>> it was an easy book to write. >>book stf tapes hundreds of author programs throughout the country. all year long. here's a look at some of the events we'll be cover oing this week. on monday journal fist john and karen have a history of awe psm in new york city. that evening we're also at the w hotel in washington, d.c. for former defense secretary robert gates talk on leadership and public an private sec porps on tuesday we're off to the jewish community center in boca raton, pht for look at the history of assassination attempts on the president. wednesday, it's back to washington for jesse's recount of the lives of slaves in the white house at busboys and poets on saturday, just a couple of miles from our studios in washington, we'll be covering two programs at politics and pros bookstore. first, magdz poundser and jim

wallace looks from a christian perspective and later that evening david will remember his decision to turn it in his brother the unabomber ted. that's a look at some of the author programs booktv will be covering this week and many of the events are open to the public. look for them to air in the future on booktv on krrks c-span 2. okay i think we're ready to go. my name is david and i direct

the science and technology innovation here, and over the past year or so we've been having a series of talks on hardly deal or not deal with conflict systems. and so when i got a call from greg, talk about his new book it was something is that was interesting to us, and i'm going to just say a few words. greg is chief economic it is commentators for "the wall street journal." but book is bullet proof. they have copies out there, if you want to buy them. when we're done and subtitles where safety is interest and the danger makes us safe. intriguing subtitle. so also greg actually concluded and spent part of your time. two months of your time actually writing the bock, actually great to have people back because we actually cut struggling and getting references and something

that pops out. great to have you come back and share what you've tone with us. so what we're going to do is have greg go through the book a little bit in terms of the primary ideas, inclusions, recommendation it is so everybody has a sort of a base to talk a little bit afterwards about the book. i think when we're done we'll make the slides available to people as well as this presentation. and so when you start, we'll take a look at the slides and then have a discussion. >> thanks very much david, and thank you. first of all i want to express my gratitude for having been my home for a couple of months. it was actually terrific, i was probably early into my research then, but by the time i spent here most productive i've spent in the two years writing the book partly because i was

surrounded by interesting people but i had a nice quiet, from this floor and made an amazing library here where you can borrow any book you wanted from the library of congress, and then we live in a digital era but nothing quite like having a book from the year ago at your fingers, and the congress is amazing , public good for somebody like me he was exploring so many disciplines, it was unparalleled. unequal resource. so thank you very much for having me. then and thank you for having me back, and so i'm that is deligho talk to you about research itch here. and it began with my exploration how we have to fight a global financial crisis and i've been fighting for 20 years and i was completely caught unaware by crisis and i thought that we had solved the problems that would lead to that sort of an event. and i get upon reflection i realized it that was exactly the

problem. but i indeed many people that tilted write about or o interview had convinced themselves that we had solved problems and not allowed risk to grow. that's how book began and i soon have found similar across all aspects of the environment and technology, and i think it has interesting for us and how the society o is notion of safety and merit, and pluses an minuses of taking risk. so to give you the beginning, from stability in the sense of safety encourage us to take more risk. now, it may not be the case and additional risk may work off, but there's a tradeoff. causes a different sort of risk and emerge somewhere else that we're not watching for us it, and later on. and try to take care of themselves with some sort of of device or practice, they may have unintended consequences that put everybody and the rest of the society at risk.

these are all ways that are safety and stability concern unattended conflict that actually achieve the opposite. the story begins a century ago in the progressive era when there were a combination of forces that came about that persuaded the americans that they could actually take more control over the economy, and environment and make ourselves better off. one eve them was that there was a growing backlash against capitalism excesses in the guilded age but also advances in scientific and social science knowledge that sort of convince us that we have the tools to manage the economy if in the environment. offered marshall principle economics in lates 1800s that was the first ?iivelg study to economics like american planning association, the american society of force, and american economic association created around that time. and wilson, first president had a ph.d., and big believer in the scientific management of

government. in 1907 there persuaded leaderse country and didn't have to put understand with it any longer. and created a private banks to find financial crises thereafter. robert owen, a senator said in 1908 it has a duty of united states to provide a means to which which shaked american public and did enormous injury shall be stopped. it was an interesting character because he had been a small community banker in oklahoma, for a number of times he had seen his father economically wiped out in the panic of 1872 and owens owned a bank in oklahoma and destroyed by pan tick of 1981 so he's speaking? personal experience. so this created a ground swell of support in congress, and although there were dweep divisions about how central bank should be set up whether bankruptcy should be in charge

or political bankruptcy should be in charge and wilson signing federal reserve act in 1913. this wasn't the only thing in the progressive era that pushed us towards a greater desire for control over our surroundings. in 1910 there were the worst fires in the history of the nation at the time. now up until 1910, most americans and settlers accepted fire as national consequence of living on frontier and use fire to clear for agriculture as indians have done before europeans came but that changed attitudes that destroyed unprecedented amount of the west of forestland, and it created a conviction not just on industry that one of those for lumber and paper and theodore roosevelt who wanted trees for forests but they have to control fire. who was a confident of teddy roosevelt and first director of u.s. forest service declared

that forest fires are holding us in the control of men and first of the human race which control the earth that lives upon. so u.s. forest service at the time only five years old made its mission at that time to press in all fires, and by 1930s they had a policy called 10 a.m. policy once fire detected it had to be under control by 10 a.m. the next day. this is an early post tear from the 1920s and symbolizes the kind of attitude that federal reserve was trying to convey to the public website that it was a mighty bull work toe save the u.s. economy from the perils of financial threats and similar posters out there from forest service of smoky bear for example that declaring that it was a duty of americans not to allow terrible waste of forest -- of wildfire to cripple the american economy. these were actually -- during world war ii as well rally civil support for the war

effort. was it ?fl well if you ask from a narrow point of view, it was successful in sense a fed did have panics and forest service did suppress many wildfires, but in the long run, it had fun intended consequences, we now -- we still have financial cries like parking lot 2010 and 2009 financial crisis and wildfires in the last deckax doe or two have been in the many decades and this is not because of one of -- a central theme in my book is is when we look at disasters not as a product of failure but as a product of success so financial cries sighs a product of the fed's success that irony of the business cycle just as fires were experiencing now are besides a warming climate. a consequence of forest service

success and fires. >> in any book one of the themes is where is philosophical approaches of the environment come from? and i attribute what began to school of engineers basically, we have this knowledge, let's use it to eliminate instability and disaster from our lives. but then i'll argue there's a competing school of people i call the you can find this in economic, and science and bottle f biology and believe they adapt. and if you can try too hard to control your environment an economy, and to eliminate a threat, you will get a cause unintend consequences that may be worse than the problem. now, in writing this book, i became fascinated by the different belief systems that both of these types of individuals have, and i could not align myself with one or the other. i like to say that i started as

an ecologist because i was suspicion of the federal reserve intervening to save us from financial crisis by 2007 i had become an engineer so impressed by that point of the job the fed have been doing limiting recessions and i ended up between the two. but i think that made me well equip to evaluate plus and minus of both approaches. thinking about the economy for a moment, for 25 years if you look at the gray line of the recession and afford that we had from here, we a lot of recessios an there wasn't a lot of accumulation of debt, but starting in 1982, we had a period that christs later called great moderation where the fed bisquely brought inflation under control. amid recessions much milder and less frequent. we have recession in 1991 and recession in twos, and those were two mildest recessions of the post war period and that essentially encouraged people to take on more debt to believe that asset prices would never go down. afterall you weren't going to have a severe crisis in the economy but that actually created the conditions for what had --

for the crisis and recession, and worst recession of the post war petered. but same thing happened in regulatory approach to finance, so although we've almost forgotten it a lot of our largest banks on brink of collapse lended to latin america and couldn't pay it back so they said to make banks safer but requiring to hold more equity capital that meant if they lost money because much a bad loan decision money would not cause them to default on their debt or unable to pay deposit and they want survive. so over this period up until crisis you actually see bank equity capital rising but this had unintended consequences when forced to have more equity they share among more shareholders so less profitable, and that meant lending opportunities migrated to others what we calls now shadow banks, company like lehman brothers and bare sterns, and investment funds, and fannie

mae and freddie mac as it become safer it was less important, and by the time that a financial crisis did have all of the lending and leverage that was built up outside of the banks where we really wrnght aware of it or aware how big and potentially dangerous it was. similar phenomenon observed in natural disasters and that the less decade we've had one after another record-breaking disaster, by hurricane katrina, hurricane reta, the earthquake in japan. just this year hurricane joaquin. this tells you that we're seeing ever more billion dollar disasters and if i would actually put total price of the disasters large spikes in the 2,000s so there's a lot of concern that this is the consequence of global warming especially in terms of flooding and hurricanes. and there's scientific consent that that a warming climate can

contribute to severe weather events, but that is not the primary reason why the class of disasters is going up. major reason they're becoming costly is because we're putting more wealth on cost where they're most vulnerable to mother nature. in fact, they're vulnerable to disaster for the same reason that they're prosperous places to have cities when they're close to water that helps your transportation link it is true for hundred it is of years and why cities like new york, amsterdam london and toque so close to the water because it's so good for transport link its d people like to live near water and temperate 37 the floodplain is where it is richer, good for agriculture. this poster or chart shows you buildup of the value of structure and hundred year floodplain of new york city. and you can see, by merely based economic development, and now going to be more costly than last big storm in new york was

in 1938, and called new england hurricane. this is a very interesting picture, and so let me walk through a little bit, in lower manhattan on a landfill that is true of a lot of coastal cities because he's become to work, and a lot of lands we claim from the sea to expand the pobilityd of putting people in such productive places. so if you look at the little red line here -- in manhattan, everything else is landfill since 1909. but that's actually the area, in superstorm sandy many 2012, you can see how closely they have each other and all that tells you is that new york city was basically inevitable that new york city would be flooded this way because this was something like quoting disaster. from the moment it was founded. one of the legends of that because new york city keeps getting wealthier and more prosperous if it is almost

inevitable that another hurricane is going to come along and be potential, even more damaging than sandy. and in a ewe near location where once or twice and every 50 years a very large hurricane. may not be intense but very wide in that damage. talking a little bit it be forest fires this is an interesting chart that tells you how much actual forest fire we've had over the last 2,000 years. this is based on things like amght of charcoal sediment found on lake bottoms and how thick the bark is on old treeses for thousands of years and what these scientist it is basically made a record of how much fire we've had, and gone up and down basically tracking how hot and dry the climate is, because we have separate records of those things, and the anomaly where we saw the climate gets steadily hotter and drier and amount of fire actually went down, and reason why because it was suppressing fire, but it is almost like there's an amount of

fuel up there weight to be burned that hasn't been burned off so when you see this year is one of the worst wildfire seasons in american history, again part of this story is warming climate but the other part of the story is we have not -- artificially suppressed control of fire that would normally come along. and properties takes away some of the dead tree matter on the forest to survive. and we actually created the condition for forest fires later on as we had with the economy. in human technology, the notion that making us give ourselves safer may make us more, and intiewty. 1975 in commerce of chicago named huntsman claimed that he had done a study and reported a find when people wore seat belts they drove faster, while the number of driver deaths went down number of pedestrian deaths

went up, there was controversial and sparked decades of effort to find a different walks of life. the upshot of a lot of this research best we can tell, and we do not lose more live it is to reckless driving as a consequence of people not wearing seat belts. but others found that the effect is live and well with antilock brakes. they find antilock brakes do not reduce number of accidents. why is that? it is not clear but people appear to dry differently in article years of antilock brakes there's a study of, one study for example, found that cars with antilock brakes involved in fewer front end collisions but fewer rear end collisions may be because drivers with antilock brakes were causing people to hit them. turns out that was actually a concern now with google cars because they're so sensitive at stopping at red light it is they get hit from behind. [laughter] the effect is in other walks of

liable. for example, in football a hard helmet introduced to football in 1940s and 1950s and reduced broken noses, but it also encouraged coaches to teach their players to use their head as a weapon to spear opponent. so what -- in the next few decades we saw a sharply rising incident final injuries like broken necks and quadriplegic when a player spears another they put pressure on the spinal column that is endureous so banned spears in most circumstances but they can't prevent from using a helmet and head as a weapon. that is a major reason why concussions remain such a problem in football. is that the helmets cannot help themselves using that head as a weapon on another player. now, financial derivatives, purpose of derivative is to a

bank on hedge fund to shift to somebody else. but they take on bigger risks. the effect appears in other places, for example, a few years ago, an airbus, air france air base disappeared in a thunderstorm and it took the french investigators years to locate wreckage on locate black boxes and find out why this airplane crashed and one of the mysteries was that as i listen to it it was clear that this airplane which was very sphition kateed and signed not to stall if the pilot takes it too steep a line a stall warning will go off until, sorry that the pilot tries to put into too steep a climb, fly by wire technology that is supposed to prevent that from happening. however, what the pilot dpght seem to rxz while he was flying this plane was that the air speed indicators had frozen up because of the weather. when that happens the wire controls are deactivated, and the plane now can stall.

as he took it up into a steep cline warning sounded in cockpit and investigators listen to the the tape on black box they can hear that and computer saying stall, stall. and the pilot fig mothered it. he can't climbing steeply. we didn't know because he didn't survive but he was convinced these airplanes weren't suppose toddle stall so that warning must have been a false warning. another sort of unintended consequences this is basically the -- belief that false belief that's what is good for individual and good for everybody you go to a movie and you want to see better so you stand up. nobody sees better and you're all uncomfortable that's sort of the textbook xeample it have composition but appears in economic and technological and environmental safety as well. i already gave you my example of antilock brakes which encourage harder brake.

financial derivatives, for example, many banks runup to financial crisis wanted to have more lending and to purchase more tub time mortgages to reduce risk it have that and plead regulators that bought insurance policies from derivatives from aig, big insurance company. but did make the bank more safe. but simply shifted risk to aig they want there was little risk in mortgages based on history how the prices and defaults. but they didn't realized that my by making it safer for banks to purchase and make these mortgage loans, banks did more of it so more risk rising in the system because banks were all believed that they -- individually had protected themselveses from the risk. not realizing that collectively it was rising in that system when had it came undone and home prices fell, aig found that it'd written all of the insurance policies that it can no longer honor because an event was happening thatted it not anticipated that the very fact that it was willing to sell that

insurance guaranteed that event that it had ensured against was going to happen. another example is antibiotics. antibiotics were dismoferred -- discovered in 1920s and miracle drug, but we know that wise use of antibiotics is not anticipated at time. it is not just natural selection but turns out that antibiotics are clever and they'll exchange bits of dna to acquire resistant properties from each other within years of penicillin and methicillin introduced, resistance in a period of hospitals in the broader community. this is an interesting chart from my old employer, the economist that basically shows the very strong positive correlation between the use of antibiotics along reside and on the west side. this is practically --

one that kills 10,000 people a year. it has 80,000 infections. you might heard of daniel fells for a while at risk of losing his foot to mrsa this is a excessive use of antibiotics which is exactly a product of the fallacy of composition belief my making myself safer, i've made everybody safe. so what should we do? well you can throw up your hands, in civilization and the dilemma we can't be more stable, we can't stop these catastrophes from coming along. but i concluded that was pretty depressing way to finish a book so i thought hard it be the lessons that we had learned and can do some good and fact of the matter is despite my preoccupation with crisis and disaster world gets better all of the time. you know, we're living longer we're more prosperous, fewer are dying from natural disasters and

fewer are dying in car accidents so we must do something right. what can we learn from all of the that? first of all, second part of my book's title is how danger can make us safe, and i lot love ths aviation because as a journalist, you love to write about plane crashes and poem who operate we write about plane crashes and not thousands of airports that land safely so i decided why do airplanes land safely? and it is astonishing how safe it is to fly. i mean, you have in massachusetts, two and a half times mrs. likely to win the mega bucks jackpot lottery than to die getting on the next flight. you're more likely to go to be president than you are to die on your next flight, and the amazing thing is this record has not been matched in other o technologies so this data shows since the 60s, the rate of fatalities in aviation has plummeted much more rapidly than an automobile. why is this?

well i actually -- when i study this i concluded that it is exactly the fact that people are so aware of flying, that industry and regulators and manufacture of aircraft can go to lengths to make it safe. extraordinary lengths, for example, no airplane is yet crashed because of an encounter with a volcanic ash cloud but there's scare is rei close calls. so when the icelandic volcano erupted in 2010 they shut down the entire north atlantic for five days. and luckily, i was somewhere else but a lot of people vacations and planned for disrupted for a very long time. but total cost of that it was $5 billion in lost economic output. that -- that tells you how far they're willing to go to prevent accidents in aviation. and we've learn from from that. there's a cool aviation that i learned about, yo is to collect anonymous reports from pilots and air traffic controllers, about the near misses and near disasters that they almost hg. and you can actually read about

these on the web because they publish them in callback. if you have phish of flying and one thrd have fear of flying, don't read this. [laughter] because this is hair raising, there's one like a guy said like -- in a congested air space worst thing you can do is turn wrong way after takeoff that's exactly what i did. why, i just don't know. [laughter] but they select reports, and they publish them to everybody, and everybody in the airlines read these and they get a little bit scared and they realize this is something i need to be aware of and system works because people are not punished for doing this. the pilots in control is called on anonymous lines, after people take it on they burn identifying information so there's no possible way this information can be used in a regulatory proceeding in it. they're aware of the dangers around them, and it's not because pilots themselves are

intrinsically more careful. commercial pilots fly their own o airplanes they take more chance hads. there's one accident in late 1980s, a pilot who was, i think flying for eastern airlines, and he had to pilot a jet from tampa to new jersey. and he lived near, an commute with his own airplane and foggy that morning. he's late actually so he attempts landing in deep fog and he had to abort and come along again, and warned visibility is down to zero and tries it and runs on a runway and collides into 2027 and dies in a fire rir explosion. few people on the comerl airline are injured but otherwise they aren't hurt. but here's the thing that rules that govern how commercial pilots wouldn't have allowed him to fly that day if he had have been flying. but my point here is that you can create an environment which

actually does limit peoples' ability to take risks. it will cost you, but it does work. another lesson i learned importance of space is that putting yourself, putting space between you ands source of danger is almost foolproof, it is safer than a levee they tend to get overtopped that won't happen if you put a park on floodplain. home and forts is safe for the fire oppression. up against the forest when the fire forest burns embers land on your roof and they're going to burn your house down. space between that makes it less likely and less urgent to suppress the fire. why flying is so safe. they call it big sky little airplane based on aircraft if you're caught in turbulence and airplane is shaking viewntly don't worry. you're miles away from the ground. you're not going to crash but have your seat belt on because your head could hit the ceiling and you'll get a skull fracture. do your homework. i'm a big believer in research we can study what works and what

had don't. requiring airplanes an lap babies we've discovered would save lives with few airplane accidents but they would drive and more likely to crash and die on the highways. motorcycle helmet laws save lives and they don't cause behavior by motorcyclists, bicycle helmet -- now they're very good idea. kids wear a helmet but if you have a law that requires to wear helmets we have evidence of the people less likely to ride their bikes so they don't get benefits of riding bicycles and drive cars that causes congestion and fewer bikes on road and less aware of their presence that makes cyclist who is do ride put them more at risk. we should not try eliminate disaster and crisis altogether because sometimes risks that bring about crisis for extra benefits. this is a chart that compares growth of thailand and india

they have a repressed financial system and therefore no financial crisis but of that economic growth. and they have a much more open economy and free willing system but mother of all financial crisis in 1997 and '98 but as you can see financial system allowed a level of risk taking that meant they grow faster than india did. so not -- so we should not aim for zero crisis society because we lose positive benefits. same is true for energy we have a fear it have nuclear meltdown thankses because it is potentially possible although highly unlikely that a nuclear meltdown could kill people. but look at the historic record people are diagnose in coal, and natural gas accidents, things like the train that derailed in quebec and killed 47 people because of an oil fire. in the case of -- this doesn't include pollution in the air so we know that hundreds, in fact, millions of people may die each year because

of sudden particle matter by oil, gas, and wood and nuclear doesn't brisk those risks with it. so people like germans and japanese overreacted to the fukushima accident because by taking on nuclear they're causing more which has all sorts of health benefits. my final lesson is that it is good to have little disasters because that trains us to -- be ready, and aware of the large risk around us, and it makes big disasters less likely. allowing cities to occasionally flood to bounce back more quickly. new york city for example is requiring large and new buildings to take electrical in basement up up to second floor so that building will not be completely knocked outside the next hurricane sandy. don't get an antibiotic every time you or your kids feel sick because that way less likely to have a resistance and that will be available to you in eivets

when you really need them. finally, about in financial sector a system that allows banks to fail but we don't have to bail them out and convince people that it is a riskless place that's my final thoughts, and david if we can have -- talk about this i guess. >> yeah. >> yeah, thank you. so one of the things that struck me when i was reading the whole thing about ecologist versus engineers is highest concentration is in the forest service. all right, all right. so -- >> i didn't know that. if if i want to find engineers so core of engineers building levees, trying to guard coastal counts. but people on forest service there's been this incredible awareness of this policy and dangers of this policy. one of the things that's now made it very difficult for them to reverse the policy is there's massive intrusions and to forest

by human settlement. >> that's absolutely right. so back to your space issue so it wasn't a matter of engineering or ecology but much on policies essentially overriding and lek culture of the agency. >> or why are houses and belief by the people who own houses that forest service will come to put fires out so that in 2012, there's these wildfires in texas and a town called i think -- near austin. so -- >> thank you. thank you. so rick perry campaigning for president actually had to suspend the campaign and become to deal with fires. but houses hadn't existed like the last time there were serious fire in that area. those houses are put there and next to woods because it is nice to live next to the woods and texas forest service puts fires out. so i like -- in 1988 yellow

stone fire. you talk about a lot of ecologists in fire service and park service. so they -- actually got rid of the 10 a.m. policy in the 60s and moved to a policy in both national forest and national parks of allowing natural fire like lightning started fires to burn when it was safe to do so. so that was a policy that was in eivet in the spring and summer of 1988 when fires began outside boundary of yellow stone but i had a very long interview with bob who was the superintendent of yellow stone at the time. he himself had a part in reintroducing natural fire prescribed fire to national park. and so ecologists on staff and he agreed they should not put fires out but let them burn. what they didn't anticipate it was first of all it was a very dry summer. and those fires u grew and they got it under control. they combine into a large complex, they burned all night instead of going down at night time. by middle of july they have to put fires. but by that time too large to control and politics came in.

and yellow stone bairvegly crown jewel of the park system so like -- the intelligent journalist and landing there at black smoke over o the park -- so a tough time and pull stops and many firefighters and people had to eventually get fire under control. but one of the worst fires in hirings. but they haven't had severe fires for a century. partly because since some park created in the army and parks suppressed with many fires. now park has come back a lot. you can see where fires were, but park has come back a lot but it creates when you see the kind of like public outrage it actually creates very strong, you know -- second thought in the part of the people whose job it is to deal request fires whether threshold suppress or let them burn. think about the risk reward.

i can put the fire out. and nobody is going to be wiser for it about you know fact that 20, 15 years it will be a fire or let it burn and something like that can be before congress and threatened with the removal of my pension, and there was a study that was done after yellow stone, that forest service temporarily suspend natural fire policy and suppress all fires, and study found that -- more homes went up next to the forest as a result of that. therefore making it even harder to put the policy later on. but i think you've constantly can't get override on policy an general public perception should we allow this or o shouldn't we? we have the same problem with floods by the way. natural flood insurance program we've tried to raise premiums for people or pay for risk of living there and it is a hard politically to do that. >> so if this is controlling boundaries, and fact that these systems have -- very different kinds of fluid

boundaries. >> a financial crisis do you think if you go back to the crisis one of the things that struck me was one of the states that made it through somewhat it was north dakota which was the only state that had a state bank which was actually set up in i think 1919. progressive era. but they actually had a state bank that they separated commercial from investment. and that was interesting buffer period that was built between those two parts, obviously, showed graphic where banks suffered. do you think that would be useful to actually move state class -- >> a lot of oil o which i'm sure one reason that housing prices and i'm sure that was relevant. but i actually think that bringing back last misdiagnosed with the problem. now, remember we've been brothers for investment banks and not products of the repeal of glass eagle. the issue wasn't that banks u

could be u secure dealer what the deal they allowed by a sheer size of the bank and shatd doe banks like lehman and country wide financial. like quest and new century and these shadow banks had essentially prospered from fact that so many regulations imposed on regular banks. thectd t they could do things that regular banks could not do. we thought that was a good thing because we thought from history it was banks that get into trouble so a good thing to move somewhere else. but once shadow banks became big and more leverage than commercial banks, they became biggest threat to the economy. and fact most was crisis was about to collapse shatd shadow bank, so correct listens from this is not to keep security dealers or banks separate but that we should not allow either securities dealer or bank get to large to bring down financial system unless it's bailed out and has more hazard problem.

so i believe that we've done a couple of things that help a lot. first of all we require much higher l level of capital from commercial banks, in fact, suspended that capital levels 85% of banks crisis would not have happened. other thing is in this country where we have so many large financial institutions like banks but if you act like a bank, we're going to regulate you like a bank so ge capital large financial on what is in intensive purposes of the bank. you have to submit to federal reserve oversight and they discovered it was so owner it wasn't holding business and solds it off. so i think that only thing that you can do is now there's a mechanism in place in the law that -- forces a large failing institution through a bankruptcy like procedure to protect them like depositors and shareholders get wiped out and knowledge of that hasn't gotten tested yet. knowledge of that should force

people to be more aware of that risk. and frankly we food to see it twails used before it has benefits and hope that it works so we don't have a financial crisis in the process. >> i think one of the issues you brought up here which is i think freeman that is the most dangerous technology is one that is never allowed to fail and it fails. >> there's a line -- a presystem becomes mute. >> so i think the issue that so going to have to you certainly if you look at airlines they went through a lot of failure technically to get a good safe merle plane up u. pilots spent enormous numbers of hour it is in flight simulators where they get to sail. how, how you create a system that allows whatever it is, bank, ecologists they fail in a way that's not embarrassing because i think that's the other piece is just this kind of way of political embarrassment.

>> that's a tough one with natural sense first of all it's owning u up to your mistake not a human -- human beings we don't do that, plus we have essentially a risk rewards system that punishes people who make mistakes so i think aviation safety reporting system which is nasa, is interesting template but i'll tell you for example, a big problem in health care is medical errors so they have reported systems in medical context and had trouble doing it and couple of reasons why. first of all there are many types of medical errors. second is it didn't happen. second of all, doctors in hospital people actually know cost of medical errors but seldom rise to level of gravity it is worth effort to root them all out. for example, tried to create systems to record medical eras too many different areas to record. a lot of hassle.

and finally a whole they think, is that there isn't a legal context in hospital setting to protect people from being sued or fired for it. so getting around that problem is an issue. i learned -- the railroad system for example, you could argue that they could use something like this problem like amtrak derailment that ought to be the environment that lends itself to this type of instant reporting system. >> that's an interesting model and i don't know how transferable it is. i think part of it was taking outside of averruation, yeah. putting in nasa. >> you're right, in fact, setting it up they got together to talk about it, they concluded that it could not be part of their regulator because it would discourage people from stepping forward. so the -- srs has a power to advise people

basically like paul revering and warn people but doesn't have power to force anyone to take any action. that ironically is part of the beauty of it. that people feel more free -- talking to them because they don't feel they're enormous need to consequences to doing so. >> so let's -- take some questions. just raise your hand get you a microphone because we're videotaping this and let us know who you are and where you're from. all the way in the back there. competitive enterprise institutes with the great statement greatest risk is attempt to avoid all risk. but i wonder at what point you touched upon -- over the last century, century and a half there's been a massive shift of risk management from private sector localized only no and pay for your own mistakes to political, federal

reserve you mentioned whole series of those things to what extent is that possibly a major door i don't know trends for these safety trends, are they getting better throughout history? but better before we publicize risk management function because it seems now major political response to any disaster is to expand the government of the socialization of risk which seems to me one of the most dangerous things we can do. >> well, this is a complicated question because -- you're absolutely right is that as a society, we have given the government more and more responsibility for the containment of risk. if that's a good or bad thing it is an interesting philosophical question because if you sort of take the attitude, well, you know, freedom from fear line if from franklin roosevelt where we basically said it is part of the job of the government to save people from the -- from are the hoards of

destitution and disaster, and when signed social security into law he said we can nots eliminate risk but take worgs risk away. that seems to be a choice that we have made as a society that is a choice that most societies have made. it seems to be that, you know, economics we talk about like -- goods that we buy when we become wart and we give up things like freedom and pay more higher insurance premiums and accept a bit of moral hazard because we think that's the price for safer, and a lot of this would have happened in government, for example, sam is research on seat belt, seat belts did find after instruction of the 60s who dp find a steady decline and fatalities but what had they noted was that that deny had been in place before the laws cam along. so it is probably a case that while federal motor vehicle standards did contribute to that

decline fatalities most would have happened because people wanted more safety as it became more. seat belts were introduced as a originally at the industry's own initiative. they were not compelled with antilock brakes, same with electronic stability control. a lot of devices that keep us safe in cars today were not forced on car makers but introduce early on as options not a lot of them work but a lot of them did. this is a greater witness of catastrophic risk. i mean, kale risk, so 9/11 essentially until 9/11, a terrorism risk was essentially rider on most property and casualty insurance policies. and the insurance company is bisquely tonight charge for it because they have no experience with it and didn't charge for it. everyone in comes along and cause tens of billions of dollars and ensure losses and tragic loss of life and all sorts eve other deep traumatic -- consequences for us as a society.

general reid sustained a lot of losses and later on warren buffett reflected that general reid made a cardinal area in my view that is they based their willingness to sell insurance on experience rather than exposure. they said there are some risks thebe that no insurance company can possibly survive and all of these federal government can assume those risks. and if the federal government doesn't assume those risks, then the -- some commerce will go into a halt because insurance isn't available. so we see federal government as ensure of last resort and terrorism risk. in many states in california, the state and ensure of last resort in okay earthquake and in florida last of hurricane risk so i don't have a fundamental problem with that rule because risks are eninsurable and overcharges for them because render insolvent but it is a low rate so basically subsidizes the activity so floridians pay too

little for their hurricane insurance and charge too little for flood insurance policies so not only do we -- do we have this inherent risk people will live on floodplains because it's prosperous to do so, but basically subsidizing them to do so. so i think if we as a society decided that federal government is only actor that can assume smef these risks then we have to at a minimum do what they are properly paid for taking those risks unless there's a stated social policy goal why the frofort or o the taxpayer is going to pay for some of that insurance with the social security. >> right there. hanson -- couple of things, one is, you know, hearing human psychology,

more than anything else, anonymous reporting if became with any reports where people can -- report anonymously and not any problem in doing so. the air france 447 problem arose because two out of the three air speed indicators both made by fails known to have a freezing problem and supposed to be replaced according to a french directorrive when that happened, the autopilot jumped off in the copilot -- pilot wasn't in the cockpit. copilot should have realized that he is now flying the plane and did not. so we have a psychological problem in which reliance on some safety mechanism such ass insurance of last resort makes people either neglect the fact that they're u now at risk or o fail to take action so one thing and interesting in all of this

is how do you address psychological props that runs gamut of what you're getting at to act to reduce it. so the first thing is that we may never be able to get rid of all of them. that is not a bad thing. one of the things we try to make people safer is to feel better and not a pleasant feeling to feel line you're about to die every minute of the day, and there's an interesting stud done in israel, they asked people are you afraid of attack by iran by unconventional weapons and people were atrade and felt bad it be. and then they ask do you own a gas mask? they said orveg we own a gas mask in israel everybody has one. handed out for free by government. they asked both the same question and they expect a lot less anxiety about possible of attack by iraq so the knowledge that there's something there to keep you safe makes you feel better. in the oregon medical experiment

to extend health insurance for flood insurance were not qualified for medicaid. they discovered to their dismay people were not healthier as a result. but they found one important difference. a lot more incidents of depression than what we speculate happens with millions of health insurance and catastrophic illness ruining your life. i'm not sure we should make people be afraid all of the time. and payments line by jordan that we can make people drive very safely if we just attach a sharp knife blade sticking out from the steering wheel at them all of the time. [laughter] that's really not a very fun way to drive your car. that's first thing. but second thing is i think there's a way to institutionalize aviation thing and be scared. be aware of your surroundings. so after the air france accident, the air flight 447 accident there's much more emphasis on excessive trust in technology, there's an awareness

of pilots almost never fly the plane themselves in difficult conditions. when something like conditions you described happen they respond the same way. so part of pilot training is prevention training. actually putting them in simulators, trying to like simulate not having -- the devices they're supposed to have. so i think that's part of it. i was on vacation actually on my honeymoon in france, in about 20 years ago. i was driving along the freeway and i remember a sign that i guess french highway department put up there that said -- [inaudible] i've asked my french friends what does this mean? they said it means speed makes everything worse. darn that's rights. you know, if you're driving 60, 70 miles per hour then we know from physics that force of the collision will be higher if you crash at 60 miles per hour. if you try to maintain space arounds yourself that means less when you're traveling at 70 than at 55. so that little reminder cools into my head all of the time when i notice i'm above speed

limit. so reminding your kids always be aware of cars when you're cross the street. soty call this like being a little bit scared not but intelligently scared and reminding yourself these things that you can do basic things that are remarkably effective at removing some of the most serious risks from our lives. >> some of this has to do you talk a lot about spatial space. but some of it has to do with temporal space offloading more decisions on to high speed algorithms so some of it high speed trading or what you saw in the air france flight. and what you might see inning if a vehicle, so you have this i think incredible compression of time because it goes beyond our reaction times. >> an interesting point. i did not study that particular aspect of space but intriguing one. but relate it does ideas interconnectedness and complex is that -- you know, a failure for example some mentioned what tells --

you mentioned noble accident-trying to test the safety system. so complex systems are so interconnected that often small things cause a series of failures, and so one of the things safety experts try to do is reduce interconnectedness is you don't get that domino effect and one thing they've tried to do is impose where they investigate some of institutions they have 6,000 legal subsidiary and that's cayman islands and somebody else and nobody knew who was going to be like responsible if like one of those contracts went bad so they're imposing so-called living will requirement on large banks so they have to explain how they would be taken through bankruptcy and how these would be shrunk. interestingly banks are discovering that a lot of these are, in fact, unnecessary and

themselveses are pursuing the structure hopefully that will reduce some of these chain reaction type failures that, you know, we've talked about. >> one final question -- >> okay. >> part of a large literature i know well, surprising to me fdr when had federal deposit insurance was introduced was clear legislation. he said it would make banks act irresponsibly but never revisit this connection of the risk system. we -- have disconnect it. we expanded it from 2000 to essentially deposit today, and we added on all of the insurance for federal and fannie and freddie and other things. effectively repromoted moral hazard program that insurance

system was supposed to resolve. wouldn't it be -- surprising we've never revisited any of that. tried for flood insurance. ..

>> couldn't microbes that were deemed too risky and that is what we call the shadow banks came about. in the 1990's as we were talking about as restrictions tightened on the banks, we saw the creation of a lot of financial company lenders, like country wide and what their model was that they would originate the mortgage, they would put it in a security and sell that to private investors and everybody said, this is great, this is really good. this is not only protecting banks because they're not the ones making the mortgages, it's actually defusing risk in the financial system. instead of one bank e