A Conversation With Financial Innovators

we really want to create a dialogue today and uh when the milkin Family Foundation was started many years ago uh we had many objectives one of them was really to identify individuals and Empower them and when the milk and Institute Foundation was founded almost 25 years ago our miss our name was longer the milk and Institute for job and capital formation um really focused on the fact that we needed to create jobs and opportunities for people in a Democratic Society later it was shortened to the Milan Institute uh but that still remains our mission the center for financial markets in Washington much the same as our decision last week for the milin Institute School of Public Health at GW um we are focused on Washington DC because that is where the decisions are made we can accomplish a lot here we can finance a lot of activities we can create new financial markets instruments we can try to solve all the problems of the world but today in America what the government policies are heavily influence our success and with that I'd like to introduce the executive director person who's running that Center Stacy Warden Stacy hi thanks everybody I'm very honored to be here with such Financial luminaries and Mike's right to emphasize right from the beginning that the center for financial markets is based in Washington and we really believe in the power of financial markets to make the world a better place to make people more prosperous and to create opportunities for people and what we want to do in Washington is to bring this to the level of policy how can we inform policy how can we raise the level of the political conversation in washingt around these issues which are as we all know very complicated and hard to hard to grasp and so we we organize our center around four pillars one is financial markets education so we're very focused on uh education of Hill staffers of of of Congress of regulators of the press in Washington we hold monthly briefings for the Press monthly briefings for for Hill staffers the second thing that we're work that we work on is kind of the strength of financial markets per se and we we think about that both in a US context as well as in a developing country and Emerging Market uh context uh third is access to Capital which is of course an issue that Mike has spent all of his life working on and we're very happy to focus on that through work on the jobs act in other areas and last is I think something near and dear to the panelists uh up here with me and that's the power of financial markets and of the way that Finance professionals think about problems to bring a financial architecture to bear on solving the other problems that we care about be it um global warming or health or the search for uh cures for prostate cancer so that's what we're focused on at the center and as part of that uh dialogue and part of that educational process uh I we do these kinds of events and so I'm very happy to invite you all to this event with uh Financial luminaries and I I guess I'll just introduce everybody on the panel and we'll kind of we'll start with a uh some broad questions and then we'll end with maybe a specific question for each panelist and then we'll open it up to you folks and you can uh ask the ask the panels any questions so uh we have uh some fathers here up on stage with me we've got the father of the options Market the father of the mortgage markets the father of the high yield fixed income market and just as importantly my boss and the father of the Futures Market who he's will be here in the future as you as you can see so uh let me just let me just start by 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 and so I just want to ask everybody uh what what do you think is the right problem to work on today and maybe I'll start with you Marin it's obviously in my own work in that I tend to try to think about puzzles and trying to solve puzzles and and model them and I think uh but in a general sense I think that uh really the biggest problem to work on today is to think about how uncertainty affects our models and how we tend to deal with things because basically we uh assume that we have um uh the well the information set is just very complicated and very large there's tremendous amounts of information and we have to model that uh information and we have models but the models all have errors and so the more interesting question is how do we use the errors that we have to learn and whether we use the error and it's an error and we ignore it or we use the error to learn and a lot of um I find in the regulatory side and the financial Market matters that you were referring to is that people tend to um not realize how to deal with uncertainty and how to use uncertainty to and how financial markets tend to help reduce uncertainty and allow us to grow and so uh if we think about if I would make it more focused I think one of the biggest problems we have in our society and how Finance was going to help solve these problems is the tradeoffs that we now have with the promises that we made to the old and uh promises that we have made to the young and how to satis safy the interaction between uh the old whether it's in health care pensions and then the young in terms of Education housing and and having a society in which we are going to be able to grow and use financial markets to function accordingly Mike getting you to narrow down to just one or two problems is going to be a I think a an exercise in futility but why don't you talk about some of the things that you think are the most important to work on I I think Stacy my my view would be that there are very few surprises you might not have timing right but there's really very few surprises in life and I think most people are working on symptoms not the problems and so I think if we can identify the problems then we could try to figure out how to solve the issues 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 America have a net worth under 10,000 that median net income in the United States is a of median net worth is a fraction today of the UK Japan Italy France and even Greece and so in a democracy a symptom is that we have a poor middle class today in America and we could we could discuss why that's occurred much of that has occurred because they've lost their net worth in housing or they bought a house too large that just drained their liquidity and their funds at the time or that they spent their second mortgage money on a vacation not an investment whatever it might be but I I think that symptom I take back ultimately to education so if I um go over the little formula I scribbled down in 65 that I've introduced over the years to each of our panelists hundreds of times and I think about it you start with human capital the largest asset and you and you say to yourself okay what can we do to increase the value of human capital this being measured in hundreds of trillions dwarves all other acid categories so there's three ways there's education and the challenges of our education system and the relative demise of the K12 system second is immigration can we continue to find a way to bring people of talent opportunity and promise to the United States and third is can we increase the length and the quality of a person's life and control those costs so the second is social capital the United States in many ways still is a leader in Social Capital um and many of the people around the world still want to come to the United States if they could come in and laws rulers of law private property rights and other things are part of that uh from that standpoint the third is real assets how do you finance real assets uh whether it's a house or a factory or a company but I really go back to education and whether it's education of our political leaders today uh education of the general population as they decide what are the decisions they're going to make uh it's my feeling that the liquidity of the market today uh would Finance most of these issues and the government could step away but I think many of our government leaders are just scared they don't know enough to know they could step away and as a result there I don't believe they're needed in in in uh multif family housing I don't believe they're needed in commercial real estate today Etc but what will give them the confidence that they could step away when their knowledge of financial markets is relatively low and their confidence in financial markets is relatively low and so I'm I see really the solution is the public acceptance government acceptance I don't believe uh that we can't find the solution to many of these issues whether it's energy environment water un name it the question is will governments allow us to implement these strategy and we'll drill down a little bit more into that actually but Lou let me ask you besides human capital social capital and real assets is there anything else that you think we should be focused on as some of the major problems of the day well in in process of rebuilding the Capital Market do Frank rewrote all the rules and we're now in the process of or said we should rewrite all the rules and we're now in the process of rewriting the rules for the entire Capital Market much of which is consumer related such as housing or asset backs or whatever and one of the questions that we don't seem to want to ask is what do we re what kind of a process do we really want what do we want to come out of this we want less government but we want to give the consumer everything he wants now not later and it's that it's absolutely impossible you cannot get the the government out of the housing market as an example if you're not willing to say no to the consumer at some point the only person who can give the consumer everything he wants the size of the house he wants with the the highest loan the value and the ability to refinance out the house the minute it has Equity is the government no one else can afford to do that so we we refuse to have this fundamental conversation what is the role of personal responsibility and what are we willing to give the consumer and is there a line where prepared to draw if we don't answer that question I don't know how to redraw the rules for the capital market and we just seem to want to dodge that very painful question yeah Stacy let me if I could just from one second let we have a slide on we could call it the decline of personal responsibility and if we look at this I think the point that Lou is making let's start with housing when Lou really gave birth to the modern mortgage markets and financing markets it was 20% down or more and the average mortgage overall was what 60% of value yes uh so today if you have to put down 5% you're complaining at FHA in fact you wonder why the government hasn't loan you money for the down payment uh also Health the real issue of obesity in America is only 20 years old this was really never an issue so I'm not responsible any longer for my own health uh education the dramatic difference between the United States and Asia in Asia education is a consumer product second largest expenditure by the middle class is education here it is one of the lowest expenditure by the middle class 2% 25 times as much on housing and transportation in the US and uh as a result these are issues that Louis talked about and I think in a democracy the question really lies what what is the issue here that it will get you elected that's a political leader and uh what can you say no to it's the same issue that everyone faces with their own children or their relative sometimes you have to say no the government because of financial institutions imploding said No at Fanny May and Jenny may but they had an a reserve category called FHA and I'm sure Lou you could talk about at length here so they just Unleashed FHA and it was under head and so they in the inter term essentially in many ways financially bankrupted FHA by doing an FHA what they used to do in Jenny May and Fanny May so the question is in order to be elected is any one willing to say no at the government level and and I think the other area that we're seeing in this responsibility that uh myON I'm sure is going to talk about is when you have an entitlement whether be a pension medical benefits that doesn't mean it's it's pretty easy to promise something that you can't afford now the question is whose responsibility is it and I think we've all seen here that a number of the public Pension funds have notified their state legislators that they need five you know three 8 billion whatever might be in perpetuity to meet their unfunded promises they've made and whether it's a school district whether it's police fire whether it's uh public employees whether it's teachers who is going to stand for those promises that on a mathematical basis can never be met and I think these all come back to the theory of personal responsibility that Lou is addressing yeah we're fully stiffed we the the the father of future markets has arrived in the present so we are the future is now the future is now as they say so let me drill down a little bit into some of the themes that we've talked about around personal responsibility and the role for policy and asks and ask you as Finance professionals and economists I mean economists don't agree on a lot of things but one thing that they all do agree on is that people respond to incentives and so let's can we talk a little bit about the right incentive structure be it at a policy level or a household level or a firm level and what can policy makers do to make sure that we have the right incentive structure to care about and to solve the problems that we need to work on be it um unemployment or the environment or the or housing or the other things that we've uh talked about and um can I can I start with you Richard sure well Richard I think you know one of the things that was a major issue in our country in the 80s was acid ring yeah and no movies Etc and obviously you were Central to much of those efforts that we talked about at the Institute yeah you know essentially the single word answer is to price it okay if you really want to change people's behavior with what economists would call externalities is to put a price on it be it clean air clean water you know uh and that will incentivize in the same way that it does with food or growing soybeans corn or wheat which one is the relative value in the United States in the 1980s acid rain was a tremendous problem you may recall 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 and we do forget that Pittsburgh was like Beijing and Gary Indiana looked like these cities at the time and we put a had a choice or policy makers had a choice simply to have a command and control device which basically said everybody no matter what their Circumstances had a lower pollution by 10% and then the alternative would be to lower it by 10% and then let each person achieve the goals in whatever way including buying somebody else's reduction so if Michael generating power was very good and his cost was low to install technology he could produce 20 or 30% and he'd now have a price on that he'd say I'll send sell my reductions to Richard power who's not too good who has to build a scrubber a plant to clean the flu glass and and we would establish a price he will sell them to me I will buy them he is incentivized to reduce as much as he can and I'm happy to buy it if the price of those reductions is lower than the technological cost of reducing it physically and that program resulted in a reduction from 8 18 million tons down to 3 million it produces annually a reduction in medical costs associated with lung disease of $123 billion a year that's amaz and it saves 30 to 40,000 lives a year just to give you an idea if we extrapolate to China today to a city like Beijing they have a potential drag given that they produce 27 million 50% more than the United States at its heart same geography four and a half times the population so if you take that 123 billion you're talking about a dragon future health costs of a half to a trillion to a trillion dollars a year just from acid rain as a inel liability on their GDP yeah it's amazing and they price all I have to do is price it and you've just written a very interesting book called good derivatives and let me just ask you as a follow-up question how many problems do you think this kind of approach is amenable to I think every case in which there is an externality water medicine education price these and you will get the most efficient outcome more than any prescription give you an idea of the the relevance of it the EPA today or at that time had roughly 177,000 employees and the acid rain division had about Brian mlan who ran the acid raid program said while there were 150 there were only 20 out of the 177,000 that addressed acid rain 20 people to reduce the biggest problem that we had at the time in the environment it's not exactly a job creator for the bureaucracy and so one of the challenges Richard obviously is when you quantify it or price it some people don't like the price so we've had a recent discussion on homes built in hurricane or flood areas so what is the real market for your flood insurance and what would your premiums have to be pay and once you discover what it is then people say well they don't like that number you know I remember I was watching uh one of the financial shows on television and pointed out that okay these were the unfunded Pension funds and you needed to get 12% of your money for the next 40 years in order to fund them and appear to be an impossibility with governments yielding 2 and a half% a lot of people would like to get 12% of their money uh if they could cound for the next 40 years and one of the uh members of Congress pointed out that they recognize what math says but they just don't believe it they know it's okay and that's just math so I think there's there's always a challenge when you price it to understand what the reality is what does it mean and I think the flood insurance recently when it was actually priced out you could see how people reacted because the price of insuring those homes was so significant you know yeah I think you have a real difficulty today Michael in in the US we did in fact resend the price increases the Congress did in its Infinite Wisdom of flood insurance um and and curiously enough you'll be interesting to learn that concominant birkshire haway is withdrawn totally from the catastrophic insurance so you have the a a country that's got 550 million in policy Surplus and the direct insurers if Sandy had made a right turn billion not million right billion sorry if Sandy had gone right and actually hid new hit New York you could have had 500 to a trillion in losses theoretically one event could have taken the insurance industry and I think you have the same ingredients in that sector that you had for the banking crisis State regulated and very simple if we where to go out today what would be our policy as business people you'd go and walk to San Andrea's fault you'd find the riskiest spot and you'd write as much premium as you could then you'd go down to Florida find the riskiest Place write the premium the storm you live it out for four or five years and you have no events you build up equity and you have one event you have a free put to the state government because there's no Governor that is going to let a massive weather event Wipe Out the home ownership of the state so you have a free put in any catastropic area to the government so you know you don't have any desire to price the product appropriately and to manage the risk right um myin if I'm not mistaken I believe you've had something to do with the correct uh pricing of risk in in the past and so do you want to elaborate a little bit on this or how you think about it well I think that Richard's right I mean the idea that we do encourage people to build homes uh against the uh walls of forests that we asked people to build uh homes on the Mississippi Rivers which are floods Etc uh and uh you know we haven't priced the options correctly in how we are doing these things and what it implies and uh we basically um the problem that I see in you know um how to address is the idea of the shortterm versus the long-term which you bring up is the regardless of when you're a politician or you're voting for your constituents Etc it's always easier to uh think that if I can support the entitlements that uh Mike and u referred to in his slide and that that basically I can carry them forward then I have an option to come back you know and be able to finance these later on and so there if there was some way to uh create the right incentives by valuing these contingencies or these liabilities and have them articulated um and then it might uh create a different incentive to uh in terms of uh who's going to pay for this and what the real cost is if we had to put this in a in a budgeting framework as well and Lou let me ask you about the incentive structure of the mortgage market and do you see how how you you both you and Mike have written about how the government incentive structure has really left us with a almost completely government-owned now mortgage market and how do you see a way out of this and do you see the the how do you there is a way out of it if you're willing to make decisions the trouble is we don't seem to have the will to make the decisions I mean but it's not simply housing it's you could look at multif family and you get the same outcome in other words remember the person who's writing who's creating the incentives or the disincentive in a sense is the government and we have the strongest multif family demographics in history even much stronger than what it was for the Baby Boomers so the need for rental units affordable housing workplace housing are extraordinary and what happens is the government who subsidizes the system through you know Fanny Freddy FHA used to require a certain number of of the units that they ured to be uh basically a percentage of medium income that forced the system to produce workplace housing so we have the biggest demographic need in our history and they move it from a percentage to full medium and now there is none so all of a sudden 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 big units on Park Avenue so in the last HUD report they show that we're 6 million units shy of affordable units in the workplace housing well that's not surprising if you want to direct direct the system to produce the wrong things so that habit of misdirecting the economic incentives you know goes well Beyond housing in housing we can rebuild the system but we're not going to be able to we will not you know I would tell you that somebody asked me Johnson Creo Johnson Creo is is a refinement of the bill that went before at Corker Warner and it it does make changes that are important it under under cre we could actually do a TBA Market as an example but practically neither of these builds will work because when you try and put when you try and say I want the if the purpose is to get the government out of housing or have less government the answer is it won't mathematically work correctly if you give the consumer everything he wants it just can't it just can't be done the numbers don't add up yeah the numbers don't add up once you put in the real cost of trying to transfer the the risk away from the government the private sector won't pay will not buy those risks at the at the prices that we're willing to accept so we can you know we can spin the wheels and it goes right back to this issue of deciding where we're what the incentives are for and are we going to price them right Stacey I just want to make a point if I could fing up and lose here I think it's very important we understand the opportunity at this point in time this opportunity in March of 2014 the enormous accumulation of wealth much of it due to the technology explosion much of it in the hands of people that are 2030 and 40 today who have different views of society and could never use the wealth that they've created at a very young age leads to an explosion of philanthropy an explosion of new models of combination of philanthropy and for-profit investing in things that has the potential to take on some of the cost that Lou has aine if that philanthropy is focused on that area so whether that philanthropy be focused on the environment whether it be focused on education medical research prevention Wellness Water whatever the issue is there are substantial funds available today in philanthropy if effectively used on one side of the coin the second opportunity of today that I think the planets are quote aign is the unbelievable liquidity of financial markets it's just hard as I look at many of the people with us today to think about Triple C's yielding between five and a half and 6% you know the average pick hco the average at the low in 09 traded at 25 cents in the dollar and the pi hco Anonymous Association got together and said we will never buy another pick H Co again never we've learned our lesson well in 2013 more pickle Coes rated Triple C were issued than in any one year in history so that that has been forgotten please tell your favorite my favorite Covenant okay so we can and as anyone knows today all covenants are being eliminated and and Stacy's excited about the Covenant that if you do liquidate the company and move your money to the Cayman you have to notify the creditors within 2 years of transfer of the money so that's real by the way the covenants the covenants are gone uh the liquidity is there and and to me between philanthropy and worldwide liquidity you could solve many of these issues and you could get the government out and I just like to switch if I could I just want show one thing sure for you so 1969 I scribble down this idea of the cube the financing cube when I was back east and and I was thinking okay how do you finance a company what is the right way to finance a company eventually wrote my thesis on this okay so first the company you had a company and then you had the industry and we had data this was you know all computerized with mathematical data and see so we could support our theories then what going on in financial markets and we all know the best time to finance is when you don't need money and when you do need money it's the worst time to finance and then what's going on in the economy and that's kind of what you study in an academic setting but in reality those things are important but not the most important and so the most important was to get to the fifth order and understanding okay what is regulation and as Bill McGowan used to tell me AT&T introduced a new regulation every day in Washington uh that would put MCI to business which is why in the early years 50% of all the employees of MCI were lawyers but what is regulation regulation is society and so the most important factor really is so what does society think and right now society as we know it doesn't think highly of anyone in the financial service industry uh at this time because it's ultimately Society that's going to make the laws and the regulations from that standpoint and I that takes me back again to education if the median net worth of Americans was similar to Australia or Switzerland would' have a different situation today but it's not and therefore whatever we try to do even though this is the best time to do it we are challenged by lack of Education uh of both the populists and our government leaders and finance and we're challenged by the fear of a relatively poor lower middle and middle class that if you pulled away their safety nets what would happen to them their children and their life and so I think that's why the uh the theme today is one of inequality from that standpoint myON I I yield the floor no no go ahead I was just going to say something about um the issue relating to the point you raised in terms of measurement you know if we're going to have these uh younger people involved in philanthropy they want to be able to know how to measure output and you know how we have value for what they're investing in in terms of philanthropy and uh there's a big debate now among these younger people that I've talked to how to actually figure out a ways to measure what uh you know so the idea of prizes because but that's a very dedicated output system as opposed to more General problems that you were raising that are going to be hard to measure so one of the things that uh involved in what the financial Market uh program is going to be involved in is actually thinking about how to set up ways in which you can measure the benefits of this and you've done it in part in comparisons geographically to what we have in the United States but also over time what we're going to be able to achieve by education and then through education being able to measure output from we have we have a few people in this room who are among our country's leading Real Estate Investors with us today and I'm not sure looking at two of them right now whether they realize that by setting up those those credits for SO2 that you're also increasing property values in those areas so you want to increase the property values in Beijing okay just clean up the air and you'll increase the property values in Beijing but the effects there particularly in the northeastern part of the country uh from eliminating the the many of the deficits that they had in air quality also at the same time was a place you'd be willing to live and ultimately increase property values and I would say the same thing myin the increase in education you know was not measured we don't take and measure human capital that as a person goes through Early Child Care Elementary midal and so on what is their increase in human capital their future earnings potential we do measure it know on an individual basis we measure it on a macro basis but what is the benefit to housing and the society to improving education one of the challenges uh that's occurred in Los Angeles has been because of the educational system the difficulty of getting companies to move into La where their employees would live in the LA unified school districts instead of in Thousand Oaks or another Community with a different School District so the measurement of the what we might call social capital is one and I think you've raised a very interesting issue whereas this issue was not raised by quote many of the philanthropists of the past the people from Silicon Valley and the you and many of the of our leading philanthropists today are asking can you quantify and I Know Rich da tizio at The Institute is scenario he working on but you can you quantify what the output is of our your request for our philanthropy and I and I think that investors are comfortable very comfortable wearing their investor hat and they're very comfortable wearing their philanthropy hat and now we're being they're being asked to wear their investor hat and their philanthropy hat at the same time and how do you can you shed a little light on how uh we might be able to wear both of those hats and measure uh outcomes 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 were able to and if I do have a map somewhere but if you would have put up a map and talk about the lack of respect for finance it is inversely proportional to the distance from Washington DC so the further you go away the more you have a Reliance so that respect is you know China has seven pilot programs in carbon trading California is leading the nation and markets and prices and finance to solve social problems Europe is doing it the closer you get the DC the further away from that precept that you get so you get this inverse relationship Richard you might Richard was on the was still on the board of the largest electric utility in America yes you might talk about you know one of the areas we focused 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 what the real world's like in that area yeah this a wonderful experience uh this is American Electric Power and I chair the finance committee and so we've got an annual spend of about 2.3 billion a year U most of it for Environmental Compliance but we really thought there was a very simple Arbitrage we could produce electricity in West Virginia at 34 cents a kilowatt hour and sell it in Virginia at double or triple that price so the idea is you build a transmission line from West Virginia to Northern Virginia all of 85 miles it took 17 years to do six 16 years of Permitting and 11 months to build the transmission so right now you can produce power in Arkansas at 3 cents and you could sell it in Dallas for 18 cents but you can't unlike natural gas it's 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 the turkic republics they built 2900 kilometers of distribution from The Source in the turky republics to the entire network cnpc in China and they did it in about 22 months as opposed to 17 years at a for 90 miles of transmission it's amazing you know one of the reasons perhaps that the so that's why we're so focused on regulation in society right absolutely uh why the people are not understanding the recovery and Recovery that has taken place and the fact that the financial services sector uh does not get credit for the good things that it does do in the financial intermediation process which are critical of course to any recovery is that this has been uh largely uh up until you know very recently and still a jobless recovery and so when you think about uh policies going forward I mean I'm always struck by this uh that technology is inter is disintermediating the workforce from from the production process in so many areas and it's not just assembly line workers now it's it's New York Stock Exchange Traders and um bi you know biology phds and at the same time companies are complaining that they can't get the qualified Workforce that they need um and how do we how can we think about what are the right policies be that education policies or immigration policies to to to create a a a more robust job intensive recovery going forward I'm going to set the stage for the others I think the president on reelection night announced that he still believes in America that if you're going to work card there's an opportunity for all of you and I think Stacy that was true in the 1950s 60s and 70s as we look at the traumatic change in jobs just as a basis for your question 65% of the jobs today require a skill 85% require a skill plus semis skill so yes there was a period of time where if you just wanted to work hard most of the jobs required just a willingness to work today they require a skill and so some of the studies show that the us is going to have you know 73 million jobs that it can't match up against a required worker and U the CEO of seamons has pointed out that the number one growth area for Seamans is the United States uh the CEO of seaman us challeng is to find Qualified workers in the United States so it probably requires and once again back to education a change in our educational system um a focus on trade and skills trading the idea that you know only 30% of the population is going to get a diploma as we think of and the other 70% similar to other countries like Germany is going to get 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 on the government the other area I would say just to launch the topic would be uh unemployment insurance and other other government uh fallbacks that have been created for people at the lower end of the economic spectrum today you actually get hurt as you make more money and get a job so you take away your Early Child Care benefits you take away food stamps and so there's a disincentive today that's been built into the system that we need to deal with where instead of it being either black or white it's gray so as you make more money I don't take away six times what you're getting in benefits when you get paid more so there are structural challenges to a system I defer to other members of the panel on this one does anybody else want to comment yeah I want to get yelled at so I'm going to ask a very touchy question in in the financial services sector um you know the Great Recession changed the economics of many many markets so as an example we we are able to build um mortgage servicing operations in towns in North Carolina and South Carolina Alabama at amazing and these These are smart skilled people right um and they love it we wind up we could rename the town you know it's the major occupation in the town and and they work really hard and the May the mayor tries the problem is many of those jobs are going overseas and it's an amazingly touchy topic because obviously they go overseas and theoretically it's less economic but I'll ask the question this way if those jobs are government guaranteed paper think about it we're now going to transfer maybe something like $7 trillion of servicing that's on government paper Jenny May Fanny May Freddy back and we're now doing it we're now moving the multif family stuff that's jinny May Fanny Freddy offshore th these are real jobs and there is a lot of them that could easily stay here because training for this kind of stuff is very doable we certainly have the infrastructure we certainly have the technology so and I'm stuck on on the horns of a dilemma myself I sit there and I say well you know globalization we should go wherever it's the cheapest okay but I'm not sure that that's true if in fact this is all the government's paper it's all the taxpayers I don't really know what the right answer is but I know we should have the conversation simply because it's it's the citizen who's in effect footing the bill on one side and losing the job in a sense on the other so you know I said I could get myself in trouble it's very easy for me to do that without trying very hard and this time I actually tried Richard did you yeah I think it's really interesting because it's far more pervasive I I was in India recently and uh they started a treasury bond futur contract and um and the the head of the central bank is the University of Chicago guy and and so they're talking about doing away with the problems that we had l in the SNL business in the 80s and trying to introduce asset liability management um they don't Mark long-term governments to Market so it's so fine until the curve inverts we were that we went to that movie once we went to that school but the interesting thing was a friend of mine said to me listen you wrote a book why don't you go out to um this place you know and give a little book talk I said up a company there and so it's I fly to New Delhi I drive out and I'm looking there and it's beling smog it's it's heavy as India is the the I can't see they're driving on the wrong side of the road H makazi you know heaven and I get into this shopping center and I said to myself why did I say yes you know what made me do that I go upstairs and there's nothing it could have looked like the trading room of any place and he's got 500 high frequency Traders okay making markets in beans German buns um Euro dollars Euro boore and the average age in the audience is 27 so the high frequency trade is the alos and I wrote this book and called the good derivatives and I asked for a show of hands like do any of your parents know what derivatives are and they said no and so they are 27 years old making markets in every single thing that you can go so the job thing even Financial trading yeah given microwave technology and what is going on they they they are we are even exporting the things that the government likes to hate now like algorithmic trading and it's going to India and he's about to expand to Singapore because it went from London where the prices and the rents were too high to Delhi where the rents are starting to catch up you can pay a Trader in Delhi 12,000 a year and give him 20 % to the bottom line as opposed to 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 electronic trading uh where can we export The Regulators to no they you export they they're all sitting there with with black schs formulas you know tattooed on their arms and they're using everything that myin taught us years ago and they're sophisticated he just went around this guy and five years ago and he hired the best graduates of the best engineering schools in India that knew nothing about trading physicists and mathematicians master's degree and their families love him because he pays the Traders 15 to $20,000 a year plus some incentive but actually in economics obviously if you want to be the most efficient person and there's always going to be someone more more efficient whether it's in producing clothing or in trading and things will move around the world but where a society tends to grow is figuring out how which is the education issues that Mike was talking about is you have to go up the value chain that's what we tend to be doing now more so in the United States is going up the value chain so Seamans doesn't have the technicians okay that can run the robots or fix the robots or make the robots more efficient but basically everything we're doing in our society is trying to uh you know make things more idiosyncratic and more uh and and that is more and more High Technologies so insourcing a lot of that and continuing to Outsource many of the other things which are routine and just uh could be done more efficiently somewhere else so they main point is that you have to respond if markets are telling you this if markets are saying that we're going up the value chain and continue to go up the value chain then basically you need more education so you can have the next black schs models or the next algorithms or whatever so we can add lots of value or you know new Innovations in housing in finance generally or other activities so you can't castigate things that'll add lots of value agreed what do you do with all of the of the unemployed who won't be able to go up the workplace I mean you know there's some well we have you I think I think the overriding factor L that we don't recognize and I think I I want to juxtapose the late 1960s the guru of the late 1960s was Paul Erick he was at Stanford right you know those that were in that academic intellectual environment of the late 60s myin as you're remember we were going into an Ice Age we weren't in to a heat wve we were going into the ice age that was going to be worse um I had a good friend who was a student in Colombia he was a you know scientist engineer and they were working on taking lava and dropping it on the Antarctic and the Arctic to to try to warm the Earth okay so these were some of the scientific challenges of this period of time that we're looking at the other thing he told us many things but another one was that we had lost the battle to feed the planet that hundreds and hundreds of millions of people were going to starve in fact these are some of the other predictions he made life expectancy going to 42 by 1980 England non-existing um Bill MCM was with us today I just want you to know that he had predicted that England was not going to Exist by the year 2000 and that was due to the all the fish dying in the ocean and you could not live within 50 mil of an ocean so this this was your kind of leading Guru I think one of obviously one of the huge challenges we need to recognize is in agriculture so you've gone from one person feeding one to one person feeding two in the US one person feeds 340 now you want to take take a billion or two billion people right now and make them unemployed just modernize their farms and China Vietnam and all other countries in the world and you're going to have a real challenge here as to what you're going to do yeah uh and so I I think we need to realize that technology this is why large companies don't really ever create jobs small companies create jobs because large companies with lowcost capital will replace human beings with technology I think myON there's another factor that you've suggested here and I want to go to using modern technology and crowdsourcing today we are increasingly finding whether it's for medical research or other things uh that you never know by challenging the web who's going to respond with a solution to your problem so therefore theoretically you could substantially reduce your employees by by constantly testing the web and letting people around the world work for you some with pay some not with pay uh by solving your issues and your Solutions you don't need necessarily to have them internally and as we saw on the uh stopping oil spills you know you had people running tattoo poers they came up with better Solutions than the major oil companies or in the case of healthc care we find a number of hedge fund and other computer scientists have had better ideas in trying to create algorithms to how to treat patients or whe they're going to be in the hospital so this trend is going to continue and it is a challenge for any Democratic Society or any society and how to create those jobs that you've spoken about we will move down more and more into the service sector and the question as you raised right at the introduction was whether we are in the incentives are incorrect and we're paying so many people not to get educated correctly paying people not to get educ not to get into the labor force and work let me bring let me bring up another facet facet of this I had the privilege to have a dinner with Bill Gates on the hill last week and they asked him this question about Outsourcing and he said listen we could keep everybody in the country that's not the problem but you have to follow the engineering Talent you need the engineering Talent and you you go and you build a factory and all of the concommittant services and lesser skilled jobs that come with it where you can find your engineers and he laid it right back at their feet in terms of immigration policies in the United States and I'm I was hoping that you could comment a little bit about how you see immigration reform and the need for um you thinking about in this area uh for job creation well yeah I I just want to one digression on the agricultural thing because it brings up a point Mike you and I have discussed and and one of the severe constraints on that kind of model will be the fact that there's only three continents that are long water and that's the North America South America and Europe essentially the Middle East is short Africa is short China's short India's short and there is no substitute for that and and that's going to be I think a very important defining characteristic and pricing that becomes important because with water you know the way you resolve differences essentially is war right and and I suspect if we could get down to it we would realize that Tibet is is not about religion it's about water and well let me come let me challenge that Richard okay okay pleas let's take a look at those slides once again here and if we look back at how the water is used if we look here at Latin America Africa and so on you see that a much larger percentage of water is being used for agriculture and I might suggest inefficient agriculture at this time vertical farming today in its most successful Vehicles where you're farming essentially uh vertically and in pots of of and using energy different energy sources has found ways to be use only 10% of the water so technology I think is a potential in water and if you look at the percentage of water used in agriculture in quote these developing markets versus the percentage of water that's used in North America or Europe I might argue as their agriculture becomes more efficient use in modern they're going to have less use of water in agriculture one two uh fresh water is equal to salt water plus energy so therefore uh new ways of desalination of water converting water the the planet is not short on water okay and those IDE and 60s and 70s you know of going to get glaciers and towing them to the Middle East and things like that that we saw but I think the question is there are technological solutions for this problem and yes the water table between Pakistan India and China in a normal environment would ultimately lead to war when they don't have water for their population but technology is a potential solution I would agree Mike and I I think the the point that I'm really driving at and I think we're driving the same what you need to do is put a price on it to to unleash the technology and create value for those people that turns salt water plus energy into fresh water the but there's one other thing that gets lost in the mix and that is we already price it but in a very inefficient way we don't call it water trading we call it grain trading so every time you grow a bushel of corn and Export it you're exporting 150 gallons of of water every time Tyson Cuts up that chicken for a pound it exports 500 gallons of water and every time McDonald's or you have a pound steak that goes some place you export 1,800 gallons so you just don't trade it in an efficient way and you don't price it so you get surrogate ways to to trade but I'm optimistic as you are that that if you priced it you know I mean we go and you you go in and we don't realize every time you flush a toilet it's it's four and a half five gallons okay so you throw a piece of napkin in it or or or something like that boom it's five gallons that's 28% of the annual household consumption is Flushing 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 um Albuquerque has a per capita Albuquerque which is in a a desert has 175 gallons per capita down from 225 and all you need is 30 so if you could somehow price that recreational or nonwe stuff this country would would be able to be far more productive and you wouldn't be having the kinds of drought situations that we have in California I think Richard take these away here I'm I think Richard just to generalize today one we analyze that say a pack of cigarettes cost $14 to society from secondhand smoke all the other type of issues so you've underpriced theoretically and I think the same thing on a on a gallon of oil cost of a gallon of oil is $ 13 to $4 because we don't factor in aircraft carriers and other things from that standpoint and so I think the message you're driving home and everything is if we priced it if beef chicken grain Etc was priced with the raw materials we would substantially increase those prices which would change the incentive and pattern to use those elements and we just have never properly priced these issues but I would come back to the discussion earlier we had on flood insurance when you've properly priced it let's just take a simple one a gallon of oil if we put in the defense department budget for oil uh and protecting the Persian Gulf which we estimate the US has spent since the uh oil shocks of 74 between 7 and 8 trillion do defending shipping lanes in the Gulf so you could think about had we said okay we're going to spend a half a billion dollars in technology to eliminate the need to protect shipping lanes in the Persian Gulf whatever it might be we'd have a lot of our best and brightest still alive today among other factors and so the proper pricing I think it sounds like a message from everyone on on thisan not a surprising message uh if we could really price it we might be able to change incentives dramatically so I want to open it up to questions with myin did you have a any concluding thoughts that you wanted to say about this before I open it up to right well obviously I mean if you have uh um the prices are not correct then you're going to have uh actions that are taken that are personalized and not necessarily internalized so there's two parts of pricing one is the pricing that um you have have which is underpriced because of policy or public policy and the other is because of externalities and so we're mixing those two things together so some them have externalities so I don't mind the chickens being exported if our prices are incorrect okay we're producing chickens but if at the same time the chickens cause there to be a lot of waste that are not priced in then that's a different matter so there's two dimensions of pricing that create incentives so I agree that uh you know and there's a lot of uh political reasons why things are not priced uh correctly okay so let me open it up to the floor this is your chance to ask the Gres of Finance any question that you'd like well or also Stacy areas that we should be focused on I I think part of our effort here is really where are the initiatives or ideas whether it's air water environment or whether it's food or education or healthare I think we are really focusing on new Financial structures and new markets y That's a fair point yeah so we've got a mic for you thank you so my question is on pricing and sometimes there is pricing it's just not transparent it for example I recently moved to Santa Monica and I noticed the $500,000 price difference between a house in Mar Vista and a house in Santa Monica which is the uh present value of educating three children in a private school if you live in marvista so there is a price for Education that's of a higher quality it's just not transparent to the average person and what are things that could be done or ways to look at different uh Financial environments to try to make existing pricing more transparent well I first three children at 75,000 a year for a number of years sounds like a present value unless you have a very high discount rate of well above 500,000 so it sounds like the house in Santa Monica is a good investment at that spr as I said earlier in thing we do not have a system in our society whether it's in the debts of the government or or how people view prices and I think Richard brought that up as well and Lou as well is is that basically um our accounting system or the way we measure things okay don't uh give you the right measures and so in some sense um the way we've accounted for things in the past where is try to do things so that you can compare things comparative things but that gives you a model which is sort of you know one shoe fits all model really what we need is to have a system where you can actually have the data to be able to understand questions as you're asking them and uh today so with the internet and other types of technology that we're developing then the data is going to be available so that you and the models that can be developed then can give you the information you need and there's going to be people are going to use that data to sell services that are going to price things more efficiently including uh government debts or California healthc care debts and California pension debts and uh and that's going to become more readily available through um through the internet and ability to take data and put models to it and be able to analyze the the efficacy or or the quality of the information the models that were put as comparative models can can I add something absolutely you know certainly part of the financial crisis was the lack of transparency right and you would think if there was a place we learned we should have learned from the Great Recession I'll tell you how how little we've learned one of the problems with creating the common platform The Fanny fr common platform is trying to get them to agree on something simple like the investor base obviously wants to total disclosure they want to know the data that Fanny and Freddy are getting that are in their Securities although the security is theoretically you know in the conservatorship it is it is guaranteed the agencies have refused as an example a simple thing like let us know what the frequency of default is and and what is your definition of default well by the way fny and Freddy have completely different definitions which they don't really tell you and what's the process in other words it's the most obvious thing you think you could conceivably want especially if we're going to talk about a less government structure well how are we going to price the risk if we're going to put less government somebody more capital in front of the the treasury guarantee if you won't tell us the most obvious things you want to know to price the risk right the system just for some reason resists the RBS Market is still broken because we can't put everybody in a room and get them to write simple definitions we can't get them to agree is what is the definition of a default what is the definition of a cure what are the rules that a trustee has to adhere to just basic simple things we cannot get a consensus how can if you can't get the most obvious in the definition of what transparency means somebody you know like somebody is just going to have to write rules and and the reason most of us wanted the common platform is because it would be like the black hole you know if if somebody who controlled the common platform wrote a series of rules even if they weren't perfect because it was the common platform and theoretically it would set the standard as the agencies used to set the standard it would make everybody else conform because where we are now we cannot and and you can it's not simply housing it's multif family it's cmbs it's ABS it's across the board so you're you're dead right transparency would solve and prevent a lot of problems but we're having a hard time yeah producing transparency and it's not simply the unavailability of the data it's the willingness to let the data go and the C and the cousin of that of course is regulatory uncertainty right I think there's another important issue that myON touched on here is we have a number of Representatives today people from lbl firms in in the audience and you ask yourself what do you pay if you buy a company have you taken on their liabilities have you taken on their unfunded pension almost all companies that are created in the last 10 or 15 years do not have essentially pension obligations do not have medical obligations if the people aren't working for you and they're worth more than those companies that do and and it's not just pensions and medical it's also liabilities what about environmental liabilities from the past Etc and so in attempting to analyze the wor of something we don't say boy uh it's worth less because they have this so we could quantify and and I think when you have a measure on the ballot we don't tell the electric that if you pass this measure the state your city your community is going to be taking on X number of dollars in future liabilities they're going to be have to met based on certain rates of return so there's a lot of transparency in understanding what ultimate value is and in valuing that asset I think there's another one thing is just one thing is that if the data were available then it's possible that you can build models and you can have competing models so if the state or city says this is this okay and it's not then you can immediately have more information which could deduce what it is at worse in some sense the you're optimistic about that oh yes very definitely mean 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 the who's going to be head of the school board if the population understood that the school board could obligate the community or City to billions of dollars of future life liabilities in health care and pensions maybe more people would vote in those Schoolboard elections with the power of those few people to potentially obligate your community in the future so I think that there's another significant transparency and I think we've talked about it here and it's much harder to quantify and that's technology transparency uh one of the themes that was brought up today is the fact that storage capacity is infinite cost is going to low soow lower and lower transmission cost are going down telecommunication costs are headed to zero speeds are increasing what does that mean to the potential obsolescence of your product or your service whatever it might be and so the the risk on those areas one of the areas that we're increasingly focused on and was the cover of the last milk and Institute review were drones so if you look at parts of the world that uh Craig mcau here and I spoke about you know decades ago where didn't have wire lines they don't have to have wire lines if they're going to Mobile and if you look at Africa today where 80% of the people in Africa have mobile phones up from two they ask themselves do we really need to build all those roads we don't have can we just use drones can we make delivery on drones and so Delivery Systems are potentially going to change dramatically here and so I think a very hard thing to quantify is the change in in Risk to any Enterprise or way you're doing something or infrastructure structure due to this technology today and how it's going to affect your business or your way you're conducting your activities and how fast it's going to obsolete potentially what you're building so it's very difficult to quantify well just there because I think the question of transparency is is really at the heart of the matter and there are two elements uh of the question there there's that kind of opaqueness which results uh from no Direct Value but you can infer a value from it that's what most of us in finance have done so you can take your example of a house differentiation and say well I can infer from that data this is the cost of private education that that's a lot of that at the consumer level is really something I think that that the milen Institute is doing and and I as a fellow and proud to be is is economic education that goes and on that very trip to India I went to to a related one I went to the wedding of a of one of my colleagues and U in Southern India and chenai and and a 8-year-old an eighth grade kid came up to me and said he knew I was an economist and he wanted to tell me what he was studying in his accounting class they didn't answer and what he had learned about in about how credit cards work and access to it this is a 12-year-old kid that's taking Accounting in the eighth grade and whatnot I think the emphasis of the institute on economic education to legislators the simple notion do they understand inferential value or what their decisions are to when an eighth grader in in India is studying accounting well that's a that's a very good point and I hope going forward to enlist all of you in this uh financial markets education process um but we have one of the things that you're saying 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 full information but you can have no value you know so fundamentally the educational process is trying to say how to model this you how to educate people how to model it and what to do with it and then Mike's Point is crucial because the model's going to be destroyed the reason the model is going to be destroyed is because technological innovation and that you got to be careful that think that your model is in transient 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 you know that model let me let me actually collect a couple of questions and then we'll remember them and uh answer them together so Shri you've got a pretty high bar for your uh to to meet on in terms of your your question Mike I'd like to go the point that you made about drones being used in Africa and who needs roads you now have that it seems that one of the points which comes repeatedly from the discussion is if you have something new and novel it's much easier to do than whether it is acid Rin or I go and set up houses in in a hurricane area that is all established or LOF going for that matter the uh Obama Administration has talked about reforming Fanny of Freddy getting government getting out of it after the 2008 crisis it's so embedded in the system you can't get out so do you really need something novel like the drones do you need something like lack of phones in India for mobile phones to work well you do you need scarcity to get more transparency okay let's collect a couple of more questions uh does anybody else have something to ask before yeah yes sir uh I want to go back to the topic that you and Mike just touched on a minute ago and it was talked about by Richard in terms of consensus Etc to me it's not about just economic education it's about a basic literacy because when myON talks about you have all this data but you don't have a model it's great that you're you and others may be educating legislators and it's great that maybe people in this room are educated but the bulk of society and I think this goes to the issue brought up earlier about the role of government versus the role of the individual does not have that recognition and while there's been a huge emphasis appropriately so as someone who's educated engineering on Science and Technology education trying to push that down at every level and there's an emphasis by the government on getting high speeed to underprivileged neighborhoods I don't think across the board there's much financial literacy yeah so Mike and I have a mutual friend in the entertainment industry very bright couple I think have close to zero personally financial literacy a place like Stanford the number one major today is computer science yeah but I and I'm sure there are plenty of econ economics majors and political science Majors who may have some financial literacy at Stanford or at Harvard or at Yale or at Northwestern or Duke but I think when you look at the widespread of society very educated people don't really understand the basics to be able to um deal with the data or the models so my question is how can we all work not just to educate but really across the system uh so because ultimately those politicians if educated will only respond if their constituents uh believe in in that issue meaning it's great to educate for example let's say Maxine Waters you know here in La who's been on the Banking Committee forever I believe but my bet is unfortunately most of her constituents believe populist rhetoric and don't understand the impact of some of the things that have been discussed up here yeah so I don't have the answer but I think that it's an issue not about educating policy makers only it's about and at every level yeah yeah I'd like to go to Sheree's scarcity issue I think I think it's a really provoking thought do you need a paradigm change so it's so hard to re build anyone who in real estate rather than just built and and so indirectly that is your question a paradigm change and it struck me I mentioned it to a couple people when I came back from Singapore the largest Singaporean and leading Bank DBS in Singapore I was visiting with the CEO it's now say three weeks ago and he asked me do I know who his number one competitor is and before I could respond he told me it's Alibaba that's his number one competitor so and they collected $40 billion in three months and if they got a banking license in China they might be the largest bank in the world in two years so I think there's the potential using technology for Paradigm changes and I think but I think that's a very thought-provoking idea uh but I would say not your scarcity a need in Mexico one of the most powerful individuals was the telephone repair man and the scariest people one of the scariest people in the country if he was coming out to fix your neighbor's phone you had to pay him protection money because while he was fixing his phone his hand could just slip and disconnect your phone and he wasn't coming back for 6 months so therefore he was highly paid on the side once you went to mobile you were able to deal with a lot of those issues and so I think it's it's it's something we should we should follow up on how can you create a paradigm change instead of trying to change something you create something new and will people gravitate to what's new comp I do think that young people are are young uh individuals today particularly in the technology industry we are very focused on water environment energy many of those areas how can we take their enthusiasm for these subjects and deal with it as a relates to the question on literacy it is a challenge recent uh questions asked in most the people in the America think us is in South America not in North America here is we have a literacy test that was recently given to us Executives average score was 38% majority of us these are business Executives could not distinguish and explain the difference between profit and cash most of them could not tell you the difference between the income statement and the balance sheet and 70% could not Define free cash flow so that's just not John Q public if you want to look at it at a different level you know what the public how the public reacts or what they think today um 33% don't pay their bills on time this is an issue 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 uh well if I don't pay my mortgage I can actually pay all the rest of them because it's the biggest number anyway so you know and the guys don't take it takes so long for them to chase me on the mortgage that I can basically you know pay everything else and and have positive cash flow anyway um stepen nin's with us what is the Foreclosure rate in New York City today Steve basic New York state New York New Jersey and Florida you basically cannot for I mean it's a it's a two to four year process okay so uh and Maryland is forever it's four years in New York and Maryland by the way it's not a surprise in California the housing markets have rebounded much more significantly because you've had quarterly turnover can you repeat so it gets on tape yeah let's uh let's why don't you repeat uh Lou what Steve has said so we get it up on oh I'm sorry so Steve was saying that in Steve minuchin chairman of One West Bank yeah in certain States like New York New Jersey and some of the and Florida it takes a very long long time to foreclose anywhere from 2 to 4 years New York it's actually a little bit more than four years as an example versus most of the other states where it's less than a year and there's an absolute correlation between the bounceback from the uh Great Recession those states which have been able to clear the inventory because they've been able to move the foreclosures through the system have come back much more aggressively and the markets are in fact if not totally stabilized and some of them they're a supply demand imbalance the other way we're in those heavy foreclosure States it's still very rugged glowing I mean and so it's not in anybody's economic best interest the number of people being benefited to the disadvantage of the everybody else in the state it's that's the way it is and Ed DeMarco as you know you know who the the former head of fhfa had the gum to threaten uh some of these long foreclosure States like New York and Florida with charging them a bigger fee to get government guarantee because it wasn't Sim Fanny and Freddy had the same problem they could not foreclose in New York state for four plus years so they lost more money on a given Loan in New York than they did on a given Loan in California so Ed DeMarco had the tarity to say aox on your house you guys in New York and Florida you're going to pay me a bigger fee because I can't foreclose you know how did that work for him he's no longer the head of fhfa so I I think we think of these things as isolated I think it's very important the Asian crisis started in Thailand and you discovered and you and you made loans in Thailand that you could not actually really foreclose for 7 years that the equity holder had a right to run the business for seven years so as a creditor yes they could default but they ran the company did whatever they want for seven years and it caused laws to be changed and it shortened it from s to one but I think if we look at the general knowledge and the general view uh of the public related to finance I think we have an enormous challenge today of how to educate not only our leadership but 42% of all individuals when asked questions on finance gave themselves either a c d or F 55% thought it's acceptable to default on a mortgage if they no longer can afford their monthly payment today so you can see how this has changed the system and I would just cite one example um one of the individuals I had financed own a series of newspapers and I was with him one day and and I took a copy of the business section that day in one of his newspapers and local towns and I said aren't you embarrassed by the headline on your business page he said no I'm not embarrassed we get very few complaints we get most of our complaints on the sports section okay if a writer doesn't have his facts correct we could get a thousand letters okay that you've written something of that the right fielder has a good throwing arm and he doesn't okay and and a thousand people will write if they're unsuccessful on the sports page we move them if they're a good writer to the financial section so this is a challenge and uh you know if the chairman of the Federal Reserve can state that no one ever lost money loaning money to Sovereign countries then everything in my opinion is open for discussion today and that is why Stacy I go back to this issue of society Society ultimately is going to decide who our political leaders are and our political leaders are going to respond to their citizens with regulation and so I think that is I am more comfortable that we can find Solutions today to many of our challenges and create Financial models with uh with myON and Gary Becker who couldn't join us together and Lou and and Richard Etc I think the challenge is can they be implemented and I and I think we talked about earlier about flood insurance if the number comes up transparent and says oh it's too high we're not going to pay that what the market is telling you uh we need something else that's the challenge I believe today so to wrap up uh you you all such unbelievable Financial innovators and I wanted to see if we could just end by you speaking to us as entrepreneurs from a personal point of view you know what did it you know uh Myan your the black sches paper was rejected I think for three years by by uh referee journals before you finally got it published what did you what did it and and Mike you've told numerous Ro stories to me and we were discussing this morning about how long it took to get kind of mortgage markets going if you could just speak to us about what did it mean to keep the eye on the prize what was most helpful to you what helped you persevere and how did you actually not just do chalkboard economics to your point but actually create the infrastructure of the markets that were that uh that you created um well I think that um you know you have to obviously uh be persistent and trying to achieve your goal and uh you know and that if uh we go along and we take trials and we fail at the trials we still are persistent in our goals then we move forward to uh uh try to uh make sure that others understand what it is we're trying to do and that's how you move forward how you do it but it's the combination of being have an objective which you believe in and you understand and why it's important and then sticking to the objective but realizing that the path along the way to that objective is not going to be easy because if it were it would probably already be done so one of the reasons why um you know uh the milk and Institute has uh persisted for all these years in trying to solve that equation and calibrate the equ equation and now moving into the financial side of the equation uh more so is because whether it's literacy questions or whether it's the tyranny of the status quo questions that were brought up in previous questions that basically the objective is to have a more competitive allocation of resources and a more efficient allocation of resources and have a growth situation but you know if it was be done already then there wouldn't be a need for all these things and that's what the fun part of creating things and doing things I think Stacy you know if you have a passion for something to me it was it was the shock value of the Watts Riots that really shocked me it was the middle of civil rights movement and the idea that a person didn't have access to Capital based on ability and then a person actually you know watched the factory worked in burn down and did nothing it was so irrational and the fact that La was on fire didn't make any sense to me that really shocked me um that we had to make Capital available to People based on ability not who their parents were their religion or where they went to school and if we didn't there'd be a lot more cities on fire if people didn't think they had a chance to fail and I think one of the real focuses of America is that a person has a chance to fail you know and I would say as Myan did it's not easy you know it's it is not easy and I still have a few arrows in my back you know from the process you know when they tell you that what you're doing is destroying rather than building you know it's it is challenging but I think passion and a belief you constantly recalibrate is your thinking correct but if you have a passion and a belief uh it's going to carry you through no matter what occurred okay and if you know there's a very famous quote from Abraham Lincoln on this thing which he basically said if everything he did was wrong that 12 angels swearing that it was right wouldn't make a difference and if what he had done was right every newspaper in America essentially saying he was is wrong wouldn't make a difference in the end and so and and I think that's that is unfortunate but I think when you look back over history most people particularly artists you know don't ever really receive their positive feedback during their lifetime from that standpoint and I remember Lou to turn over to Lou just to have an insurance company being able to buy and sell a bond really might have taken five years in the accounting to do that really yeah everybody forgets that really what I started out this s was this issue whether we have would have enough money to to finance housing the baby boomer generation and the balance sheet of the specialized Thrift industry didn't balance so we had to figure out how to how to fund housing just the demographic need for housing is shelter and it you know the solution was pretty simple um in in retrospect was don't use the balance sheet just Finance the assets themselves but that was a heretical idea at the time it actually took 7 years to pass the enabling legislation I know many people now wish it would have taken 27 years or forever to pass the enabling legislation but one observation I learned a lot about rules and you know there's always been rules there were rules about what made a good loan there were rules about what made good legislation you know I when we were going through that process I remember being Tau told by the Senators and congressmen who helped me in the White House at that time and they kept saying make sure that the language is clear because the rule will live long after you're gone and make sure that somebody's not in effect reading a rule you didn't write with an intention you didn't occur and in fact make sure the report language further clarifies the rule that that stood forever and always as a rule of passing Federal legislation we keep throwing rules out that's our problem dodf Frank did not write a rule it said to somebody else you Regulators please go M write the rules to recapitalize to recreate the the the capital Market that's a crazy idea because what you did is you empowered a regulator to interpret what Congress really meant and and many of those regulations are themselves not clear so for in for coming Generations we'll be Reinventing what Dodd Frank really meant and then we created the Consumer Financial Protection board which has absolutely made sure that they will protect every consumer from himself regardless okay so one of the problems this is about you now one of the problems we consistently have is lately I mean this didn't see I've been doing this 40 some odd years 46 years it maybe it's my age but it didn't seem to be I mean we seem to have had a respect for rules that existed for a long time now we I see just routinely ignore them and and go off and do things that have no historical precedent and assume that they're going to be right and that's the most powerful lesson I've learned okay Rich um it's it's hard to speak after my we have Michael and Lou but a couple of things and I think everybody really hit this and and just it's passion I think those of us have been involved myin said it all it's patience okay it took me 10 years Lou you know working on got thrown out of every Bank in New York in 1970 and said interest rates don't fluctuate it's a stupid idea most the Wall Street firms too yeah most of the Wall Street firms you need that um I agree with lose Point dodf Frank is 2300 Pages the US Constitution is six the bill creating the FED is 25 bill I worked on creating the cftc is 155 pages SAR boxes 160 DOD Frank at 2300 pages is longer than the Old Testament the New Testament and the Quran combined now what does that telled you when a piece of legislation is is greater than than the rules that govern the behavior we we live in a kleptocracy which is formally defined as that the governed serve themselves and their friends at the expense of the Govern so you have to I think s's point was perfect you have to look at where the rents are who is going to make the money when I was working on climate uh change I I ask a person in Washington who everybody would know in this room but whose name shall be uh not be kept Anonymous and I said I want to come in and show you what I did what I got right and what I got wrong in this climate exchange we running on monitoring and verification and how you do it accounting how you allocate these rights to Adit and the answer I got was we don't speak to anybody until after we write the legislation and I walked out and I I said to myself that is is the most idiotic thing that I've ever heard and then about 4 days later I said I'm the idiot screw me because the way to optimize campaign contributions and economic rent is to write bad legislation initially and then have people come in and because and it it's something you know I basically operate on all of these cases these Financial crisises always end two hours before the crisis occurs and I would like to call that the theory of billable hours because up to the 2 hours you can credibly charge people and say you will influence the legislation with two hours left there's not enough bable hours left so you have to get resolution of conflict so I would suggest that that sh's point you got to do and I think what the milin Institute is doing and what you know you got to go in there and educate you got to be prepared to to have a long lead time and and a deep pocket uh to be able to affect change but I am still in spite of all of that incredibly bullish on on this country its ability to reinvent itself and I'm really proud to be part of of this group and a fellow again at the milk Institute because I think if anybody can do it this organization can well I want to thank you for ending on that cynical view of the political process for us and it's probably a good time to remind everybody that the milin Institute itself and the center for financial markets is very much a nonpartisan um organization just my remark was nonpartisan I didn't say that was want to get it out there um but I am reminded of an anecdote uh stre by your question that uh Marty felstein felstein likes to talk about in India and he said you know in India electricity the provision of electricity is considered a fundamental uh right of the people and therefore a fundamental responsibility of the government and therefore needs to be regulated whereas cell phones you know who cares if people have cell phones that's a kind of a you know kind of a luxury good and so not regulated and kind of stayed away and you know as a result almost everybody in India does have a cell phone and uh electricity penetration is still not what it could be so maybe a a lesson in there but uh gentlemen I am so honored to be on a stage with the four of you uh for the center for financial markets and um I just want to thank you so much for sharing your insights with us and as we move forward on our agenda at the center I invite all of you please to a part of that discussion and a part of that agenda setting process and we hope to do uh good things in the future going forward so with that I think we'll end the the session thank you

Channel: Milken Institute

Views: 19,808

Keywords:

Id: 8vhMgSf6vKY

Length: 108min 38sec (6518 seconds)

Published: Fri Apr 04 2014