were doing it. because if you're quiet about it, the people who don't like it have a lot of political influence and a lot of deep pockets. you got to get out in the public domain and explain what you're doing and why you're doing it. if you can't explain what you're doing and the public benefit of it, then maybe you should rethink. i think there are tools that need to be in use more aggressive. believe me, i quite sympathize and i wish congress would just stand down and get out of it because, you know, sometimes they are a positive influence but i'm sorry, most of the time they are not. you are a negative influence. it's not the regulars are perfect and there's a legitimate role for congressional oversight, but not letters signed by 200 members of congress telling them to stand out on april or whatever. i don't think they are the people with the technical expertise, the once that goes to the comment letters and have -- that's why they have these jobs, to make these kinds of decisions, and congress doesn't

have the same expertise. i think it's regrettable and a what you're saying but i think there are tools for pushback and they need to be used. >> it's hard to go to the public and say to the people are buying houses and pretending to flip them, we will take away your credit because we don't think buying a home is a good idea. >> i think it would have been a lot of political support. >> now there is but not back -- i mean, the public is basically saying, as we all know, people who speculate in the middle of it and thought they were doing the right thing. ..

based on what we discussed this morning, what is the one recommendation you would give to each of the following participants, the government, financial service providers and consumers? give a sort of a short, snappy response to that question if you can. >> may i go first. >> sure. >> well on the government, balance the budget. simple. >> there you go. >> one other -- one of the reasons why balancing the budget is so important because that would give us more room to finance private investment. and if you want to get the

economy back on track, one of the things that is going to have to happen is more private investment. so that's, that's that one. financial service providers, which, i kind of, tend to put regulators in that same category because we're all in the same boat, i think that perhaps especially though for financial service providers, with all of the things that are being done, revisiting models, cutting expenses. building new or regulatory frameworks, lots of stuff going on, all of that is very good but what i would like to see on top of all that good stuff is more attention within financial institutions, of all kind, more

attention placed on effective governance, values and culture. ultimately those are the things that were going to provide the glue that really, really, really makes banks special and in fact would make other forms of financial steinses be institutions also special. with regard to consumers, et cetera, one of the things that i would love to see is for payday lenders to disappear off the face of the earth. and, within that framework to provide much more stimulus and emphasis within the regulatory community and the banking community for outreach programs that really do make progress in

reaching out with banking services to low income and other members of our society who could use some help and could use some education to begin in a very effective way to put that nightmare behind us. and then finally, which gets back to the bubbles questions, greater transparency in terms of things that really matter. you know, one of the things that's all over the place including in the mortgage space but it is not limited to that is the lack of transparency. one of the things that is, it's much too widespread, what i like to call embedded leverage. and embedded leverage is one of

the things that grows out of derivatives and other highly structured complaints, complex financial products. we've got to do a better job, within the industry of winning regulatory community of trying to get much more effective disclosure, particularly as it surrounds the concept of embedded leverage. that was probably too long. >> no worries. we've still got time. sheila. >> for government, yeah, getting our fiscal house in order, looking to fiscal policy for growth, taking the burden off the fed. mon nair at this policy can only accomplish so much. we need more infrastructure spending. i think you can do that in a way fiscally responsible. fundamental tax reform. those are kind of discussions we need to be having. we need fiscal policy to get more robust growth in our economy. the fed can't do. i wish congress, with all the

problems with unemployment, why there is not greater focus on jobs and growing this economy, i don't know. i think that benefit for everybody, including banking sector to get this economy going again, in a way that we have been used to in the past. for financial service providers, i think, you know, i think for the long term, i think in long-term customer relationships, think of making money by providing real value, not, you know, quick bucks or hidden fees or selling a secured instruments or constructing complicated derivatives that people don't really understand what they're buying, you know. get back to customer service, whether it is a business or household, serve them, provide them good value and longer term, that is going to make your institution more sustainable and more profitable. for consumers, i think, they need to, a couple things. consumers as voters, i think they need to get more engaged on financial reform to combat

issues and push back regulators get when they try to institute unpopular reforms with the industry. i think we need more of a counter weight from, go to the main street folks. we need more interest and involved in, put counter political pressure, as consumers of financial products, it is age-old advice, know what you're getting. i think consumer bureau is helpful in terms of getting better disclosures and encouraging industry to develop simpler products that are easier to understand and imposing some consequences to them as they don't, they do provide things where the fees are hidden or potentially abused. consumers also need to be prepared to protect themselves. and so, know what you're getting. if you're unhappy, go someplace else. there is a lot of stickiness with customer relationships in financial institutions and we probably make it too hard to change account relationships. i not talking about banks. i'm talking about brokerages as well. well, move, if regulators,

another thing the consumer bureau might think about, making it easier to move those transactions, when you feel like you've not been well-treated by your financial institution, that is another kind of market discipline i think would be helpful in improving the sector. >> i certainly agree with the comments that i heard so far. so i'm just going to add my thoughts which should be viewed as -- alternatives to recommendations. i think the government should start to think about long-term policy and not short-term political gain. too much, in my view of trying to get the next headline in tomorrow's paper. they really need to think about what's the best policy for the united states country and not for themselves. financial institutions, really screwed up and, i hope that they have learned the lessons in

terms of what happened in the reaction. i think some financial institutions should seriously consider whether they want to be in consumer business at all. banks, especially were for many years commercial lenders. they didn't specialize in consumer products. i'm not sure that they are the best institutions to be in the consumer business going forward, or if they are, to have to have the kinds of ethics that we've discussed right here. and what was the third one? >> consumers. >> consumers, yes. consumers, my advice would be, just because you can get a loan doesn't mean you should take it. [laughing] >> there you go. so any questions from the audience? we'll take one or two questions. over here. >> good morning. [inaudible]

how much longer do you think we need and how much longer do you think the banking industry can recommend policies that -- [inaudible]. >> well, first of all, i'm not representative of the banking industry. so i can't speak for the banking industry and i'm sure there are things i've said today that the banking industry would oppose but, let me give an example of what i'm talking about. i recently read a paper from the boston fed which talks about adjustable rate mortgages. the thought had been and conventional wisdom is that adjustable rate mortgages were a big problem because when the rates went up, people were tricked into getting loans at a low interest rate.

then they had a rate shock two years later and they weren't able to repay the loan. well empirical data which is coming out now says that that is not factually what happened. that for many adjustable rate loans, there was no rate shock, because when interest rates went down, there was no increase in their monthly payment. and if you look back over history, the past 15 years of the performance of adjustable rate mortgages, there is no correlation between, very little correlation between adjustable rate mortgages and mortgages that defaulted. they defaulted without there being an increase in their interest rates. there is a lot of regulatory effort to, and ultimately didn't happen, but to ban or provide penalties for adjustable rate mortgages. turns out that would have been

inappropriate reaction, and, to the extent that it's a good product, i think it can be a very good product for people who are moving or starting families with a starter home, it would have been a benefit, economic benefit for the population that could easily have been taken away. so, that is just one example. we are beginning to get evidence, certainly i think prudential standards, having better liquidity and right kind of liquidity, having better and more reasonable capital requirements, having stress tests. these are all things that make sense, no matter what the cause of the crisis. but we need to make sure that the actions we take are based on facts and not on conventional wisdom. >> i'm sorry, i can't contain myself. i know. i think the industry, not with,

there has been some industry sponsored research and other kind of, you know, reinventing history, creating fuzziness about what caused this crisis and whether that serves people's interests that they don't want reform, let's create a lot of confusion what the problems were and we don't know what the solutions should be. adjustable rate and adjustable rate, the toxic 327s and defaulted much higher rate than other mortgages. that is silly to suggest otherwise. if you want research doesn't necessarily reflect industry view, go to center for responsible lending does a lot of work on this significantly, yes, there was a significant size of the troubled mortgage market, were flippers. they were professional investors, doing low-doc, no doc, lying on three or four houses, you betcha, there was ugly stuff out there. there were people in lower income neighborhoods, had night

safe fixed 30 year fha mortgages and got refied into 328s and 327s and default rates were very, very high, and much higher than fixed-rate subprimes. there are definitely two different perspectives on that. >> i have to respond, because i feel with my -- >> did the industry have any responsibility for? did they originate debt? this is all the government forcing to give poor people mortgages or you know, sophisticated borrowers ripping these investors off. with all the borrower's fault? i heard that so much. i heard that in 2006, 2007, 2008. i'm sill hearing it. take some responsibility for this. we can't get -- [applause] take responsibility. >> reminder, we have more than couple questions. >> no -- >> all right. >> there is -- >> one more rebuttal we'll move to the gentleman in back. >> i respect you, sheila.

you are a heroine. you are a lear row win, what i'm a -- heroine. i'm troubled by industry sponsored research. research, federal bank of boston. i don't think that is industry sponsored research. it may be and if it is, i retract all i say. if you look at empirical data i looked at you might want to say -- >> look at default rates between adjustable rates. >> you didn't talk about default rates. talked about -- >> you two take the discussion off-line in the speakers lounge after the fact. gentleman in the back with questions. >> fifth third bank. since we're at symposium honoring the 150th anniversary of occ i must ask this. miss bair, in your book, one much your proposed reforms included abolishing the occ. you expressed cautious optimism

at the time regarding the agency's future with mr. currie taking over as comptroller. do you still espouse this proposal? if not, how is the occ altered its behavior to cause you to change your mind? are there any particular rules, guidelines, or other regulatory actions that you would point to as evidence of this improved and reformed behavior? thank you. >> well, look, i think my experience with the occ was during the time where predated tom currie's tenure here. he was at fdic, on the fdic board, was one of great frustration. there were a lot of disagreements. and i felt, as opposed to being a partner in trying to make sure these banks were stable, it was an impediment. i also think just, having so many regulators can complicate supervisory response and rule writing. so having a framework where you

had the fed basically holding company regulator and fdic regulator of insured banks. that would be a merged fdic, occ entity seems to me to make some sense. it was done before tom got here. i think tom made, showed tremendous leadership here. i think occ examiners are some of the best in the country. you know, they really have been top-notch. and i don't think the congress is going to abolish occ anytime soon but let me tell you something else i think would make occ a stronger agency which i think most of the occ folks agree with, dealing with their funding phase. they have to rely on examination fees which is difficult, especially as industries become more and more concentrated. the fed and fdic have advantage of separate funding sources from institution-specific fees. so try to figure out a new structure but some combination of shared fed-fdic funding for the occ i think would make it even stronger and more

independent agency. that is something i would hope be in the short term doable. i do want to compliment tom. i think he has done tremendous work here. i agree with occ too, including past leadership. i do think examiners are some of the best and most sophisticated among the regulatory community. that said, i found as i chronicled in my book, frequently unfortunately i felt occ was impediments, not a partner in trying to get these problems fixed. >> last question, gentleman in back. >> jose, from florida international university. thanks for a great panel. bank funding model. banks are supposed to be liquid. they're liquid by design and borrow short and lend and trade long but if you look at a lot of the regulatory proposals, liquidity coverage ratio which racer more liquid, shorter duration assets, net funding stable ratio whose status is unclear but governor tarullo makes noises of getting u.s. banks to issue longer-term debt.

seems like are regulators suggesting that the borrow short, helped long model is no longer tenable or banks can't really do that anymore or in the same way? >> well i think -- >> that's what they're doing, they're in for a surprise. >> yeah. i think the issue is, non-deposit funding and your debt financing and whether that is short or long term. yeah, there was way too much reliance on repo and commercial paper market. that was increasing portion of the liability structures in these larger institutions which is quite unstable. so i think in terms of the non-deposit component of the funding base, forcing them to issue more long-term debt is good. that will, that will also have the indirect effect of making the uninsured deposits more stable because you'll have a thicker level of long-term unsecured debt to serve in addition to the capital that if the institution fails to protect the uninsured deposits which should make that funding more

stable. i absolutely strongly support governor tarullo. i think that is the right direction to go but i think you need to distinguish between deposit and non-deposit funding in analyzing what he is talking about. >> changing the nature of banking which is what is happening, we're changing how banks are regulated, how banks are funded, that is going to result in different impacts on the economy. so as a general matter i'm not saying it's not appropriate but no free lunch. there will be higher costs of borrowing, higher costs of credit. maybe that is good but it is going to be impact. i don't think it is good but will be an impact. we can have that model but it is not free. >> excellent. like to thank each of the panelists. thank you so much. [applause] >> we have more from this banking conference. financial services roundtable

president tim pawlenty to joined by fdic chair thomas hoenig to discuss whether the 2010 dodd-frank law low otherred financial risk to the financial system imposed by a failed bank. >> great pleasure to be here and honored. i want to congratulate con and tom and others who set up this terrific conference and happy birthday to the occ i haven't written anything in my book that it should have been abolished. let me be clear. we have two jimmy stewarts right here with us. there are a few left. they're not all dead. these are people that are extremely distinguished. they really need no introduction but just for those, few of you may be along the younger side and not know that john reed was chairman of citigroup for, citicorp for, i guess 16 years

from 1984 through 2000. and that he transformed citigroup into a global consumer bank and he then rescued the new york stock exchange for many years and today he is chairman of the board of mit, the corporation of mit in other words, john is running mit now as well., to its great benefit. gene is an old friend of mine. he was a distinguished and transformational comptroller of currency between 1993 and 1998. then he, and during that period he put special emphasis on making sure low and moderate income households would be a able to get loans from the banking industry and vigorously

enforced the community investment act. the, he also then turned to working with bankers trust as vice chairman and subsequently he founded and is now ceo of the promontory financial group. so these are two fantastic folks to talk to us about their views of the financial crisis, the reforms that have been implemented so far, and where we need to go. the title of this talk is, protect the bank. i think we really want to change that to protecting the financial system because it is not just the banks that need to be protected. it is the entire financial system and it is not just the united states financial system. it is the global financial system of which the american financial industry is so much a part of. let me just say, just for maybe three minutes here, and i do want to leave us a fair amount of time at the end for q&a for

everybody to participate, just a few words about the economists perspective on this, or at least one economist's perspective. so i am a professor of economics and the way i look at what weigh have here in the financial system is we have two public goods at stake. one is the financial highway system. think about your physical highway system. that's a public good. a lot of people can use it at same time. it doesn't interfere with other people unless there's congestion. you want to keep that open and free and working. you wouldn't want gas stations who are helping manage the system to gamble with their businesses, and lead it to potentially break down, which would completely cut off traditional commerce, shipping of goods and services. so, the financial civil is very much a public good. it is a financial highway system. the banks and other shadow banks are running that system.

and what they're doing is gambling with it. that's what they're doing. they're gambling with the public good. there is a second public good. that is the level of confidence in the economy. when lehman brothers failed in 2008 its building did not collapse. none of the people working there died. there was nothing physical that happened to the economy but the failure of lehman scared the hell out of everybody and we had collective panic. so people who are employers, small, big, employers, started seeing all this panic, all the discussion of the next great depression. google searches for that spiked sky-high in september after lehman went under. press had a field day with something they could write about. politicians had a field day. everybody got nervous and employers decided, let's fire people. let's fire my employees before

my customers stop showing up. and over the next 19 months, eight 1/2 million americans were kicked out on to the street from their jobs. that was a tragedy. and it was, and each employer was firing somebody else's customer. so we had a coordinated panic and that's the other public good. the state of confidence is a public good and when the banking system fails, and it could be an insurance company, an ltcm, a small thing that flips that degree of confidence, then we can have massive economic fallout. so we need to make the system, we need to protect these public goods and that's really the discussion we're going to be having today. i'm going to ask gene to start us off with some comments about the, how he views the protect the financial system.

then john will follow. then we'll have pointed questions, specific questions and we'll try to leave 20 minutes at the end for all you folks to interact. thanks. thanks, larry. i grab a -- oh, my. >> okay. >> well, first, larry, it's an honor to be here and i particularly wanted to single out con hurley and boston university for putting this together. con and the university have done a great job in focusing a serious way on academic issues that surround our industry and congratulations for them putting this together. alongwith, i might say, jessie stiller of the occ. in this regard of course this is, this is a particularly big event because it is the 150th anniversary of the occ. i myself aspire to 150

personally but at least the organization made it that far. we're also lucky as an organization not only to have an organization filled with extraordinaire men and women, i may say our, having once bit a part of the occ, i take tremendous pried in the organization but also having an enormously capable and highly intellectually strong comptroller of the currency tom curry. importantly like the men and women of the occ, somebody dedicated to the well-being of the public service and well-being of the system. i stand in for my good friend paul stroller who has a very bad cold but nothing worse. he is a person of exceptional character, intellect and integrity as everybody knows and i'm proud to call him a friend. of course i'm honored to be on the platform with john reed who i have a great deal of respect

for and once supervised his institution. once spent time at his institution and realized his capability is extraordinary. the issue before us with the panel specifically is ceiling off the bank as i remember and so to what degree can very or should we wall off, ring fence, if you will, banks? there i think an important premise for this, when the occ was founded 150 years ago by just the brilliant ability and intellect of abraham lincoln, he actually personally sent his secretary to lobby to congress to get the national currency act, national banking act through and i'm sure it was true for tom, true for me, right over my shoulder was the national banking act and national currency act interlynn eeighted by abraham lincoln. he spent the time to work on the act himself. it was a brilliant stroke.

at that time the banking system was the financial system in essence and in 150 years the banking system is still enormously important and a lot has changed and it is not the whole financial system and to some degree heart of my remarks about ceiling it off because the question i think is, will walling them off make them safe and or the financial system safer? behind me i think is a broader question. what is the right relationship between formal chartered banks and the rest of the financial system? i think the answer is, as it is for much of finance, it is a matter of proportion, judgment and balance. right now we're at an important inflection point seems to me. many steps have been taken to strengthen banks and banking, good steps. additional capital liquidity have made the system safer. we can take pride i think as a nation, for having confronted new financial realities, learned from the past and made changes.

the wonderful thing about america, you can god knows see it in these wonderful regulatory institutions and the congress, we confront our problems, we deal with them, we make changes and we move on but as we implement the new rules, dodd-frank, basil three and its progeny, we're in the danger i think of letting the pendulum swing to excess of losing balance to the detriment of financial system and broader economy. in some ways this is the hardest period. we made changes. ismly mentation is always less fun and less topical and less newsworthy but for those of us who toiled and soiled in the intricacies of this, seems to me that the most important part or very important part. now a great part of the risk lies in the shadow banking system it seems to me. a $9.2 trillion sector that grows every day. the shadow banking system, you say it doesn't seem like a big thing. you read about the banks on the front page of the paper you typically often don't read about

the pieces of the shadow banking system but it is enormous and it is growing every day. that is the more we lock banks off from the real financial economy, the more financial activity is moving to the unregulated financial players. we can see it almost every day in the newspapers as talent is draining away from the banking system and moving to the unregulated sector. any of us who read the american banker or any of the financial press you can see almost daily this transformation is going on. in our highly dynamic, high-tech age this swing of the pendulum can happen rather quickly. internet pier to peer lending and hedge fund and you other funds. that is only the tip of a very big iceberg that is getting bigger. as someone who believes in regulation and supervision, me, i myself am uncomfortable with the notion that regulating by charter type is distinct from activity makes sense. isn't the right answer like

activity, like size of entity, like regulation? if an activity is risky it is not made less risky by putting it into an entity that has different, a different charter, a different name on the door if you will and much less regulation and supervision. and goodness knows i think you can say that for consumers importantly. that a consumer doesn't even know the name on the door, you know, going into unregulated institution and getting abused it seems to me is something we all ought to worry about. banks are different to a degree. deposit insurance confers benefits and taking deposits insured or not, making loans along with maturity transformation is a tough business requiring an enormous amount of skill. and yes, we found after 150 years of regulation and supervision that there is a great deal of value that comes with men and women such as those at the occ with the experience and responsibility to help

insure honest dealing and avoidance of excess. i think one can't overstate in my view the importance to the well-being of the financial system of the supervisory excellence that you see at the occ and other financial regulatory agencies. everything can not be done by rule. a lot of what really makes a difference in the safety of the system has to be done by feel and touch. and that supervisory experience that has developed, and takes generations to develop, at an organization like the occ, makes a profound difference in my view of the safety of the system but banks are not in essence the entire financial system as i mentioned earlier. it is not the way it was in 1863 when the occ was founded. they are inextricably interdefined with ever more dynamic financial system and history has taught us they can not be walled off nor have they opinion the flashpoint. the actual causes of our

greatest financial calamities. this is my own biggest bug bear. the great depression as scholars today understand was caused by restrictive monetary and trade policies. bank failures did not cause the great depression. they were in many ways caused by the great depression. every time there's a financial crisis in the united states because of our history in banking we call it a banking crisis. the great depression viewed very much as a banking crisis, but if you historically, now that academics like larry, one of my most talented academic friends in this area look, you find the really the great depression was caused by governmental policies. now it is also instructive to note that in what is now called the great recession, where the financial crisis of 2008, i know great recession is kind of a nice euphemism i think, the failures that brought the country to the brink of disaster were not bank failures. just think of it, bear stearns, lehman brothers, ages,

fannie mae and freddie mac. the triggers for the crisis, they're not banks. when these none banks, less regulated financial players got sick, so did the banking system. that is parallel to the knit '30s. banks are part of the transmission process in both cases in my view were not the cause. now in part this is issue of competitive dynamics. in other words sort of why do banks get caught up in this? part of i think the dangers of shadow system is competitive dynamics. if you're going to stay in business and you have this enormous shadow system that it can do anything 2 wants and unregulated the pressures move you in that direction. in addition of course it is an issue of connectivetivity. natural connectivity of the financial sector. this is not to say that banks are not important players in the economy and they are indeed transmission belts for financials as i mention. they should be regulated and

supervised and regulated and supervised by expert such at occ and other bank regulators but to think we can solve serious financial and systemic problems by walling banks off is i believe a big mistake. the financial crisis of 2000 itself teaches us walling banks off within bank holding companies is not the answer. that was viewed as, you know, one solution to the problem but it's not. where bank holding company affiliates got into trouble the entire banking organization gets into trouble including the bank. as i mentioned, walling them off from other financial players doesn't work either. so where does this leave us? to my mind it suggests the following rules. one, banks ought to be regulated and supervised by knowledgeable specialists which we're blessed to have in organizations like occ and importantly the occ. two, it suggests we should not rely upon artificial walls between banking and nonbanking.

it will not solve our financial problems by overregulating banks and squeezing activities out to the unregulated sector. in my view quite the contrary. and three, to the extent an activity is risky, it should be regulated throughout the financial system and in an even-handed way. again, i come back to what i think is the right rule. like activity, like size of activity and entity, like regulation. of course this takes some doing. but, anyway, those are my thoughts and thank you very much for listening. [applause] >> i hesitate to get up because i met with larry for lunch a couple weeks ago and we agreed we would have no starting comments and since i thought i was going to be talking with paul volcker and he and i have often spoken about the volcker

rule and so forth. so i'm sitting here, sort of reacting real time but let me say a few things. first of all, agree very much with jerry corrigan, banks are special. i do think you have to look at function. you have to look at size. i hadn't intended to talk very much about regulation. i have experienced it and i must say it is a very important component of the industry. when i got in trouble in the '90s, had we not had interaction with the regulators that we did i doubt seriously we would have gotten out as well as we had. in other words it really did help in the dealing with the problems we were dealing with. the thing i would say is this. and i'm going to introduce a couple of new ideas here. one is, when you think about banks, i think you have to understand something about bank

customers. there's a small but very large and very important set of customers who enjoy access to the capital markets. they have been rated, they have access to the capital markets. they become customers of banks. they also become customers of institutions who specialize in intermediating the capital markets. this is what we were dealing with when we dealt with our most recent crisis. the great majority of customers for the banking industry do not have the access to the capital markets. they are not part of the part of the problems which had here in '08. they get impacted by it. but for great majority of bank customers they're looking for banks to finance them in their activities. they don't have luxury of issuing debt or other instruments that can be sold on the capital markets. often they don't have much of an

equity base and certainly not one that is traded. that industry has gone through its troubles. i like jerry's comments going back to the0's. that industry, when they -- '80s. that industry when they got into trouble did not constitute a systemic risk to the economy. it could be very devastating to a lee call economy. i can remember when the texas banks got in trouble and it was diss is truss for banks themselves. it certainly did not help the local economy but they did not imply the systemic risk that exists with the larger institutions that are dealing with these larger enterprises that do in fact have access to capital markets. when we talk about the industry, you should talk about an industry who serves people who have access to capital markets and differentiate it from those who do not. and then when you look at the industry, particularly the portion of it that deals with entities that have access to the capital markets, there has been

an immense transformation that i did not have to live with totally during my career. i just saw beginning of it. banks traditionally had provided credit to their customers. often, you know, seven, eight-year loans were long-term finance. if you wanted anything beyond that, you went to the days of glass-steagall to somebody who dealt with the capital markets who could issue bonds or equity on your behalf, what i call capital capital as opposed to working capital. the big transformation that took place in the industry was when securitization came along. all of a sudden the industry shifted its focus and many of the customers were not the people who were originated credits but they were customers who wanted to buy an investment product. people who manage money and managing money in the united states and in the developed part of the world is a very large business because we have large pools of capital that need to be

professionally managed and these pools of capital tend to demand performance. it is a very competitive arena. if you remember during the '60s and '70s when the markets didn't really do all that well there was a tremendous amount of pressure put on investment managers who were managing pension fund and college endowments and things of this sort to get performance because the institutions, they were dealing with required that performance for their own economic well-being. the industry responded by becoming very aggressive. the idea of shareholder value is something that emerged from that. and it had a profound impact on the structure of the financial sector because all of a sudden, people who used to simply provide credit and allocate capital as economists would describe it, started looking at how they could create products that could be packaged and sold

to an investment industry that was looking for higher yielding products than those which were traditionally available to them. so the industry shifted very, very importantly to creating products for investors and that's where the idea of packaging mortgages came from and that of course has been sliced and diced and made very sophisticated so that you can now create products that don't really exist. they're sort of synthetic products that you create and sell to would-be investors. as this transformation has taken place it changed the structure of the industry that traditionally deals with customers who have access to markets. it allowed the industry to take products that normally would sit on the balance sheet of banks that didn't deal with customers that had access to markets. you could buy those assets, pack them, sell them off to customers, and the industry has

changed. and with that change the vulnerability of the system, the highway system, larry, that you're talking about, became at risk because if a, if a difficulty developed within one much these institutions they were so interconnected and so tied to other institutions that the notion of systemic risk, a word that could not even been pronounced when i joined the banking business, this notion of systemic risk became a reality. so we're now dealing with the issue, how can we have a healthy banking system that provides the functions that the society needs. larry, i like your highway analogy. yet live in a world where systemic risk doesn't take on this character that you also referred to which is the fear factor lead to an actual close

down that you can't use the highway system that is built because everybody is scared to get in their car and get on it. so that is what we're talking about now. the notion that banks are special is important because they do have a particular role to play because of their depository function and because of their function in the clearing and settlement mechanisms, most importantly for money transfer purposes which are absolutely fundamental to the operation of this highway system. when mr. volcker came up with the notion, and i don't know to what extent, you know, it is just become a label as opposed to an idea, the idea that things that are banks, that enjoy the protection of depository insurance and access to the liquidity at the fed, that, they should not be using their institution for purposes of speculation with their own

capital. they could work on behalf of the their customers, but they should not be engaged in trading activities for their own account. i joined in supporting this argument and frankly in supporting a separation of those who engage primarily in capital markets from those who do not. and the word is primarily. because of managerial issues. that is something that is not typically in the conversation but the only skill that i bring to this discussion is the fact that for 30 years i in fact was a manager within a bank. i'm not trained economist particularly. i've never been a regulator although i've come to know regulators fairly well. my only contribution to the discussion i have had in fact the responsibility to in fact run a banking institution. i would tell you from a managerial point of view the type of management, again, i go

back to one of jerry's comments which i think is extremely important which has to do with culture, values, ethics and so forth and so on associated with the management of institutions culture and management of an institution which a bank in our mind as opposed to a an institution that deals primarily in the capital markets or an institution that deals primarily in creating investment product, these required different managements, different cultures, and different skills. and i would argue for a separation based on managerial differences. i think it would be better for the structure of the industry and for the problems we're dealing with if you could get the managerial separation between these various things and take that into account, because

ultimately when you deal with crises, the structure of the management and capability of the management is extremely important. and i do think we would benefit if there were some compartmentalization based on this managerial difference as well as the functional difference. why don't i sit down and your questions will elaborate this. >> great. thankthank you, john. so let me ask few quick questions to you, quick in scenes maybe you could give us quick senses so we get everybody a broader sense of your general views. and then we'll, again in about 25 minutes, we'll move to some q&a, so do you think the system is safer today than in 2007? start with you. >> absolutely. i think the changes of the last few years have been profound. you have vastly-increased

capital standards, increased liquidity requirements. and a whole panoply of other requirements and some new, good offices, like the office of financial research is at the treasury is a, is a big step forward in terms of looking at the system. from a systemic perspective. having said that, i think that the implementation of these rules as we go forward is profoundly important because where, where the banking industry may be safer, the whole financial system may be weakened, if what we have is a moving of activity into this shadow banking system without any regulation or capital standards or liquidity. >> do you think the overall financial system is safeer? are you kind of not so clear, not so clear on that? overall? >> overall probably better but, but the shift is dangerous and it is something we'll have to be

watched pretty closely. >> okay. john. >> i don't think it is safer. no question the banking industry is better capitalized and that presumably is going to continue it is certainly alert. people are not sleeping. people are paying an awful lot of attention. on the other hand the interconnectedness of major financial institutions, those that are deemed to be systematically important, if anything is greater the institutions are greater. i doubt seriously i think the fact we have more capital and makes likelihood after problem smaller. , if a problem were to develop i think they're so interconnected right now, we would be right back to where we were with bigger institutions and would take a hello of a lot of money. you know, so my sense is, if we were flying on an airplane and is risk of this plane crashing

going up or going down. probably risk is going down, probability of the crash. i tell you there will be a lot of dead people if the plane crashes. >> it's a bigger aplane. >> it's a bigger aplane. >> i see. do you think the royal of the financial system is gamble with this public good or just to intermediate between households who want to save and lend money, and and households that want to borrow money and house healeds -- households that want to invest money and financial firms that want to borrow and also sell securities? why do we need, banking, financial intermediaries to, to gamble with the financial highway at all? i've not figured that one out. are they, are they somehow adding some value?

we wouldn't let gas stations systematically gamble with their businesses. they could gamble on their own but we wouldn't let them sell securities, like, for example, we wouldn't allow them to sell forward contracts on gasoline and all do the, take the same position and all go broke at once and all leave their businesses with the keys in their hands to the pump? that would be ruled out immediately by congress, but let we're letting the financial system broadly speaking continue to gamble. you're telling us we've got this big jet that could crash. jerry was telling us earlier today that things almost went south big-time in early '80s. we saw what happened globally in 2008. isn't it time for the financial intermediaries to stop gambling entirely with the financial highway system? >> well, larry, if you ask the question, am i in favor of gambling in the financial system? the answer is affirmatively no.

no gambling. but the issue i think, is a bit more complex. i know you say that as a sort of a way to elicit, you know, sort of interest here, provoke comment. is, the nature of the, of the transformation process is risk-taking. and in order to foment economic activity, whoever is lending money is taking risks. they're taking calculated risks. there is not surety. if you call that gambling, then the whole financial system has always gambled to a degree to insure the product. the question i think is, is, to the extent that the risk-taking is, as controlled, thoughtful, regulated and super vices as you can be consistent with the need of this society? and there is, that is where it gets, you know, complicated and

i will even say nerdy because, you know, you have to make decisions how much risk you're willing to take, not whether or not you take any risk. >> scale makes a big difference. you know, the fact of the matter is individual gas stations go broke and highway is fine. you may have to drive an extra five miles to get your gas. individual banks, you must take risks. you use gambling, obviously a loaded term. you must take risks but if there are individual size so you're not threatening the entire highway that in fact has worked out pretty well. there are societies that use their banks for economic purposes and basically cause them to, you know ignore risks and simply support certain industries and so forth and so on. if the government's willing to bail them out at the end of that, it works pretty well.

korea, the korean banking system which i know a little bit about, was used in that fashion but when they got in trouble the government was there and so depositers were not at risk. that's not our style. what we're sort of saying is look, we don't want to all the gas stations taking the same risks and we don't want them all owned by a single entity, that is taking risks that might result in all the bass stations getting closed. so there is a question of scale. the reason we talk about systemic risk is we say, there is a set of institution as whose scale is such that we worry about them because they would have second order effects that we're not willing to live with. seems to me it isn't the function, it isn't that hey, a bank is doing something that we don't want them to do. banks will take risks almost. almost all of the bank failures are credit failures. you know, shipping, so forth and

so on, you lend, goes bad. you have big problem. if the scale is distributed so that you're not closing the highways down, it is unfortunate but it works. your question is, hey, can we risk the highways? the question is no, we should not and that is why we have this big discussion. >> larry and john, i would go a bit farther in this regard that systemic risk, yes, can be caused by a panoply of large institutions but the great depression was a systemic event. we didn't have institutions at the scale we do today. i, it seems to me that we are always going to have from time to time challenging global events. it is the nature i think of finance and the pendulum swing. the reason institutions like the occ make such a difference, is because while regulations can do some things to lower the

probability and perhaps the extent of systemic events, the, on the ground, day-to-day activities dealing with entities that are flying in real time, to use your analogy, is enormously important. >> so, let me press you guys a little bit on this. you say it is kind of important for the financial intermediaries to take the risk. in 1795 frederick the great of prussia and he also owned denmark at that point, he set up something called the covered bond system which is basically if you look at it is pretty much an equity-based mutual fund system. here i am. i want to get, i want to lend money to john so that he can buy a house. he is trying to sell me his mortgage. you're a mutual fund in between us. you sell shares to me and other are willing to buy a pool of mortgages.

you have a closed end mutual fund. it is 100% equity financed example here. so, now you're a financial institution that can never go broke. you're part of the financial highway that is now perfectly secure. and the covered bond system has worked really well in europe for centuries now. would you favor moving our mortgage system to a covered bond, 100% equity-based, use the word bond. it is really equity based mutual fund system like they have in europe and parts of europe where they have it, as a way of taking some of the risk out of intermediaryies? yes there is risk, my need to risk my money with john but no need for you, gene, to risk your institution. your gas station. . .

added value to growth and economic development. i think you are at the heart of the very big issua very big isso me it does go the six i hate to keep parking back to the shadow system, but one of the good things that has come out of the capital is to leverage in the banking system has come down so you still have a leveraged system but that is more contained by the way the banking system was more than them on th-

system even so. today however you still have the banking systems tend-1, 12-1 and the system levered 15-1. so you have to decide what the balance is and those are the kind of difficult questions that i know you put your mind to and that's why academics focus on these things and it's so important. >> the question has been answered. okay. this has worked pretty well for a couple hundred years so the question is whether we have the option of switching. there have been members of congress and for the secretariat is thought that this is a way to move. europe has a banking system as well and certainly it has exposed less than ours.

sheila bear was saying that the system is to take the lead -- okay. let me give you the tylenol scare in 1982 that probably most of you will remember. there were four bottles of tylenol that were somewhat in an undisclosed manner in the sense that there were no safety seals acting so someone put cyanide in these four bottles of tylenol and within a few days, seven people died from eating this stuff. and around the world there were 30 million bottles. so just four bottles of tylenol that people knew were bad or poisonous, and there could have been others but nobody knew for sure because there was no safety seal on the containers.

around the world places like thailand, everybody decided that it's too dangerous to buy. the market dropped like crazy. there was a run-on tylenol if you like. a 100 million-dollar market went zero. what did johnson and johnson do x. they threw away the old tylenol, they recalled and repackaged it with safety sealed containers. that'seal containers. that's why we can't open anything he's days. [laughter] we don't have enough disclosure as far as i can tell in the financial system so we have the faith-based banking. people are investing money, lending money to your bank and you are lending it to john that you might be angela and be involved in the no doc loans and i wouldn' wouldn't know him buti get a little bit of news there might be bad mortgages that you've made and suddenly i pan

panic. i'm scared as i get m should i y out and others do as well. not just scared about -- i'm scared about what other people are scared about and then the whole thing collapses. do we need more disclosure? do we need an fda for the financial services sector so we can see what is in those bottles? >> were asking a expert provocative question. i think it is unfortunately the situation is more complicated in this regard. the one thing i want to avoid this financial panic. and while i'm a huge fan of transparency, transparency has got to be clear and it's very hard sometimes not to panic people with information that may be totally unclear to them. but sadly financial literacy in the country p6 even among

educated people -- is remarkably low actually come and that is a huge responsibility that we all have to get ourselves better educated and everyon than every. but having said that it is. the impression is that information one gets out and how one gives it out without causing a financial panic. you know alan jimmy stewart. so that's something the bank regulatory agencies have pored over for generations. how much information to get out. if you give every single piece of information, you could have a mixed use -- misuse of information and the disciplining institutions. interesting enough if you want to get philosophic and studies there are societies in the world, you think of china and also to some degree europe where the transparency is less than in

the. and wonder whether or not with that lack of transparency you are likely to have less panic and must run on institutions. i'm not advocating for those systems by any means, but the question of transparency and how much you recognize is very difficult stuff and potentially highly volatile. >> i agree. you have to have some reliance on the institution just for the division of labor if nothing else. if you trust the institutions, they are making judgments about credit and risks that they are going to take you have some track record, yes, you need some degree of transparency. no one knows how much. i will tell you having run a bank that you have infinite transparency, in other words the manager had as much information as they want about anything that is going on.

even then, get rid of the risks just because you understand. you may get rid of concentration as a risk and things of this sort, and this is one of my objections to the risk based capital formulation. i don't think we know what the risks are until after the fact, and therefore i really am sort of agnostic. i sort of say all assets are risky. we don't know how risky so you have to manage them as if there is a hit in risk and it isn't until the lack of transparency. it's a question of judgment. if the price of oil drops from a hundred colors of their goal to $50 a barrel, i assure you there will be risks in the portfolio that you didn't know were there and they are people sustained at the price levels for the state at the time. banking industries can take price adjustments. if you think of buildings worth $100 million in the next week

it's worth 70 on the u. have a bad loan on your hands. it seems it is important to gain credibility with your depositors and investors. you want to tell them whatever they may need to make an informed judgment whether they want to deposit with you or not. the reason the fdic exists is they came in and provided an a number of that got rid of that kind of judgment. by the way one of the reasons the chinese system worked is because the government has a history of protecting depositors and people are willing to live with less transparency. when you get into a shadow banking situation where you have more sophisticated investors, they are going to demand the kind of information they want from the people who are damaging their money and they are going to insist upon it.

transparency is important and vital. but ultimately transparency isn't going to get rid of the risk because the people that have total transparency, which is the management, they make mistakes about risk. >> lehman brothers kept all this information to itself, and a few days before it went under -- i think september 12 -- they put out a report that said they had 11% capital, which is higher than most of the banks having a stress test and the fcc must have approved the document, because they've been in the bank since the crash. so, nobody could actually investigate the assets online or the public didn't have the information, the hedge funds might have had some information

that nobody could really tell. so they all ran. >> can i say something about that? i went through a crisis. jerry knows it better than i -- in the '90s when people were worried about citi. i spend tons of time talking to the people who lend to us. i talked to the other banks who gave us lines of credit and so forth and so on. at the level of disclosure exceeded by far anything that was in the public domain. and they were very interested in just seeing me and getting the sense of his reed okay into telling the truth? if you keep the bowl or not capable? the level of disclosure existed with lehman brothers and the funded us have reached the conclusion they were not going to make it.

it has nothing to do with 11% capital requirements. you have counterparties that are funding you in the security business as they were almost all of the funding coming from the counterparties. they are getting all of the disclosure they want for the major counterparty calls and says i want to come over and talk to you about what's going on that you meet with them and talk to them so forth, so on. what happens is for good or evil, the firm was unable to convince their lenders that they in fact were going to get out of this and sai so they were unwilg to take risks. but this occurs anytime a company is in difficulty. the suppliers come if you are a retail organization, you go out of business because the buyers won't ship to you and it's all a question of judgments made by the counterparties that has very little to do with public

disclosure. it's all the interaction that occurs between the funders and institutions. regulators play an important role in the banking industry because of the bank of england says not to worry they are going to be okay other lenders will place a certain amount of credibility on the bank of england is. >> in terms of the way that it really works, the problem on the market environment and you can make if it is simply the environment and every panic every institution is gone. >> we have 25% of the financial assets in this country held by equity finance mutual funds. i don't work for the company to be clear. i'm not talking about markets that are leveraged by the other mutual funds that are 10,000 in

total. 7500 are equity-based mutual funds out a single one of those financial intermediaries went out of business because of the financial crisis. so, we had a financial earthquake and certain structures collapsed in theaters which were made out of stone did not collapse and we rebuilt out of strarebuild outof straw as f. so we will have to differ on this, but let me ask you a different question which is on the money market. you think they should be marked to market? in the money market fund. >> mark to market leaving the funds aside for a moment it seems to me is a very dangerous area that deserves a great deal of looking hard. one thing that is on -- i am in favor of looking at the real numbers and real-time.

but the way the mark to market often works in terms of how it translates into the financial system is the point of time marked to market. so the question becomes whether on december 31 when you offer, the mark to market on that day and time is the decision he wants to take to how you measure all kinds of things that have been in the institution. it's one of the reasons the supervision is so important because regulators have the opportunity to look at an institution over time. and it goes to jon's excellent t plaintiff who is the management. what is the quality of the book lacks and the problem with any of the disciplines it seems to me there is good in them and we certainly want a more transparent. we want a transparent society. but at the same time there is a danger because the mekong judgments based on simply that.

>> i agree 100%. money market mutual funds should be allowed to go back to the buck without any change in the regulatory status? how would you deal with that and what you require them to pay for fdic insurance? >> gene set it up front, we were not answering the money market question per se. i'm not particularly knowledgeable about the trade market funds, but any mutual fund you buy into whether it is mutual fund or not he may not have 100% capital or maybe there is leverage, the point is the value of the fund can go up or down. disconnect profoundly. one of the dangers and assuming any part of the financial system in and of itself isn't going to be volatile on the crisis is that the system is so complex and you don't know where the

people's panic low brow irrespective of how well it is run. to your excellent point even if you have 1-1 people can lose a lot of money and to say i want my money out. >> there's two things -- and i know we are going to go to questions after this -- is two things. panic is always going to happen in the stock markets fluctuate like crazy. in 87 the market went down to crazy and end 2002 the market crashed 50%, but none of the financial institutions collapsed. so the specter of the financial intermediaries collapsing seems to scare people like crazy. and that could be diverted to go over to divide the current system. let me ask the audience now further questions. please come up to the microphone and give us a question or two.

>> just come right up to the microphone. don't need to have me be able to see your hand. a >> another question for john. the size and potential complexity of citigroup was thrown into the spotlight and the federal reserve rejected the plan. kind of wondering your thoughts on the complexity of the organization is citigroup is a complex organization is part of a global sprawl and does that make it risky to be in multiple countries, multiple businesses? is it mor more the corporate tht you talked about in banks? >> size is one thing, but multiple business lines is the other. and i of course spoke about the culture of management that required if you are dealing with capital markets as opposed to if

you are not. citigroup today is immensely large and geographically dispersed but it's been dispersed since 1902. the complexity comes from the lines of business. they have major capital markets as well as very traditional banking operations and that makes for a very difficult management structure, and if anybody here wants to get scared they should read a book called command and control which is a story of how the united states operates its nuclear weapons. and the conclusion is that human systems are immensely difficult to manage with discipline. and banks are no different when you end up with a couple hundred thousand employees which is the

situation as not only a citi that a number of institutions. even if you know exactly what you want to do in the organization, it is an amazingly difficult kind of tax. so, i would argue that citi's problems that are referred to in the press i have no inside knowledge whatsoever reflects this complexity. they seemingly in the minds of the fact were unable to create what the fed was looking for and if you are talking about an institution that is large in size on a diverse and activities and has gone through a certain amount of turmoil, you can imagine that it was very difficult for them to respond to the request of a they got and the fact they have had three or four ceos over ten years can't

help. >> more questions. you were described as transformational when you were in control of the currency. you had an interesting question and i wondered what the take away would be as you basically introduced innovation through your role. >> there are some interesting ones for me. thank you for the question. one that i think is fascinating is the anchorage the community reinvestment act funding for low to moderate income people and interesting enough there have been those that have tried to claim that kind of advancement is in fact the cause of the financial crisis. but in any case in and of itself it isn't safe. the boston fed in san francisco did a study in the book and found that in fact the lending

to the low and moderate income people is done properly is not only transforming in terms of their own life experiences but also in terms that are perfectly safe. is it exactly as safe as lending to a person with great means x. maybe not but perfectly safe if it is done correctly. innovation and finance i know it seems to me it's something we don't want to stop because the wonderful thing over the last couple hundred years of the development of the banking system through the national banking system of 1963 is opportunity and economic development as well. and in our era, one of the people i'm most respecting on and we try to work with when i was at the s. sese and that they have made to the global poverty

elimination. so if i look back i don't think there is a balance between innovation and safety and soundness. i think the controller's office has been a good job of allowing things to grow up and basically support the growing economy. >> we have time for one more question. if there is no other? the reason it to you for the whole issue of those we have been discussing about the financial system. how do you see the world economy today or what is your -- what would you do if you are running the world economy right now? as with a lot of finance, so much of what makes the finance

have been it seems to me is what they used to call humorous that this individual amount of confidence or lack of confidence and we are living in an enormously dynamic era where more discoveries are being made daily van were made in the period from zero to 1700. that offers tremendous opportunity for the poverty and a better environment but it also creates all kinds of opportunities for risk. i would say in terms of the world economy by ellen is to keep your seatbelts fastened tight. >> i think the opportunities are there and there is no question in the last 20 years there has been a change in poverty levels on a global scale. and that's all for the good.

we have a very big interconnect system and i think the biggest challenge is government. bad government is distributed. there is horrible and there is a little bad and good that exists in small pockets. can we get this system to maintain some momentum i think it's possible that it's challenging and in the short term i definitely have my seatbelt on. >> thank you so much for your tremendous contribution. >> undersecretary of education ted mitchell talks about how the federal and state officials can

work together to improve schools. we will be in a meeting of the education commission of the states at all:15. booktv sat down with former secretary of state hillary clinton to discuss her book "hard choices." >> getting to the point you can make peace isn't easy because you make it with people who are your adversaries and to have killed those you care about coming your own people or those you are trying to protect and it's a psychological drama you

have to get into the head of those on the other side because you have to change their calculation in us to get them to the table. we will see what happens but that has to be the first step. and i write about what we did in afghanistan and pakistan to get the tablet into the table for a comprehensive afghanistan. in iraq today i think what we have to understand is that it is primarily a political problem that has to be addressed. the ascension of the sunni extremist group is taking advantage of the breakdown in political dialogue into the total lack of trust between the maliki government, the sunni leaders and the kurdish leaders.

next how robots may eventually replace judges. several university professors test the hypothesis chief justice roberts is a robot. the form is part of a conference on legal and policy issues related to robotics. it's hosted by the university of miami law school in coral gables florida. >> thank you very much. i was told that i am supposed to speak into the microphone, so i will. this is a wonderful paper by ian and a carissima. i will set up the premise that at one point, john roberts,

chief justice john roberts is ambushed and they bring him to the hospital and they discover all along he's been a robot. hypothetical is important because it's related to the argument we are going to make later, which is that he was created sometime in the mid-70s and was the latest in technology and somehow they got him into harvard law school where the rest of his career unfolded naturally just the way that we know it to have. he did very well at the harvard law school. he was on the law review and clerked for chief rehnquist and got married to a woman and they adopted two kids and he became a very successful washington litigator, one of the finest oral advocates before the supreme court and then he was

nominated to the first of the associate justice and then later the chief justice that he became the chief justice and he basically wrote all of those wonderful opinions. so that's the story. everything is the same and that is important to their thesis except for the fact that it turns out nothing really happened around 1975 because that has been was meeting and then he becomes a robot. the paper is about the question of whether or not it is adequate for him. he could be fixed to be a judge. that is what the question is. now they have a very cute name for justice roberts as a robot. they call him jrr throughout the paper. we could actually do this, there were a whole bunch of different names we could come up with for the roberts robot. i was thinking robert's bot,

mr. roboto roberts, the chief robot of the united states, robot versus wade. [laughter] those of you from the new york area, jnr electronics and my personal favorite, sheldon h. wilson's remote-control device. so, in any case which brings me to the fact there's something extremely timely about this paper because as we know, the supreme court decided in the case yesterday and the day before whether or not chief justice roberts is a robot the supreme court is on autopilot when it comes to campaign finance, and also the fact that recently there was a controversy in canada over the qualifications of a nominating

supreme court judge that was rejected by the supreme court for being insufficiently qualified to be one of the three representatives on the court which carissima has written about and it seems those are relevant to what you want to talk about in the papers as we will see in the second. so that is the name and now what is it exactly that ian and carissima have to tell us? there are three reasons why chief justice roberts is not qualified or fit, qualified as a legal question but that is a more philosophical question to be the chief justice of the united states. and here are the three basic ideas. first is that they argue a jury that is qualified as to be able

to know how to follow the rules and they argue that the robert's bot doesn't follow rules and reacts to them or predicts the behavior of others and reacts accordingly. the second claim is that a jurist has to take what they call the internal perspective, that is he has to understand the legal norms of his society as being his norms and apply into him and basically internalizing them. they argue that they associate with robert's bot, robert's bot in which they are not one's norms they are just simply extra no to the entity.

aninto this is related to the first claim. the third argument they make is based on the philosophy they have an elaborate discussion that's working but the most important is that it argues what a journalist does in deciding the cases is to articulate and apply and be in sympathy with the norms of the community in which the journalist is and they argue that john roberts robot cannot be a member of the community and has not internalized the community. so all of these arguments revolve around it seems to me a set of assumptions about robots and their relationship to

communities. if you look at the arguments that are based on an interpretation, their argument is to follow the rule isn't simply to be presented with the rule and then have a particular state in your head rather than to follow the rules should b rue community and disciplined and tutored and lived a certain kind of life and because yo he liveda certain kind of life, because you've enter into a form of life, therefore you know how to follow the rules. and what they want to argu argus that a robot cannot enter into a form of life and participate in the community and therefore it can't follow rules and missing a a normal church split. church split. similarly, the whole idea of the prospective they argue is borrow something or does something to the theories about language and find.

they would argue again the internal perspective is not just a state of mind that comes from beating a part of a particular community and if they are participating in the norms and seeing the norms and then of course the idea also seems to be related. so this is the part where i want to ask questions for them to develop their thesis. at the way in which the paper proceeds these three criteria of what it means to be fixed to be the true rest are articulated that some links. but then when they apply it to the john roberts robot, they just come close to restate they do not believe you can follow rules and they do not belief that he can take the internal perspective and they do not believe that as a member of the community that he can internalized the community norms. and this is the part of the paper i want to ask questions because it wasn't clear in the lead up to the hypothetical that

in fact these things couldn't be true so let's start with the idea of what it means to be a member of the community and follow the rules. john roberts, the robot graduated from harvard law school in 1979 and i graduated in 81 so by a couple of years although i did not know him so we were both exposed to the same culture. we were both immersed i interese same culture. he took exams. he went to study groups. he spooked people. some of the people i went with in those days struck me as being like space aliens but it never struck me. [laughter] they did find they were in favor in some of them did better than i did. john roberts was clearly one of them. and so it's hard to figure out why he doesn't in fact engage in a kind of training and

discipline which is important to be able to follow the rules. what h we need is the extra part of the argument to be at he's been exposed essentially the same environmental influences i was exposed to. i probably ran into him and i didn't even know it at the time. he was a part of a study group and the community. he was part of the form of lifee into the institution and the harvard law school. so, why then begs the question why couldn't he use that to be able to follow the rules for sex and the second question is the internal perspective. similarly the perspective is to be part of the community and under the norms here i think that there is a direction that i want to make. i don't think in fact that in order to be able to argue and practice the law of one has to o take the internal perspective in the way that ian and carissima say. i have many students who come from other countries and they do

not regard american law as being binding on them. they do not understand themselves to be an american law that is their project. they come to the school every year and some of them are quite good at it and they come out even able to talk about the american law. in fact and of themselves and one part of the paper they start talking about american law and they take what i regarded to be the internal perspective with respect to even though they are not part of the american community and do not consider themselves to be bound, the reason from the perspective it ithatis a point that was made be jurisprudence professor is that that is all you really need for the hearts and tests to occur. you have to deal to sympathetically understand others and their projects and to be able to participate in the project with that kind of understanding but of course the question you want to ask is why couldn't the john roberts robot do that? after all once again he's been

immersed in this culture not only in fact has he emerged in this culture but he is under the impression that he is a human being. that he believes the hype. he needs that when he talks to other people he is talking to them as a human. when he gets married, he thinks that he is a human being marrying another human being and if one wants to know what else is necessary in order for him not to have either the internal perspective for the [inaudible] and finally the idea that in order to be a fit jurist for a regime coming you have to understand, sympathizing to use the norms of the community because that is part of the complicated relationship between what you want to say into the existing norms and the justification of concern.

here again i had some thoughts or suggestions. i don't think the way this point was made in the paper -- i think it is too strong. first once again many people come from countries around the world. they are not american. they've been exposed to the culture on television perhaps and they are able to engage in the legal argument or reasoning even though they are not part of the community. the fact you do not share the community norms doesn't seem to disqualify you for making legal arguments. the second it' is a strange argt to come from to canadians. after all canada as part of the british commonwealth and one thing we know about the british commonwealth is that they exported colonial law of the british empire imposed on other countries that have different

norms and cultures and religions and the idea is that would become the law of the particular colony and even though the judges who were deciding the law for the company didn't care much in terms of the norms into communities anandcommunities ans of the colonial power and indeed until recently several from the british colonies it was the case still you could take appeals to the council. i think that is still true in a couple of the companies. has new zealand gotten rid of theirs? for many years many of the british commonwealth countries you could appeal into the judges to sit on the cases often have very little connection to the values of the community so i don't think you can make a strong connection between the values of the community and the ability to engage in the law but even if i'm wrong on that and believe me i could be it is hard to argue that the john roberts robot doesn't share these values

in the community. what else would you expect? he goes to the american law school come he does extremely well, he lives a life in the united states and developed some of the customs and behaves if he is engaged in them and it looks like she's a member of the community. one of the other points that is worth talking about and this is an issue raised in the paper john roberts isn't just a fine lawyer but he's one of the finest advocates to appear before the supreme court. that is to say he has a great talent of persuasion. what we learn from the history of rhetoric the classical period into today is to have the skill almost requires that you would be able to have sympathy towards your audience can understand

your audience and to sympathize with their norms and values and articulate your ideas in a way that arrested in eight. so if this guy that is supposed to be the robot is the greatest advocate of his generation that is almost going to seem to follow that he has all of the characteristics that ian and carissima declare our necessary which leads me to the west point which is really this is what the paper is important because it takes up these issues and it makes us confront them. they begin by saying in a hypothetical that this robot could pass a test on steroids. they then go on to say that in their view the test is simply a behavior account of what it means to be human or have intelligence. now, it may or may not be true

depending on your interpretation of the original paper that i want to argue that the testing on steroids that they've placed their subject and is different. it's not behavior is. it's everything they could possibly want in terms of asking whether or not the entity can participate. it talks to you and is before you and not only that but it understands itself as part of you and as being human and it participates in the forums and also develops the skills to persuasion sympathy, of rhetoric and all the things we associate to persuade. dan wrote an interesting paper that he argued to be human and ability to reason with him to come up reason with him t reasod efficiently to know the truth, but rather to persuade people into get them to cooperate.

he argues that's the reason why a lot of the recent faculties developed. if that is the case, and once again john roberts robot would seem to pass any test so the questions raised in the paper or what are the features of living in a community that we think are necessary to be called sufficiently or equivalent of human and if we are going to accept the hypothetical as true which my one advice is basically hypothetical, what does this tell about this particular entity so those are the questions. >> thank you very much. i will start with a couple of brief remarks that i hope go into the last points that you made and i'm sure we can have some points to as well. we are also conscious of the fact that this audience will

have a lot to say to eat up for questions as well so it's appropriate to spend time trying to address what jack has raised for us but needs some space for others. i guess i would start off by just maybe speaking for a moment sort of autobiographical the about carissima into our decisions how to cast a hypothetical because we realize when one divides this experiment one has to be extremely careful because the conclusions one can view right from that experiment are as weak as the experiments themselves. what we tried to do the jack booted to his people to do to build a hypothetical that stacked the deck in terms of in favor of jrr. we wanted to come as close as thewecould to make it a slam dur

jrror passing the test on steroids. we wanted to do that with the goal of still asking the question could there be some problems raised to say that even if there was no doubt about the passing of the test we still might find reason to say even if they have reached this level of the functional capacity we still might say at the end of the day it isn't adequate or not fit for playing the role of each shall purchase a high-level role in the human communities and four example as i think the goo we co see in the paper quite clearly very different from other human activities that involves rules such as for example driving cars

so that is the task we set up for ourselves and trying to do this. the idea was to say that we still even if the robot to perform functionally that while come up with reasons for thinking or at least trying to publicize the idea that it's not a slam dunk that we would just allow them to play the role of the judge in one of the reasons why fo from my own perspective i think that this is a worthwhile task is because of the emphasis has been placed on the test vote for people who know the backwards paper but also informally into this idea that reaching a certain level of functional capacity in and of itself can convince us that we ought to treat them in particular kinds of ways.

and so with that in mind a couple of the responses at the outset i want to be very clear that the way i jotted this down and maybe too quickly one of the last appeals you made alongside a skilled rhetoric is that jrr the robot understood itself to be among us and the fact that it understood itself to be among us in fact would be very interesting as we did not do in the paper to reflect on what happened if they could have animated him and that is a discussion we might want to have but the fact that jrr understood

itself being among us and was a skilled rhetorician able to behave in accordance with rules doesn't necessarily that we would understand jrr to be among the community of those that carry out these very particular artist kind of human activities. so one of the things i would question and we stacked the deck in jrr's favor those are the things that would show that he behaved in accordance with all of those rules the question is up for grabs and it is to decide for example whether he was a follower and so with that in mind i just want to say i don't

think what we were doing in our paper which is the sense i got from your remarks was to save the way that you put it was our argument revolves around a sign of assumptions about robots and we saw our project. we as not making those assumptions but rather thinking about it the other way around. what would be the element of proof required to say that jrr isee that jrris carrying out thf functions that are so important in judging and i would make one more remark and i'm sorry for taking so long to sit out the first exit point. but it's important to see the question we are asking is not a question about whether jrr is a member of the human community or a question about whether jrr

would be considered a person or some of these things that were raised in a final session of yesterday. it is a question about whether jrr code be understood to be in the position to carry out the activities of human judging. >> thank you for the fascinating questions. i don't have much else to say that i do wanbut i do want to ss important that we can see that certainly at least in the appearance you have the legal arguments being made in the reasoning being done at decisions rendered. so, we can feed back from the outset that this paper is focused on a particular practice. the practice of charging. what do we expect judges. what do they owe us and what is

the relationship? i would agree there is a relation aspect to the judging in thand the human society thate find extremely important and which is by we placed this robot on the institution that for many years has seen is incredibly important and has this long history as really being one of the defining actors in the history of a particular community so there are intuitions i am expressing in this paper that when you are confronted with the appearance and i use the acronym i'm sure we'll run some people the wrong way but when confronted with that it is having to justify those intuitions again in a few really counterfactual sense because we can't ask jrr the question and we don't ever

really relieve him of the deception that he has been laboring and so the interesting point when jack was talking was whether we would be comfortable with having a robot of that processing capacity as long as we were sure he didn't consider himself human that that would be a precondition under which we might be comfortable in investing with certain kinds of authority and what would that say. and we were not able to get into the whole concept. so it's absolutely about the deeper question what is a robot, how does it relate to us but it's also very much about the particular crisis of judging. >> can i just shortened this by asking a question? you say it isn't about whether or not a robot is human but

everyday i keep reading the paper and that's what it's exactly about. i will give you an example. so, when the jewish immigrants from eastern europe and russia around the turn of the 20th century, they start to go to law schools. and when they go to law school, many people say about them they are very clever and they are able to argue very well, but they don't really understand the anglo-american genius behind our constitution. and no matter how smart they are, they really lived and the world of eastern europe. they will never truly understand what america is and our institutions. so when brandeis is nominated for the supreme court you get some grumbling o of the sort that's in the paper which is i don't care how smart he is or how well he performs in law school, they will never get it and will never really be a part

of our community. we can't trust him with the authority of the community. now there is an important way to distinguish brandeis on the one hand from the john robert robot. one is that brandeis wasn't a human being and that john roberts reports is not a human being. but you don't want to take that answer. right backs and if you reject that is the justification and the difference between whether you accept the argument against frankfurter and brandeis, that's what i want to know. and he's not human and as long as -- we can't trust authority. with that out of the venue for face the frankfurter brandeis. >> it's been pretty clear to us since we have conceived of the idea and wanted to work on it but the biggest challenge in the papepaper and indicate in answeg this question is a way of trying to respond to it that doesn't

invoke some form of essentialism whether it is human, etc., biological etc.. and in fact, the path that we selected in the sort of inspiration was with the hope that in fact those were ways of expressing why this entity might not be said to be fit to be a judge because there is no way in which a limited robot could engage in the rule following if it didn't have the training. you make some points that are difficult for the hypothetical in fact that it went to law school.

but in any event, the aspects where our attempt to try not to deface the argument is something that i think falls from your example which is we are trying to avoid that by saying the capacity is not enough but it's also not just based on a particular cultural requirement or biological requirement and i don't know if you found it satisfying or not but i feel like i want to push back against the example that you give to say they are not the same thing. what we are trying to achieve does not drive off into that kind of argument that we would never accept. >> i have been uncomfortable with the spurting out and perhaps occasionally fudging of the essentialist line and i

agree it is absolutely fair. and i did just take a slightly different tack and i think that one of the things raised by this paper is that a lot of our choices around come eventually around super advanced robots will essentially be questions of politics. ..