A (0:00)

Thank you very much for coming. Welcome to an LSE public event. Today we have Professor Ahmar Bideh who's going to be talking about his new book, Call for Judgment, Sensible Finance for a Dynamic Economy, which I think is a provocative or at least a thought provoking way of looking at the financial institutions risks embedded in them and the way those risks were managed and actually mismanaged in the last few decades, culminating in what we all now call the crisis.

B (0:35)

So without further ado, terrific Amar, thank you very much. Welcome to this cozy room. I'm going to speak really quickly because I'm told that somebody's going to hit an eject button and we're all going to be tossed out at 6:30. So I'll dispense with the early jokes and everything. So yeah, the obligatory advertisement for the book. So this is the book that is I believe, available for sale outside. And this is a look inside this little lecture. So let me start out by framing this in terms of two misinterpretations of the financial crisis. There's one misinterpretation which is too broad and it's offered by the likes of, of Sarkozy, which basically says the whole system of capitalism, particularly US Anglo capitalism, is broken and we need to fix this root and branch. And then there is the too narrow interpretation of this crisis which is offered usually by insiders in finance. And they said, yes, we had a little bit of a problem in 2008, but the basic structure of the financial system is fine. All we need to do is to make sure that regulation catches up with these great innovations that we have produced over the last 20 or 30 years. I argue in my book that both interpretations are wrong, that the fundamental structures of the real economy, at least in the United States, are fairly sound, that we have developed through a process of, through over the last 100 years or so. What I describe as an inclusive system of innovation which has delivered the goods, which has produced unprecedented prosperity more than anyone could have imagined 100 years ago. But that the financial system is severely flawed. That it's not a few things here and there that we have developed a financial system that undermines the real economy, that doesn't support it and is also inherently unstable. And that these defects of the financial system are not some things which suddenly emerged after 2000 or 2002. It isn't that investment bankers suddenly became greedy or some really bad instruments were invented in 2002. There's been a long, slow, creeping build up to this collapse. It derives in part from financial theory, and it derives from misregulation. There's a view that the financial system is over regulated. There's another view which says financial system under regulated. I argue that we've had a misregulated financial system. If I had to sort of summarize my central idea in one slide, this would be it. So I would argue that our economy delivers the goods because it's venturesome, that it's comprehensively venturesome. And it's comprehensively venturesome because we decentralize judgment on the one hand, and we coordinate this decentralized judgment not just through prices, but through a variety of other mechanisms, such as dialogue and relationships. And then, of course, we tie responsibility to decentralization, otherwise the thing doesn't work. I argue that over the last 20 or 30 years, Modern Finance has moved in exactly the opposite direction, that it's become progressively centralized and concentrated, that we have replaced judgment with mechanized models, that we have dispensed with communication. And almost as the inevitable result of concentration, we have untied responsibility with the right to make decisions. So the three things that I will talk about in this talk, I'll spend most of my time talking about how modern finance undermines dynamism. Here I will talk about what I think of as some of the crucial features of an innovative economy. I will then draw from these features some implications for what a good financial system ought to look like. And then I will describe what I think of as a dangerous and dysfunctional divergence between the financial system and the real world. I will very briefly discuss what made finance pathological. That's about two thirds of my book, but that would have you here for hours. And I want to leave something for you to want to read afterwards. And then I will spend some time offering you what I think of as a radical and retro proposal. So let's start about thinking about the real economy and the kind of innovation that it entails. There's a view which goes back to Schumpeter and which is carried through to modern departments of science and technology, which is a very elitist view of innovation. It takes the point of view that we have a great entrepreneur, we have a great innovator, that guy or gal does his stuff, and the rest of us simply enjoy the fruits of what that person produces. The modern version of this. We sort of deify Silicon Valley, we deify research and research and development. And I think that's a fundamental mischaracterization of the kind of innovation that underpins widespread prosperity. Widespread prosperity, as I've argued in my last book requires widespread productivity improvements. You cannot have a prosperous society based on the contributions of 3 or 4% of the workforce. We have to include most of the workforce. This means that we not only need to develop great new innovations, we need an effective system for the use of these innovations. This in turn requires not just science and technology and advances in science and technology. It requires a range of advances. It requires advances in marketing, it requires advances in sales. It requires advances in organization. It requires innovations by the users of of technologies. This is a system which is not elitist. It is a system in which many people contribute and many people benefit from. And then the question arises, how is this thing organized? I argue that the organization of the system has at least four important features. It's decentralized, it's case by case, and it's forward looking and it involves judgment. Each of these four things are important. Decentralization simply means that it's widespread and there are lots of people who have the right and the opportunity to make decisions which are innovative. It's case by case in the sense that one may rely on precedent, but one actually looks at the facts of each case in deciding what to do. It's forward looking in the sense that it does not rely. One thinks about precedents in history, but one imagines things that have not yet occurred in order to innovate. And it's fundamentally judgment. It isn't a mathematical calculation. Now, the classic article arguing for Decentralization was the 1945 article by Friedrich Hayek, which was aimed principally at central planning, but it is germane even today. And the interesting thing about the article is that there is not a word in there about the lack of intelligence or the lack of incentives of the central planner. So even if Hayek implicitly argues, even if the central planner has perfectly aligned incentives, that central planner will not be able to make good decisions. Because you need a great range of facts, on the spot facts which only the on the spot decision maker has access to in order to respond optimally to an ever changing economy. The only facts that can be there are only a few highly abstracted facts can be communicated to a central planner. And decisions made based on the basis of just these few abstracted facts tend to be wrong. So we we want the farmer to make decisions about how to plant, what seeds to use, how much fertilizer to use, when to harvest, etc. Etc. Taking relying on the farmer's knowledge of the soil, of the market that the farmer is confronted with. The interesting thing about Hayek's piece. Another interesting thing, other than the fact that he does not mention the incentives of the central planner, is that it says nothing about innovation, that the problem that Hayek talks about is responding to changes. But if you now introduce into the system the problem of innovation, the Hayek's case for decentralization becomes stronger, not weaker. Because innovation requires imaginative forward looking choices. And these forward looking choices not only require knowledge of the facts on the ground, which only the under spot person has, it frequently requires huntresses, it involves sort of, I think perhaps if I did this, such and such would work and these hunches would be virtually impossible to communicate to a central planner. Furthermore, to the degree that these innovations require an iterative process, you'd be very hard put to communicate these changes as you went along to the central planner. So the argument for letting individuals decide is even stronger again because. So it is best if we have a large number of innovators who decide what initiatives they want to pursue, and we have a large number of consumers at the other end who choose, rather than a panel which picks. I should say that in a modern economy this decentralization is not absolute. It is limited by economies of scale that we don't choose that. There are only so many shoe sizes that get produced. People who work in a shoe factory do not have the opportunity to figure out what shoe sizes they want, because if everybody did that, you would not get these economies of scale. And they're also, as technology advances, you get more and more negative externalities that need to be controlled. So in a sense you have a paradox, that it's the decentralization of initiative that leads to the advances of technology. And it is the same advances of technology which then demand rules to control the negative externalities and to realize the economies of scale. So in a sense you can imagine a very primitive Robinson Crusoe who has all the freedom in the world, but really cannot do much except knock off coconuts. We have the freedom to drive at 200 miles per hour because we have automobiles. But if you drove at 200 miles per hour, this would kill other people. So it's this interesting balance between decentralization and control that we live with. But as a rule, I think one could say that our system has prospered because to a very large degree, much more so than our forefathers, more and more people have the right to and the opportunity to make these imaginative judgments about how things proceed. So then the question is, how is this stuff coordinated? The classic answer in Hayek's article is of course, prices and we all love prices, and prices are fantastic for coordinating decentralized activity. But common observations suggest that this is far from the only mechanism that we rely on, particularly in a technologically dynamic society. So the engineers who are working on developing this microprocessor, their activities are coordinated by formal organizations. There's a committee which decides, you, engineer, will work on this piece of the microprocessor. You will design to these specifications, because unless you did that, these independent actions of the engineers would never come together to produce a microprocessor that worked. We rely to a very great degree on dialogue. It is not the case outside of economics textbooks that one can coordinate by simply putting up price and quantity bots. It is particularly not the case in an economy where technologies are changing, where products are changing. So if we produced exactly produced and consumed exactly the same things over and over again, then perhaps we could dispense with dialogue and we could just talk in numbers. But because we are constantly doing stuff which is new, we need to have conversations. You, the innovator, needs to have a conversation with me to figure out what my problem is that you're going to solve. Having figured out that you've solved this problem, you then need to persuade me that you have solved the problem. Then you need to understand to what degree you've fallen short, and so on. So it's impossible to conceive of a modern economy without an enormous amount of dialogue taking place through a variety of. Through a variety of mechanisms. And again, the proportion of modern commerce that actually passes through an anonymous market, or nearly anonymous market, is fairly small. In fact, quite trivial. And perhaps again, one could imagine a primitive society where nothing changes, where stuff is transacted principally through without relationships. But in almost everything that we do, we rely on relationships to economize and dialogue to make sure that we understand what it is we're doing. We rely on relationships to make adjustments, because whatever contract we may have entered into at the outset, we rarely can proceed through to the end without some trial and error. And then, of course, I hardly need belabor this point, that if you're going to have this decentralized system, we need to tie the decentralization to real responsibility. So I would argue then, if one thinks about what a good financial system should do, it should nurture and mirror a dynamic real economy. The and this may seem completely trivial, but it was only three years ago that a blue panel driven a blue ribbon panel convened by the Treasury Secretary produced a report that said that the American financial system was fantastic because it produced A large number of very high paying jobs. And if only the rest of the economy produced this large number of high paying jobs today, I think most people would be skeptical about the idea that the worth of a financial system is that it produces, makes a lot of investment bankers rich. We do not think about the contribution of prison guards in terms of we have lots of prison guards, we think about what they do to public safety. So if you take that for granted that what we really want is a financial system that nurtures real economy innovation, I would argue that the same kinds of characteristics that you see in the real economy ought to be reflected in the financial system. And this isn't merely because I like symmetry, because we like symmetry. There are good fundamental reasons for why this is so. So why is it important to have on the spot financiers? It is because the demand for finances is generated by on the spot people in the real economy making judgments about why they need money. So if I am thinking of buying a house, I'm making in the hierarchy sense, a judgment. I am wandering around neighborhoods, I'm sort of seeing whether the neighborhood is upgrading or deteriorating. I'm looking at the history of prices. I'm making a guess as to whether prices will hold or they collapse. I look at my own job. I ask whether it's secure, to what degree it is secure, or will I be able to hold that mortgage or not. And therefore, for a prudent banker to make me that loan, that banker also needs to understand the same facts on the ground that have gone into my decision. Likewise, if I'm a small businessman or person looking for working capital loan, I'm making a judgment about the prospects about of my business. I'm making a judgment about my customers, about my markets, and so on and so forth. And on that basis I am asking for a loan. And therefore the only sensible way to make that loan again is to share with me those facts on the ground. To go the other way. To imagine that you can make these loans sensibly based on five or six variables that you can throw into a model is like believing that you can have great central planners who can make great central plans based on five or six variables which were tossed up to Moscow. Now, in order for these judgments to take place, you also need dialogue. The banker needs to have an extensive conversation with the person who is demanding finance to the degree that most finance is extended not for overnight periods, but is extended for, for months, if not years. There's a pretty good chance that whatever contract you signed at the outset will become obsolete. That if I take a business loan, it is possible that my business will grow faster than I expected, in which case I'll bump up into a borrowing limit or I may run into a hiccup and I may violate a covenant. At that point, the banker has to make a decision about what to do. And that decision can only be sensibly made if there has been an ongoing relationship. If I borrowed money to buy a house and I fell behind on my payments for three months, again, the banker has to make a judgment about the prospect that I am a truthful, honest fellow and I haven't just sort of, I'm not messing around, I'm not committing fraud, that I'm diligent about where to get money from. And that too requires a relationship. And then again, to the degree that most finance is not conducted anymore by individual money lenders, that financiers are making judgments on the basis of other people, the depositors or the stockholders, there has to be some kind of tie between the decisions that the financier makes and what happens. It can never be perfect, of course, but at least there has to be a reasonably tough time. And I argue that there are certainly sectors of the economy where this kind of boots on the ground judgment based, dialogue based finance still continues. So we still have small business loans made by individual bankers. We still have venture capital. Venture capitalists who finance the most advanced technologies in the world, still use the most primitive methods for figuring out how to invest in people. They actually go talk to people. They don't run a model, they sit on people's boards. But I argue that the big growth in finance that has taken place over the last 20 or 30 years is not in this old fashioned area of finance. It's that we have seen a continuing and massive displacement of good finance by pathological finance, which is highly centralized, concentrated, which relies on mechanistic models, which involves no dialogue and relationships, and which has no responsibility for bad outcomes. Let me focus attention on two specific pathologies. And these are pathologies involving mass produced judgment. The mass produced judgment free explosion of asset backed securities. Now it is always the case that because of economies of scale in the real economy, there was some degree of necessary centralization in finance as well. So if you wanted to finance a railroad, you could not finance a railroad by going to your local banker. So you had to issue a big slug of bonds. And for these big slug of bonds to be issued, you had to delegate to some degree the judgment for whether these bonds were sound or not to an Underwriter and possibly a ratings agency. But here the centralization was derived from the, from the economies of scale in the real economy. And the centralization did not dispense with judgment, it did not dispense with dialogue. So the underwriter actually came and looked at your books, looked at your traffic projections, had discussions with you, the rating agency might actually have a negotiation with you and say, if you throw in this covenant, then we'll give you a higher rating or a low rating. What we've seen again over the last 20 or 30 years is the securitization of assets which could easily be financed in this decentralized way. There is no reason why a local banker cannot make a housing loan. There is no reason why a local banker cannot make a housing loan. There's no reason why a local banker cannot make a credit card loan. So allegedly the advantages of this kind of asset backed finance lie not in any economies of scale of the activity being financed, but in the activity of financing itself. So allegedly we have created models which dispense with the labor intensive process of exercising judgment and have replaced this with precisely the same kind of thing that brought the Soviet Union to grief, which is reliance on a small number of variables which do not take into account the facts on the ground. We have similarly seen, and this hardly again needs to be told, we have similarly seen a massive explosion of complex derivatives. So till about the 1980s pretty much there were no complex OTC based derivatives. There were contract based bond instruments and currency instruments. The thing really got started in 1980. It grew to about $100 trillion in 2000 and I think 6 or $800 trillion by 2006 and 2008. None of this would have been possible without massive mechanization. Each of these contracts, as yay think it, is incredibly complicated. And yet we can, a trader can do a trade in the flash of an eye by pressing a button. In come a bunch of variables and outcomes. The other stuff, no judgment needs to be exercised, no facts on the ground need to be known. You need to know nothing about nothing except a small number of variables which came out of nowhere. And this mechanization again in turn has facilitated the concentration of finance in, into a few mega firms. So as long as finance was a labor intensive activity, the span of control problems meant that if you had 100 bankers and they were all sort of exercising judgment, the only way you could supervise these bankers was to second guess their judgment. And therefore the number of bankers that you could have working for you was fairly small. And it also limited the domain in which you could operate, allegedly. Because we have now mechanized this process and we can do it by the numbers. Just as the chairman of intel can manage a vast range of microprocessor producing units, allegedly Jamie Dimon et al can oversee a vast empire of these complicated things. In fact, what we really see is ineffectual top down management. These people have not a clue, I mean a great number of illegal, I mean JP Morgan, bank of America have recently been accused of, and it's probably right, of robo repossession of mortgages, which is the law says every person who's signing a foreclosure document needs to be aware, familiar with the facts. They just, they're so swamped with the number of foreclosures that they're off to the races. Now does Jamie Dimon personally tell these people to do this? No. But can Jamie Dimon possibly have any control over all the stuff that goes on in his massive empire? Absolutely not. Likewise, we've lost any regulatory oversight. Time was that the way you examined a bank was you went into the bank and asked for the loan files and you examined every file, every loan file, loan file by file, by file and see whether it was properly done or not. Now an examiner walks into the likes of a JP Morgan Chase or a Goldman Sachs and what does he see? He sees a giant computer with terabytes and terabytes of data. How on earth can this stuff be properly examined? And how on earth can it be sensibly regulated? The consequences in the establishment's view, this is like the Model T. This is like the assembly line. We have more cheaper credit. I mean just as we made cars affordable, this is simply making car loans affordable. This is a quote from Raghu Rajan in an allegedly critical article of the financial crisis. And Raghu says financial innovations have produced beneficial real effects. Increased lending, entrepreneurship and growth rates of GDP while reducing the cost of financial transactions. It is absolutely true that the cost of financial transactions have been reduced. The evidence of all the other stuff is at a minimal flimsy. More realistically, it doesn't exist. Allegedly we have better risk management. This is Donald cone, vice chairman of the Federal Reserve, claiming the derivatives enable risk and return to be divided and priced to better meet the needs of borrowers and lenders. Nice. Ben Bernanke 2006 Banking organizations of all sizes have made substantial strides over the past two decades in their ability to measure and manage risks. Concepts such as duration, convexity and option adjusted spreads provide better risk returns to stockholders and greater resilience of the banking sector system two years before, the thing just blows up. This is the more resilient banking system, in my view. There is a very serious downside to this robotic decentralization. First of all, simple Hayek and analysis suggests there's a massive misallocation of capital. When you eliminate case specific facts, you will inevitably give money to people who shouldn't get it, and you won't give money who should get it. As far as the model is concerned, income is income is income. It doesn't matter whether the income is of a school teacher who has a job for life, or whether the income is that of an automobile plant worker whose plant is announced to be closed tomorrow. The model doesn't see that. And you know, the model doesn't see that the person who came to apply for a loan was drunk. As long as the stuff is full, it's built up. This also leads to sort of sector wide misallocation of capital, I would argue. Think of the issue of growth from the point of view of the CEO of a large bank. If I want to grow my small lending portfolio, then I have to go through this awful process of hiring lots of bankers. Then I have to put them through a two year training program and then they have to sort of go around looking for good clients and on and on and on. Instead of which, I can crank up this mortgage producing machine because I don't need any judgment on the part of the people who are generating these mortgages. All they have to do is to get people to fill out these forms. The data gets shipped out in New York and off comes the answer. You can really grow really rapidly and you can get economies of scale, very high returns on equity. The attractions of building a huge derivatives book are irresistible. Again, you don't need to do much. You hire 10 traders, soon you can build a trillion. You can add a trillion here and a trillion there. And in good times the stuff makes really high returns. Once every 10 years it collapses. But in the meantime, you took a nice piece of the action. Why not? And what this will inevitably mean is that those sectors of the economy, which even today cannot be easily mechanized, will be deprived of credit. And the attention and the money of the banks will go to those sectors where mechanization is easy. So we'll have a huge boom in housing lending and we will have niggardly increases in lending to small businesses. It's also inherently unstable. Of course. When people make judgments, they make mistakes. And this is indeed why we decentralize stuff, is because These mistakes are independent, unless they're sort of a social pathology. And there's a widespread mania, the mistakes of the individual lending officer will be uncorrelated with other people's mistakes. Whereas if you're going to land on a model and basically everybody's going to lend more or less the same model, using more or less the same historical data, if that model is wrong, it's going to bring the system crashing down. It also I believe it would be hard to, or at least I don't know anybody who's done it. But I have a very strong belief that this, the idea that securitization, which is supposed to be risk reducing, may not actually be reducing risks. So it used to be believed that housing markets in the United States were completely local. And so housing in Boston was uncorrelated with housing in Chicago. And then people said, aha, wouldn't it be nice if a bank, instead of merely holding loans in Boston, could sell off these loans and instead hold on its books, a quote unquote diversified portfolio of nationally diversified portfolio of mortgages. Well, what happens? One thing I believe what happens is because you're going to use exactly the same model across all markets, there will be a natural pull to increase correlations. Plus, once you begin to think of this as an asset class, prices of asset classes tend to move in unison. So as long as you have individuals making individual judgments about stocks, the correlations of stock prices will be lower than when people begin to think of stocks as an asset class, which they buy and sell as an index. You've seen this in 2008 in Commodities as well. So this whole diversification business, which is to supposed supposedly risk reducing, I suspect is actually risk increasing. And finally I'd say this, and this is probably worst of all, hardest to measure, but the greatest threat to our long term prosperity is that it jeopardizes the legitimacy of capitalism. We do not begrudge the founders of Google that they have made $10 billion each, because we recognize, whether we calculate it or not, that if you add up the value that all of us, hundreds of millions of us, have derived from Google, you add up that economic value that swamps the $20 billion that the founders of Google made. And this is why we may be a little bit jealous and so forth, but at least in the United States, we think this is okay. Once you begin to get a game where you think no value has been created for society, at least value with the right sign attached to it, and where this wealth has been accumulated based on government subsidized loans. We then fail to distinguish between wealth accumulation that is socially beneficial and wealth accumulation that is not. And then we sort of say the whole system of capitalism is bad. How did we get to this? And we have one of the world's experts in this room sitting in this room. So it's been enabled by theories which ignore the kind of multifaceted, unquantifiable uncertainties that we all face. Each of us at every minute is making risky decisions. You took a risk that you would come here and you find this a waste of time. I bet you nobody calculated probabilities. We order things off a menu. Nobody calculates probabilities. I would suggest that for Most of you, 99%, if not more of the risky decisions that you take are not based on quantifiable probabilities. And this is no accident. It's because the kinds of situations that you're dealing with involve night and uncertainty. These are one off decisions, each of them. They're mundane, but they're one off. And therefore it makes no sense to do this. However, to turn all risks into one or two measures of quantifiable risk really makes it easy to mechanize stuff. And therefore we mechanize stuff. We go a little bit further. We assume there are no differences of opinion. Then we go even further. We assume that the world is a state, that the real world is a stationary place, that the only changes that are taking place are according to some known probability distribution, when in fact, if you really believe in a comprehensively dynamic world, tomorrow is different from yesterday and day after will be different from tomorrow. If we simply cannot rely on theories whose implementation requires that we rely on historical facts, I also argue at some length that what we've had is misregulation. I said earlier in my talk that many new technologies demand more regulation, but the degree to which they demand new regulation varies. So, for instance, personal computers require very little regulation. All you need to do is to submit your personal computer to the fcc. The FCC checks it for whether it interferes with radio transmission, and if not, you're fine. That's fairly low level regulation. In contrast, you could not imagine automobiles functioning without extensive regulation of traffic and of safety. And I argue in my book that securities laws ought to be a little bit like the regulation of computers. There really is no compelling need for strong securities laws. But in fact, what we've seen over the last 20 or 30 years is just securities laws that have become progressively tighter. History suggests that banking is an activity which you simply cannot run without. Tight and close regulation. And the United States had banking regulation at a time when virtually no other form of commerce was regulated. And with good reason. But in fact what we have seen over the last 30 years is that banking regulations have been weakened. But this is just sort of like a somebody else get look at it in the book if you wish. So what do we do now? The establishment's diagnosis, like I said, is regulation fell behind Obama. Old institutions cannot adequately oversee new institutions. Ben Bernanke says it would be a mistake to think that there's anything wrong with financial innovation continues to be a tool for making our financial system more efficient as long as our regulators are more alert to the risks, which means that they were asleep or what. And Tony Blair in his book, after having described at great length why regime change was a good thing, tells us that credit default swaps are not so bad either. So the insider cure is to modernize, which is crank it all up. So we have the dot Frank act. It's 2,300 pages long. It does all this kind of stuff. It's this Financial Stability Oversight Council. We have a council of people who are going to monitor systemic risks. Well, wasn't the Fed supposed to monitor sort of excesses in the economy and if they missed the housing bubble, are we going to really have any. There's the SEC and CFTC as the authority to regulate over the counter derivatives. The Court of command and you go on and on down the list. From the point of view of the skeptical outsider, and I don't think I'm the only one, this regulatory catch up is both futile and it's pointless. It is futile because there simply aren't enough humans in this world to do all the things that this regulatory catch up thinks we should do. We'd have to hire basically every PhD produced by every PhD program and somehow prevent them from from going and becoming investment bankers if they are going to actually be able to control any of this stuff. Secondly, we've done it guys. We've done it over and over again and it's failed over and over again. So Till the early 1980s, the United States had no uniform capital requirements for banks. So the principal line of defense for imprudent banking was loan by loan examination. At the end of that examination, the examiner would then have a discussion with the banker and say, I think given the kinds of risks that I've seen, you should have this capital requirement. As time progressed and the kinds of activities that banks undertook simply could not be examined loan by loan. We went into this game where we said we can't see what's going on in this box. We just demand that you have a big airbag or bigger bricks. And as long as our airbag is somehow scaled to the size of the risks in this box, we'll be fine. But it can't be, because this again assumes, for instance, that all securitized mortgages will have the same kinds of risk and they will deserve a certain amount of capital. And people play with this game and they say, oh, we made a mistake, let's chop up this category into some more categories and you can keep doing this and it just doesn't work. And then finally I say it is not worth the effort. We as a society invest large sums in making our highways work. We pay policemen salaries, we set up traffic lights, we have traffic inspections because we believe that this is an. Automobiles are an innovation that produces net benefit to us that it merits this. We don't regulate pet rocks, but then pet rocks don't do any harm to. So the question is, if this is an activity which has the potential to do a great deal of harm and the only way to control the harm that it does is by setting up this vast regulatory structure, then I can no longer, as a Hayekin or a libertarian, simply say, well, let him do what I want. I then want. It's no longer. I want some evidence that this stuff actually produces benefits commensurate with the potential risks and commensurate with the costs of regulating the security. I haven't seen this evidence. Nobody's seen this evidence as far as I know. So let me offer you a retro radical alternative. It's radical in the sense it sharply breaks with the Squam Lake crowd, it sharply breaks with Dot Frank. But it's retro in the sense merely to a large degree, takes us back to the kind of regulatory system that prevailed in the United states in the 1950s and 60s. So my overall philosophy is case by case enforcement of broad rules. So I want on the spot examination with boots on the ground examiners, not top down edicts of how much capital, how much capital you should have for what kinds of risks. The kind of model that I have in mind is the common law model. So Congress or Parliament passes laws and there are historical precedents, but the enforcement of these laws takes place case by case by juries and judges looking at the facts of specific cases. Of course, case by case means it's labor intensive and it is infeasible to think of case by case enforcement for every good thing that you Might imagine that should happen in the financial system. Therefore, I argue we should focus on the most crucial parts, which history tells us are important. It's focus on a sound depository and payment system. And if you do that again, history suggests we will also provide credit within prudent bounds and contain speculative manias. So in the 1950s and 1960s there were virtually no bank failures. But it was not because banks did not take risks or did not take credit risks or did not expand credit. Bank lending expanded the rate of about 9% a year in the 50s and 60s. So you don't actually have, if you sort of focus on the sound depository system, I think as a byproduct you get this. So the very specific proposal is severely circumscribe and regulate what depository institutions, by which I mean anyone who takes short term deposits from the public can do. Limit them just to simple loans and hedging operations. The standard is pretty simple. It's what an examiner with a basic accounting or college degree can understand. If it requires a PhD to figure it out, it it's not allowed within the depository institution. And perhaps we need, if these things ever come to litigation, something like a prudent lender rule, which is if this was your money, would you have made this loan? And if you can persuade a jury that you would have made this loan, then it's okay if you failed. That's the sort of the common law approach to it. I would shut down money market funds. They're a parasitical free riding institution which cannot coexist with the banking system, with the prudent lending system. And perhaps the time has come to reassert the full government monopoly over money. So time was when all currency in the United states till about 1863 was privately issued currency. It was madness. And we ultimately said no, no, no, we're going to have government issued money. Then we said, well that's not good enough because stuff in checking accounts is also quasi money. Then we basically guaranteed checking account deposits as well. Let's just end this. Let us say that there should be no difference between the money in my wallet if the money in my wallet is the liability of the government, so should the money in my bank deposit that the bank is simply an agent for this transactional process. Get rid of this notion of interbank transactions failing because the banks don't trust each other or people refusing to accept checks drawn on banks which think they're going to fail. Just basically have what in the United States are Treasury direct accounts for everyone. And on the other side, I say there's no need to regulate hedge funds and investment banks. All the other stuff people can do as they please, no additional oversight. So it's like we have certain rules which say that cars cannot be more powerful than this in order to be street legal. We don't ban cars which are more powerful than that. We simply say you can race them on Formula one racetracks. So put all the crazy stuff on Formula One racetracks. And Formula One has its own set of rules so they can play in their privately governed ruled markets. Just keep them off the public road. No credit or counterparty risks with respect to regulated institutions. No LTCM problems where we implicate the banking system. No Lehman Brothers. And if people want to gamble with each other's money, as long as they don't raise short term deposits from the public, be my guest. So to conclude, let's focus on what is really broken. Let us not go after sort of the model of capitalism as a whole. There is a deep seated pathology of centralized finance that needs to be attacked. That a stabilized status quo ante is not the answer. There are people who say, oh, the economy is not going to recover unless we bring back securitized lending. No, no, no, good riddance to securitized lending. Let's not bring it back, even if it takes a little bit longer to get the boots on the ground kind of lending back. And let's go there and on the other side, let us protect and nurture decentralized innovation which is the ultimate source of modern prosperity and a good life. Questions? Right.