>> what are you reading this number? tv wants to know. >> two books, the storms of war by andrew roberts and a book called 1861, by jeffrey goldberg. anyway it is about the beginning of the civil war. those are the two books i've been reading most recently. >> tell us what you are reading this summer. send us a tweet at oak tv. ..

>> he's in conversation with simon johnson, co-author of "13 bankers". this is just over an hour. >> good afternoon, everyone. thanks for your patience as we get started, and thank you, all, for coming out today for government place. i'm the marketing director of boston review. it's an independent, non-profit magazine of ideas. we cover a wide range from global politics and economics to contemporary fiction, poetry, and film.

please pick up a copy on your way out at the door or at the table in the lobby. today's event is the final installment of the academic year of the ideas matter lecture series. it's a joint project of boston review and the finance department. the goal of the series is to encourage serious debate, reasonable and phak-based on key issues of public policy. over the course of the year, we've discussed campaign finance, immigration, marriage, and full employment. today, i have the honor of introducing professor simon johnson who will be introducing our speaker, eliot spitzer, whose book "government's place in the market" is about to appear in the boston review series with imt press. he's the professor of entrepreneurship, a senior

fellow at the institute for national economics, a co-founder of baselinescenario.com. he is a regular contributor to the economics blog at the newyorktimes.com and is contributing editor at the "huffington post". he's part of the next financial meltdown. we are very happy to have him with us today. please help me welcome to the podium professor simon johnson. [applause] >> thank you very much. thank you for coming out today. this speaks well of us as a community of people engaged with ideas. you didn't come here to hear me speak, but to listen to eliot spitzer, and i'll let you have

him in a moment. his book is great, it's powerful, and easy read in some senses. it's a very deep read and a read you should -- it's worth reading many times and thinking about the points he's making. eliot spitzer, i would suggest he's the sheriff of wall street, the last sheriff of wall street. as attorney general of new york state from 1998 to 2006, he made an impact on wall street and on our thinking about white collar crime in the united states and went on to be governor of the state of new york where he had in pioneering and important ideas in education, health care, and economic development, ideas that will continue to resinate as we try to sort out the united states and decide what to do going forward. he also holds a powerful tv show in the arena that you can see on

cnn most nights. eliot spitzer, thank you very much. [applause] >> thank you, simon. thank you, all, for being here, a privilege to speak here at mit, and i was saying i held mit in a bit of awe because as close to the school i went to,mit you did thinking, numbers attached to the studies, and there was right and wrong answers. i took courses where there was an opportunity for partial credit -- [laughter] that was, it was one of my important lessons i try to impart on my kids. i hope i tell my daughter early enough who is a junior up the river here at another school, stopping by, has not heard me speak about harvard which is where she is. let me say this about simon. he wrote a book, "13 bankers,"

that's the book you should read. it's brilliant, the critique of our financial system, and i say this with appreciation, it's not an easy read, pushes you, makes you think, it's filled with numbers, complicated ideas as his books always are and should be, but i recommend it to you because if you want to see what has e morphed and what happened in our economic structures, that's the book that will do it. i want to promote one more book today. i'm here to promote mine, so i'll do that. even though i was in politics, i'm embarrassed of self-promotion, but it doesn't stop me as you will see. [laughter] embarrassmented is something you learn to live with when you live my life. [laughter] that made me lose my train of thought. [laughter] the other book i really do want to promote is by josh forbes,

"moon walking with einstein". we had him on the show the other day. he's from a family where he had brilliant parents. we want to promote it because we've had in our nation a case of universal amnesia that's really permitted us to forget the last couple years, and the reason it's relevant to what i talk about today is when i was attorney general, and from 1998 to scene of this accident, we did -- 1996, we did a lot of things that ended up in this book, but then there was an economic cataclysm, and that moment, people were forced to confront some of the pure ideological boundaries and thinking that had driven us to the precipice and over it. i thought we'd have the epiphany to bring us back and embrace policy again. here we are # two years later,

and i think to myself, what happened? how can this possibly be? didn't people learn the lesson? didn't people see what happened? haven't we taken anything from the crisis, the cataclysm, the maldistribution of wealth, the horror relived through, and i'm afraid to say the answer is no, we didn't. in the politics of the moment, in the ideology of the moment, i see the crvetion which is a -- conversation which is a word i don't like to use, but the confers is down in washington at such a level i'm persuaded nobody was paying attention or they don't do what simon eluded to which is to pay attention to facts. i'm not talking about proposing an alternative ideology equally distant from the facts and history relived through. it's hard to live through the years and draw the conclusion the tea party draws. they do.

it's very hard to live through the past couple years and believe in the libertarianism of rand paul. i interviewed him today for our show, a pretape for the show. self-promotion is something you learn in the commercial business. here he is very smart, but he believes the libertarian stuff that he's been spouting for years. when i say we need to revisit our history, i really believe that. how can we be where we are today because i fear as a society we're about to go over the precipice once again. that was all pream l. let me frame the conversation this way. i had an absolutely spectacular time as attorney general and governor too broof as it may have been, because there's nothing better than being in the arena, hence the name of the tv show i host nowadays. it's wonderful to be there and be in a position to try to affect public policy, think

through the tough issues and go from the classroom and say what should we do? you experiment. that's why roosevelt's great quote that you try something and if it fails, doing? different, but at least try something. there were moments that were fun. i mean, one of my favorites and some of you heard the story, i apologize if you have. i find it enjoyable. i was talking one evening, been invited by the wall street analysts to speak at their dinner. as i'll describe in moments, i had a somewhat fraught relationship with wall street at large and with the analysts in particular. i'll describe the wase in a -- case in the moment or two. we subpoenaed all the e-mails created out of wall street, and we read them, and they were not pretty to read and certainly not pretty if you were an investor. maybe you are front running and doing just fine. the -- i got to the dinner and

looked at the add yen over 300-400 analysts in their black ties because there was their annual awards dinner. they were going to get awards both silver and bronze i guess for being the most proefficient analysts of recommending stocks to the public. we crunched the numbers and determined those getting the gold standard, the peak, olympians, had you followed their advice, you would have lost 30% of your money that year. it went down from there. they were not doing their clients tremendous -- not helping them a great deal. that aside, i stood up and said it's nice to put faces to the e-mails, and they did not find that amusing. [laughter] that was when the tomatoes began to whistle by the podium. it was the only time my wife ever said you better have real security tonight. these analysts may rip you limb from limb. fortunately, i can run faster than they can.

[laughter] they it had too many steak dinners. [laughter] where i want to begin is with this sort of simple realization, and we discussed this briefly before we began speaking and maybe we'll talk about it in greater depths in the q&a, but we're at a unique critical moment. there's many lines converging and facts in the public's eye. i give the president credit in the speech he gave on the budget about a week and a half ago now. there was a sentence that was important stating something many of us have known and observed but it's not restated often enough. 90% of the american public have seen their income stagnant or declining, the top 1% or top 2% has income going through the roof. this maldistribution of wealth is exsen waited and will drive our politics unless we can

reverse it. unemployment now, and i don't mean to give you data points, but unemployment is not below 9% that was reported. it's really in the mid-teens, at least when you factor in those who are part time employed, those who are disengaged from the labor force that they have given up. no matter how you count it, the u6 is the more important number and mid-teens as least. beyond that, but just to prove somebody went to harvard and knows numbers, the number that matters is the work force participation rate showing you what percentage of society is trying to work these days. that has declined over the past decade, and it has been going up for decades which is a good thing, more people working, earning income, that made the middle class wealth possible. that is done 45 7 or something that means the wealth earned by the middle class is going down,

down, down, and fewer are finding jobs. this is a structural issue to deal with. another data point, in the last decade, the multinationals that are still the dominant players in our economy in terms of capital flows, cut, eliminated 2.9 million jobs at the time and increased employment overseas by #.4 million, a net there of close to, you know, 5 plus million jobs. it's devastating to think what that means long term in terms of wealth acreation and what the prospects are for middle class. first, the debt crisis, and there's a national debt that is going to quickly surpass our gdp. you can debate whether it's a near term problem or not, but it will catch up, and we have to deal with it and we can talk about how, but it's a reality out there that is encumbering our political process for the

future, and the last data point announced yesterday by the imf when you use purchasing price parody rather than the exchange rates in the economy, the chinese economy will be bigger than ours in 2016. you can argue whether that matters, hurts, made whole, you know, avis had a ad campaign that we're number two. i'm not sure politicians like saying they are number two or the trend line is something to be proud or of happy to hear, but it tells you that with projections that chinese economy would surpass us in 2030 or 2024, that date gets closer and closer proving the point made with some regularity when you go over the precipice, it's faster and steeper than what you think it's going to be. this is an economic moment filled with risk, and if something doesn't change fundamentally, then we are going to be in some sort of crisis. now, against this backdrop, we

have a political system that has been i would say taken over by the no-nothing party which is how i refer to the tea party. we don't know what we can believe anymore. there's really almost nothing to believe in, and the tea party slogan, you know, get government out of our health care chanted by people receiving medicare summed up the contradiction with the lack of intellectual conversation. it's a powerful move. -- movement. the ideas matter and the ideas they are saying are enormously politically satisfying, sort of an anti-government venom. we blame them, big, bad, ugly washington bureaucrats. it is they, someone who is distant. it's led to a dumbing down of our politics that has been terribly problematic. it is sort of an

anti-ideological perspective i find difficult to deal with as someone who was in the political arena. we all had hope that barak obama when elected would change that. he was the vessel into which we poured our hopes, aspirations in a way that was frankly unfair to him and couldn't succeed as we hoped it would, and we have been suffering from the psychological let down that is inevitable, and even i in my role as tv pundit critique and say negative things. moments i say, folks, let's step back and be real. he was as we hear, he was dealt one of the worst hands in history in terms of the crisis, the problems, the ideological strains in our society, none of which is sufficiently justifying the mistakes he's made so giving that footnote, i can be the critic, but he was dealt an impossible hand, and we expect

it of him that he would raise the debate, give us the answer, and at least i was hoping he would give us the counterpoints in the tea party and the sort of libertarian critique dominating politics for the last 10-15 years and further back than that with the rise of president reagan when he began to spread the anti-government theories that led to the destruction of the social contract that had guided our nation, basically since fdr. we have this absence of an ideology standing in contrast to the tea party. the president, even though as i say, give you the caveats, responded with a pragmatism that's so mall eweble, there's no ideology buried within it. that's what troubled many supporters. there have not been lines in the sand such as, you know, an easy one to pick, and i pick guantanamo. i think he was fore closed by

pursuing the right solution by congress, but it's harder to excuse, and i don't want to discuss the physical crisis. we can get to that later, but that was hard to excuse his deference to a republican majority that was not there until after he lost the midterm election. he could have agented with a democratic majority prior to that point, but he didn't. lack of ideological fortitude, poor strategy, who knows, but the point i'm making is there's been an absence of a terminology to stand in contrast to the tea party and the anihilism and libertarianism of the republicans, and that absence, i think, led to a shifting of the political debate far to the right of where it should rationally be, and i think part of the disappointment with president obama is that he's not constructed that alternative. in fact, i would almost say his pragmatism led him to become an anti-ideolog and there's a certain joy of him announcing over and over i'm a pragmatist

and will craft a solution, the result has been that we wandered without a counterpoint. if you read paul's articles with regularity, there was an important one last week talking about civility. sometimes we need the absence of civility, the regidty and and belief to stand up to the other side and by also being willing to compromise, we give away fortitude and they win negotiation after negotiation, and, in fact, that's why, you know, bill mar's show a couple weeks ago who has humor as well and referred to the president as the conceder in chief. there's an element in that. we concede rather than say we have the votes, we are right as a matter of ideology. all of that is still crazy. where are we as a nation? this is not 1945 anymore. what do i mean by that? 1945, we won world war ii. the united states was the only

nation that had capital, as in the sense of traditional capital, money. the only nation with a middle class to provide a consumer base for production. we were the only nation with a firm rule of law giving people con fort when they invested, the only nation with exe titch markets which are the engine of growth. we were the only nation with a firm established set of institutions that believed in sort of liberal democracy. i don't mean liberal conservative, but in the classical sense of what governments are all about. as the only nation with that growth, we went through several decades of remarkable growth. it was a period, perhaps without any analog in history. when i say that today's not 1945, the point i make is we no longer have a monopoly on any up puts. the reality is that the success that we've had in proclamation

to the other world means we have to compete now in terms of capital, labor, creativity. it's a tougher world, but in a perverse way, that's a good thing. when we were the only nation who believed in that value, we had to send off ide yolingses, pick your favorite ideology, we have to push back against them. now having won, we have to compete with them on a level playing field. francis' book, "the end of history" got it kind of right, not completely right, but fanaticism is the ideology that challenges us in many shapes and forms and it has one particular look to it perhaps, but fanaticism is still what is threatening us in a deep way, but because he was right in the deeper sense, china is on the rise. 2016, their economy may be bigger than ours because they

believe in capitalism. you know, if you speak to the folks at goldman, and i'll talk more about them later on, i can't go a half hour without mentioning them. [laughter] by the way, how many of you want to work for goldman? don't be shy? [laughter] oh, come on, some are holding back. [laughter] we're talk afterwards. [laughter] there's nothing wrong with it necessarily. where will most of the capital in the world be coming from ten years from now, there's no question where it will be, it's over there, and so we have won the president l, but in so doing, perhaps we have lost, and so we need to ask ourselves fundamental questions about how we structure or society to make it work. now, you know, i presume the world is flat, you read the spectacular book "the post american world" and pieces in

"time" magazine that was were less affirmative in terms of the fate of the united states with the last one called drg i forget the headline, but said the middle class is dead, no prospect for the middle class, not quite that dire, but this is the backdrop against which we have to ask fundamental questions. the questions i ask myself is why are we doing these things? the cases we made ran the gamet. the wall street cases as i referred to them were the ones with the greatest attention because when you talk money, you generate headlines. when you put names like goldman sachs and others on the other side of the litigation, attention is immediately stirred and people perk up, but we did cases across the entire range of environmental cases, labor cases, internet privacy cases, doing things that individually made sense, but after a few years as attorney general i said to myself, why are we doing this?

is there a theory to explain what we're doing? this was the era when the libertarianism or faux libertarianism of president reagan grabbed hold in washington. the fcc, the occ, all the agencies that had been created to protect the public against repatience capitalism had gone to sleep and stopped doing their jobs. i said are we right or are they right? what are the boundaries? is there a theory to explain what we're doing? does this make sense, but no larger set of principles to judge and guide the future? you know, perhaps it was rationalization, but overtime what began to emerge to me was a set of principles, and so what i want to do very quickly is sort of throw these principles out to you and say these -- they are not, they are neither terribly well-developed nor fast and without limits and footnotes as you think about them, but they at least would give us the

initiation point of a conversation about as the title of the book says, what is the role of government in the market place? do we buy into this notion, the libertarian notion that government does nothing, or buy into the notion of an overreaching, overbearing government that second guesses every decision made, but there's a caricature that's easy to knock dun, but where's the point where you have a market that functions moving capital, bringing innovation to the table, and a government that makes it work with the social crft keeping in mind our responsibility one to the next. that seems to me we had that social contract and understanding and balance between the period roughly 1932-2000. maybe not 2000, maybe 1980. pick your end point. we had a rough consensus about what those rules of engagement were. during that period there was

enormous growth and wealth acreation for the middle class, but since then, it's been trouble. let me give you the rules quickly. the first, it's so obvious that it almost shouldn't need to be restated, but only government, and i say this, only government can enforce rules of integrity, transparency, and fair deals in the market place. private sector companies simply cannot do it. i'll tell you the story quickly of the first big case we made against merrill lynch. they gave advice to people across the country, and on the other side of merrill were the underwriters, the secondary offerings for countries. there's a tension between the sides. why? because when they bid for clients that we want to do your underwriting, they would promise

their analysts and brokers would push the stocks whether or not they were good purchases. they would say you bring us the underwriting, pay us tens of millions in fees, and the fact it's not a good stock, oh, too bad, people just have to suffer. this conflict of interest pervaded what they and everybody did. i have an e-mail i referred to earlier, full of bad language, this is for c-span so i i can't use it, but if it was cable, i could. we brought merrill in, filed suit, you know, the first conversation i had with their lawyer, and he said to me, the most sophisticated legal argument saying, eliot, be careful, we have powerful friend. i said, i'm not sure that's a legal argument. he said, well, it's the best we can do. i said that doesn't bode well for the case.

they came in, and we had a fascinating conversation. how many of you want to be common defense lawyers? how many of you want jobs at all? [laughter] a few of you, okay, that's good. the next generation has not completely thrown in the towel. that's nice to see. if you want to be a defense lawyer, you'll understand the litany of arguments you make. the first one is 9 person who made those comments didn't have the authority to speak on behalf of the company. then you say it's out of context, then he didn't understand the business model, and then you check and see how much insurance you have. [laughter] they didn't do any of those things and they came into my office when i was ag, and they said, eliot, you're right, absolutely right about what you diagnosed, this conflict of interest, but they said we're not as bad as our competitors. [laughter] think about that as a defense to their behavior. what does that tell you? they were right about that. other banks were worse in which

their analysts recommended stocks that were bad investments, but the point was as long as our competitors are doing it, we'll be driven down because our drive for market share and profits precludes our worrying about the underlying ethics of what we're doing. think about that. now, i'm not saying they are bad people. really, i'm not. i'm not saying everybody who worked at merrill was a bad person. that's silly for obvious reasons, but this was the dynamic and pressure of the marketplace and it was so overwhelming they threw to the wind concerns of the integrity of what they were doing. only we could come in and find that lowest common denominator and say he's the rules and guidelines to play by. now, i want to give you another example of that, much more recent. the report that came out just last week, senator livin.

you had senator koa burn who parched the entirety of the record of what happened and transpired on wall street, but specific to goldman. if you read the document, it is kind of astonishing, put aside the inconsistencies between the testimony that day with four reasonable senior executives deafing before senator levin. the reality here is that goldman saks understood no later than december 2006, the subprime market in particular was going over a cliff. it was going to be a disaster. they then ended uptaking the short position, which at its peak was $13 billion. $13 billion short position on the subprime market, a big position just for them. there was not ensuring liquidity, but a short position contrary to what they said elsewhere, and they knew that

they could profit by betting against the market. i've absolutely no problem with that. they want to do that, that's great. all the years when i was making wall street cases, the response from the republicans, be it congress, the banking community, the ideologs pushing back was self-regulation will work because the markets will mend their own problems. leave markets to themselves, let the markets take care of these issues, both the ethics of the market place and the self-corrective nature of the market place solves the problem. we don't need you as a bureaucrat to ensure integrity. here's the question i then ask after you parched the entire record, when goldman took the $13 billion short position. did they ever, and they were selling decent subprime debts, all the sophisticated stuff they created because the smartest minds went to goldman, and they

are smart. did they while selling all of this stuff to their clients ever pick up the phone to a single regulator and say, you know what? it is time to rain in this parade. it is time to slow it down. we're heading over the cliff. no. did they ever pick up the phone to their clients and say get out of this market, it is dangerous? no. did they ever call the rating agencies and say, you know what? we are shorting the very products that you have just given the aaa rating to because we understand your ratings are meaningless. you better change your rating system. no, they did none of that. they simply bet against the market. now, as i say, i'm not only have no problem with betting against the market. one can argue they had an obligation to the shareholders to do so, but if there's any credibility whatsoever to the notion that the market can regulate itself, that the actors, the most sophisticated, the smartest, the best of the

players in the market which is what goldman sachs is could stand up and say we have to slow this down, we would have seen evidence of their trying to do that at some point along this paper trail. it's simply not there, complete absence. i said to them, look, show us we're wrong about this, prove to us that you, in fact, did try to rain in the system. chuck, the ceo of citi at the time said something that's quite famous. he said, as long as the music is playing, we will dance. think about that. as long as the music is playing, we will dance. as long as there's a game there, we'll keep playing it. my response is whose responsibility is it then to turn off the music? whose obligation is it to stop puttings quarters into the jukebox when you see this is going to lead to a cataclysm? clearly, the banks didn't think it was theirs or their job when the analysts was misleading the

public. only government can do this. doesn't mean we are always right, but only government can step in and do it. let me run through the other two rules quickly, and i hope the second one is obvious to all of you, and it is relating to the single most important word not often enough discussed in economic classes. we learn supply and demands curves, the beauty of e e quill lib yum, two lines interkt, and we solve the problem. this reflects the borrowing and interactions of the parties. extraalties reflect the transactions on people who are not party to the transaction, but there's a societal cost, positive or negative costs. classic example on this one is pollution, all right? pollution is a negative

extraalty and when a coal plant in ohio buys really cheap coal that produces a lot of pollution, the people living there get cheap electricity. they bid up demand for the electricity generating more and more bad pollution. nobody in that environment pays the price of the pollution which may be increased asthma, global warming, or the trees in adirondack park, they are going to suffer from the acid rain, nobody in that transaction cares about that. they are not party to it. that's a negative problem. that's why we have the clean air act. i'll get to that in a sec. we sued a lot of the power plants in the midwest on this principle. when i went down to testify about it one day, the senator from ohio who is had been l the governor ohio said, you know, attorney general, when i was the

governor of ohio, we cleaned up the power plants in ohio, do the same in new york. i said, senator, i applaud you for that, but do you remember how you did it? you did it by building 1,000 foot tall smokestacks not because they are pretty or cheap, but when you build a smokestack that tall, the pollution goes up and doesn't come down in ohio. [laughter] right? it goes into the jet stream, doesn't come in new jersey, that would have been okay with me. [laughter] or boston since you have the celtics, and we don't -- [laughter] that would have been great. it comes down in new york, and so as a new yorker, attorney general and lawyer, all i know how to do is sue you. we sued them because we need you to internalize this cost. in other words, only government can say private parties can do it and that's why they are private nuance actions, but government has to do it.

government can measure the negative and try to impose the behavior modification upon the economic actors to diminish output or get people to switch to natural gas. we are not here to discuss energy policies, but high sulfur, coal, measure it, take corrective action. the people who are party to the simple transaction of buying electricity near that powerplant don't see the cost to society. government can and does. this is a very conservative notion. you go to any economics textbook, it talks about this. there's positives extraalties too. they are a critical reason for government to participate and alter the outcomes that you otherwise get from two private parties who reach an e quill equilibrium point. this is the one with the

greatest value. there's certain core values that pure, unbridled market behavior does not respond to or deal with or address, and i would give you as one i think we can all appreciate, discrimination. there were people, those who were sort of libertarian in their outlook who said we don't need to pass laws that make discrimination illegal. why? because discrimination they said is inefficient. if i'm running a restaurant and say i won't serve people who are over 8 feet tall or hire people to work in my restaurant who are 8 feet tall, i'm losing customers or smart people to be in my work force because i'm less efficient and less revenue, i'll go out of business. it's logical, and obviously if you use the real objects of discrimination based on race, gender, sex, orientation, they

are right, but historically, they are wrong. it doesn't happen that way. people did discriminate on race, gender, sexual orientation, and for whatever reason, the societal pressure to continue to do that overweighed the economic cost, and so whatever the actual economic cost may have been, they continued to do it, so they not only survived, but thrived and discrimination thrived in our societies. we passed laws that forbid discrimination. that's the right thing to do. that's government intervention in a form that's absolutely necessary. minimum wage laws. they said let the labor markets themselves set the minimum rage to which we said no. as a society, we commongrounded that when people work a 40-hour week, they need enough money to put food on the tail and buy clothing for their kids. that's a core value that we

believe in, and these reforms of market intervention we believe in. those are the three rules. those are the three rules. now, are they completely -- by the way, one footnote to that. one of the cases in the core value context that made me think about this deeply was a subprime case. we began to make subprime lending cases in 1999, and it's not that i'm present about these things, but anybody who dug into the area knew a vast majority of the loans would not be repaid and knew the loans were sold off into the pipeline of the capital markets in a way that benefited everybody other than those who were ultimately holding the notes, and in many cases, the borrower. we tried to bring a case about it, and we were shut down by the occ, office of control of the currency, the puppet of all banks. it was us versus the major banks in the occ and lost that case

interestingly enough until we got to the supreme court. all the way to the united states supreme court, it was an issue with federalism, jurisdiction. the point i wanted to make to show you life is not ever totally predict l, the reason we won in the supreme court we got the four traditional liberal votes, but we needed five. five, if you're a lawyer, is the most important number in the world because five votes in the supreme court do anything. they can choose the president, whatever. the fifth vote we got was justice scalia. here was somebody who looked at state's rights, the issue of market behavior and said you know what? these guys are right. i make the point to not prejudge the opposition and presume they'll be predictable. we ultimately won giving us, not until 2008, so too late obviously, the power to dig more deeply in the subprime area, but back in 2004 when this was

pending, i wrote an article that said make no mistake, most of the loans will not be repaid. this is something that virtually anybody active in that market understood and needed to pay attention too. they didn't, and we had a cataclysm. those are the three rules. they may seem obvious, and if we had not had a spasm of collective amnesia in the nation, we could have internalized the rules and say, yes, this makes common sense, reasons for the government to be involved in market -- in the marketplace, and we should act on this. what we are seeing now and we can discuss if you want dd-frank and in my view it was not sufficient. simon wrote about the fact it was too big to fail, and we have seen greater concentration of capital markets, not less, the leverage is still there, made major banks and given and socialized the risk and

privatetized the gain while we guaranteed borrowing and increased capacity to make money on the spread. understand banks make money, we give the money, and they pay us with 2% for us and lend it out at 8%. that spread increases and they make more money. by having the federal government stand behind the banking community, they are borrowing costs to go down and driving interest rates close to zero because the borrowing costs have gone down, increasing the spread, making more money. it was not t.a.r.p., but the spread that did it. things are worse for competition out there, not better. let me leave you with one time thought. changing all of this is extraordinarily difficult. as i said, despite whatever hesitations we may have had about the way president obama addressed some of the issues, he has been trying desperately to push, maybe not hard enough, but

to get us to a point with a new social contract and understanding of what the market should be. two books, i'm not here as a professor, but two books i recommend you read because for me when in college, they captured the difficulty of social change, and they are not often enough read and put on syllabi. first the the -- it describes how individuals respond to constitutions that have failed whether it's a political party, consumer products, exit voice and loyalty discusses the dynamic that attaches. the other book is the rise and decline of nations which is also essentially the, you know, e -- the equivalent of interest groups in society in leading to a palsification, stagnation that results whether the interest group is a union, a corporation,

a student organization, legislated officials, editorial boards, all interest groups vying for power, wealth, acreation, whatever it may be that leads to a stagnation that's hard to overcome and that makes it hard for society to change. whatever frustrations we have at the slow pace of change, understand those books describe why that is. my final plea to you -- one plea and one final last thought, and then we'll do questions. the plea is don't give up on that effort to change things. it is a frustrating task to say the least. there were days as attorney general when i had moments of great elation that i thought we changed things and whatever context, the environment wages, wall street, a break through here, and then you realize nothing changed. despite that, don't stop the effort to change things and whatever your vision of change may be push back vigorously because that's what it takes.

last thought, and this is maybe off point. having just given this sort of talk about why government is a necessary player here, i want to in 10 seconds suggest an area of activity that is again not sufficiently paid attention to and that's shareholder power. the corporations that have to a great extent made the decisions that brought us to the precipice are owned by somebody. that somebody is you, and the capacity to use shareholder democracy to reclaim decisions made from companies is something that has not really been focused on. who owns the companies? mutual funds, endowments, you through your 401k. we have democracy because regulation should not be and cannot be the entire answer. even though we still do not have the mechanisms given to us by the fcc to give proxy resolutions, long term, i think

that is the area of power. those are the muscles we need to flex in the long term to really reup vying rate the economy. look, i've talked for twice as long as i supposed to. i apologize for that. i welcome, simon, i think has the first question, and then i leave myself open to all of you to throw questions at me. thank you for your attention, and i appreciate the invitation. [applause] >> my right and my left and we'll start with simon johnson. >> thanks very much for that actually encouraging and inspiring talk which we don't hear very often, such a positive, upbeat message. let me ask you the question i'm asked frequently to which i don't have a good answer which is what should any one individual do? i mean, you discussed the broad

and social process, the warfare ideas here, but as an individual, somebody with retirement money, somebody who has a job, somebody who votes, somebody who doesn't get to talk to justice scalia, but as a regular person, how should they see the opportunities here? who should they be backing on what basis? >> if what you mean who should you back politically, i want to stay away from names or parties. i ran as a democrat and believe deeply in the principles of the democrat party, but i would say this. what they should be backing is perhaps the words on the front of the podium, that ideas matter, and what we should demand of our legislated leaders is greater coherence and we should not permit this sort of rhetoric we had over the last couple years. i suggest paul ryan's budget proposal is a complete smoke and

mirrors game, it's the budget adding $6 trillion of debt in ten years, refuses to raise taxes or deal honestly with how we control health care costs and does nothing but say the poorest absorbs the cost. maybe an answer for some, but not an answer that passes philosophical or economic critique that i think is real. on the other hand, president obama's budget is not a lot better. it doesn't deal with the debt issue or the equity issues well or deal with health care containment at all, and it did not address how to control medicaid, medicare, and social security. i think the first thing we as citizens should do is demand a greater level of integrity in the answers we're getting from our elected officials, and that may be a more offed answer, and i'll reduce it to my evening job now which is to ask questions of

people on a tv show. most hosts, and not critically, but they don't ask the follow-up questions, and without the rigorous follow-up question, they embrace the sort of premise of the answer that was given by whoever gave the answer, and they don't push them back hard enough to say that doesn't work. this conversation i had with rand paul today, he begins his new book, which is fun reading, it's about liberty, and he beginning by saying liberty is the ability to do whatever you want as long as it doesn't affect other people. i said to him, congressman, that's great. i agree with you. the problem is virtually everything you do does effect other people, and if, in fact, everything you do effects other people, don't we as other people have the right to make decisions with you? i use the example of pollution. in other words, be more demanding and he could see --

he's a smart guy. he saw the logic and saw this was at the heart of his libertarian world view. challenge people intellectually and we will elevate the nature of our political conversation. >> is it possible to change the role of government in the market without first reforming the way political campaigns are financed in the united states? >> you know, i think so, and i say that not out of any false false sense of optimism nor out of any, you know, of course, we need to change campaign finance. it's a mess. elected officials spend vasts amount of time raising money no matter how good and honorable they may be, they feel emotionally tied to their donors. there's an implicit emotional connection there.

should we have public financing of elections? i wish we would. president obama's going to spend a billion -- raise and spend a billion dollars running for the presidency next year. that was a huge sum of money. my response is that's not much to choose the person who fills the most important position in the world when we wrote a check to goldman sachs for $12.9 billion to unwind their credit default swaps with aig and wrote the check without thinking about it, $1 billion to pick a president is not a lot. what we should do is really take some amount of public money and fund the sorts of debates to inform the public and eliminate private giving that is corrosive. can we solve the issues before we dole with that? yes, if there were a political movement of equal power to the tea party on the other side, and here i'll be somewhat partisan for a minute. what has troubled me a great

deal about the way president obama handled the unwinding the wall street dynamic is having bailed out the banks, we turned off the spigot. we didn't negotiate with them to get the reform that we needed and by bailing them out, you did not harness the public's anger to create a momentum to lead to the reform that we needed. the very process of the negotiation he undertook, his desire apparently to be buddies with them when at the moment we needed to be harsh and critical of them permitted the anger, the real public anger at what was happening to be funneled into the tea party rather than support for a political agenda. if he did what fdr did, use the anger wisely, not that -- cheap pop pewism is -- popularrism is not better than libertarianism, but understand how to use the emotions and

harness the probable anger to real purpose, and by being so nice to the investment banks, he gave away the opportunity to do that. i think if we had that moment, president obama could have harnessed that energy and gave us a very different, more aggressive reform agenda. >> you talked about regulators not having the most finely-tuned minds. how do we change that and get the most intelligent people and best analysts as regulators as well as on the side of the market? >> this is a tougher side of the issue. europe being in government service viewed as being the pinnacle of one's possible career, and, you know, i don't know why or how that is, but people in europe go to the, you know, the top universities and go into government service and people get the respect. here, being a bureaucrat is viewed as you can't get a real job in the private sector.

we have to change that mind set and how we do that is a deeper issue. i don't pretend to have the answer to it, but we could begin by not speaking in such derogatory terms of government service and begin by recognizing most of what people do in government service is if not noble and important, but thoughtful, preacing the public, and people are there for the right reasons. there's counterexamples, but if we brought that sense the to the distribution of government -- where government became the enemy, if you look at the contrast between the era of president kennedy when public service was noble versus president reagan when it became somehow an unfortunate, you know, place for people who could not do better, we need to change the way we talk about the government. >> what role do you think mba programs contribute to the culture of excess on wall street and also to the lack of

excellent regulations? >> how many are in the loan school? oh, my, i didn't realize that. only one of you wants to work for goldman? that's interesting. [laughter] the rest of you were clearly not telling the truth. [laughter] here's what i would say. if you -- have you seen the movie "inside job?" it was one of the more subtle points, it was like being hit over the head with a baseball bat, but that's fine. it was superb in what it did. one of the points was to raise the issue of the intersection between academia and the crisis and frankly, it's the only place in articles or movies that i'm seen that raised. i think it is -- it raises important questions about the degree to which our business schools and our law schools, by the way, i think our law schools are equally culpable in that respect and are taught sets of principles and paradigms that we now have to seriously rethink. now, the underbelly of the

argument that charles ferguson made were the consultants getting big sums of money. i don't want to challenge a motive now whether that's right or wrong, but the conclusion you reach is we have to rethink how and what we teach is certainly correct. i don't say that to denigrate the education here or up the river a little bit, but i think we have to challenge what we were teaching, the whole issue with financial engineering, a product of a lot of smart people believing in the premise that, you know, the more credit defoment swaps there were, the less risk there was in the economy, clearly, it didn't work out so well. we have to rethink basic things. >> now that the markets are completely global and banks are global, is it enough to legislate and regulate domestically? >> well, if it's not enough, but it's also -- the fact of globalized markets is not an excuse not to do it. we still have sufficient market share and enough capital coming out of the united states.

there's very few players who would say we will not participate in the american markets because they have capital requirements of x or disclosure obligations of y. the notion that we somehow have to ourselves -- think when merrill said we're not as bad as our competitors, dumbing down to the losest common denominator, we can fall into the same trap in terms of the regulatory triage as they referred to it saying, the brits will do something different, therefore we won't do anything. the reality is frankly, the other areas where capital markets are pretty healthy, europe markets have been more aggressive than we in addressing too big to fail and capital requirements and disclosure issues, and i think, yes, the issue is theoretical, but not excuse to not put in the right rules and regulations in place now. our share of the capital markets will diminish and not inse