A Conversation With Financial Innovators

We really want to create a dialogue today and when the Milkin Family Foundation was started many years ago we had many goals, one of them was to really identify people and empower them, and when the Milkin Family Foundation was founded almost 25 years ago years, our Lady, our name was no longer milk and Institute for the formation of employment and capital. It really focused on the fact that we needed to create jobs and opportunities for people in a democratic society. It was later reduced to the Milan Institute, but that is still our mission. center for

financial

markets in Washington, very similar to our decision last week for the Milin Institute School of Public Health at GW.

We are focused on Washington DC because that is where decisions are made. Here we can achieve a lot. We can finance a lot. of activities we can create new

financial

market instruments we can try to solve all the world's problems, but today in the United States government policies greatly influence our success and with that I would like to introduce you to the executive director who directs that Center. Stacy Warden Stacy hello, thank you all. I am very honored to be here with these financial luminaries and Mike's right to emphasize from the beginning that the financial markets center is based in Washington and that we truly believe in the power of the financial markets to make the world a place. better to make people more prosperous and create opportunities for people and what we want to do in Washington is take this to the policy level.

How can we inform policies? How can we raise the level of political

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in Washington? These topics are, as we all know, very complicated and difficult to understand, which is why we organize our center around four pillars. One is education about financial markets, so we are very focused on educating congressional staff of regulators. the press in Washington we hold monthly briefings for the press monthly briefings for Hill staff the second thing we work on is the strength of the financial markets per se and we think about that both in the American context as well as in the context of a developing and emerging market country, the third is access to capital, which is, of course, an issue that Mike has worked on all his life and we are very happy to focus on that through the work on the law of employment. in other areas and lastly, I think something near and dear to the panelists, here with me, is the power of financial markets and the way financial professionals think about problems to achieve a financial architecture that influences the solution of the other issues that we care about, whether it's global warming or health or finding cures for prostate cancer, so that's what we focus on at the center and as part of that dialogue and part of that educational process, we do this type of events, so I'm very happy to invite you all to this event with financial luminaries and I guess I'll introduce everyone on the panel and we'll start with some general questions and then we'll end with maybe a specific question for each panelist and then the we will open up to you and you can ask the panels any questions so we have some parents here on stage with me. the father of the options market, the father of the mortgage markets, the father of the high yield fixed income market and most importantly, my boss and the father of the futures market, who will be here in the future just like you , as you can see, huh. let me start by saying uh myin, in your Nobel Prize interview you said that one of the most important things to focus on and the most important thing to get right is what is the right problem to work on, so I just want to Ask everyone, what do you think is the right problem to work on today?

Maybe I'll start with you, Marin, obviously it's in my own work where I tend to try to think of puzzles, try to solve them and model them. and I think, but in a general sense, I think really the biggest problem to work on today is thinking about how uncertainty affects our models and how we tend to deal with things because we basically assume that we have the well. the information set is very complicated and very large, there are enormous amounts of information and we have to model that information and we have models, but all models have errors, so the most interesting question is how do we use the errors that we have. learn and if we use the error and it is a mistake and we ignore it or we use the error to learn and a lot of the issues that I find on the regulatory side and in the financial market that you were referring to is that people tend not to do it. realizing how to deal with uncertainty and how to use it and how financial markets tend to help reduce uncertainty and allow us to grow, so if we think about whether I would focus on it more, I think one of the biggest problems that we have in our society and how finance was going to help solve these problems are the trade-offs that we now have with the promises that we made to the elderly and the promises that we have made to the young and how to satisfy the interaction between the elderly, whether it is in pensions healthcare and then young people in terms of education, housing and having a society where we are going to be able to grow and use the financial markets to function accordingly.

Mike asks him to limit himself to just one or two problems. I think it's a pointless exercise, but why don't you talk about some of the things you think are most important to work on? I think, Stacy, my opinion would be that there are very few surprises that you might not have. It's the right time, but there are actually very few surprises in life and I think most people work on the symptoms, not the problems, so I think if we can identify the problems, then we could try to figure out how solve them, so obviously a symptom today would be the fact that the median net worth of Americans is so low that more than 30% of adults in the United States have a net worth less than 10,000 than the median net income in the The United States is a fraction of the average net worth today of the United Kingdom Japan Italy France and even Greece, and in a democracy, one symptom is that we have a poor middle class in America today and we could argue why that happened.

A lot of that happened because they lost their equity in homes or they bought too big a house that just drained their liquidity and funds at the time or they spent their second mortgage money on a vacation, it's not an investment, whatever you think. Whatever, but I think I ultimately lead that symptom to education, so if I go back over the little formula that I scribbled in 65 and that I have presented over the years to each of our panelists hundreds of times and think about it : You start with human capital, the largest asset, and you say to yourself, what can we do to increase the value of human capital, this is measured in hundreds of trillions it dwarfs all other acid categories, so there are three ways in which there is education and the challenges of our educational system and the relative demise of the K12 system, secondly, immigration, can we continue to find a way to bring people with talent, opportunity and promise to the United States and the third is : Can we increase the length and quality of a person's life and control those costs?

So, the second is social capital. The United States, in many ways, is still a leader in social capital. and many people around the world still want to come to the United States if they could come and the laws, the rulers, the private property rights and other things are part of that. From that point of view, the third is real assets, how are real assets financed? assets, whether it be a house, a factory or a company, but I really come back to education and if it is the education of our political leaders today, the education of the general population as they decide what decisions they are going to make, it is I feel like market liquidity today would fund most of these problems and the government could pull out, but I think a lot of our government leaders are just afraid that they don't know enough to know that they could pull out and as a result, there I am.

I don't think they are necessary in multi-family housing. I don't think they are necessary in commercial real estate today, etc., but what will give them the confidence that they could walk away when their knowledge of the financial markets is relatively? low and their confidence in the financial markets is relatively low, so I see that really the solution is public acceptance, government acceptance. I don't think we can't find the solution to many of these problems, whether it's energy, the environment, water. Without naming it, the question is whether governments will allow us to implement this strategy and we will actually go a little deeper into that, but Lou, let me ask you, in addition to human capital, social capital and real assets, is there anything else that do you think we should? focus on some of the major issues of the day, on the process of rebuilding the capital market, Frank rewrote all the rules and now we are in the process or he said we should rewrite all the rules and now we are in the process of rewriting the rules to the entire capital market, much of which is related to consumption, like housing or asset returns or whatever, and one of the questions we don't seem to want to ask is what kind of process are we?

We really want what we want to get out of this, we want less government, but we want to give the consumer everything they want now, not later, and it is absolutely impossible. You cannot remove the government from the real estate market as an example if it is not willing to say no to the consumer. , at some point, the only person who can give the consumer everything they want, the size of the house they want, with the highest loan, value and the ability to refinance the house on the spot. has equity it's the government no one else can afford to do that so we refuse to have this fundamental

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what is the role of personal responsibility and what are we willing to give to the consumer and is there a line that we are willing to draw yes Don't answer that question.

I don't know how to redraw the rules for the capital market and it seems that we simply want to avoid that painful question. Yeah, Stacy, let me, if I could, in a second, let us have a slide. We could call it the decline of personal responsibility and if we look at this I think what Lou is pointing out: let's start with housing, when Lou really gave birth to the modern mortgage and financial markets, the decline was 20% or more and the average mortgage generally it was 60% of the value, yes, so today, if you have to pay 5%, you complain to the FHA, in fact, you wonder why the government has not loaned you money for the down payment, also the health, the real problem of obesity.

In America it's only 20 years old, this was never really an issue so I'm no longer responsible for my own health. uh, education, the dramatic difference between the United States and Asia. In Asia, education is a consumer product that ranks second among the largest expenses of the middle class. Here education is one of the lowest expenses of the middle class: 2%, 25 times more on housing and transportation in the US, and as a result, these are issues that Louis talked about and I think in a democracy The question really is what is the problem here that will make you choose?

That's a political leader and what can you say no to? It's the same problem that everyone faces with their own children or family members. Sometimes you have to say no to the government because of the implosion of financial institutions. They said no to Fanny May and Jenny May, but they had a reserve category called FHA and I'm sure Lou could be talked about at length here, so just Unleashed FHA and it was under the heading, so in the interim period essentially in many ways they bankrupted the FHA financially by doing an FHA what they used to do in Jenny May and Fanny May, so the question is, to get elected, is anyone willing to say no at the government level and I think The other area that we're in.

Looking at this responsibility that, uh, myON, I'm sure, I'm going to talk about is when you have an entitlement, whether it's a pension, medical benefits, that doesn't mean it's pretty easy to promise something that you don't. can you pay, now the question is. Whose responsibility is it and I think we've all seen here that several public pension funds have notified their state legislators that they need five, you know, three, 8 billion, whatever in perpetuity, to fulfill the unfunded promises that they have made and whether it's a school district, whether it's police firefighters, whether it's public employees, whether it's teachers, who are going to fulfill those promises that, from a mathematical point of view, can never be fulfilled, and I think that all of this comes back to Lou's theory of personal responsibility. addressing yes, we are completely rigid, the father of the markets of the future has come to the present, so we are the future is now, the future is now, as they say, soLet me delve a little deeper into some of the issues we're talking about.

I've talked about personal responsibility and the role of policy and I'm asking you and asking you as economists and finance professionals. I mean, economists don't agree on a lot of things, but one thing they all agree on is that people respond to incentives and so on. Can we talk a little bit about the right incentive structure, whether at the policy level, at the household level, or at the business level, and what policymakers can do to make sure that we have the right incentive structure to care about and solve the problems ? that we have to work on, whether it's unemployment, the environment, housing or the other things that we've talked about and can I, can I start with you, Richard, of course, Richard, I think you know one of the things which was aThe main problem in our country in the 80s was ring acid, yes, and no movies, etc., and obviously you were fundamental to many of those efforts that we talked about at the Institute.

Yeah, you know, essentially the one-word answer is to price it, if you really want to. Changing people's behavior with what economists would call externalities is putting a price on it, whether it's clean air, clean water, you know, and that will incentivize the same way it does with food or growing soybeans, corn or wheat, what is the relative? value in the United States in the 1980s acid rain was a tremendous problem, you may remember that even Michael Douglas made movies called Black Rain, I mean it was a metaphor for everything that was wrong in the United States and we had grown up and we do it.

Forget that Pittsburgh was like Beijing and Gary Indiana looked like these cities at the time and we put that they had a choice or the policymakers had the choice of just having a command and control device that basically said that everyone, regardless of their circumstances, they had less contamination. by 10% and then the alternative would be to reduce it by 10% and then let each person achieve the goals in any way, even buying someone else's reduction, so if Michael generated energy it was very good and his cost was low to install the technology that could produce. 20 or 30% and now I would have a price on that, I would say: I will send my reductions to sell to Richard Power, who is not very good, who has to build a scrubber, a plant to clean the flu windows, and we would establish a price he will sell them to me I will buy them he is incentivized to reduce it as much as he can and I am happy to buy it if the price of those reductions is less than the technological cost of physically reducing it and that program resulted in a reduction of 8.18 million tons to 3 million, annually produces a reduction in medical costs associated with lung diseases of $123 billion a year, that's staggering and saves 30 to 40,000 lives a year just to give you an idea if we extrapolate to Today, China has a potential burden for a city like Beijing, given that it produces 27 million, 50% more than the United States, in its same geography, four and a half times its population, so if you take those 123 billion, you are talking about a Los Future costs to dragon health will range from half a trillion to a trillion dollars a year just from acid rain as an inel liability in their GDP.

Yes, it is incredible and they have a price. All I have to do is put a price on it. You just wrote a very interesting article. book called good derivatives and let me ask you a follow up question how many problems do you think this type of approach can address? I think in all cases where there is an externality, water medicine education, put a price on these and you will get the most benefit. efficient result more than any recipe gives you an idea of ​​the relevance of this, the EPA today or at that time had approximately 177,000 employees and the acid rain division had about Brian mlan, who directed the acid attack program, said that while there were 150, there were only 20 of the 177,000 who tackled acid rain 20 people to reduce the biggest problem we had at that time in the environment is not exactly a job creator for the bureaucracy and therefore one of the challenges for Richard it's obviously when you quantify it or put a price on it.

Some people don't like the price, so we've had a recent discussion about homes built in hurricane or flood areas. So what is the real market for your flood insurance and which ones should you pay your premiums for and once you find out which one is it? So people say, well, they don't like that number. You know, I remember I was watching one of the financial shows on TV and I pointed out that, well, these were the unfunded pension funds and you needed to get 12% of your money for the next one. 40 years to finance them and it seems impossible with governments that yield 2 and a half%.

Many people would like to get 12% of their money, if they could finance it for the next 40 years and one of the members. of Congress pointed out that they recognize what the math says, but they just don't believe it, they know it's right and that's just math, so I think there's always a challenge when you put a price on it to understand what reality is, what it means and I Think about flood insurance recently, when the price was actually discounted, you could see how people reacted because the price of insuring those homes was so significant. You know, yes, I think you have a real difficulty today.

Michael in the US We actually forward the price. increases that Congress made in its Infinite Wisdom of flood insurance and, curiously, it will be interesting to know that the competitor Birkshire Haway is completely withdrawing from catastrophic insurance, so we have a country that has 550 million in policy surpluses and the insurers, if Sandy had made a right turn a billion, no million, really a billion, sorry, if Sandy had acted right and actually hidden a new success in New York, you could have had between 500 and a billion losses, in theory one event could have wiped out the insurance industry and I think so. the same ingredients in that sector that you had for the banking crisis Regulated state and very simple if we had somewhere to go out today what would be our policy as businessmen would you go and walk to the fault of San Andrea you would find the riskiest place and write as much premium as you could, then you would go to Florida, find the riskiest place, write the premium, the storm, live through it for four or five years and have no events, accumulate capital and have one.

In any case, you have a free option for the state government because there is no Governor who is going to allow a massive weather event to wipe out the state's home ownership, so you have a free option for the government in any catastrophic area so you know that I have no desire to price the product appropriately and manage risk correctly. If I'm not mistaken, I think you have had something to do with setting the risk correctly in the past and also want to elaborate. a little bit about this or how you think about it well, I think Richard is right, I mean the idea that we encouraged people to build houses against the walls of the forests that we asked people to build houses in the Mississippi rivers, which are floods, etc., you know, we haven't properly weighed the options in how we're doing these things and what that entails, and basically the problem I see in how to approach it is the idea of ​​the short term versus the short term. the long term you mention is regardless of when you are political or voting for your constituents etc., it is always easier to think that if I can support the rights that you and Mike refer to on your slide. and that I can basically carry them forward, then I have the option to come back, you know, and be able to fund them later, so if there was some way to create the right incentives by valuing these contingencies or these liabilities and having them articulated and then I could create a different incentive in terms of who's going to pay for this and what the actual cost is if we were to put this into a budget framework as well and Lou, let me ask you. about the incentive structure of the mortgage market and do you see how you and Mike have written about how the government incentive structure has really left us with a mortgage market now almost completely owned by the government and how do you see a way out? of this and see how you can get out of this if you are willing to make decisions?

The problem is that we don't seem to have the will to make the decisions, I mean, but it's not just about housing, it's about you could look at multifamily and get the same result; in other words, remember that the person writing and creating the incentives or the disincentive in a sense is the government and we have the strongest multifamily demographic in history, even much stronger than it was. For the Baby Boomers, the need for rental units, affordable housing, workplace housing is extraordinary and what happens is the government subsidizes the system through Fanny Freddy, the FHA used to require a certain number of units that, According to them, they were basically a percentage of middle income that forced the system to produce housing for workplaces, so we have the greatest demographic need in our history and they move it from a percentage to a full middle level and now there is none, so suddenly no one has to produce workplace housing unless they really want to and it's a lot less fun to produce workplace housing than it is to produce large units on Park Avenue, which is why in the latest HUD report they show that we 6 million units of affordable units in workplace housing are missing, well, that's not it.

It's amazing if you want to direct the system to produce the wrong things, so the habit of diverting economic incentives, you know, goes well. Beyond housing in housing, we can rebuild the system, but we won't be able to, we won't know. I would tell you that someone asked me Johnson Creo Johnson Creo is a refinement of the previous bill at Corker Warner and makes changes that are important under cre, we could actually do a TBA Market as an example, but practically none of these versions will work because when you try Put, when you try to say, I want, if the purpose is to get the government out of housing or have less government, the answer is mathematically it won't work correctly if you give the consumer everything they want you just can't you just can't do the numbers no.

Yes the numbers don't add up once you add in the real cost of trying to transfer risk from the government to the private sector The sector will not pay, will not buy those risks at the prices we are willing to accept so that we know we can spin the wheels and it all comes back to this question of deciding where we are, what the incentives are. and we're going to price them right, Stacey. I just want to make it clear that if I could fail and lose here, I think it's very important that we understand the opportunity right now, this opportunity in March 2014, the enormous accumulation of wealth.

Much of it is due to the technological explosion, much of it in the hands of people who are now in their 30s and 40s, who have different views on society and could never use the wealth they created at a very young age, which leading to an explosion of philanthropy. an explosion of new models of combining philanthropy and for-profit investing in things that has the potential to take on some of the cost that Lou has if that philanthropy is focused on that area and if that philanthropy is focused on the environment, whether focus on education, medical research, prevention, wellness, water, whatever the issue, there are substantial funds available in philanthropy today if used effectively on one side of the coin.

The second opportunity today that I believe the planets are citing is the incredible liquidity of the financial markets. It's just difficult, as I see many of the people who are with us today, to think about Triple C returns between five and a half to 6%, you know, the average pick hco the average at the 09 low was trading at 25 cents on the dollar and the Pi Hco Anonymous Association met and said that we will never buy another pick H Co. We have never learned our lesson well. More Triple C-rated Coe pickles were issued in 2013 than in any year in history, so that's been forgotten, please tell them. your favorite, my favorite Pact, okay, so we can and as everyone knows today, all the covenants are being phased out and Stacy is excited about the Pact that if you liquidate the company and move your money to the Cayman Islands, you have to notify creditors within the next 2 years. transfer of money, so that is real because of the way that the agreements disappeared, the liquidity is there and, for me, between philanthropy and global liquidity you could solve many of these problems and you could take out the government and just me like to change If I could, I just want to show you one thing for sure, so 1969 I doodledthis idea of ​​the cube, the financing cube, when I was back east and I was thinking, well, how do you finance a company?

What is the correct way to finance one? The company finally wrote my thesis on this. Well, first the company had a company and then it had the industry and we had data. This was, you know, all computerized with mathematical data and look, so we can back up our theories. So, what is happening in the financial markets? and we all know that the best time to finance is when you don't need money and when you do need money it is the worst time to finance and then what is happening in the economy and that is what is studied in an academic environment but in reality, those things are important, but not the most important, so the most important thing was to get to the fifth order and understand well what regulation is and, as Bill McGowan used to tell me, AT&T introduced a new regulation every day in Washington, uh, which would put MCI in business, that is why in the early years 50% of all MCI employees were lawyers, but what is regulation is society and therefore the most important factor really is what society thinks and right now society as we know it does not.

I think highly of anyone in the financial services industry right now because ultimately it's society that's going to make the laws and regulations from that standpoint and I'm the one that brings me back to education if wealth average net worth of Americans were similar to that of Australia or Switzerland would not be a different situation today, but it is not, and therefore whatever we try to do, even though this is the best time to do it, we face the challenge of lack of education from both populists and our government and finance leaders, and we are challenged by the fear of a relatively poor lower and middle class that if you take away their safety nets, what would happen to them, their children and their lives?

So I think that's why today's topic is one of inequality from that myON point of view. I'll turn it over to you, no, go ahead, I was just going to say something on the topic related to the point that you raised in terms of measurement, do you know if we're going to have these younger people involved in philanthropy, they want to be able to know how to measure production and you know how we have value for what you're investing in terms of philanthropy and now there's a big debate among these younger people that I've talked to about how to really find a way to measure what you know, so the idea of ​​awards, because it's a very dedicated production system, unlike the more general problems that you raised that are going to be difficult to measure, so one of the things that's involved.

What the Financial Market uh program is going to engage in is actually thinking about how to establish ways in which you can measure the benefits of this and they've done that in part in geographic comparisons to what we have in the United States, but also, over time, what we will be able to achieve through education and then through education we will be able to measure production. We have some people in this room who are among the top real estate investors in our country with us today and I. I'm not sure I'd look at two of them right now if they realize that by setting those credits for SO2 you're also increasing property values ​​in those areas, so you want to increase property values ​​in Beijing, okay. , it simply cleans the air and will increase property values ​​in Beijing, but the effects there, particularly in the northeastern part of the country, by eliminating many of the deficits they had in air quality, also at the same time it was a place in the one who would be willing to live and ultimately increase property values ​​and I would say the same.

In the increase in education, you know, it was not measured, we did not take or measure the human capital that, as a person goes through early childhood care center, primary school, etc., what is their increase? In human capital, we measure your future income potential, we know it individually, we measure it macro-wise, but what is the benefit to housing and society from improving education? One of the challenges that has occurred in Los Angeles has been because of the educational system the difficulty of getting companies to move to Los Angeles, where their employees would live in the Los Angeles unified school districts instead of in Thousand Oaks or another community with a different school district, so the measure of what we might call social capital is one and I think you've raised a very interesting question, while this question was not raised citing many of the philanthropists of the past, the people of Silicon Valley and you and many of our leading philanthropists today ask, can you quantify and do I know?

Rich da tizio at The Institute is the scenario he's working on, but can you quantify what the outcome of our request for our philanthropy is? And I and I think investors are comfortable, very comfortable, wearing their investor hat and they're very comfortable wearing their philanthropy hat and now they're asking us to wear their investor hat and their philanthropy hat at the same time and what? how can you shed a little light on how we could wear both hats and measure the results to the extent that an investor would need and have the impact that a philanthropist would want, yeah, one observation before and that is if you could do it and if I have a map on somewhere, but if you had put up a map and talked about the lack of respect for finances is inversely proportional to the distance from Washington DC, so the further away you go, the more confident you are, so respect is you know that China has seven pilot programs in carbon trading, California is leading the nation and Markets, prices and finance in solving social problems.

Europe is doing it. The closer it gets to the DC, the further it moves away from that precept, which is why this inverse relationship is obtained. Richard, it is possible that Richard was on the he was still on the board of directors of the largest electrical company. utilities in the United States, yeah, you could talk about it, you know, one of the areas we focus on is okay, you want power, let's move power from one part of the country to other transmission lines, why don't you tell us how Is it the real world in that area?

Yes, this is a wonderful experience. This is American Electric Power and I chair the finance committee, so we have an annual spend of about 2.3 billion a year, most of it for Environmental Compliance, but we really thought there was a very simple arbitrage that could produce electricity in Virginia West at 34 cents per kilowatt hour and sell it in Virginia at double or triple that price, so the idea is to build an 85-mile transmission line from West Virginia to Northern Virginia. It took 17 years to make six 16. years of permits and 11 months to build the transmission, so right now you can produce power in Arkansas for 3 cents and you could sell it in Dallas for 18 cents, but you can't, unlike the natural gas, it is not allowed to flow freely between states, so 17 years to build 80 million when we had our business in China, the Chinese during the crisis bought gas from Turkmenistan and the Turkish republics built 2900 kilometers of distribution from The Source in the turkish republics to the entire cnpc network in china and they did it in about 22 months instead of 17 years with 90 miles of transmission, it's amazing, you know, one of the reasons maybe that's why we're so focused on regulating the society, absolutely, why people don't understand recovery. and the recovery that has taken place and the fact that the financial services sector does not get credit for the good things that it does in the financial intermediation process, which are fundamental of course to any recovery, is that this has largely been Until you know, it's been very recently and there's still a jobless recovery, so when you think about future policies, I mean, I'm always surprised by this thing that technology is disintermediating the workforce from the production process in so many areas and not it's just assembly line workers now it's the New York Stock Exchange traders and um bi you know, PhDs in biology and at the same time companies complain that they can't get the skilled workforce they need um and how can we think about what they are? the right policies, whether education policies or immigration policies, to create a stronger, job-intensive recovery in the future.

I'll set the stage for the others. I think the president, on re-election night, announced that he still believes in America, that if "Let's go to work," there's a chance for all of you and I think, Stacy, that was true in the '50s, '60s and 1970, when we looked at traumatic change in jobs just as a basis for your question. 65% of today's jobs require a skill 85% require a skill plus a semi-skill, so yes, there was a period of time where if you just wanted to work hard, most jobs required just the willingness to work hard. work, today they require a skill, so some of the studies show that the US is going to make you know 73 million jobs that cannot be compared to a required worker and U, the CEO of Seamons, has noted that the number one growth area for Seamans is the United States.

Seaman US CEO, the challenge is finding skilled workers in the United States, so that will likely require and once again return to education, a change in our education system, a focus on trade and trade in skills, the idea that you know only 30% of the population will get a diploma like us. I think the other 70%, similar to other countries like Germany, will gain one of those skills so they can have a rewarding career. I mean, I think it's a fundamental issue, but ultimately, if we don't create jobs, it has a dramatic effect. In terms of government, the other area that I would say, just to start the topic, would be unemployment insurance and other alternative government measures that have been created for people on the lower end of the economic spectrum.

Nowadays you actually hurt yourself as you make more money and get a job to take away your early child care benefits, take away your food stamps, so today there is a disincentive that has been built into the system with the one we have to deal with, where instead of being black or white, it's gray, so as you make more money I don't take from you six times what you receive in benefits when you get paid more, so there are structural challenges to a system. I'll leave it to other members of the panel on this one. Does anyone else want to comment?

Yes I want. to get yelled at, so I'm going to ask a very sensitive question in the financial services sector. You know, the Great Recession changed the economy of many markets. For example, we can build mortgage servicing operations in cities. in North Carolina and South Carolina, Alabama, in incredible and these are smart, skilled people, right, and they love it, we ended up, we could change the name of the city, you know, it's the main occupation in the city and they work very hard and mayo, the mayor. try, the problem is that a lot of those jobs go abroad and it's a surprisingly sensitive issue because obviously they go abroad and in theory it's less economical, but I'll ask the question this way, if those jobs are paper guaranteed by the government, think about it, now we are. we're going to transfer maybe something like 7 trillion dollars worth of services that are in government documents Jenny May Fanny May Freddy back and now we're doing it, now we're moving the multiple family things that are jinny May Fanny Freddy overseas .

These are real jobs and there are a lot of them that could easily stay here because training for this kind of thing is very doable, we certainly have the infrastructure, we certainly have the technology, so I'm caught in a dilemma myself. I sit there and say, well. You know, globalization, we should go where it's cheaper, okay, but I'm not sure that's true, if in reality this is all the government's role, it's all taxpayers, I really don't know what the right answer is, But I know we should have done it. the conversation simply because it's the citizen who is actually footing the bill on the one hand and losing the job in a sense on the other, so you know, I said I could get in trouble, it's very easy for me to do it without trying very hard.

And this time I tried Richard, right? Yeah, I think it's really interesting because it's a lot more generalized. I was in India recently and they started a treasury bond futures contract and the head of the central bank is the guy from the University of Chicago. And that's why they're talking about eliminating the problems that we had in the SNL business in the '80s and trying to introduce asset-liability management. They don't mark governments long term with the market, so it's fine up to the curve. inverted we were that we went to that movieonce we went to that school but the interesting thing was that a friend of mine told me listen, you wrote a book, why don't you go to this place you know and give away a little book?

Talk, I said there was a company there and then I fly to New Delhi. I am driving and I am looking there and there is smog, it is heavy as India is the I can't see that they are driving on the wrong side. H road makazi you know heaven and I walk into this mall and I thought to myself why did I say yes you know what made me do that I walked up the stairs and there's nothing it could have looked like anyone's operating room place and he is I got 500 high frequency traders who are doing well doing markets with beans, German rolls, euros, dollars, euros and the average age of the audience is 27 so high frequency trading is the alos and I wrote this book and called the good derivatives and asked for a show. hands like if any of your parents know what derivatives are and they said no so they are 27 years creating markets in everything you can so work even financial trading yeah given microwave technology and what's happening, they they, we're even exporting the things that the government likes to hate now, like algorithmic trading, and it's going to India and it's about to expand to Singapore because it moved from London, where prices and rents were too high, to Delhi where rents are starting to catch up, they can pay a trader in Delhi 12,000 a year and give him 20% of the bottom line, unlike London where the bonus pool is 40 % and you're paying them 150,000, so we think Finance is immune, yeah, and That's a very, very naive assumption given the world of e-commerce.

Where can we export to? The regulators. No. They export. They're all sitting there with black schs formulas you know tattooed on their arms and they're using everything I can think of. taught us years ago and they are sophisticated, he just met this guy and five years ago he hired the best graduates from the best engineering schools in India who knew nothing about the trade of physicists and mathematicians with master's degrees and their families love him because he pays. merchants between 15 and 20,000 dollars a year plus some incentive, but in reality in economics, obviously, if you want to be the most efficient person, there will always be someone more efficient, whether in clothing production or in commerce, and the things will move around the world, but where a society tends to grow is to discover how, what are the educational problems that Mike was talking about, you have to move up the value chain, that's what we tend to do now, even more In the United States, it is moving up the value chain.

Seamans doesn't have the technicians who can operate the robots or fix them or make them more efficient, but basically all we're doing in our society is trying to make things more idiosyncratic and more uh and that's increasingly High Tech, so internalizing a lot of that and continuing to outsource a lot of the other things that are routine and could be done more efficiently somewhere else, so the main point is that you have to answer if the markets tell you this, if the markets say that we are moving up the value chain and continue to move up the value chain, so basically you need more education to be able to have the next black schs models or the next algorithms or whatever so that we can add a lot of value or learn about new innovations in housing in finance in general or other activities so that you can't punish things that will add a lot of value.

Okay, what do you do with all the unemployed people who won't be able to go to the workplace? I mean, you know there are some, well, we've got you, I guess. I think the overriding factor L that we don't recognize and I think I want to juxtapose the late '60s. The guru of the late '60s was Paul Erick. He was at Stanford. You know, those who were in that academic intellectual environment of the late '60s. Well, as you remember, we were entering an Ice Age, we weren't in a heat where we were entering the Ice Age that was going to be worse.

I had a good friend who was a student in Colombia, he was a you know, a scientific engineer and they were working on taking lava and dumping it over Antarctica and the Arctic to try to warm the Earth. Well, these were some of the scientific challenges of this period of time where we're looking at the other thing. He told us many things, but another was that we had lost the battle to feed the planet, that hundreds and hundreds of millions of people were going to die of hunger. In fact, here are some of the other predictions he made: Life expectancy would reach 42 years in 1980 in England. nonexistent um Bill MCM was with us today.

I just want you to know that he had predicted that England would not exist by the year 2000 and that was because all the fish were dying in the ocean and you couldn't live there. 50 million ocean, so this was your kind of leading guru. I think one of the big challenges we need to recognize is agriculture, so you've gone from one person feeding one person to one person feeding two in the US to one person feeding 340 now you want to take a billion. or two billion people right now and leave them unemployed, just modernize their farms and China, Vietnam and all the other countries in the world, and here you will have a real challenge as to what "Let's do it, yeah, uh, and I think we need to realize that technology is the reason why big companies never create jobs.

Small businesses create jobs because big companies with low cost capital will replace human beings with technology. I think myON there is another one. factor that you have suggested here and I want to continue with the use of modern technology and crowdsourcing, nowadays we find more and more, whether for medical research or other things, that you never know when challenging the web who will respond with a solution to your problem. So, in theory, you could substantially reduce your employees by constantly testing the web and allowing people from all over the world to work for you, some paid, some unpaid, by solving your problems and your solutions, you don't need to have internally and As we saw in stopping the oil spills, you know there were people doing tattoos and they came up with better solutions than the major oil companies or in the case of healthcare, we found that various hedge funds and other computer scientists They have had better ideas. in trying to create algorithms for how to treat patients or when they will be in the hospital, so this trend will continue and it is a challenge for any democratic society or any society and how to create those jobs that we have mentioned, we will descend further and further into the service sector and the question you raised in the introduction was whether the incentives are wrong and we are paying so many people to not be educated properly, paying people to not get educ to not get into the workforce and work, let me bring, let me bring out another facet of this.

I had the privilege of having dinner with Bill Gates on the Hill last week and he was asked this question about outsourcing and he said, listen. We could keep everyone in the country, that's not the problem, but you have to follow the engineering talent, you need the engineering talent and you go and build a factory and all the attendant services and lower skilled jobs that come with it wherever you can. I found his engineers and he brought it back to them in terms of immigration policy in the United States and I was hoping that he could comment a little bit on how he views immigration reform and the need for him to be thinking in this area, uh, for the creation of jobs, well yeah, I just want to digress on the agricultural topic because it brings up a point that Mike and I have discussed and one of the severe limitations on that type of model will be the fact that there are only three continents that are water long and that is North America South America and Europe essentially the Middle East is short Africa is short China is short India is short and there is no substitute for that and I think that will be a very important defining and pricing characteristic that becomes important because with water you know that the way you resolve differences is essentially war and I suspect that if we could get to that we would realize that Tibet is not about religion, it is about water and well, let me go, let me challenge to Richard.

Okay, okay, please, let's take a look at those slides one more time here and if we look back at how water is used, if we look here at Latin America, Africa and so on, you'll see that a much higher percentage of the water is being used for agriculture and could suggest inefficient agriculture at this time. Vertical farming today in its most successful vehicles where it is essentially grown vertically and in pots and using different energy sources has found ways to use only 10% of the water, so technology. I think there is potential in water and if you look at the percentage of water that is used in agriculture in these quote-unquote developing markets versus the percentage of water that is used in North America or Europe, you could argue that a As your agriculture becomes more efficient in modern use, we're going to have less water use in agriculture one two uh fresh water equals salt water plus energy, therefore, uh new forms of water desalination converting water, the planet does not lack water, that's fine, and those IDE and 60 and 70, you know about going to look for glaciers and towing them to the Middle East and things like that that we saw, but I think the question is whether there are technological solutions to this problem and yes, the water table between Pakistan, India and China in a normal environment would ultimately lead to war when they have no water for their population, but technology is a potential solution.

I agree with Mike and I, I think the point I'm really getting at and I think we're driving the same thing, what you need to do is put a price tag on unlocking the technology and creating value for those people who convert saltwater more. energy in fresh water, but there is another thing that is lost in the mix and that is that we already put a price on it, but in a very inefficient way. let's not call it water trade, we call it grain trade, so every time you grow a bushel of corn and export it, you are exporting 150 gallons of water, every time Tyson cuts that chicken for a pound, he exports 500 gallons of water and Every time McDonald's or you have a steak that goes somewhere, you export 1,800 gallons, so you just don't market it efficiently and you don't price it, so you get substitute ways to market it, but I'm optimistic that a you're that, if you priced it, you know, I mean, we come on and you walk in and we don't realize that every time you flush the toilet it's four and a half five gallons, okay, so you flush a piece of napkin in it or something like that, that's five gallons, that's 28% of annual household consumption.

Flush, you could have dual flush toilets that could save 50% of that, you have recreational showers in Arizona and New Mexico and that's another 20%, you need 5 to eight hours, all you really need in the United States for hygiene and hydration is 30 gallons. Albuquerque has a per capita Albuquerque, which is in a desert, has 175 gallons per capita instead of 225 and all you need is 30, so if you could somehow put a price on that. things recreational or unrelated to us, this country could be much more productive and we wouldn't have the kind of drought situations that we have in California.

I think Richard takes this out of here. I think Richard just to generalize today. We look at, say, a pack of cigarettes costs society $14 because of secondhand smoke, all the other types of problems, so theoretically it's been undervalued and I think the same for a gallon of oil, the cost of a gallon of oil is $13 to $4 because we don't take into account aircraft carriers and other things from that point of view, so I think the message it's driving home and everything is that if we put a price on it, if the grain chicken, etc. If it were set with raw materials, we would substantially increase those prices which would change the incentive and the pattern to use those items and we have simply never priced these items appropriately, but I would go back to the discussion we had earlier about flood insurance, when it was You've priced it right, let's take a simple one per gallon. of oil if we put in the budget of the department of defense for oil and to protect the Persian Gulf, which we estimate that the US has spent since the oil crises of 74 between 7 and 8 billion in defense of the sea routes in the Gulf, so you could think about if we said well, we're going to spend half a billion dollars on technology to eliminate the need to protect the shipping lanes in the Persian Gulf, whatever it is, we would have many of our best and brightest still alive today, among other factors and So, the right price, I think it sounds like a message from everyone on this, it's not a surprising message.

If we could actually put a price on it, we could change the incentives dramatically, so I want to open it up to questions with myself. anyFinal thought I would like to say about this before I open it up properly, obviously I want to say that if the prices are not correct, then actions will be taken that will be personalized and not necessarily internalized. So there are two parts of pricing, one is the pricing that you have, which is undervalued because of politics or public policy and the other is because of externalities, so we are mixing those two things so that some have externalities, so I don't It doesn't matter that chickens are exported if our prices are wrong.

Okay, we are producing chickens, but if at the same time the chickens cause a lot of waste that is not priced, then that is a different issue, so there are two dimensions of prices that create incentives, so I agree. okay, you know, and there are a lot of political reasons why things aren't priced right, okay, so let me open it up to the public, this is your chance to ask the Gres of Finance any questions you want. Like, or also Stacy, areas we should focus on. I think part of our effort here is really where the initiatives or ideas are, whether it's air, water, environment or food, education or health.

I think we are really focusing on new financial structures. and new markets and That's a good point yes so we have a microphone for you thank you so my question is about pricing and sometimes there is pricing it's just not transparent for example I recently moved to Santa Monica and noticed the $500,000 price tag. difference between a house in Mar Vista and a house in Santa Monica, what is the current value of educating three children in a private school if you live in Marvista, so there is a price for education that is of higher quality, it just isn't is transparent to the average person and what things could be done or ways to analyze different financial environments to try to make existing prices more transparent.

Well, the first three children at 75,000 a year for several years sounds like a present value unless you have a very high discount rate, well above 500,000, so it seems that the house in Santa Monica is a good investment in At that time, as I said before, we don't have a system in our society, whether it's government debts or how people view prices and I think Richard also mentioned that and Lou also is that basically, our accounting system or the way we measure things okay, we don't give you the right measurements and in a sense the way we've taken things into account in the past, where we try to make things so you can compare comparative things, but that gives you a model that is as if one shoe fits all models.

Really what we need is to have a system where you can In fact, we have the data to be able to understand the questions as you ask them and today, with the Internet and other types of technology that we are developing, the data will be available for you and the models that can be developed then can give you the information you need and there will be people who will use that data to sell services that will price things more efficiently, including California government debts or healthcare debts and California pension debts and uh and that will be more available through the Internet and the ability to take data and put models into them and be able to analyze the effectiveness or quality of the information of the models that were put in place as comparative models.

Can I absolutely add something? We certainly know that part of the financial crisis was a lack of transparency and you would think that if there was anything we learned, we should have learned from others. Great Recession I will tell you how little we have learned one of the problems with the creation of the common platform The common platform Fanny fr is trying to get them to agree on something simple like the investor base obviously wants the full disclosure that they want. know the data that Fanny and Freddy are obtaining that are in their Values, although security is theoretically, you know that in guardianship it is guaranteed, the agencies have refused, as an example, something simple like informing us what the frequency of non-compliance is and and what is your definition of default?

Well, by the way, fny and Freddy have completely different definitions that they don't really tell you and what the process is, in other words, it's the most obvious thing you think you might want, especially if we're going to talk about a less governmental structure, well How are we going to assess the risk if we are going to put less government, someone more capital against the treasury guarantee if they don't tell us the most obvious things they want to know? to correctly price risk, the system just for some reason resists RBS The market is still broken because we can't put everyone in a room and have them write simple definitions, we can't get them to agree: what is the definition of a by default, what is the definition of cure?

What are the rules that an administrator must follow? Just basic and simple things. We cannot reach a consensus. How can you do it? If you can't get the most obvious in the definition of what transparency means. Someone you know. someone is going to have to write rules and the reason most of us wanted the common platform is because it would be like a black hole, you know, if someone who controlled the common platform wrote a set of rules even if they weren't. perfect because it was the common platform and in theory it would set the standard like agencies used to set the standard, it would make everyone else conform because where we are now we can't and you can, it's not just about housing your multiple family, They are cmbs, it is ABS.

It is general, so you are absolutely right, transparency would solve and avoid many problems, but we are going through a difficult time, yes, producing transparency and it is not simply the lack of availability of data, but the willingness to let it go. and the C and bonus of that, of course, is regulatory uncertainty. I think there is another important topic that myON touched on here is that today we have several representatives, people from LBL companies in the audience and one wonders what you would pay if you buy a company, have you assumed your obligations? Have you assumed your pension? financed?

Almost all companies created in the last 10 or 15 years essentially have no pension obligations they have no medical obligations if people don't work for you and they are worth more than the companies that do and it's not just pensions and medical services, it's also liabilities What happens to the environmental liabilities of the past? Etc., etc., when trying to analyze how something works, we don't say, boy, it's worth less. because they have this so that we can quantify and I think that when you have a measure on the ballot we do not tell the electric company that if you approve this measure, the state in which your city and your community will receive X amount of dollars in Future liabilities will have to be met based on certain rates of return, so there is a lot of transparency in understanding what the ultimate value is and valuing that asset.

I think there's another thing, just one thing is that if the data were available, then you might be able to build models and have competing models, so if the state or the city says this is okay and it's not, you'll immediately be able to. have more information that could deduce what is worse in some sense. I'm optimistic about it, oh yeah, I definitely want to say that if I wanted to cite a really simple example of transparency, if you look at School Board elections, very few people vote, a very, very low percentage of the population votes for who He will be the director of the school. school board if the public understood that the school board could force the community or city to assume billions of dollars of future life obligations in health care and pensions, perhaps more people would vote in those school board elections with the power of those few people to potentially bind their community in the future, so I think there is another significant transparency and I think we've talked about it here and it's much more difficult to quantify and that is technological transparency.

One of the issues raised today is the fact that storage capacity has an infinite cost. transmission costs are going down, telecom costs are heading towards zero, speeds are increasing, what does that mean for the potential obsolescence of your product or service, whatever it may be, and therefore the risk in those areas is One of the areas that we increasingly focused on that was the cover of the last Milk and Institute review was drones, so if you look at parts of the world that Craig McAu here and I talked about, you know, ago decades, where they didn't have cables.

They don't need to have phone lines if they go mobile and if you look at Africa today where 80% of the people in Africa have mobile phones instead of two, they wonder if we really need to build all those roads that we can use. drones? Can we make deliveries with drones? The delivery systems are potentially going to change dramatically here, so I think something that's very difficult to quantify is the change in risk for any business or the shape it is in. do something or infrastructure structure because of this technology today and how it will impact your business or the way you conduct your activities and how quickly what you're building will potentially become obsolete, so it's very difficult to quantify it well just because I think that the question of transparency is really at the heart of the matter and there are two elements to the question: there is that kind of opacity that results from the lack of direct value, but you can infer value from it, that's what most of us in finance have done it, so you can take your example of differentiating a house and say well, I can infer from that data that this is the cost of private education, which is a lot, which at the consumer level is really something that I believe that the Milen Institute is doing and I, as a colleague and proud to be one, is the economic education that is involved and on that same trip to India I went to a related one.

I went to the wedding of one of my colleagues and U in South India and chenai and an 8 year old boy, an 8th grade boy came up to me and said he knew I was an economist and wanted to tell me what I was studying in his accounting class, they didn't respond and what had he learned about as far as how credit cards work and access to them, this is a 12 year old kid who's taking 8th grade accounting and all that, I think the emphasis of the institute in economic education for policymakers is the simple notion of whether they understand inferential value or what their decisions are about when an eighth grader in India is studying accounting well, that's a very good point and I hope I can enroll them all in this process of education about financial markets, but we have one of the things that you What I say is interesting, I mean, transparency is a wonderful word, but it's all the data, but you have to have a model to analyze the data.

You can't just have transparency because you can have complete information but you can't have any value. You know it fundamentally. the educational process is about saying how to model this, how to educate people how to model it and what to do with it, and then Mike's point is crucial because the model is going to be destroyed, the reason why the model is going to be destroyed it's because technological innovation and you have to be careful thinking that your model is transitory, it's going to stay forever and people reverse engineer the error of your model and try to make money by figuring out how to get rid of that model, let me.

Let me compile a couple of questions and then we'll remember them and answer them together, so Shri, you have a pretty high bar for you to meet in terms of your question, Mike, I'd like to go. The point you made about the use of drones in Africa and who needs roads, it now seems like one of the points that repeatedly comes up in the discussion is that if you have something new and novel, it's much easier to do than if it's acidic. . Rin or I go and set up houses in a hurricane area that is fully established or LOF, for that matter the Obama administration has talked about reforming Fanny or Freddy to get the government out of this after the 2008 crisis, it is so entrenched in the system. you can't go out, so do you really need something novel like drones?

Do you need something like the lack of phones in India to make mobile phones work well? Do you need scarcity to get more transparency? Okay, let's gather a couple more questions. Does anyone else have anything to ask first? Yes, sir, I want to return to the topic that you and Mike touched on a minute ago and that Richard talked about in terms of consensus. Etc. For me, it's not just about economic education. it's about basic literacy because when myON talks about you have all this data but you don't have a model, it's great that you and others can be educating policymakers and it's great that maybe the people in this room are educated, but most of society and I think this speaks to the question raised earlier about the role of government versus the role of the individual who does nothas that recognition and while there has been a big emphasis, appropriately, as someone who studied engineering in science and technology education trying to push that down at all levels and there is an emphasis from the government on bringing high speed to disadvantaged neighborhoods.

I don't think there's a lot of financial literacy across the board, yeah, so Mike and I have a mutual friend in the entertainment industry, a very brilliant couple, I think. I have close to zero personal financial knowledge at a place like Stanford, the number one major today is computer science, yes, but I'm sure there are plenty of economics and political science majors who can have some financial knowledge at Stanford or at Harvard or at Yale or at Northwestern or Duke, but I think when you look at mainstream society, very educated people don't really understand the basics of being able to deal with data or models, so my question is how can we all work not just to educate, but really throughout the system, because ultimately those politicians, if they're educated, will only respond if their constituents believe in that issue, which means it's great to educate, for example, let's say Maxine Waters, you knows here in Los Angeles, who has been on the Banking Committee.

I always believe that, but my bet is that unfortunately most of your constituents believe in populist rhetoric and don't understand the impact of some of the things that have been discussed here. Yes, so I don't have the answer, but I think it's an issue that doesn't It's just about educating policy makers and at all levels yes, yes. I would like to address the issue of Sheree's shortage. I think that's a really provocative thought. Is a paradigm shift needed? That's why it's so hard to rebuild someone in real estate. instead of just building and, indirectly, that's his question, a paradigm shift and it caught my attention.

I mentioned it to a couple of people when I came back from Singapore, Singapore's largest and leading DBS bank. I was visiting with the CEO, now he says Three weeks ago he asked me if I knew who their number one competitor is and before I could answer he told me that Alibaba is their number one competitor so they raised $40 billion in three months and if They got a banking license in China, they could be the largest bank in the world in two years, so I think there is the potential to use technology for paradigm shifts and I think it is a thought-provoking idea, but I would say that Its scarcity is not a necessity in Mexico, one of the most powerful people was the phone repairman and the scariest people, one of the scariest people in the country, if he went out to fix your neighbor's phone, you had to pay him money of protection because while he was fixing his phone, his hand could slip and unplug his phone and he wouldn't come back for 6 months, so they paid him very well.

Once he switched to mobile, he was able to deal with a lot of those issues, so I think it's something we should. track how you can create a paradigm shift instead of trying to change something, create something new and people will gravitate towards what's new. I think young people are young individuals today, particularly in the technology industry, which we are very focused on. water environment energy many of those areas how can we take your enthusiasm for these issues and address it in relation to the issue of literacy? It is a challenging recent questions that are asked in most people in America think we are in South America, not In North America, here we have a literacy test that they gave us recently.

The average score for the executives was 38%. For most of us, these are businesses. Executives could not distinguish or explain the difference between profits and cash. Most of them couldn't tell you the difference. the income statement and the balance sheet and 70% couldn't define the free cash flow, so that's not public John Q. If you want to look at it on a different level, you know how the public reacts or what they think today um 33% you don't pay your bills on time this is a problem that was raised by Lou, you know if I don't have to pay my mortgage then maybe I don't have to pay any bills on time.

Well, if I don't pay my mortgage, I can pay the rest because it's the biggest number anyway, so you know, and the guys don't take, it takes them so long to chase me with the mortgage that basically, you know, I can pay everything else and have positive cash flow anyway, um Stepen Nin is with us, what is foreclosure? rate in New York City today Steve basic New York State New York, New Jersey and Florida, you basically can't, I mean, it's a two to four year process, okay, so Maryland is forever, it's four years in New York and Maryland, by the way.

It is not a surprise that in California the real estate markets have recovered much more significantly because there has been a quarterly turnover. Can you repeat it so it is recorded? Yeah, come on, Lou, why don't you repeat what Steve said so we can record it? Oh, I'm sorry, Steve was saying that in Steve Minuchin, President of One West Bank, yes, in certain states like New York, New Jersey, and some of Florida, it takes a long time to foreclose, anywhere from 2 to 4 years. . New York, it's actually a little over four years as an example, versus most other states where it's less than a year and there's an absolute correlation between recovery from the Great Recession, those states that have been able to clear inventory because We have been able to move foreclosures through the system, they have come back much more aggressively and the markets are, in fact, if not completely, stabilized and some of them are an imbalance between supply and demand.

Otherwise, we are in those States with heavy foreclosures. It's still very resilient and bright, I mean, so it's not in anyone's best economic interest for the number of people to benefit at the disadvantage of everyone else in the state, that's just the way it is and Ed DeMarco, like You know, you know who the former boss is. of the fhfa had the gum to threaten some of these states with long foreclosures, like New York and Florida, with charging them a higher fee to obtain the government guarantee because it was not Sim. Fanny and Freddy had the same problem that they couldn't run in New York State. for over four years, so they lost more money on a given loan in New York than on a given loan in California, which is why Ed DeMarco was lucky enough to say, "Aox at home, you guys in New York and Florida , they will pay".

They will charge me a higher fee because I can't foreclose. Do you know how that worked for him? He's no longer the head of the FHFA, so I think we think of these things as isolated things. I think it's very important that the Asian crisis started in Thailand and you discovered and you and you made loans in Thailand that they couldn't actually execute for 7 years, that the shareholder had the right to run the business for seven years, so, As a creditor, yes, they could default, but they ran the company, they did what they wanted for seven years. years and caused the laws to be changed and shortened it from s to one, but I think if we look at the general knowledge and the general view of the public related to finance, I think that today we have a huge challenge of how to educate not only our leadership, but 42% of all people when asked questions about finances gave a C D or F. 55% thought it is acceptable not to pay a mortgage if they can no longer afford their monthly payment today, so you can see how this has changed the system.

And I would just cite one example: one of the people I had funded owns a number of newspapers and I was with him one day and I picked up a copy of the business section that day in one of his local newspapers and cities and I said don't you embarrasses the headline of your business page? He said no, I'm not ashamed. We receive very few complaints. We get most of our complaints in the sports section. Okay, if a writer doesn't have the right data, we could get a thousand letters okay you wrote some of that the right fielder has a good throwing arm and he doesn't throw it well and a thousand people will write if they don't have success on the sports page we move them if they're good Financial Section Writer, so this is a challenge and, you know, if the chairman of the Federal Reserve can claim that no one lost money lending money to sovereign countries, then, in my opinion, everything is open to discussion today and that's why Stacy I Let's go back to this topic of society.

Ultimately, society is going to decide who our political leaders are and our political leaders are going to respond to their citizens with regulation, so I think I feel more comfortable that today we can find solutions to many of our challenges and create models financials with myON and Gary Becker, who couldn't join us, and Lou and Richard, etc. I think the challenge is can they be implemented and I think we talked about flood insurance before if the number comes up transparent and says oh it's too high we're not going to pay what the market tells you we need something else that's the challenge that I create today, so in closing, you, all of you such incredible financial

innovators

, and I wanted to see if we can finish talking to each other as entrepreneurs from a personal point of view.

You know what it was. Know? Myan, your black outlines paper was rejected, I think for three years by referee journals before you finally got it. You posted what you did, what you did and, Mike, you've told me numerous Ro stories and we were discussing this morning about how long it took to get the mortgage markets up and running, if you could talk to us about what it meant to keep your eye on the prize, what was most useful to you, what helped you persevere and how you actually not only did blackboard economics to your point, but you created the infrastructure of the markets that were that, that you created, well, I think, um.

You know obviously you have to be persistent and try to achieve your goal and you know if we go ahead and take tests and fail the tests, we're still persistent in our goals and then we move towards uh uh. Try to make sure that others understand what it is that we're trying to do and that's how you move forward, how you do it, but it's the combination of having a goal that you believe in and understand and why it's important and then persevering. to the goal, but realizing that the path to that goal is not going to be easy because if it were it would probably already be done, so one of the reasons why, you know, the milk and the Institute have persisted through all these years trying to solve that equation and calibrate the equ equation and now moving to the financial side of the equation, even more so, because whether it's literacy issues or the tyranny of the status quo that was raised in previous questions that basically The The goal is to have a more competitive allocation of resources and a more efficient allocation of resources and to have a growth situation, but you know if it had already been done then there wouldn't be a need for all this stuff and that's the fun part. of creating things and making things, I think Stacy, you know, if you have a passion for something, for me it was the impact of the Watts riots that really surprised me, it was the middle of the civil rights movement and the idea that a person no You didn't have access to capital based on your ability and then a person you know watched the factory burn and did nothing it was so irrational and the fact that La was on fire didn't make any sense to me which It really surprised me.

Well, we had to make Capital available to people based on their ability, not who their parents were, their religion, or where they went to school, and if we didn't do that, there would be many more cities burning if people I wouldn't think they had a chance to fail and I think one of the real approaches of America is that a person has a chance to fail, you know, and I would say, like Myan did, it's not easy, you know, it's not easy and I still have some arrows in my back, you know it by the process, you know it when they tell you that what you are doing is destroying instead of building, you know it's a challenge, but I think the passion and the belief that you constantly recalibrate It is your correct way of thinking, but if you have passion. and a belief that will help you get through no matter what has happened, okay, and if you know, there's a very famous quote from Abraham Lincoln about this that basically said that if everything you did was wrong, 12 angels swearing that it was they would do it well.

It wouldn't make a difference and if what he had done was right, every newspaper in America basically said he was wrong it wouldn't make a difference in the end and I think that's unfortunate, but I think when you look back on history most people, particularly artists you know, never get positive feedback in their lifetime from that point of view and I remember that Lou, to turn to Lou just to have an insurance company that could buy and sell a bond, really could have takenfive years. in accounting to do that, really yes, everyone forgets that really what I started was this question of whether we would have enough money to finance the housing of the baby boom generation and the balance of the specialized savings industry was not so balanced .

We had to figure out how to finance housing, just the demographic need for housing is shelter and, you know, the solution was pretty simple. In retrospect, not using the balance sheet, just financing the assets themselves, but that was heresy. At that time, it actually took 7 years to pass enabling legislation. I know many people now wish it had taken 27 years or forever to pass the enabling legislation, but an observation: I learned a lot about the rules and you know there have always been rules there. There were rules about what made a good loan there were rules about what made good legislation, you know, when we were going through that process, I remember the senators and congressmen who helped me in the White House at the time told me Tau and they kept saying saying make sure the language is clear because the rule will remain in effect long after you are gone and make sure someone isn't reading a rule you didn't write with an intention that you didn't and, in fact, make sure the language of the report further clarifies the rule that that remained forever and ever the rule for passing federal legislation, we keep throwing out rules, that's our problem.

Frank didn't write a rule, he told it to someone else. In the capital markets, that is a crazy idea because what they did was empower a regulator to interpret what Congress really meant and a lot of those regulations are not clear in themselves, so in the next generations we will be reinventing what Dodd Frank really meant and then we created the Consumer Financial Protection board, which has made absolutely sure that they will protect every consumer from themselves, regardless of what happens. Well, one of the problems that has to do with you now is that one of the problems that we constantly have is that lately I want to say that I did not see this.

I've been doing this for about 40 years and something like 46 years, maybe it's my age, but it didn't seem like it. I mean, it seems like we've respected the rules that have existed for a long time and now I see that we just routinely ignore them and and go out and do things that have no historical precedent and assume that they're going to be correct and that's the most powerful lesson I've ever done. learned, okay Rich, um, it's hard to talk after me, we have Michael and Lou, but a couple of things and I think everyone really got this right and it's just passion, I think those of us have been involved, I said it all , it's patience, okay, it took me 10 years to work at Lou, you know, he got kicked out of all the banks in New York in 1970 and said interest rates don't fluctuate, it's a stupid idea, most Wall Street companies Also, yes, most Wall Street companies need that, I'm okay with losing.

Dot dodf Frank is 2,300 pages, the US Constitution is six, the bill creating the FED is 25 The bill I worked on to create the CFTC is 155 pages, SAR tables, 160 DOD At 2,300 pages, Frank is longer than the Old Testament, New Testament, and Quran combined. Now, what does that tell you when a law is greater than the rules that govern behavior: we live in a kleptocracy that is formally defined as the governed serving themselves and their friends at the expense of the Governor, so you have to do it . I think the point was perfect, you have to look at where the rentals are, who is going.

To make money when I was working on climate change. I asked a person in Washington that everyone in this room would know but whose name will not remain anonymous and I told him I want to come in and show you what I did. I was right and wrong in this climate exchange that we carried out about monitoring and verification and how the accounting is done, how these rights are assigned to Adit and the answer I got was that we don't talk to anyone until we draft the legislation. and I came out and said to myself that's the most idiotic thing I've ever heard in my life and then about 4 days later I said, I'm the idiot, screw me because the way to optimize campaign contributions and cheap rent is to write Initially there is bad legislation and then people come in and because it is something you know.

I basically operate in all these cases. These financial crises always end two hours before the crisis occurs and I would like to call that the theory of billable hours because even at 2 hours you can credibly accuse people and say that you will influence legislation. With two hours left, there are not enough hours left so you have to resolve the conflict, so I would suggest that is the point you have to make and I think about what the Milin Institute is doing and what you know, you have to go there and educate, you have to be prepared to have a long preparation time and a deep pocket, uh, to be able to make changes, but I still am despite All of that is incredibly optimistic about this country's ability to reinvent itself and I'm very proud to be part of this group and a member again of the Milk Institute because I believe that if anyone can do it, this organization can do it too.

Thanks for ending that cynical view of the political process for us and it's probably a good time to remind everyone that the Milin Institute itself and financial markets center is very much a non-partisan organization, it's just that my comment was non-partisan . I did not do it. I say I wanted to post it, but your question reminds me of an anecdote that Marty Felstein likes to talk about in India and he said you know in India the supply of electricity is considered essential. right of the people and therefore a fundamental responsibility of the government and therefore it should be regulated, whereas cell phones, you know, who cares if people have cell phones, that's kind of a good luxury, so it's unregulated and it kind of stayed. away and as a result almost everyone in India has a cell phone and electricity penetration is still not what it could be so maybe it's a lesson but gentlemen I feel very honored to be in a stage with the four of you. uh for the financial markets center and um I just want to thank you very much for sharing your ideas with us and as we move forward on our agenda at the center, I invite you all please to a part of that discussion and a part of that agenda-setting process and we hope to do good things in the future, so with that I think we will end the session, thank you.