about his background is in new jersey and how he got to be who he is and we're also going to read it inferno which i think is the ultimate summer beach book i have read the other books and i think miles will enjoy this one. he has a real knack for ending his chapters with the figures that make you turn the page so i think miles will enjoy that allotted we will have lots to talk about so it should be a fun summer of reading

[applause] >> thank you very much indeed it is a great honor to be you're speaking at the margaret thatcher center for freedom. the sad passing of their nests thatcher last month reminded i thought conservatives umbel sides of give-and-take of the values we hold in common. i am delighted with the a.d. is the devil is existed between the countries. it is relevant today because margaret thatcher's in view of capitalism has a very contemporary bearing on the debate about the fix the relationship between the financial system with the economy is to support at the center of "masters of

nothing" because throat her life lady thatcher passionate lee believed capitalism not only the most effective form of economic organization ever invented, but also the most moral and today the first of those is almost undisputed in regional be grateful to the market liberals of west and east those to free the people through thought and deed of china in the at and indonesia and beyond and it is the greatest source of prosperity as known to man. but that the free market is

a moral force for good is less well understood in this moral authority hinges on two crucial factors. first at the free market is bad because reward is proportionate to ever win the markets work those prosper in those who work hard and risk their capital succeed to make other people's lives, their customers lives better. and for most people fairness is a form of reciprocity you get out according to what you put in and for most people this is of more important than the quality and free mike -- free markets make it up but they also support personal responsibility if the state takes the responsibility away from people then they tend to be paid irresponsible.

with the shabby management of the 1970's the examples that margaret thatcher held for the way people behave and the moral implications of that behavior should be at the very heart of how we think about capitalism. she supported small business the challenger the entrepreneur not the corporate giants or the public for the private sector. on middle ising, pay packets and we on the political right that everyone can benefit from what the market can generate. i am not one of those

conservatives that can look at the mistakes that the private sector has no case to be observed at the fact is before the crash a lot of people especially in the finance industry make money for their clients but the moral underpinnings of the free market of personal responsibility that reciprocity with that behavior and we argue in this book "masters of nothing" that happened because the markets were not true the free. there is a story in the book about a minnesota assistant who was investigating america west back in 2003. he ordered them to hand over data in one day 10 boxes of files arrived and he pulled

one out to random and found the borrower was listed as the antiques dealer and he went to these boxes of files and pulled out another and another in every file said the same thing every file listed the borrower as an antiques dealer. clearly the loans were fraudulent but they had already been bottled up and sold off further you can blame government for making life easier for companies like ameriquest of lending to people with poor credit had political backing then of course, the ameriquest of this world could operate with greater impunity. but by focusing solely on the government's failings is a danger that we tacitly excuse for the behavior to rely on the wall street banks without asking the difficult questions and the rating agencies to close their eyes to put a trile a

on the finnish securities and in his famous essay milton friedman wrote the social responsibility of business is to increase its profit. but rather too many people on wall street seemed to have read the title to ignore the argument that friedman goes on to say it is the social responsibility of business and i quote to make as much money as possible while conforming to the basic rules of society that is embodied in law and ethical custom someone the right have taken the crisis that government should get out of the business to manage the economy all together and this book very much argues that it is the role of government to recognize the flaws and all

of the feelings to ensure reregulate appropriately rather than not all the cato institute has recently suggested we abolish central banking and deposit insurance going back to private money based on a gold the arguments you hear occasionally on the right but in fact, we already have a system of private money because the difference of what takes taken of deposits is indeed private money in history shows spinks sometimes make the wrong call even when the individual banks have the right decision for them and in this century before the fed was founded the u.s. experienced by a major banking panics and the panic of 1873 which coincided of

the railway bubble triggered a global recession that lasted for nine years on a skeptical of the idea that eliminating central banking and management of the economy is the answer to all our problems not just because that system is more complex than interconnected but indeed in the book we go back further to look at the panorama of the crisis to the tech bubble and it becomes clear it is not central banking but human nature and at the height of the south sea bubble fictitious trading companies were set up to cashman for company stock a and in one famous example stock was issued on behalf of a company for carrying out a

great undertaking of advantage but nobody to know what it is. it is all very well and we can laugh today at the 18th century investor and how much smarter we are now who would ever imagine such a problem? but are we smarter? are they any wiser? i think the most dangerous idea in economics is the division the economy exist independently of the flaws sid failures of the people so from that idea flows the assumption that a self interested decision is always rational and fact is from economics but who thinks they are always rational? in "masters of nothing" we ask these questions 48% of

the american public thought they were always rational. but only 32 percent thought the friends were always rational and that proves the point* i as a politician when i make this point* gast sure you thank you are always rational and i say no. have you ever fallen in love? have you ever made a mistake? we all have. and we need to base that management on that now -- knowledge so imagine you're given a choice between a certain game on the chance to gamble for more specifically if i offered $350 now or it gave the 50/50 chance to have $1,000 of walking away with nothing

you would choose to take the risk? that is very telling. 8% of the american public said they would take the gamble even though the expected campbell is higher. but to demonstrate risk aversion we changed the game around see either lose $450 for sure or you gamble with have the chance to lose 1,000 but half a chance you lose nothing. in because people don't like the loss of the second case the expected value is actually higher the gamble was found to be more attractive because 25 percent of the american public would choose to gamble to avoid the loss although only 8 percent would gamble to make a greater gain.

this is because we are naturally inclined to gamble to avoid a loss with the trait of loss aversion and this can explain why in the critical period between 2006 and 2008 the leverage ratio of the member others actually increased after the housing double had begun to burst another example is decisionmaking that these casinos and the big money game shows demonstrate past gains have a powerful influence on decisions made in the present it is a chemical rush from the physiology of literature a big win means a high roller will rarely quit when they are ahead you could think there is no analogy between austria and the possible deal show contestants but

aig entire business model was promised of the ada u.s. house prices would continue to rise in the future as they had in the past psychologists new about these for decades but the problem is that nobody told the economist and rather than confront the messy subjective reality they clung to the objective of the of mathematical modeling based on the invalid assumption now none of this would matter as long of market as a whole was rational even when individuals are not but this does not square with what we know being a highly social species we're naturally inclined to follow the herd. november 2008 her majesty the queen at the london

school of economics was asked why didn't anyone see it coming? but some people did the problem was that nobody was in a position to act wanted to listen in the u.k. then governor of the bank of england made a series of speeches warning of the over leveraged financial system that had grown so big and complex nobody knew the risks of what lay and also predicting fiscal recession the chief economist at the imf spoke at jackson hole of the dangers of the irresponsible risk taking and in all three cases they were either derided or ignored by the global economic establishment and again this is from psychology.

i don't know how many of those in the audience are watching but if you ever go up the psychology offered important advice don't go in a big group. those groups of more than four are more likely to suffer fatalities so this is slightly unexpected you with that more people the safer you were but a group think and the social pressure of the shared goal makes people who're reluctant to suggest heading back when the weather starts to turn and bad weather is the single greatest fatality of mountain climbing expedition and this dynamic was replicate in finance ministry across the board in those come with private misgivings kept to

themselves in "masters of nothing" recall the of the fools and those who made the case but were set apart by the system. so if we except the roots of the financial crisis line human behavior what should we do about it? after all we cannot legislate away human irrationality otherwise many problems would have been solved. to argue we need more rules but the problem is we have already tried this. in the u.k. the financial rubric u.s. government spending on regulation has increased from 725 million in 1980 to over 2 billion in 2007 the framework of capitol records cruz through 30 pages at 350 in 2004 the

system demanded increasing compliance with complex rules but it degenerate into a superficial process. remember not one was in breach at the time of the crash and if fettle multiplied in grew more complex they were more easily gained and crucially linking back to the moral purpose that i spoke about at the start people stopped asking is this right? and instead asked is this legal. and by the and they would ask can we get away with it? so the answer is not more rules and the argument says the three broad conclusions for how we run the economy first regulators need to move away from trying to micromanage individual bankers to make judgments

against the big picture. culture and social norms are always the best regulators. the vast majority that takes place every day depends not on formal rules but choosing to do the right thing when i have a restaurant at the end of the meal i am not scared to be arrested by the police but it is the right thing to do strong cultures good social norms are supported by simple and clear rules and laws not complex and confusing and to get the culture of banking right means tougher sanctions greater shareholder empowerment so that is the first response to call for simple and clear rules but second we're all human and

things can and will go wrong everyone even the regulators the hated ways that are irrational so we need to reduce the damage when the banks to go wrong in the u.k. that analysis leads to the utility banking all markets exist in this framework of the rule of law are all vital to the markets outworked to be truly free. finally we as conservatives need to recognize human behavior for what it is to make sure the rules of the game free us from weather in banking or energy or government to support the challenger, the competitor the entrepreneur and the innovator with the aspiring homeowner mrs. thatcher was

on the side of the insurgent and so must we from that the liberty and future prosperity of our great nation will once again spring. thank you very much. [applause] >> 84 the thought-provoking and timely analysis seven like to invite questions from the audience and if i may take the liberty for the first question to switch gears slightly over to europe in issue very close to lady thatcher's heart and bear in mind that turmoil in the ozone prime minister david cameron has pledged to hold a referendum of the european union provided the

conservatives win reelection in 2013 and cameron has pledged to renegotiate britain's relationship to seek those reforms is in the european union and in you're view is this a vital strategy? can you reform the european union to make it work effectively can you go against the tide that is pushed forward by the french and germans? >> you picked up on an element of the books which i did not mention in this speech which is also important. britain's relationship with the e.u. which is based on a referendum of the entry into staying within the common market we believe needs to

be put once again be resolved and with the euro crisis talking about the irrationality of human beings that there are some parallels. the you're a crisis means that there is the inevitable drive within the you're ozone 47 closer collaboration and i understand that but the u.k. does not want to be a part of that however the trading relationship is a beneficial one to the u.k.'s every have set out and cleared strategies to renegotiate relationships based more on trade to put the results in a referendum and i have every confidence the prime

minister at least there'll be a referendum at the end of the process will be able to negotiate a good settlement we're in the process to let the competencies' between the u.k. and the e.u. and then set out to and still put the results in the referendum with a clear strategy to get the best from that e.u. to have a positive trading relationship but allow them to go on with the necessary changes they need to make of which we don't want to be a part of. >> that is a very persuasive thesis i would ask you to reexamine your example how

the free market leads to a bubble but the one you chose is all involved so government is very much behind that bubble of life to choose a better example but your argument of the free market have a moral basis is a good one but addis certain point* that it will all work out fine but there has been an argument from another part of the right going back to the catholic church which is self-interest has to be tempered with certain judeo-christian principles to work most effectively so there is criticism romney/ryan britain and what do you make of his argument against the free market? how you put yourself with his argument? >> it is a very good question then there are

legion of examples of course, and of course, in many of them that does not get private behavior off the hook so that is one example where there is little involvement and likewise and i think they need and for ethical behavior in business which is the argument you mentioned coming the catholic right has a great deal of validity and indeed i strongly believe that is an argument that margaret thatcher would have made and was making because he talked about the ethical boundaries of behavior and the social norms.

and indeed that sort of cultural and religious or otherwise that cultural restraint is a stronger and better regulator both valuable for insuring we get the best of the market but avoid some damaging consequences but at the same time have a free market that can be change. there is a lot in it in the question is how to promote it which is difficult because you cannot legislate for culture alone that underpins some of the conditions that we have a society but culture is so

much more. >> please identify the institutions. >> from the heritage foundation but in the context of your argument that i find very powerful how do you see the future of china? what is your take? >>. [laughter] there is the subject for a whole new speech of the of the heritage foundation can never be criticized for small thinking because the two questions fellows is what about europe and what about china? each of which are worthy of a speech in their own right. but china i think tells us to sayings and the first and the biggest single lesson over the last 30 years is that the free market is the

root to prosperity in the engagement of hundreds of millions of people with the free market but only in china but other countries have lifted more people out of poverty than socialism could ever achieve and it is this engagement with the global economy with the positive changes we have seen over the last few decades indeed the imf has just produced its for a one china to suggest it will be 7.seven 5% something that we in the west would be thrilled to have. that is the first great

lesson from china over the last few decades with the other lesson is they have read their market carefully and they have insisted in contrast to the eastern bloc's that while they free the market they try to promote competitive markets as much as possible collapse into oligarchy and the lesson there is without a framework it is difficult to have a strong market because this is emphatically not a libertarian doctrines before a strong framework that the free market can operate.

>> i think your conclusion was right the crashes the basic cause of human behavior but the analysis of that would be the bubble that caused one of the major causes the bush administration ran a bad management of human behavior with some criminality then comes the obama administration but the left doesn't see any problem and other criminal group to endorse it so where is it your theory that the best would come out of human behavior that we you're in pretty much bad shape?

>> 56 that human behavior is behind the crash and the dangers the failures of all humans is not one that limits the critique to the private sector and in order to get things right we need policy-makers to show humility about the systems to get things perfectly right now i talk a lot about private-sector behavior but regulator behavior politicians and policy makers of those who were designing and implementing regulation all of these are designed by human beings and we you're all flawed. so to make sure the system

when the inevitable failures in the private or the public's fear have been the system is the least damaging as possible is very important and is rarely a thesis for humility not the least of political leadership which is something that i try to practice although i am myself live in the ability to practice. >> i would like to hear your opinion because i see with

the you're is no crisis that it is determined by human behavior so somehow it is inclined to support so how do we bridge the differences in the case of china or india it also shows that is a culture. >> quite so but coulter is in and of itself one way toots' described the summit and it is a description of social norms and the way

people tend to react although and all the countries there is an array of opinion that overlaps with other countries and too often i think we could think of countries as inseparable blocks. the argument of living within your means as a country like greece or spain exist in large numbers and the question is the tendency so there are those in germany who are more profligate than the average creaky and likewise there are those in spain who are more conservative than the average german and i think it is very important to understand this whole array of behavior rather than

saying the country's as blocks that move as one. >> a darr from university of notre dame that you mention a lot of concept from psychology to see that the emergence there should be a psychologist in the boardroom to work with leaders? >> yes absolutely one of the most enjoyable parts of writing the book i call myself the x economists because i used to be the economic forecaster my goodness you only have to look at the results but i think one of the most exciting things happening in policy and development is the introduction into economics of different

studies and the subjects. but physiology is also important from wonderful research on the impact of women on the trading floors if you have a trading floor that is almost entirely been then the adrenaline and testosterone level of the of traders is higher and in order to get that same adrenaline they need to take bigger risks because if you take the same size hit you have less of an impact over time but if you introduce more than just a few women into that environment then research shows that testosterone and adrenaline levels in the bloodstream of the traders produces the desired for and the taking

of high risks so in order to understand the economics we need to understand human behavior so we should use all of the research not just psychology but in this case physiology as well. >> maybe it is because i have been reading lately but one of the things he argues for that liberalism will grow and says it has to start incorporating things and his argument is liberals have done a bad job putting this into policy so having more women why is it

inherently conservative position that as the sciences mitscher they don't necessarily become that you want this many women in their room but what separates the conservative use from the liberal use? >> i think using different disciplines at our be passed is not conservative or liberal approach at all in my argument from a conservative point* of view is the need to make sure free-market separate and therefore are in a framework and we understand properly human behavior one of the essences of conservatives throughout time that we understand the realities of the world and change it

where necessary in reflection of those realities rather than having the views of what ought to be a respective of how people are. so the inherent conservatism in the argument if you like based on the realities of people and in the best to preserve the best and embrace the new. for instance in favor of the institutions and the importance of those because they attract loyalty and a steadfast this that helps to lean against the irrationalities of humanity and again that

is a conservative position essentially. >> you indicated bringing women in the stock market was moderate risk taking but was vegas uses it in the opposite direction. [laughter] >> that is a very good point*. [laughter] you always learn something new of these presentations a very good point* in that case in order to heighten the agenda land i was thinking of women being brought in to the trading floors as an equal to men rather than the other end by did not make that clear the first time around that i was put on the record. [laughter] with as much clarity as i could muster.

>> of waikiki pioneer has the economic forecaster here in the united states we have gone to considerable risk in my judgment was quantitative easing what are the prospects of the emerging from this monetary policy without a serious bout of inflation with negative economic outcome as a result? >> i think there are good prospects the economic strategy we are pursuing with the u.k. is based on tight fiscal policy and alongside the supply-side reforms and we judge that is the best way to come through the crisis the need for the management of the automatic

stabilizers and also for your active monetary policy to offset the direct effects of the fiscal policy that we judged to be important. so in central banking this is a judgment of risk and as an active politician and would be loath to criticize and the independent judgment of monetary policy but the strategy is clear and consistent with getting through this to support the economy as much as possible while also of dealing with debt and insuring inflation is kept under control over the medium and longer-term and to have that offset or a

tightening of the balance sheets so if you look at the effect on the ground of quantitative easing, the money supply growth is recently picked up to become positive and that has happened at the same time while for constant improvement in the economy and many people would think of that so i of an optimist as a conventional and loose monetary policy is a broad plan and strategy. >> i am from flyover country these two young gentleman over here there question got

me on a different trade of thought i think liberals fully understand psychology and i have been reading george orwell and he was anti-utopian as opposed to the utopian they lived in a fantasy world and another gentleman talks about the highest form of morality and the free market is small business and the liberals are doing all they can so we're d.c. the tipping point* where we can fight off the liberal philosophies because businesses could where we are but i am fearful i know margaret thatcher would not do that

in her time. >> i think the argument that this analysis leads to is the need to insure regulation of finances is strong and simple and at the same time the free market and the support particularly for companies and small and growing businesses, that the free market for then is that. so we have at the same time bringing tougher financial regulation we also have a program of deregulation broadly for much of the rest of the economy especially for small business. i don't think those two things are inconsistent at

all to make sure the financial system should work for the rest of the economy rather than the other way around. so we're very clear the direction we travel in the u.k. with the regulation at the same time being clear we need to make sure of finances. >> from your vantage point* in london with a tremendous amount of debt with the $16 trillion now the rise of a big government here in america are you concerned about the implications of these politics for america's state in the world?

with the unfunded entitlement programs and some say even through bankruptcy. >> i am a big believer of living within your means and i am a fiscal conservative i believe our countries are at our strongest when we are strong economically and when we pay our way in the world through exporting and also making escher we don't borrow beyond the means and this is part of the economic program in the u.k.. of america is a great country that relies on the individual, the ingenuity of millions of americans who are ambitious and work hard

and entrepreneurial to have a great culture of that enterprise. i think it is unwise to bet against the return of the greatness of america based on that history of strength that comes from the many, many millions of americans across this great nation. >> i would like to bring this event to a close. thank you very much. a tremendous presentation. [applause] >> thank you. >> we wish matthew tremendous success with his book here and also in the u.k. and thank you for joining us today here at the

heritage foundation. [applause] >> the chapter on capitalism i wrote because people in business first of all, very few have ever been in business because it is hard it is easy for an academic and then you begin to come back to their world is like a warrior to go into government but it is hard for a business person if they are small it is their business and they have to be there if they are larger corporation they get knocked off the ladder and they are out and it is hard so there are people i will admit it confession of the soul but

if you are in government looking at business you understand intellectually but it is one-dimensional you don't have any idea what delay does if you are in government what it does to business. you have no idea what uncertainty does to business. you don't really feel the impact of the regulation and i send my taxes in every year i always add a letter to whom it may concern, here are my taxes. i want you to know i don't have the vaguest idea if they are accurate. [laughter] i said i went to college i have average intelligence my wife went to college and she will not even read them because she knows she does not understand and i just want you to know that is the case and i paid money to an accountant and he helps me

and i hope they're right if you have a question give us a call. [laughter] but can you imagine this country with allows a tax system like that? it is on excusable. how many people here understand their taxes? i don't see many hands going up but i wrote the chapter because i felt i was in business and i know it businessman of a large company has shareholders they have customers they have employees and they are all across the spectrum political views and ideas and parties there for business people are very reluctant to challenge the government or criticize they do not want to divide the stockholders or employees or their shareholders. they also worry about the

irs. [laughter] if you don't understand your taxes you ought to worry. i worry. i know i don't know. if you are in the pharmaceutical business you have the fda and securities exchange commission and the alphabet organizations to the extent someone criticizes the government to challenge an approach them they worry that the government can turn on them and in my view why the current iras thing is so critical because american people don't want to feel that their government could be turned on them in a way that targets people you can target one person you did target another doesn't matter liberal or a democrat or conservative or republican.

now what i would like to do is have somebody do you have microphones? i thank you do. i would be happy to respond to a question an even answer some i will do my best and what you need to do i suppose is raised your hand. i always hate the first question. [laughter] anyone who pops up like the jack in the box scares me to death those lights are bright make it a good one i will embarrass you if you do not. [laughter] >> here's what we will do mr. secretary. >> you had the floor before. >> who has the first

question? >> mr. secretary i do have quick question. >> no no. i am 81 in july i do not need most part questions. [laughter] it is 7:15 p.m. and 2:15p.m. in washington where i flew in from yesterday. single question. [laughter] >> okay. >> but feel free to go ahead [laughter] >> okay. the first question. >> no no. you only get one. turn off his microphone. [laughter] >> will you write a book for republicans that says you will not tax without a decrease? you will not raise expenses

without some sort of cut? i remember when i watched your interview on the letterman show you had suggested there was a time at which the debt would reach $100 billion the world went crazy. >> i was there it was in the presidency of lbj was a congressman and it was the first federal budget in our history that hit $100 billion and everybody just gasped at the thought. >> but now it doesn't seem like that and it doesn't look like the republicans are helping us any. will you write a book for them? >> let me say something about that i think the republicans, there are people all over the spectrum of both parties but i was asked or speaking about my

other books from fort leavenworth the military base, not the prison. [laughter] 1400 majors from around the world and someone asked what is the biggest problem that i worry about when i go to bet at night? the answer was american weakness. why do i say that? was sent out from this country is we you're modeling the american economy and a failed model. there is no way you will have the deficits we have had or the debt we are incurring without sending out a signal to the world that this country will not be but it was in the past and there is no way you can

do that if you don't act responsibly people take that message and then you turn around when i went to washington i can matt of the navy and served there during kennedy johnson we were 10 percent of gdp on defense today we spend less than 4% and in you're spending less than 2% now with the sequestration is cutting $493 billion out of the pentagon budget and about to cut another half a trillion that brings it close at $950 billion out of a 10 year budget. the signal that sense to the world is the united states will not be the position to a more peaceful and stable

world.

>> walter, what compelled you? most of the people in television have made so much money they can go off to do nothing. eat he did not write this for many -- many one of the best writers especially in local news but you always were a good writer but you wrote in the short form but what compelled you to tell your story? >> i had no idea about writing a book and had never thought about it when i retired five years ago for the first time. [laughter] like the michael jor