rate mentioned worse, were too many people won't be able to afford a house. there's pressure for other ways of making them able to afford it. we had 20% down payment requirement for the housing market for a long time. worked reasonably well, and i think we could go back to that, as long as this holds across the housing market, no one can say there's no riskier. therefore, we can't lower it and eliminate it.

>> sherry siegel. it sounds to me like a lot of what you are suggesting on too big to fail is actually the application of classical antitrust analysis to some of our financial institutions. if that's the case, do we have a regulator or regulators who you would trust to apply that analysis and a relatively efficient way, so that we could achieve the goal of breaking up too big to fail? >> i think if we have market discipline of these firms, it actually lessens the need for antitrust. you know, we see more so in britain right now been here, where the public is very concerned that these banks have

too much consumer power, where you've got two or three banks that set the whole market. and looking at it from an antitrust remedy, is another example of a government solution to a government problem where there is a much easier solution, allow for market discipline and let the markets for some of these firms to break up. and if that doesn't work, we've certainly -- we got antitrust and everything else. but let's try the obvious, market discipline solution before we go to the secondary command and control government solutions. >> you recently have written about dubai and new york state. could you expand on that a little? >> sure. this is not -- this is actually quite on topic because we have

dubai and abu dhabi saying we're not going to bail out our investment arm. and of course, this investment arm does not have sovereign guarantees and the government is effectively saying, we decided we want you to read the fine print after everyone has invested. why are people surprised at this? only in the world in which the financial industry considers bail out to be an entitlement is this a surprising announcement. what dubai world is saying is very reasonable. you lend us money based on valuations that don't hold any more. we borrowed money on these valuations. this is nonrecourse lenny. we've got to go and adjust the price of these assets and adjust the price of the day. this happens or should happen all the time in the financial industry dealing with the consequences of your actions is part of doing business. as it relates to new york, we have these off-balance sheets, quasi-strategic entities, not

officially guaranteed by the government all over the place. and people are depending on this too big to fail guaranteed with a state and local finances as well. nobody would invest in a lot of new york's projects if they did not think there is a bailout there from the state in a crisis. and for that matter, people would not invest in new york and california debt if they did not think that washington considers these to be too big to fail. so we got these government distortions preventing states, cities from getting their spending in order -- is the same guaranty that comes from washington, it makes these -- distorts these market signals so that they are unrecognizable. >> if your recommendations were implemented, don't you think it would affect the way monetary policy works? because the fed has to be able

to effectively and quickly manipulate the credit availability. and if, across the board limits on borrowing were proposed, then wouldn't that create a barrier to the fed change liquidity in the markets? >> it would mean that the economy is better protected from mistakes and monetary policy, but it should not change the way that the fed sets monetary policy. in fact, it lessens the pressure on the fed to try to recognize asset bubbles and pop them before they happen. if you get consistent limits on borrowing, people will not be able to keep up with the rising prices with the cash that they have to put them. and you will see less fraught s well. the mortgage markets filled with fraud, people would not have

risked their own money on their own life to the extent they did if they had put 20% down payment down. >> her book again is "after the fall: saving capitalism from wall street - and washington." >> thank you. [applause] >> there are copies available and i know nicole would be glad to sign them. >> nicole gelinas is a senior fellow at the manhattan institute and a contributing editor at city journal. for more information visit manhattan-institute.org. >> we are here at west virginia university speaking with professional daniel shapiro about his book, "is the welfare state justified?." so let's start at the end, if you will. is the welfare state justified? >> probably not. i should explain a little bit about that.

first, what i mean by the welfare state, by the welfare state i'm in prague rims like national health insurance, social security, and government welfare. when i say probably not, what i do in a book which is interesting i think as i look at the values and principles of people to defend the welfare state. the reason they get. so i'm in applause be so there are various positions that support it. i will say people appeal to fairness for protecting the poor, providing a sense of community. and i argue that given their values, if you compare those institutions with feasible, more market based alternatives and people support a welfare state should actually support the alternative. they actually come out looking either better or at least as good, given their own values. >> so what are the central principles or values that drive

the creation of welfare programs? >> well, i think the one i will talk about perhaps the most, the one is fairness. i think that's probably if you ask people why do we need these programs, they probably will say because they are there. and we let people try to have their health insurance on their own or have pension plans, retirement on their own, they are left to defend for themselves if they are poor it's not going to be there for them. so i think those are the central values. do you want me to talk about one of my arguments here is. >> of course. >> since health care is in the news let's talk a little bit about this. i wrote this -- this came out in 2007. it's not completely current for what's going on, but basically if you look at systems of national health insurance which exist in all -- almost all the affluent democracies, we don't have one. we have a clause i system of his. we have medicare and medicaid. half of all health care

expenditures. if you look at those programs, basic to put us in the, they everybody. and keep the price below what they would pay any market player and what happened to sort of elementary. you subsidize something, get more of the. once you get more of it, you get a big explosion to man. and eventually, the government has to put a cap on that and then you get government rationing. when that happens you get lines. and who is going to go to the top of the line? i will tell you who will go to the top of the line. people like me. people with connection, people who are knowledgeable, people who can game the system. is going to go to the bottom of the line? i live in west virginia. poured west virginians. if you want to be fair, this is not a fair system. now, to do this, we would need to talk about what a feasible alternative, what a real market-based insurance would look like. do you want me to talk about

that? >> yes, please. >> we have to compare because it's not fair to just look at one system. just look at say it has a problem without looking at another. so by real market health insurance, i don't mean to the united states. i mean a system where not the government is in control and not the injured cubbies are in control, but you're in control, the consumer. health savings account. you have an account, taxi. you can use it to spin for predictable routine expenses. we limit insurance to catastrophes which is really what insurance should be like. think about car insurance that doesn't pay for your tuneups? doesn't pay for oil and lube's quest you know the answer to that that evidence, it would be cast optically, pardon the pun, catastrophically expensive. if we have a system like this, everybody can be in control of their own health care dollars. it seems to be much fairer and we limit capacity. we don't have the rationing problem. because in my system you would have tax incentives so almost

everybody would have a health savings account. we would leave just like for the really hard cases, subsidies. then you don't have rationing that you get an national health insurance that you don't get the poor people getting shunted to the bottom of the line. so if you want to favor, you want to be fair, have a system in which people control their own health dollars and which we don't get this kind of rationing, which we see a lot of. >> in your opinion, can welfare programs in general achieve social justice? >> well, it sort of depends, pardon to be a philosopher and to, what you mean by social justice. if you mean something like fairness, a sense of community, protecting the poor, i think if you compare them, social interest programs, they do a worse job than these alternatives. on welfare, government welfare, i think it's more of a tossup. but if you just want to ask my

opinion and not the audience, yes, i would say they do a poor job you're given again devised a people that defend them. >> who would you like to read this book? >> well, it's dedicated, i didn't mean this as a joke. is dedicated to all supporters of the welfare state. it's dedicated to them. i did want to answer my own views in a. i want to say i'm going to take your views seriously, and i want to convince you, rather than -- i want to convince you that the institutions, you are supporti supporting, if you want i can say a little bit about what motivated this book. would you like me to talk about that? >> sure. >> i've seen these debates all down like some people say, liberty is the most important that some people say fairness is the most important that some people say community is the most important. than a battle about principles. i will to you the truth that it doesn't get anywhere. instead of doing that, why not say okay, we start from different starting points that

maybe if we start from different starting points we can converge on the same kind of institutions. so i got a distinction between the principles and the institutions. i've tried to say maybe despite all the disagreements, we can converge on similar results about what institutions we should have. that's really all of them only what this is about. what kind of society we want, what kind of social institutions do we want. that's why would like to read the book. it's not sarcastic that i dedicate to a lot of my friends to disagree with me. basically about principles. i say look, we disagree on principles. my own view is i am much more of a liberty guy, libertarian. but i keep libertarianism out of the book. you should be supporting the social interest program, you should be supporting on your own principles. >> and so what would your central message of the to all of those caledonians?

>> the central message would be reconsider your position. that is to say, maybe you're supporting institutions that actually do a worse job in promoting the backs you want to promote. when you compare to the feasible alternatives. >> we've been speaking with professor daniel shapiro at west virginia university on his book, "is the welfare state justified?." thank you.

>> welcome, everyone. on behalf of the activities committee of the know would residents association, it is a pleasure to welcome lieutenant general julius becton, and mrs. bakhtin, to this afternoon's conversation. let me take a couple of minutes to tell you something about julius becton that you may not know. is it on now? i've got to move it. how about that? thtter?