reduction, make some difficult choices in spending reductions but don't cut the heart out of our future like education and health care research that will make us less competitive and also make sure that you ask people who can afford to pay a little bit more by closing tax loopholes people have no business benefiting from. .. and some of the tax cuts, which we did in january when we allow people who make less than $450,000 a year for their tax cuts to continue and who made more for those tax cuts to expire. we made some progress. we have to make more. i will tell you i think it's going to take another election for us to make sure we reduce the influence and not hold those tea partiers have on the two pathways in our ability to actually travel down the path of voters chose klosterman may be elected or obama president of the united states.

>> madam congressman, this question was asked to president obama when he was senator obama when he read from his book seven years ago. the question is, are you going to run for president? [laughter] [laughter] >> wow, okay, thank you. [applause] you know i love that josh i have now so much. i love it so much i took a second job and president of him asked me to chair the democratic national committee. after he was reelected, yes we do a full four-year term as chair of the dnc. when the president asks you to watch his back and bring them across the finish line and when you are a gimme the ball person that i consider myself to be, being assured the dnc is the coach but human and now i get to run the ball. i'm going to run the ball and run for reelection and i hope that you give me the privilege of representing them in our nations capital. thank you. [applause] >> thank you for the question. i appreciate it.

>> we are actually out of time, unfortunately. let's give a round of applause to debbie wasserman schultz. thank you. [applause] >> thank you very much. [applause] [inaudible conversation >> this program was part of the 0th annual miami book fair international. to find out more visit miamibookfair.com. >> alan greenspan appeared at the national press club in washington, d.c. to discuss his book "the map and the territory" which looks at the past and the future of economic forecasting is risk management. you can watch this hourlong program next on booktv.

>> it's, in fact, the second book he's written since concluding eight and a half years as chairman of the federal reserve. so we are honored to have you here tonight. eight and a half plus a decade. [laughter] >> felt like -- [inaudible] >> i'm sure. in addition to being a renowned economist, dr. greenspan was once an aspiring jazz musician, and he is special to us here at the press club because he's the husband of andrea much -- mitchell who was just honored for lifetime achievement in journalism, so we are honored to have him in our audience for that, and we are excited to have you back.

i also want to let our audience know that if you are tweeting tonight, the hash tag is the map and the territory. so please go ahead and use that hash tag with abandon. would you like to say a few words, or should we go right into the discussion? >> go right ahead. >> all right. let's start by talking about the end of the book. you talk about a lot of concern with the political system that we have today and, of course, shortly after the book came out the government shut down, so you were quite prescient. you forecast that quite well. what do you see coming next? do you see any prospects more improvement in the political situation? if not, what are we in for? >> well, i think we first have to define what the problem is. and it is not unique to the united states. we've seen this before in our history. but the best way to define it is

to recognize that a democratic society such as ours with more than 300 million people in it requires to function effectively in a civil manner certain sets of principles on which we all agree. and that turns out to be the bill of rights; freedom of the press, freedom of speech, freedom of assembly, freedom of religion. and pretty much everybody agrees with that. indeed, the people who do not are not here or are certainly not here in the way in which we prefer they would come and behave. so those are the firm, fundamental beliefs, and they are so sufficiently important that they are uncompromiseable. and it's that fact which locks us all together. the problem is that the rest of the decision making which makes

up corporate -- or i should say civil government largely is made up of issues of compromise. without compromise, you have no real, fundamental rule of law. you will not have a society which can function. and so the issue here is that it's not a we your ty term -- pejorative term, it's an essential term for a society which wishes to function. and what we are finding is that there's too high a proportion of issues in the public domain which have become uncompromiseable. and that means that the system will grind to a halt a as it has, indeed, been showing it can do when we have too much in that particular area. and that cannot continue indefinitely. the issue really is novel to my

experience, and i've been in washington since the late 1950s. and it's never been this way. and the reason if you start digging into the basis of it, you can see it in just our history. when i first arrived on the scene here, people were invited to dinners by people like joe alsop or katherine grimm, and those dipper parties were realistically -- dinner parties were realistically 50% democrat, 50% republican. and that continued on for quite a while and, indeed, host of the social gatherings were of that nature. but most importantly, everybody talked to each other. i mean, i remember, for example, i was in the ford administration white house, and gerry ford would rail against tip o'neill's positions on many issues there 9

a.m. to 5 p.m -- from 9 a.m. to 5 p.m. and tip would come right back with his zingers at old gerry ford. at 6 p.m. tip would show up at the west wing of the white house to have a bourbon with his old buddy gerry. that does not happen anymore. and you find that the parties are 98-2 either way. there is very little cross-fertilization of ideas or willingness to compromise. and something has got to give. i don't know what it will be, but i will tell you this, that unless and until we do that, we're going to have these types of crises which are showing up periodically for an indefinite period. right now the discussions with respect to what essentially is going to be the budget deal, we

find out that everyone is thinking, well, we can do a little bit. but what it needs is something far broader. as i've always said, what this problem that we're dealing with today in the economy and the budget was essentially solved by simpson-bowles back several years ago. and i recall very vividly saying when i saw that roam come up -- that proposal come up from a bipartisan group of people and was very rapidly accepted by the economic profession, all professionals said this is terrific. we can all work from here. it never happened. and the reason it never happened, basically, is we have this fundamental sort of rupture in our political system. so the question is, how do we get back there. >> paint for us the picture that

we might see if we do keep having a series of shutdowns. we only have a deal until early 2014, of course. what happens to the u.s. economy, to our credit ratings if this becomes not the first shutdown, but one of many? >> well, i think there's a little bit of misunderstanding of what the issue of a shutdown is. remember, there is continuing resolutions which essentially keeps the government going, but there's a broad element of discretion in that, and that never shuts down anything except a few divisions. remember that the whole civilian pentagon, defense personnel were furloughed at the point of sequestration, then they brought them all back. so that's not the issue. and it won't be the issue. the issue is the debt ceiling.

the debt ceiling is an an anachronism from 1917. few people -- what people don't realize is it actually was something to enhance expenditures, not to curtail it. because prior to world war i, every single appropriation had to be passed a as a law -- as a law by both houses and signed by the congress, signed by the president. the result of that is you had a physically impossible situation when you got into the war and there was this very large build-up in the military. so the solution to that was to substitute a debt ceiling which limited the amount of expenditure, amount of debt that could be taken out. and the many so doing that -- in so doing that, what occurred is it got constructed into the system until today its particular version is with a very peculiar definition of what the public debt is to,

essentially, restrict spending. it's not as much an issue of restricting spending, restricting borrowing to a certain amount. and, indeed, if you have a ceiling, by definition it is zero. of and that means that you have to get in today's market, for example, if we actually, this debt ceiling grabs hold, you're going to have to cut spending by a significant amount or raise taxes. in order to make the debt ceiling. and as you can well see, there's not ready desirability on either side of that. so that the congress is caught in a problem of arithmetic; that is, in order to meet the debt ceiling you've got to do either cut spending or raise taxes, and

they choose separately to do neither. and so what happens is that the president is required as the chief executive officer -- and it's never clear what the legal aspects of this is all about -- to somehow pare expenditures which he can do down to a level which meets the requirements. the problem here is people making a distinction between default on the debt and default on other government obligations, havenly into it -- mainly entitle elements. forfeiture of the debt is a very dangerous thing to do k that occurs when you cannot meet your repayment of debt when due. but there will still be a huge amount of revenues coming in even in the context of the balanced budget amendment. so if the president were to

segregate funds for paying interest, the issue of the bankruptcy of the government would go away. but that raises a lot of political problems because you can then say, well, yes you're paying interest to the billionaires who are holding the government debt, and you're keeping people who are on food stamps from getting their entitlement. and it is a an impossible political position to be in. but if the law stays in place, somebody's got to make that judgment and take the political heat. because there is no winners in this sort of situation. the bottom line of all of this is the debt ceiling is an anachronism should not exist, and the reason it shouldn't exist is that the congress appropriates funds, we have a tax code. and if you do a little

arithmetic, you can determine what expenditures are going to be during a fiscal year and what taxes are going to be. and we don't strain ourselves to subtract one from the other which tells us what the net change this the debt is and, therefore, you know exactly what the congress and the president signing into law has essentially set as the level of the debt. and it's invariably a number higher in today's context than the ceiling that's implicit in the law. and so the problem here is you're having contradictory legislation. you're having legislation which both houses of the congress and the president agree on a certain set of statistics of what the fiscal situation will be, and then nothing further these to be done because it's already passed. you're now taking the debt ceiling which says what you just

enacted is invalid by an earlier law. so you have contradictory legislation. this is the reason why the debt ceiling is creating such a rob. it should never -- a problem. it should never have existed. but having existed, it should have been repeal ad at the end of world war -- repealed at the end of world war i. >> given the political situation, what is your outlook for growth, employment and inflation in 2014? >> well, as i outlined in the book -- incidentally, this book covers an awful lot of subjects of which the political issue we just doesed is one of them -- discussed is one of them. the issue of the economic outlook is another, and then we have all sorts of things because the fundamental thrust of this book is to say that the old assumptions which, for example, i and all of the professional economists of note believed is

that while human beings do behave irrationally, they basically do so in a random manner and, therefore, only rational decisions work their way through. in other words, you cannot produce the steam engine by somebody's emotional intuition. it's a conceptual issue which requires reason and that you can -- that's basically demonstrated. all economic growth must fundamentally reflect actions that are rational. but it doesn't necessarily, therefore, follow that if that is true longer term, that people acting irrationally is irrelevant, especially when as i develop in the book most of these things are fear, euphoria, herd instinct in the like. they basically create a system

of of systematic relationships. people always respond to fear. individuals act, respond differently, but with a threat to, say, your life and limb or your net worth, fear is the response that comes up. you cannot avoid that. how you handle it happens to be a different thing. but what can be modeled as i describe in this book is how to put those types of problems into the econ to metrics, the data systems that we have in our models that actually had we tone so and knew what we were doing -- which we didn't -- would have told us we were having a big crisis coming up. we all knew that we had a bubble. everybody knew that. the issue that nobody got was

that september 15, 2008, was the day the bubble would break. i would say virtually everybody in the financial world knew that there was a bubble there, and it was going to burst. but they were smart enough to get out before it got too big. the trouble is, they all believed that they could move, you know, in minutes or hours ahead of everybody else. of what they didn't realize is that they didn't have that much time. everybody who thought they were going to get out was unable to. the whole system collapsed instantaneously. it wasn't anything. and as i point out in the book, even though it did not create economic depression the way 1932 did, it was arguably the greatest financial crisis globe has ever known. it's the first time ever -- well, not that assets went up or

down, it's the fact that markets shut down. they never shut down during the great depression. prices went up, and they went down, but the markets were always open and functioning. following september the 15th, those markets hut down. trade credit disappeared, and you could see boats backing up in the port of singapore because they couldn't pay their debts. you could see all sorts of thing s going on and crumbling. the type of crisis that we had never experienced. the last time that markets actually shut down was in 1907 for one day. they were back the next. this was a much broader issue, and we responded to it as i think was necessary to do so. and i think we don't know for certain, but i think those actions stabilized. i know t.a.r.p. was considered

to be political disaster. it wasn't. i think it was an essential action taken by government to substitute sovereign credit for what was the disappearance of private credit. and the result of this is that we got into a situation where government activism, in my judgment, became very -- we tried to do everything. every time there was a little thing going wrong, we took action. and i think what the evidence is becoming increasingly conclusive to show is those actions by creating uncertainties in the marketplace -- especially for the investment and capital goods -- were sufficient to suppress the level of economic activity because, as i very well remember because that was a good part of my job before i went into government, was looking at

capital expenditure appropriations projects for companies. and the one thing that we were always acutely aware of is that it wasn't so much the forecasts of profit and the usual statistical stuff, the issue of uncertainty was critical. and it turns out that the degree of uncertainty as i measure in the book became extraordinarily high, especially for very long-term investments. and they collapsed. housing collapsed, residential, building collapsed. all sorts of lives were -- all sorts of assets that we ruse in the gdp -- we produce in the gdp which had a life expectancy of more than 20 years fell by 50% and are only gradually recovering now. but that 50% of, essentially, 8% of the long-term assets is four

percentage points. that's the unemployment rate. that's what created the problem. and to this day, we haven't cured it. the uncertainty is still a major overhang in suppressing activity. now, there are some signs, and i go into it in the book and i don't want to get too complex, but we have one important issue which is very fortunate. because of the collapse in 2008, stock prices fell very sharply and stayed down for quite a long period of time. and because the long-term uptrend in stock prices as i go into the book and explain is a little over -- is about 7% a year, so that means that even though we have reached, stock rices have come back to where they were in, say, october 2007 which was the peak, we've just lost five years of trim growth.

the effect of which is by all objective measures stock prices are actually quite low by historic standards. and the pressure is for rices to continue to move -- prices to continue to move up. that's important because even with the uncertainty that's built into that, the prices are still suppressed, and as far as i can judge at this particular stage, it's the only thing that's keeping the economy void at this point. because i then go on to demonstrate how assets, asset prices are far more than indicators of finance, they have a major impact on real economic activity, employment and the like. and the uncertainties that have been engendered as a consequence of the aftermath of the crisis and the very considerable activism which, incidentally, has created a major uncertainty

uncertainty -- especially the deficit -- are what the tax rates are going to be in the far distant future. if every year tax rates are on a capital project which you're in the process of discussing to implement, that project is going nowhere and, indeed, that's what's happening, what has happened. and so the problem is when you ask what is the outlook -- this is a very long answer to a very short question -- [laughter] it's going to depend very critically on whether the degree of uncertainty can be brought down. i think there are some signs it is happening, but the presumption that this thing's going to come back very fast, i think, is unrealistic. we still, i mean, fortunately, we have asset prices which still have a way to move up. housing prices, of course, have moved up quite significantly, and they're still moving.

but remember, the single-family housing starts have come back a great deal, but they're still only one-third of where they were at the top. and you can do the same thing by going project by project in the business investment area. it's all suppressed. i have a specific ratio which i use which i think is very useful which is the ratio of what private business capital investment is to liquid cash flow. or more specifically, illiquid fixed asset investment to liquid cash flow. the extent to which businesses are willing to take that liquid asset and put it into assets which they can't sell tells you how confident they are about in the issue. that number, until or very recently, was at the lowest

level since 1938. which is a measure of how severe the issue of uncertainty has been. and it's only since we've come up a little bit so that we still have a way to go. and i'm not exactly overly optimistic about where we're going. i don't think we're going to be surprised if we fell into another deep recession. but it's hard to see either the united states or, indeed, the rest of the world moving this a major -- in a major recovery which will wring -- bring us back to the pre-2008 crisis level. >> you took us through a bit of the history there. going back to the end of your term as fed chairman knowing what you know now five years later, is there anything you would have done differently? >> well, yeah, if we had only niche yens, it would have been

terrific. first of all, the issue of bubbles are an issue of human nature. we will never prevent them. but the irony to a central banker, and you'll find many such comments in the transcripts of the federal open market committee which we very, i think, sensibly issued only five years after the fact, but there's all sorts of discussions back there in which we're all talking about bubbles, but no one's saying anything publicly. because we're afraid it will cause problems. but the main issue about bubbles is that a necessary condition is that the economy is behaving very well. that inflationing is suppressed -- inflation is suppressed, that interest rates are modest, there is no evidence

of instability. those conditions are the necessary and i would say sufficient conditions for a bubble emerging. it happens 100% of the times. but most bubbles when they break do not have significant economic impact. we had a big bubble break in, i remember, october 1987. the dow jones industrial average went down 22% in one day. it never each had gotten even remotely close to a crash. the economy, which i felt was going to be in real trouble if we didn't solve something quickly, basically sews in retrospect -- shows in retrospect almost no signs of weakness then. then again in the so-called dot.com boom, the one that went from, say, 1993 to the year 2000, that was a big stock

market boom. it blew out in the year 2000. the markets crashed. there were huge capital losses by individuals, investors and the like. the effect on economic activity was virtually zero. and the reason, essentially, as i explain in the book is a fess condition for -- a necessary condition for a crisis bubble is that those who hold these so-called toxic assets in the dot.com boom be, it was stock, are holding it on debt or leverage. because what the real problem of the financial crisis is -- and i might say fundamentally the crisis of all economic cycles -- is contagion of defalters. and most specifically it's bank defaults. so if you don't have defaults by banks or others, there is no

contagion. contagion, incidentally, is sort of the domino effect of one person going bankrupt, bankrupting somebody to whom he owes money, etc. , and you get that domino effect. that is a critical condition that is required to get the type of crisis that happened in 2008, 1929, 1907. those things happen basically because there is debt there. and so if you go back and ask, well, what could we have done differently, well, the question is could we have stopped the rise in debt -- which we knew was happening. i mean, the federal reserve, for example, was publishing all the data. the question is, how? and if you have legislation that says you have to lend -- because

with, remember a there's a huge amount of legislation which preceded the crisis which was called the affordable housing act. and as i point out and you can see it's politically unacceptable to a very substantial part of the society that it was regulations by hud which required fannie and freddie to hold a very significant amount of their total assets in affordable housing loans. and the only way they could do that was to basically buy it wholesale which meant what we'd call securitized subprime loans. and without getting into the detail which i do get into is and document in the book, is they moved in the market, and in and 2004 -- no, it was 2002,

2003 -- they picked up half of all the net new issuance of subprime security cans. securities. and because they had to have actual whole mortgages behind them in order for a people who wanted to sell those securities to fannie and freddie, those brokerage firms in turn had to get actual mortgages to get under the so-called securitized banner, securitized, the funding for the securitized loans. the problem with that is that these subprime mortgages which were actually, i think, quite safe in the early years, they had fixed rates, they had

somewhat higher interest rates, but their very nature was they were issued to people who could not afford the 20% down payment but could afford the monthly payments. what the hud regulation enforced or forced the financial community to do was to create a whole new set of subprime mortgages. but by definition, you couldn't change the down payment. you could only change the monthly aim. and the only way to do that was to go to adjustable rate loans. and lo and behold, if you look at the data of the mortgage bankers association, the proportion of adjustable rate mortgages in i think it was 2003-2004 went straight up. and within a very short period of time, they found a goodly number of those couldn't make the first payment. and that's what set the whole

thing off and created a boom which i don't care what type of monetary policy you had, you're not going to prevent that from creating, ultimately, the problems which it did. so could we have done something different, or more exactly, could the regulators have done something different? the only thing we could have done differently which we weren't able to do for a reason i'll tell you, we need a lot more capital in the banks. the problem, unfortunately, is that in 2006 federal deposit insurance corporation -- essentially speaking for all of the regulators, the federal reserve, the fdic and others -- said that more than 99% of

american banks were highly capitalized by the highest of standards. it would be, it would have been very difficult to get any form of legislation through that would raise the capital requirements. and so the problem basically is if you're sitting there as a central banker knowing that we've just been through from 1983 to 2005-2006 a period of extraordinary stability and the few yore ya's -- euphoria's starting to build because it's not altogether crazy to believe you've had this long period of stability, that the next six months are going to be stable. in other words, it's not craziness. the problem, unfortunately, as i go into the book is how it happens is that the system will break down. but it will not only break down,

but a necessary condition for when it breaks down is that nobody expects it to happen. there were an awful lot of people who were out there saying, you know, we forecast -- what they forecast is what everybody forecast. we were in a bubble, and it was going to break. i know of nobody who got september the 15th, 2008, as the period. and as i go into in the book, i explain why that happened that way. i argue that if people anticipated the actual date, it would not have happened. and, indeed, the real rob that we were supposed to get -- the real problem we were supposed to get involved with was our so-called account deficit or lending to foreigners. and everyone became aware that was the next crisis. so the exchange rate for the euro and the dollar turned in such a manner and so rapidly that all those imbalances

disappeared, and the one thing that didn't cause the crisis was the so-called current account deficit. but what did was fundamentally untore cast bl. unforecast bl. is there anything that we the fed or controller of the currency or other regulators could have done? the answer is nothing that i can, nothing i can see. unless we had the capability, as i hope you have in the immediate future, of making a major increase of cap -- capital requirements for commercial banks. >> going from the past to looking forward, can you give us your assessment of janet yellen as the next fed chairman, and what would it mean to have the first woman this that -- in that position? >> well, i assume the way you put the question that those are not two separate issues, it's the same person. >> are all in one. [laughter] >> i worked with janet yellen for several years.

i remember she was on the federal reserve board when i was there, then she subsequently became president of the san francisco federal reserve bank. and while she wasn't at the board meeting, she was at the fmoc meetings, the federal market committee meetings. and she is an extraordinarily good economist. she, i found, was very helpful to me because she was a professor and academic and had very significant insights into various different new theories coming up and the like in academia. i mean, i, obviously, have had an awful lot of education, and i did actually teach graduate school for a while, but i was essentially a private economist in my early years for a long period of time. and there were a lot of theories that had been developed when i'd never had time to watch them which i never really followed

very closely. and i didn't quite understand them. i used to go to janet and ask her, explain this to me or that to me. and i think she was terribly helpful. she's got a very tough -- i agree she's going to be, i can't imagine that it'll be otherwise. but she's going to have a or very tough set of problems, and i think she knows it going forward. >> and what about the fact that she would be the first woman? is that important? >> i made a public statement of that. i said it's extraordinary and wonderful to have a woman finally in that particular job which has been an all-male line going back as far as you can go back to 1913, '14 really. but that, to me, is all to the

good, not to the bad. my wife would certainly agree with that. [laughter] >> we're here at the national press club, so give us your assessment of the media coverage of the crisis. obviously, journalists didn't see it coming either. what was the role the media played in covering the developments before and since 2008, and what did the media miss? >> well, i'm scarcely going to be sitting in the national press club and criticize the press. [laughter] >> constructive criticism. >> well, it's difficult to say because everybody had the same problem. it wasn't an issue of whether or not you were a terrific economist and you could do these big model structures with all

sorts of very fancy mathematics in it which i don't think any person i know in the press corps per se has any expertise in, but as i indicated in the book, that didn't matter all that much. what we were dealing with was human nature. and i know this is not -- this is a very radical statement, but press people are knowledgeable about human issues because they're human beings. in any event, to me the issue here is very important that we all are introspectively aware whether in the press club or whether we're economists, whether we're bankers, we all sensed the same issues of euphoria, fear and the like. and it doesn't require an expertise -- maybe perhaps a little bit in psychology -- but i think that the press corps

is -- i mean, this issue as i say same level as most highly skilled economic technicians. some of them report somewhat better than others, but in general i've never had a problem seeing good press missed the real issues that were on. i mean, some are not reporters, some are commentators. that's a different group. but for those in the press corps who endeavor to be objective and not to have political biases, i think they did an extraordinarily good job in general, and i think that it's largely because there's an attempt to say what's really happening distinct from what policymakers would like you to believe is happening. >> we talked at the beginning about the polarization of congress. you just mentioned the rise of

opinion-oriented media. do you think that plays any role in the partisanship that we see this -- many congress and contributing to the bigger picture problems that we talked about? >> well, you know, partisanship which is something which -- is something which has always existed. in the book i have certain charts which i take, for example, the 2010 congress and four caucuses -- democrat, republican, house and senate -- and all four had the same pattern. they all go up and down with the center of it being, for example, in the republican party those on the far right, the tail end. but the middle of the caucus is sort of plain just medium conservative, then it goes down.

and the actual bridge between republicans and democrats is virtually nonexistent. there are members of either the house or the senate which are really in the middle, and they never have been. because i go back, and i pick be up, for example, the four caucuses in the 1900 -- or was it 18 -- maybe 1996 congress. looks the same way. and the difference, essentially, now is not that there's more partisanship. there are differences, but they're pretty much the same if if you just look at the data. the thing that bothers me is that that's not what the issue is. it's the issue of getting together and recognizing that there are fundamental values which we all have which are,

indeed, uncompromiseable, and nobody requests us to compromise them. the problem is, as i mentioned at the very beginning, that there is much too much in the way of public policy which shouldn't, which should be subject to compromise. indeed, must be subject to compromise if you're going to get a viable form of laws in which people can civilly live. >> you're, of course, still actively working, till forecasting -- still forecasting, still modeling. what are, what are we missing now i? what are you seeing that we, the rest of us, might not be seeing yet? >> there's a book that came out a week or so ago which explains all that in some detail. [laughter] >> a lot of people tonight have just bought the book and, hopefully, they've been listening to you rather than

reading the book. give a little synopsis of looking forward there. >> well, as i said, the fundamental issue was what came up in which i looked in the mirror one morning and say how in the world did we all miss this so badly? and i, you know, went through -- it was not only the fed models which didn't work, the imf models didn't work, jpmorgan was forecasting that the american economy, indeed, the global economy was going to be rising during the second half of 2009. it, obviously, didn't. and so it wasn't an issue of some yes, some no. all -- i do not know of a single standard econometric model which captured the actual point in which the bubble would break.

and so i said is it -- what is it that makes us fail here? and so the book is, essentially, a detective story. i go through as i go step by step starting with the presumption that i, like everybody else, assumed that human irrationality -- while significant -- was essentially random and that, therefore, could be disregarded. i then went on to start to ask ask the question, is that statement true? and i garage ally -- gradually proved to myself that the views which i held earlier are wrong. and it's an interesting experience to look in the mirror and say, you were wrong. but i was. and, indeed, so was all of my other colleagues who did the same thing. and so the question was, can we integrate what this relatively new part of economics called

behavioral economists which don't itself try to build an economic model, but does point out that there are a lot of inconsistencies -- i should say not inconsistencies, but very significant differences in the way people behave in the real world. than the way the models develop them. there's a very specific point which caught me. there was most econometric models, most economic models generally are all based on sort of probability distributions and issues of how chance, i mean, the whole issue of gambling gets surprisingly analytical into economics in developing a lot of our statistical data and what they do. one of the things that became very obvious to me and struck me

is while i realized that the so-called probability distributions of how economic outcomes are supposed to occur, and that basically is standard going all the way back that they were wrong. and the one example that struck me and i think everyone will recognize this, you go into a physician's office, and you're about to have a procedure. and you ask them, what is the probability that something will go wrong? and he says, we have extraordinarily large amount of data on this exact question. it says the probability that something will go wrong is 1 in 10,000. you walk out of the door of the doctor's office, and it feels like 50/50. there's no way you can avoid

that sort of bias. but when you take that bias and put it into economic terms, you get what some of you may understand a lot of people have been calling the fat tail which is a very extraordinary distortion of how what probabilities are of how people respond to events, and they do not respond in the sense that it's everything is random. they respond in a systematic way. this book endeavors to define those various aspects. and while i don't actually construct the full model in some considerable detail, i do outline basically what's involved, and i go through things like i have a chapter on stock market forecasting. and i apply these principles to the way markets behave, stock

prices behave with. and part of it is developed from my own experiences before i got into government. i decided at one point i wanted to do trading in commodities. so i bought a seat on the exchange, and i traded. i'm not -- i had my office right next door to the floor where i would go to the opening, i'd sort of bid and ask -- [inaudible] and then i'd go back to the office, go back begun at lunch -- go back again at line up. and and then at the close. and i thought i knew a great deal about the way, say, copper prices and zinc prices which is what was being traded, i knew a great deal about how they worked. and i found that i made a reasonably good amount of profit when i traded as an outside

customer using a brokerage firm away from the floor. at the end of three months as a member of the exchange, i made zero. and i realized in retrospect that what those people in the ring knew that i didn't was human nature, how people react. and they can spot when somebody is overly anxious to sell which is exactly the time you want to buy from them. well, i i wouldn't say i got fleeced, but it was an experience that induced me to sell my seat right away and go back to do something which i knew something about or thought i did. but that was really the first time i became aware that there's something very unusual about how we behave. the trouble is it took an awfully long time for it to penetrate. but, as i said, i'm not there yet.

i'm still -- this morning i wrote a lot of copy for a potential op-ed piece i'm going to write. and so you get into the type of, sort of position i'm in once you start to think about something, i find i have the same degree of curiosity i had as a 6-year-old. and i just, i love it. i mean, it's a fascinating experience. and i try to make it, try to leaving all of the heavy statistics in the appendix. and i say very specifically i've written a narrative in a way which doesn't require an understanding of a lot of the econometrics. but it's in there because a lot of the conclusions i come to are politically controversial. and the question is not what your ideology is.

ideology is a useless abstraction. what are the facts. and what is the syllogisms you're using. and if i, for example, am wrong about a particular position i'm taking, i in the appendix require that people say, well, you were wrong because this fact is wrong, or you're making the jump logically from a to b, and that's false. so i actually lay out the exact process by which i would say i, quote, prove certain issues or at least say they are highly probable. but i leave that out of the narrative. in other words, i try to do narrative as best i can that most anybody who has any interest in our political economy could understand. >> we are almost out of time, but before we wrap up,