 Good evening. Welcome. Welcome to the fourth talk in Chicago's Einran Speaker Series. The Einran Center for Individual Rights in Washington, D.C. is the public outreach and policy division of the Einran Institute. And we hold public events like these around the country. The center is named for Einran, novelist whose heroic novel, Alashrut, demonstrates why the individual's rights of life, liberty, property, and the pursuit of happiness provide the only moral basis for a fully free society and that any such society would have to include laissez-faire capitalism. In addition to public talks, the center engages with public policy organizations and public intellectuals in panels and debates and discussions about current issues and the fundamental philosophy underlying those issues. We write and speak in various forums, including TV, radio, print, and online media. And I'm Lynn Zinser and I'm the Vice President of Public Outreach for the Einran Institute and for the Center. In fact, next month we're starting a debate series in New York City. The first debate will be March 10th and will be held at the NYU Skirbel Center. If you plan to be in New York City on March 10th, I strongly urge you to attend. These debates will be about the fundamental issues that drive today's politics and the opposing side will be from persons associated with Demos, a left progressive organization. And in current politics, the budget is a current bone of contention. What size should it be? Should we be investing in Obama's agenda? Or should we cut, and if so, how much? Well, the first debate, Iran-Brook, our speaker tonight, will be debating the executive director of Demos on the issue of what is government's proper role. Is it promoting equality? Is it solving society's problems? Or is the answer protecting individual rights and promoting free markets? The answer to these questions informs the answer on the budget. And so if you can't attend, I urge you to attend. If you're not able to attend, we plan to live stream these events as they occur. If you want more information, we have flyers out on the table, and I urge you to take them, or you can go to our website, irancenter.org. I also want to make note that our next Chicago talk will be on Thursday, March 30th. We will be back here at the Hyatt with Tara Smith, professor of philosophy at the University of Texas at Austin. We're delighted to have her speak on the menace of pragmatism. As we enter the next few months of congressional debates, we will hear from the mainstream media and commentators on the need to come together in the middle and to compromise for the sake of the country, for the sake of compromise. In fact, while Americans disagree vehemently about all manner of moral and political issues, the need that disagreement rests a shared presumption with many of us that the way forward is invariably through moderation and compromise. Dr. Smith will look at this issue through a new lens, and I suggest that this talk will be very provocative as she discusses that pragmatism is aversion to principle and how it destroys values and strangles American business. Before we begin tonight's talk, I want to note the generosity of certain local sponsors and donors who made this series of talks possible. They are Tim Bloom, David Strohsberg, Jonathan Honig, Donald and Linda Duel, Russ Rosenzweig, and two other anonymous sponsors. Without the generosity of these people and their companies, these talks would not have been possible. They funded and made these talks available for you to come and attend without any charge. So please join me in thanking them. If you would like to join them in sponsoring these talks or other events or projects of the INRAN Institute or the INRAN Center for Individual Rights, please see me after the program. Or visit our websites. The INRAN Center and the INRAN Institute is a 501c3 organization, and donations are fully tax deductible as allowed by law. And I'd also like to thank the volunteers who were at the door and at the table outside. They are all members of the local Objectivist Society, and if you wish to find out more about this local organization, please see one of them afterwards. Now let's get to tonight's talk. It's my pleasure to introduce our speaker for tonight, Iran Brooke. Dr. Brooke is a naturalized citizen who came from Israel with his wife to live in a better, a freer society. He obtained a PhD in finance from the University of Texas at Austin and was a finance professor for seven years at Santa Clara University. He is currently the executive director of the INRAN Institute. He speaks around the world about INRAN and her ideas. He just returned from England where he spoke in London and at both Cambridge and Oxford universities. He will be speaking at the end of this month at the Tea Party Patriots American Policy Summit in Phoenix. And then of course he leads off the New York City debates next month. He also has a Forbes.com column with Don Watkins called The Objectivist that comes out every two weeks. He is a frequent guest on national TV news and opinion shows. He will speak this evening in defense of finance. The talk will be about 45 minutes and then we will have a question and answer period that will last until eight o'clock. And we'll have instead of, as we've done in the past, lining up in the center aisle, we're going to move the stand over and you'll line up over here to the side. So without further ado, Dr. Brook. Thank you. Thank you, Lynn. And I guess this is our first experiment tonight. We're actually live streaming this talk. So it's on Facebook right now. A little strange. So hopefully there are a lot more people, even more people watching this on Facebook. More people, Daniel? What do we have to? About 250 people are watching us now on Facebook. So that's cool. And in this weather, I would stay home and watch on Facebook. So thank you all for braving the weather, although thank you also for fixing it so I get the nicest days for the last two months in Chicago when I'm here. So financiers, finance. You know, financiers have been demonized. They have been portrayed as evil and the devil. They've been killed. They've been criminalized. They've been put in jail. You know, for the last 2,000 years. And this is before Dodd-Frank was even passed. Because if you know it's the latest atrocity in terms of regulations of the financial industry. Here's a class of individuals in a profession that almost universally, literally for the last 2,000 years, has been demonized. Dante puts the money lender, right? The precursor to the modern banker and financier. And near the very bottom of hell, you know, being dragged down by the bag of money around his neck. Those of you familiar with Shakespeare, Shylock is one of the great Shakespearean villains of all time. He is the Jewish money lender that is hated really more for being a money lender than he is for being Jewish. Indeed, one who could argue that much of anti-Semitism of the Middle Ages is a consequence of the fact that Jews were, at some extent, forced into the profession of money lending. It was the one way in which they could make money in a world that would not allow them to own any land or any real businesses. Every major playwright and author over the centuries has written books in which financiers have been the villains. I used to teach a class called Finance and Ethics. And at the beginning of the semester, I used to tell the students, I want you to go and you've got the whole semester to do this. I want you to go and find a movie in which a financial, a successful financier, is portrayed positively. And don't bring me into a wonderful life, right? Everybody seen it's a wonderful life? Because in it's a wonderful life, the success of financier is the bad guy. He's the villain, you know why? Because he dares to foreclose on loans when people don't pay him back. And he makes lots of money. If you remember, he's the one who's willing to buy out a hero's failed bank. He can't even keep track of his uncle, you know, who misplaces $8,000, which in the Great Depression was a lot of money. So in it's a wonderful life, the hero's the failed banker. Because he won't foreclose on people who won't pay their loans. So you've got a whole semester to find one movie in which a successful financier is portrayed positively. You know, and it's the toughest assignment they have the whole year. Because there are very few. You know, you can broaden it to businessmen and there are very few, but financiers, there's almost none. In, to use Dante's analogy, financiers are businessmen on some of those rungs of hell, financiers at the lowest of those rungs that involve business. They were condemned again for usury and money lending. Every financial crisis of the last 2,000 years in one way or another has been blamed on financiers. In the old days it was money lenders, then it was, you know, bankers and now for the last 100 years it's been Wall Street. Why did the Great Depression happen? Because of rampant speculation in the stock market in Wall Street and the greed of Wall Street bankers. Is that true you might ask an economist today? Oh no, we now understand that the Federal Reserve really caused the Great Depression, made it deeper than it needed to be and that government policy, you know, was a disaster right after the stock market crash of 29. What caused the recent financial crisis? Well, of course. It was Wall Street. It was the greed of bankers and mortgage bankers and securitization business and derivatives and you know, Congress, you know, talk about finance when they have one of these CEOs of the banks and they're whipping them, right, from the banks. They ask them these questions about CDOs and CDSs and all this terminology and I wish just once one of these CEOs would look up at the banks and say, Congressman, would you care to define to me what a CDO or CDS is given that you're questioning them? I mean, they don't even know what a CDO is to blame, right? CDSs are to blame, CDOs are to blame and bankers are to blame. I'm not going to go into a whole spiel about what really caused the financial crisis. I did that in a talk I gave you six months ago and there's plenty of me talking about the financial crisis on the web so I encourage you to go there but it wasn't bankers. It's crisis and if it was bankers it was central bankers but I just considered them a branch of government, you know, another set of bureaucrats. So what caused this crisis was government from beginning to end. Yeah, there were some people who committed, who did bad stuff but there were always people who committed bad stuff. That always happens but that's not what causes major dramatic economic events in this case clearly this financial crisis and in 10 years all economists will agree to this this financial crisis was caused by government, not by Wall Street, not by the finances. So you have to ask the question what is it about finance? What is it about money lending? What is it about usury? What is it about Wall Street, about derivatives? But all these instruments what is it that creates such fear, such anxiety, such hatred and why are they so demonized and why are they always, again always for the last 2,000 years every financial crisis, they are the scapegoat. Why are they such a scapegoat and why do we all buy into it? Everybody, almost everybody buys into it and it doesn't matter if you're Democrat or Republican McCain blamed the crisis on Wall Street just as Obama did. Sarah Palin has blamed it all on Wall Street and goes after, you know, it's easy on the campaign trail to blame everything on bankers and Wall Street and we are the public who respond positively to that, otherwise, you know, our politicians wouldn't do it. They're very attuned to what gets us going. So what is it about finance? What is it about this profession? And, you know, the classical explanation for this is, look the problem is that finance is fundamentally not a productive activity. This is the economic traditional explanation. It's just paper shuffle. It's just to not create anything. They don't make anything. And this is a long history, this attitude. So this isn't something modern. If you'd asked Aristotle, the great philosopher, one of my favorites certainly, but not in this topic. If you'd asked Aristotle about money lending and about interest on money he would have said that's wrong because he would have said he called it money is barren. Money doesn't create more money so it's wrong to charge interest because there's no productive function for the banker, for the money lender. He's not adding anything to the process. And, you know, that has been an economic view that goes back again to Aristotle and has been reasserted over and over and over again. And, you know, once in a while the economist cracks their head and they look around and say if it's not productive then wherever there's a booming economy there happen to be bankers and lots of them. Going back again to the renaissance Italy booms and their bankers in Florence and their Jewish money lenders all over the place and as capitalism develops money centers develop and the profession of finance just becomes more sophisticated and more complex. So, you know, this has been a real challenge for economists and to this day, to this day so many people just don't get the productive nature of finance or finance. See, there's a financial market, financial institutions. It's really hard for them. It's really easy if you make stuff, right? If you're Microsoft, I mean they get harassed as well, but relatively less. You know, because you can show, here's a product. Here's a product that I made and you guys are using it. You guys are clearly benefiting from something I made. And here it is. I can show it to you, it's visual. Finance doesn't work that way. It's abstract. It's complicated. It's difficult. It requires mental effort to understand the activities of a financier and to understand the benefit that we all get from those activities. It's not easy. It took until the 17th to 18th century until people started to get that banking was a productive activity and the charging interest was okay. And you get economists in the 17th to 18th century starting to get that. Even then, they're a little suspicious of it. Even then, they argue against levels of interest that are too high. That's bad. They call that usury. But it took them a long time. They had to get a lot of evidence from human activity to figure out that this is a productive activity because it's so abstract. Because it really is hard. It's objectively difficult to get. People like concrete. They like, you know, to see. They're very visual and unfortunately they don't spend a lot of time thinking about these things. And this definitely requires ability to think abstractly because that's what financiers do. They do something that's very abstract. So what is it? What is it that finance does? So what is the case for finance being a productive endeavor? Well, let's take an example. And a controversial example. Why not? Because this guy went to jail for being a successful financier. And let's take Michael Milken. One of my personal heroes who did land up in jail. And I think landed up in jail primarily for his virtue, for his successes. But put that aside. What is it that Michael Milken did? Did he do anything productive in the economy? Did he add any value? Did he make anything possible? So let's look at, you know, I like to use my iPhone, but, you know, all these things that we all have depend on a lot of infrastructure. Huge amount of infrastructure went in. And really the beginnings of creating this infrastructure that makes our cell phones possible today were in the early 1980s. In the early 1980s, AT&T had a monopoly over long-distance phone calls. A government-protected monopoly, and it was broken up basically. And suddenly there was opportunity for competition. And the first company to compete with AT&T and really start competition on a long-distance phone call was a company called MCI. It doesn't exist anymore. It was rolled up, I think, at a World Comp. And MCI had the idea of creating advanced fiber optics networks all over the country. But that involved massive amounts of work, right? They had to dig up the U.S. and lay cable. AT&T already had the cable in it. You remember your economics lesson? Big barrier to entry? So here's MCI. They've got a vision. They've got an idea. But they need billions of dollars. And they try to raise it. They try to issue stock, and they try to think about issuing bonds, and it's just too difficult of a project to value, and too difficult of a project to risky of a project to get easy access to capital for. And the guy who steps in and ultimately finds a way to get them capital, and therefore makes it possible. Because remember, when you lay down the fiber, when you do all that what revenue is coming in? None. How you paying those employees? You might say, they're not working for anything. They're going to not take any salary, and they're going to wait until the vent is profitable, and then they're going to take a percentage of the profit. Right? It just doesn't happen. They want to get paid now, even though there's no revenue. They want to get paid now. And the suppliers and all the people involved in digging this up, how do they get paid? And how do you build it if you don't pay them? You can't. So you have to have capital in advance in order to make it possible to pay all these guys. That's where the financier steps in. And puts together the money to make it possible to pay their employees. To buy the fiber. To dig the holes. To get the switches and the technology. And I don't know what else goes into creating a network, but it's complicated and it's expensive. That does not happen without financial markets that can aggregate the money without people figuring out how to put in this case, it was a junk. They called it junk. But it was a high-yield bond. Then that's how they did it. They raised a lot of money with a high-yield bond and made a high interest rates to the investors in order to lay this. But somebody had to create that financial infrastructure. Somebody had to go out and raise the money from the capitalist. And one of the things, you know, one of the things that's crucial when we talk about, you know, Marxists who claim that everything is created through labor. Labor doesn't exist. There's no such thing as an employee without capital. You know what we are without capital? With subsistence farmers. With subsistence farmers. Capital creates the infrastructure to give us jobs. Because none of us work for profits that might be one day in the future. Doesn't happen. So, you know, they've got it all reversed. They think manual labor starts and then the capitalist gets rich off of the manual labor. No. The manual labor is getting any kind of return only because the capitalist has capital and chooses to invest in that particular project. So Michael Milken is that financier. Is that capitalist? This is why by the way we call it capitalism. You know, people always question, should it be called capitalism? Because capitalism is the key. Capital is the key to any kind of economic progress. To any kind of industrialization. Any kind of investment. Any kind of increased standard of living. It's just, if you've ever seen a graph of standard of living over human history, it's flat. It's basically flat. The average person did not live that differently in the 17th century than it did 5,000 years ago. It's, you know, the increases. You know, yeah, they're wealthy did but the average, the subsistence farmer was basically dirt poor 5,000 years ago and dirt poor 300 years ago. And then it goes like that. It goes where? That's industrial evolution. That's capitalism. That's what makes all this around us possible. So Michael Milken made it possible for MCI to create that network and he also made it possible for McGraw's Cellular, the first cellular company in the United States to build those powers that, you know, that, you know, I guess, your future generations are what we all use today for our cellular infrastructure. You know, when Ted Turner wanted to build a cable television, national television network, it was Michael Milken who raised the funding and made it possible for us to have cable. Without financiers, without that financial infrastructure, without the genius of one particular financier, but, you know, he just stands here representing the whole industry, none of that would have happened. None of that would have been made possible. And then, of course, we shoot up satellites. What's the return on a satellite like that, dude? You put out there for direct TV. It takes years to get the investment back. Who's putting up the money in the meantime? Financiers. Financiers are creating the network to make all that possible. And then, you know, what else did Mike do, Mike Milken do? You know, he used this new financing tool, you know, which is the high yield bond, which was not really new, but everybody pretended like it was new in the 1980s. He used it to help restructure American businesses. You know, American businesses in 1970s with these much of American business were structured as large conglomins. If you look at the top companies in the United States, the list of the largest 15 companies in the United States in the 1960s and 70s, and you look at the list today, there's almost no, you won't even recognize the names of the companies that were listed. These were large conglomins that did everything. If you look at GE today, GE is the last, among the last remnant of the age of the conglomins. GE makes jet engines, refrigerators, provides financial services, and a bunch of other things. That's how American industry was constructed. And it turns out, you know, experimentation in the market, but you could argue the government had a role in helping incentivize the creation of the conglomins. It turns out the conglomins don't work well. They require a real genius in terms of management skills and they're very, very, very few managers who can run a conglomerate well. Jack Welch, the former CO of GE, being one of the real exceptions who could do it. So here we are in America with these large conglomins not very efficient, not very effective, losing in the global economic competition to the Japanese and the Germans. And we have these conglomins going into the 1980s. And what's interesting is if you go into the 1990s, you suddenly see an American industrial landscape that's very different. Focused, specialized companies that do one thing and one thing really well, productivity through the roof where its productivity in the 70s was declining. The landscape of American business in the 90s was very, very different than it was in the 1970s. Well, how did we get from the 1970s conglomerate to the 1990s very, very well run, very focused, very productive American companies? We got there through the restructuring that happened in the 1980s. Basically, these conglomins were taken over, they were broken apart, and those pieces were sold off. And how did that happen? To take over these conglomins, you needed huge amounts of capital. Again, financial markets. Financial markets made it possible for people with high management skills, people who knew what they wanted to do and knew how to do it, but didn't have a financial resource to do it, to use leverage in this case, to take over companies, break them up and change the landscape of American business. Of course, Congress intervened because these were called hostile takeovers and nobody liked them, so it's very, very difficult to do one of these takeovers today. But in those days, they were relatively easy and they happened, and American business would change forever. And it originated in Wall Street. It originated through financial innovation. And Mike Milkin was a big part of that. Again, through the use of these high level junk bonds, I mean, even calling them junk bonds was a way the media kind of dismissed them and wanted to present them as demeaning and worthless and, you know, what they want. They were the way in which American business was structured. So finance does a lot of different things. Financial markets are essential, essential for the health of an economy. One of the reasons Japan which went into recession in 1991 and has never come out of has not been able to come out of that recession is because it doesn't have the kind of financiers and the kind of financial markets that we have in the United States or had in the United States. They couldn't do the restructuring. They didn't have the mechanisms by which that restructuring that our economy went through in the 80s, they it was impossible for them to do it. So they got stuck with these conglomates and they still have the same conglomates. Nothing's really changed and they haven't been able to achieve the efficiency and the productivity increases that are vital for an economy that we achieved and that they cannot and they're stuck and I fear that we are stuck there too because regulations of financial markets have made it very difficult to do what was done in the 80s in the United States again today. Very difficult. So finance is a profession that allows us to reach large amounts of capital. It's a profession that allows us to start businesses. The venture capital industry is all about that. When you start a biotech company, the investors don't expect to see a dime for at least 10 years. 10 years. And during those 10 years, the scientists and everybody else is getting paid. They're getting a salary. Why? Because the venture capitalists put up the money so they can get paid. Now yes, they expect a very high reward one day, but you know, for 8 out of 10 of the companies they invest in, they either get a very small reward or none at all and sometimes they're wiped out 4 out of every 10 venture funded firms returns exactly $0 to the initial investors. They hope and the good ones achieve, succeed in getting one or two companies that make them so much money that they don't need to worry about the few that don't. But that takes skill. That takes ability. And you know, if you monitor venture capitalist firms, you'll see that it's not luck. The same firms, repeat. The same firms that were successful in the early 80s are successful in the 90s are successful right now. Because it takes real skill to be a great banker and choose who to give loans to and who not to give loans to. It takes enormous amount of skill and has real macroeconomic importance. Because who do you give loans to? Imagine you're a banker and you get two guys walking in your office. The guy running the buggy whip factory right? And the guy just investing in a brand new automobile factory. If all the bankers choose to give the money whip guys, you've got a massive misallocation of capital and economy and you're not going to get the innovation of growth that's necessary. They, the financiers have to identify that buggies are dead and automobiles are the new and invested in automobiles. That's a crucial productive function in the economy. To choose the winners and the losers. To choose who gets funding and who doesn't. Who gets the loan and who doesn't. And the stock market. People talk about, well, the stock market. That can't be productive. That's just paper shuffling, right? My gain is your loss. It's all zero something. No. Stock market is huge inclusion. First, the obvious way it's a way of raising capital. Companies go public and they raise a lot of capital so they can grow and invest and produce. But it's not just that. It's more than that. When people are buying and selling stock, they're doing it based on their expectations of what will happen to this company. What will happen to the industry. They're providing vital information. Those prices are all pieces of information about what the market would find people participating, buying and selling, believe are the future prospects of this company of this industry. And capital is influenced there. Capital flows to where the future is positive and away from where the future is negative. So when the buggy industry was collapsing on Wall Street people weren't heavily funding them. You know, in finance we say that cost of capital went way up. When the cost of capital goes way up, that means it's expensive, it's difficult to get capital. But if the automobile industry stock were going through the roof, what was happening there cost of capital. It was going down which made capital more available to them. So the stock market, but by assessing who's good who's not, who's going to grow, who's not is vital for the allocation of capital in the economy. It's crucial, and indeed wealth, functioning, capitalist semi-capitalist, relatively free economies need stock markets and you look around the world and you can see that. You have to have it. You can't raise the kind of capital modern business needs without... What about all these derivative markets and when should cargo after all? That's much more complex obviously than the stock market, much more difficult. But that can't be really productive. This is just all those people yelling on those floors around the corner here screaming and yelling at one another. What productive activity could really be going on there? Well, I mean there are a lot of things that you could go on and on and have given whole courses on the productive nature of these activities, but just think these are areas in which you can protect yourself from risk. These are places where you hedge risk and we'll use the obvious example of the farmer who doesn't know exactly what his crop is going to be and doesn't know therefore what the price is going to be next year on his harvest and he can now lock in a price and reduce the volatility of his profits and therefore make long-term investments in his own business. Today obviously the original futures markets were about agricultural products but today you can do it about a lot of different things. So it's a way to protect you from risk and when people talk about CDSs what is a CDS? CDSs were credit default swaps right? Complicated name. These must be really, really hard to understand instruments. I wish somebody would ask a congressman what they mean. Actually they're really simple. I mean they might be complicated how you price them certainly very complex and how you actually trade them might be complex but what do they actually mean? It's simple. It's an insurance policy. It's all it is. I buy an insurance policy that protects me if you can't pay your debts. It's all it is. It can get more complicated than that but fundamentally that's it. And that's what the insurance CDS market was for. It was to protect investors from failure bonds and yes you can speculate on them you can speculate but the prices, what do the prices of CDSs reflect? What information does that provide the market with? Well the prices reflect the probability of a bond defaulting which means of a company or a country not being able to pay its debt. Now that's important information. That's very useful. And indeed the CDS market has been shown to be more predictive of that than certainly the rating agencies but that's not hard. Anybody could be more predictive than the rating agencies. But it's being correct. They've done a good job. Markets do a good job at assessing risk and evaluating and protecting people from it. And you can go complex instrument after complex instrument and there is a productive function to them in all this complex abstract world of finance. And while it's complicated it's not that complicated. While it's abstract it's not that abstract. One of the reasons people don't get it is because nobody tells them. Nobody talks about and this is finance is to blame for a large extent for this. They don't defend themselves. They don't go out there and say I do do something productive. Hear it what it is. Our professors at the universities, you know the finance guys explain it. But nobody else does. Because they're not incentivized to present to present it in. And we have to ask the question of why? Why does nobody explain it? That it's productive. And we all benefit from it. That standard of living is substantially higher because of financial markets, because of finances. We couldn't exist as a semi-free country without them. No. No successful economy has ever existed without a thriving, relatively free financial markets and institutions. And none could ever exist. It is the nature of reality. So why are they demonized? Why do we view them all as crooks, as villains and always have? And this Dodd-Fang bill just is, you know, makes everything 100 times worse at least for bankers. It again assumes that you're villains. That's the assumption in post-regulations. You're crooks and now we're going to catch you. We're going to put in the steps to catch you when you commit the crime. So why is it? Why is it that nobody defends them? Why is it that the financiers don't defend themselves? And I think it has to do much more than with economics. It has to do with ethics and morality. And generally the kind of mixed economy and let me just address this point about the mixed economy. I'm sure there are going to be people here who asked me in the Q&A when they heard I was going to defend finance. You know, you get all these arguments about, yeah, but these guys are crony capitalists and bankers, they have deposit insurance and they're too big to fail and we all bail them out. Right? Okay, that's all true. But whose fault is that? You know, my view is wow, under that burden under all that heavy lift, you know, heavy burden that they are placed on, they still do their jobs. That's pretty amazing. That's pretty amazing. The capital still flows in this economy in spite of all the regulations. The banks can still function in this economy in spite of the fact that they have on average four to five regulatory agencies responsible for regulating every single little activity that they do. It's pretty amazing in spite of, you know, deposit insurance. The banking industry hasn't driven us all into bankruptcy because deposit insurance is one hell of a corrupting thing. And yes, many of them particularly on Wall Street, but many of them generally participate with government in increasing those regulations and not decreasing. And let's fire those guys and let's get rid of them. You know, right after we replaced the politicians with freedom-loving advocates for capitalism. But let's put this in proportion, right? The villains the villains are the ideas that we held in the culture. The villain, the villain here is the ideas that over the last 2,000 years have driven us to hate financiers. To a large extent what they're trying to do is to protect themselves. And to the extent that they are really corrupt, well, let's condemn those individuals. Those bad guys. But let's not condemn the whole industry and let's not condemn the function because the function is a legitimate function. So why? Let's go back to the why question. Why do we condemn the function? And I think it goes back to to ethics to morality. To what we view as good and right and noble and just. And what we view as good and just is as a culture and the way we've been brought up is to be selfless. It's to take care of others first. You know, the symbol of morality and sainthood and goodness is somebody who pursues other people's well-being and doesn't care about their own well-being. We value sacrifice. We think sacrifice is wonderful. I mean, we might not value it in our own lives but we value it when we see it. We give it lip service. We all, you know, live our lives to make our lives the best that they can be at least to some extent. But, you know, our morality tells us that what's really good is mother Teresa. What's really good is somebody who gets nothing in return for what they give. Selflessness. Nobody argues with selflessness as virtue as good as the essence of morality. And almost nobody asks, why? How did selflessness become the essence of morality? And if everybody's selfless, who's going to create all this stuff? Why should we consume it? Because, you know, consumption is a pretty selfish activity to begin with. You know, very simple questions. And if everybody's supposed to sacrifice to other people, then what about the people who get the sacrifices? So if we're all supposed to give our money to the poor, what happens when the poor gets all that money? Who do they give it to? Us, because now we're poor? You know, where does it end? Why is it that the standard of morality, why, has to be the well-being of other people? But think of the consequences of that view. The consequence of that view is we view a suspicion anybody who seems to be acting in their own self-interest. That's not moral. It's not part of what we consider morality. Indeed, self-interest, selfishness is very much what we consider as immoral. As wrong. That's what ethical teachings, both religious and secular, have taught us for 2,000 plus years. And yet, what a businessman and certainly financiers. What do they do? What's their activity? Did Michael Milken pursue the high-yield bond in order to maximize social utility? In order to make the world a better place? No, not really. That might be an outcome. I'm sure he cared about wanting to make the world a better place, but that's not what drove him to do what he did. What drove him to do what he did was to make a buck. Lots of bucks, as the case may be. To make money. To take care of his family. To build a nice home. To have a nice car. To do good stuff for himself. For the people around him. For the people he loves. And that's what drives businessman. Most of you have heard my Steve Jobs example. I mean, he didn't build the iPhone to make our life better. He built the iPhone to make his life better. Yeah, our lives are better too. But he built the iPhone to because that was his dream. That was his vision. His. His. And we buy the iPhone. Again, not to stimulate the economy. Not to make other people's. Not to make Apple better. We buy the iPhone because we want to make our life better. The whole marketplace, everything in the marketplace is about self-interest. And that's a good thing. Adam Smith got this. You know, 200 and something years ago. 1776. Whatever. Yeah. Right? That's a key year because you remember that graph I was talking about? That's the year. It really starts going up. Because of the establishment of this country. Adam Smith and the Industrial Revolution basically started all of it around that period. And it's no accident. So self-interest is what capitalism, what markets are all about. And when I started, I described the fact that somebody who makes a product like Microsoft, they can say, look, yeah, we're in it for all profit and everything. It's for you. Look at the nice little box and the software you use. And here are the things that we're building that you all benefit from. So it's easy to show that it's a win-win and that somehow you're all the beneficiaries that you all are better of. Finances are much tougher time. Much tougher time. Because it's so obvious that they're in it for the money because the tool that they're using is money. Everything about what they do is money. They don't have a product and industry, a creation, a visual thing to hide behind. So their self-interest is naked. And who wants to defend self-interest? Well, nobody. Nobody in our culture. And that's why finances don't defend themselves. Because it would be obvious within a few minutes, I mean, that they are self-interested. Nobody would believe them if they claim to be altruists. Nobody would believe them if they claim to be doing it all for us because it's just not true. They're not doing it for us. We're the beneficiaries. But it's not for us. So the only way ultimately to be able to defend finances, just like the only way ultimately it's possible to defend businessmen, the only way ultimately it's possible to defend capitalism and the only way it's possible to defend freedom is to defend self-interest. It's to defend the idea that rational long-term self-interest is a virtue. It's the essence of virtue. They're taking care of yourself. There cannot be anything more important than life. They're taking care of your own life. Of making the most of your own life. Of pursuing your happiness. Properly understood. There's rational long-term pursuit. There is nothing more important than that if we care about finance and business and economics and freedom and much more importantly if we care about our own life. Which I think most people do. Taking that seriously. And as I've mentioned many times before being self-interested being selfish in this sense is hard work. It's not easy. It's complicated. Because it requires truly figuring out what's in my self-interest. What's good for me. Sometimes it's easy. The cocaine's over there I could snort it and get it high. But it jeopardizes the rest of my life. That should be easy for many people it's not. They still are attracted to the instant gratification of whatever the temptation happens to be. But that's the easy ones. There are lots of much much harder decisions one needs to make. Who one wants to be friend. Who we are going to marry. How to raise your kids. What career to pursue. Whether to lie or not to lie. When it's convenient. So it seems like again the temptation is convenient in the short term. What are the real long-term consequences of the decisions I make for my life over the long run. Not easy to do. But it's what we need to do. What's necessary for us to do. It's what those of you successful in business do very well in your business lives. You can be successful over the long-term in business without thinking long-term. Without being rational. Without devoting real resources mental resources to figuring out what works. What's good for my business. Not cutting corners. Not lying cheating stealing. Because you know that in business it doesn't work. Well surprise surprise it doesn't work in life either. The same principles apply to life. So if we're going to defend finance we need to defend self-interest. And the only author other than Aristotle really go back to Aristotle who messed it up on interest in money lending but got it right for the most part in ethics. If we're going to defend self-interest I'm really the only author that has done that the only philosopher that has done that and I encourage you to read a nonfiction book The Virtue of Selfishness to get a deeper understanding of her ethical system. At the end of the day if we care about capitalism, if we care about our freedom, if we care about something simple like our standard of living then we have to defend financiers. We have to have a thriving free successful, innovative prosperous financial markets, institutions and individuals. Our freedom depends on and the only way to do that is to passionately defend each one of our right to life, liberty and the pursuit of happiness. Thank you all. Before I ask my question I just want to remind you that back in the days of conglomerates another genius Harold Janine Grant IT&T before it was broken up there was a time when people really thought this was the greatest thing coming down the pipe with these conglomerates. My problem is the wealth divide and it seems to me these Wall Street financiers with their what I would consider obscene stock options and bonuses I just it may be alright to work in your own self interest but I don't think that I'm that much less of a person than some of those people are and I don't have obscene amounts of money isn't there a problem in our economy? What is the problem? Yes and no let me start with defending stock options because I think stock options are wonderful why were stock options invented? When did they come from? They've always been around and today they're relatively modern phenomena really of the 1980s the same 1980s of Mike Milton and stock options were invented because there was something that became evident during the 60s and 70s in corporate America and that was that there was a real disconnect and remember that the whole corporate structure is a relatively modern invention and people are trying to work through how does this work? and one of the problems that people realized in this is that you hire these managers and the manager has a certain incentive structure he wants to maximize you know wants to minimize risk he wants to make sure that he can keep this job for a long time not every manager is motivated through integrity to really grow the business and make it the best business that he can a lot of them are motivated by other incentives and one of the reasons conglomates were created because they're really good for managers conglomates are low risk one business is sinking another business might be rising they're diversified but shareholders can diversify by buying lots of stock they don't need a manager to do diversification for them it's a very expensive way to do diversification through a conglomerate but the manager has an incentive to do it because he doesn't own any stock and what they discovered is managers didn't own any stock particularly in these very large businesses and if they owned it was so tiny it didn't make any difference so there was this disconnect between the shareholders incentives to maximize shareholder wealth in other words to maximize long term profitability of the company and the managers incentive which might have been different it might have been to lower risk or to maximize his you know pension or to grow a big company so he could go to really nice parties the bigger the company the better the party stock options were invented to eliminate that problem so basically we said here manager we know you know the company is big and you know instead of giving you out and out stock here's an option which basically means if the company does well i.e. if the stock does well if we shareholders value the company more and more you get very handsomely rewarded and if the company stays flat you get nothing nothing you don't even get the value of the shares that's what an option does so here was a tool a fantastic tool in my view to align the incentives of managers and shareholders and by the way people say options encourage managers to take on a lot of risk yeah they do but that's exactly what shareholders want managers to do investors tend to be diversified they want their managers to take on risk because they can afford any particular company getting into trouble because most investors are pretty well diversified so we want them to take on risk stock options get them to take on risk we want to reward them when the stock does well stock options allow them to get rewarded when the stock does well every case in which a manager made huge amounts of money so-called obscene amounts of money from stock options shareholders made even more money by a factor of 100 than he ever did so you won't find a case where a manager makes a lot of money from options where shareholders don't benefit as well now there are croaks here and there that people manipulate the system there always will be there always are but that's a small minority of stock options but let's get to the broader question so first people are compensated based on what the market will be there's a market for CEO talent there's a market for engineering talent there's a market for public speaking talent there's a market for different talents the fact is that the market for CEO talent has driven prices over the last 50 years very high why? supply and demand there's a lot of demand and it's global today because US managers were good there's a global market for their services for their work and there's very little demand there's just not that many people qualified to do the job it's very very difficult I can do a whole lecture on what it takes to be a CEO and the kind of skills and efforts and the kind of decisions they have to make the integrations they have to make and you're right Jack Welch or the guy who went ITT those are really really rare phenomena and they make a lot of money because they're rare a diamond is more beautiful than rubies they're rarer and we value them more so they're more expensive supply and demand that's what drives CEOs now given all that there is a problem there is a problem of the way wealth is you know allocated if you will in our economy the way it gets allocated and I do believe that the difference for example between Richard Poor in the United States that difference is more than it should be should be by what standard should be by the standard of a free market I think in a free market it would be reduced now not because the rich would become poor but because the poor would become richer I believe that what hampers and distorts the distribution of wealth and salaries and all the stuff you were talking about is government government policies damage the poor particularly the ambitious poor the entrepreneurial poor the smart poor much more than they damage the middle class or even many of the wealthy and some government policies particularly in banking allocate wealth to banks first so for example when the government prints money it's printing money go well it goes first to the banks and right now it's going to the banks in a big way so I can't borrow it zero Goldman Sachs can so does Citibank Citibank can borrow it zero if you can borrow it zero and you can't make money something's wrong so they borrow money and these banks are making a lot of money now this is a scheme that the government is running to save the banks in order to allow them to get back to profitability because of all the losses they did everybody knows this and this is what they're doing they bailed out these banks now does that create a distortion in the way wealth is allocated? Absolutely we all get taxed in order for Citibank to be able to continue to pay salaries that's wrong Citibank should have gone bankrupt Citibank should have been allowed to fail what fault is that? Is the capitalist fault? No, it's the mixed economy it's government intervention's fault it's the fact that we had a Federal Reserve's fault it's too big to fail's fault you know Citibank has gone bankrupt four times in the last four decades Latin America debt and we bailed out we didn't bail out Citibank directly what we did is we bailed out Mexico so that Mexico could pay the bonds could pay back Citibank for the money Citibank had lent it so we were bailing out Citibank we were bailing out Wall Street commercial real estate in the early 90s Citibank was bankrupt in 1991 Citibank was bankrupt they knew it and basically Greenspan lowered interest rates to the sharpest rate ever other than this last crisis in order to save Citibank again and they went bankrupt twice during this financial crisis they got bailed out twice so what kind of culture and mentality do you think that places at Citibank? well culture and mentality that says when things are good we can make as much money as possible and we get rewarded when things are bad we can walk away because the government owns it all that's not good but whose fault is that? is it the financier's fault? no it's government's fault it's government's fault for setting up the rules that way the rules are corrupt the rules need to be attacked too big to fail is horrific for American culture for the incentives of the banking industry and it distorts allocation of capital it distorts the allocation of wealth it's a distorted pyramid so let's get rid of too big to fail but you don't get rid of too big to fail by claiming that bankers are immoral and bad guys and within the structure that we have today salaries are allocated mostly based on supply and demand within all the constraints that the government placed on and the fact is that me and you our skills are not in huge demand that's just a fact I think I'm a pretty smart guy but I'm never going to make as much money as somebody in the financial markets because the kind of profession that I have is not in high demand out there people are not willing to pay me but that seems completely reasonable to me and in any society even the freer society in the world when we achieve complete freedom teachers are going to get paid less than CEOs it's just the type of skill that a CEO of a large company has is going to require larger compensation based on the world's supply and demand than a teacher and when you choose a profession take that into account the CEO is more valuable to you as an individual money is not a measure of all things it's a measure of some things it's not a measure of all things it doesn't mean they're more moral or that they're a better human being or any of that it just means that their skill is valued more by the marketplace than my skill big deal I don't take offense by somebody else making more money than me quite the contrary I cheer for them good for them it means that they're producing stuff what do you produce? I do you do more millionaires the more billionaires the better but there is a distorted effect government does distort there's no question about environmental regulations all those regulations you know who they hurt the most the workers and this is the myth all these regulations are supposed to you know they inhibit and they make the lives of CEOs miserable but they you know they also reduce the wages in our economy you've spoken extensively about the detrimental effects of regulation what in your opinion should the role of regulation play with respect to globalization and in a hypothetically 100% free economy is there a moral ethical obligation for companies to keep money in the country so I think regulations should play no role in terms of regulation and no I think the moral obligation is to reverse a friend of mine one of the board members of the Diamond Institute Harry Benzling had a talk called by American is un-American it's wrong morally wrong for a company to keep its money in the United States because it's the United States what's good for all of us as Americans and what's good for the company and what's good for the shareholders is for it to do what's good for the shareholders it's for it to maximize its profitability and if that means putting the money in China then it should put the money in China globalization is in a truly free market granted there are lots of distortions in the world today and we still benefit from globalization but in a truly free market the benefits of globalization are fantastic just think of the simple benefits of trade between two human beings economists again 300 years ago figured this out the division of labor, going back to Adam Smith division of labor and specialization and trade are win-win activities both parties benefit it's not a zero sum world it's a growing pie now take that situation of two people multiply by 100 people now it's even better and now make it 100 million people 300 million people in the United States much better, we're all specialized we're all doing a thing, we're all producing we're all trading, all of our lives are better win-wins all across the board now take 300 million and turn it into 6 billion people even better so the best thing you can do is encourage free trade encourage no barriers encourage more win-win situations encourage trading trading is win-win we all benefit from it so the best thing we can do is globalization the 19th century industrial revolution to a large extent was the original globalization what was the British empire about it was about eliminating trade barriers and creating these colonies were there to mine raw materials to get cheap labor and then to facilitate trade they were pretty harsh and they did some ugly things to facilitate all this but the benefits of trade were already realized in the 19th century with the British Empire and then we went into a period after the Great Depression where trade was restricted and we slowly after World War II started growing out of it and today we live in a world where trade is relatively free, still there's still a lot of barriers up there but look how much wealth we've created as a consequence and again, the biggest beneficiaries of freedom are the poor the biggest beneficiaries of so-called sweatshops are the people in the sweatshops they're making a living they're not subsistence farmers anymore they're learning skills they're getting self-esteem they're producing stuff they're making stuff the standard of living is going up now, does the American company has a moral responsibility to enslave people in another country? yes if you're producing if you discover that a subcontract of yours is producing goods by whipping their employees and chaining them to machines you should stop doing business with them but as long as the transactions are voluntary then people are better off for having those transactions so you want to encourage trade you want to encourage globalization free market create a lot of short-term self-interest like guaranteed bonuses or even reward for failure like golden parachutes and other various devices that we've seen so what were the two example golden parachutes and what was the first one? guaranteed bonuses guaranteed bonuses I don't believe any of those reward for short-term I think those are just mechanisms to attract talent so I'll give you the most famous example of this was the guy who ran Home Depot remember Nardelli? he ran Home Depot and the stock of Home Depot was basically flat and the comparison was low and it went through the roof so the board ultimately fired Nardelli and they gave him a golden parachute they gave him a huge bonus at the end why? because when they hired him, that was part of the contract and contract law says that you abide by contract now why was it part of the contract? that's my question because when Nardelli was hired he was the most sought after CEO in America there was no CEO candidate there was more sought after than Nardelli so he sat down with, let's say, five different companies and he negotiated with them and one of the items that he negotiated was a golden parachute why did he negotiate a golden parachute to defend himself against an arbitrary board that just, you know that just fired him on whim why did the board sign it? because they did what they did is they looked at his total compensation package and said is this guy worth the salary, the guaranteed bonus and the golden parachute and they summed it all up and said, yeah and you wouldn't be asking a question if they loaded it all up front and giving him a signing bonus I'll give you an example the Boston Red Sox baseball, I know a little bit about baseball not too much signed this Japanese pitcher I can't pronounce his name Matsuzaka, right? they signed Matsuzaka and they paid him a signing bonus of $5 million $50 million, I'm sorry it was a total package of $100 million $50 million and then $50 million over so many years the guy had never pitched in a major league baseball game is that short termism? no it's the Boston Red Sox saying this guy's so good, we think we're going to make a risk we're going to pay him all this money and if we're wrong we lost $100 million but if we're right we're going to win a few World Series and we're going to make a lot more than $100 million off of this guy it turns out they were probably wrong the guy's good but he's not that good and they're probably wrong and the guy's not worth $100 million did you think that's a good practice? absolutely who's to decide? one of the questions to always ask yourself first of all I don't think it's a short term practice I think it's just risk or turn, trade off here's a risk, will he be able to pitch or won't he be able to pitch what's the return, how much am I willing to put up it's a net present value analysis that you do in business every single day it happens to involve lots of zeros but you could do the same argument paying somebody $500 to paint your home and he does a lousy job but you didn't know he was going to do a lousy job when he gave him the $500 upfront so that's the trade off that's the kind of decision making you do every single day just here there's a lot of zeros so we get upset but it's their money and that's the key every time you see somebody making a lot of money and you get upset, ask yourself why do I care? because I don't who's money is the market or even in our world it's the shareholders market so I ask myself do I stock in Home Depot and if my answers no then I say I don't care and if the answer is yes then I say maybe I should sell or maybe I should go to the board meeting and vote differently or yell at the board manager or maybe I should talk to other shareholders and we should take over the company so there are 100 different things that you can do but if I don't own the stock it's the same for it, the shareholders are but Nardelli's a great example Nardelli came out of GE the GE board was considering two candidates to replace Jack Welsch Nardelli and Emelt Nardelli was considered the Jack Welsch like CEO he's a hard-nosed tough demanding businessman Emelt was considered the opposite of Jack Welsch the politician he was a good schmoozer he does well at parties and they had to choose between the two and when they chose Emelt it was clear the path GE was going to go suck up the government which is what they've done of course and Emelt is an awful CEO in running the business and very good in Washington and Nardelli was like loose in a sense he left GE because he didn't get the job and then everybody wanted him so then it's just a negotiation now you could argue about whether he did really badly or not at Home Depot he didn't do well but he didn't do awful it turns out but that's irrelevant so they find him and he got whatever he was promised to get and guess who hired him the private equity guys hired him and they put him as CEO of Chrysler and you know what he didn't do looks like he didn't do a great job there either so maybe there's a lesson to be learned about Nardelli but they all thought he was a good guy and he was a good CEO we're talking about some of the smartest people around thinking he was a good CEO so ex ante they made a mistake haven't you ever bought a stock and then regretted it it's the same thing you invest in a CEO and then regret it but it's not short termism at all this is the last question last question sorry guys so make it good I'm confused by the actions of Warren Buffett he's considered and I consider him to be a great capitalist and financier and on the other hand he's come out in the last year or two and made a lot of defenses of government intervention and I'm just wondering what your thoughts are if you think that that's a reflection of the changing rules or whether there's something else going on No, Warren Buffett you know he is it's hard to imagine the state of mind that a person like that has to be in on the one hand benefit enormously the freedom we have in the marketplace and attack it at the same time and it's not in the last few years you can track this back at least a decade or two Warren Buffett is the illustration of the importance of philosophy and ideas Warren Buffett is an intellectual he is very very very smart and you can see that in his investing but he has chosen to adapt a philosophy that's antagonistic to the capitalist system in which he made his wealth and so he interprets the way he made his wealth in a way that I don't think any of us interpret so his interpretation and this is philosophical and he really believes this I'm not kidding when I say this he believes he made his wealth because he's lucky now how does that luck manifest itself he's lucky because he was born in the 20th century he's lucky because he got the genes that he got he's lucky because he had the parents that he had he's lucky because he was at the right place at the right time for all of these deals he's lucky because he met what's his name, Munger he's a partner who's really really smart all of those he considers luck and he considered those determining factors in his success he, Warren Buffett who conceived of that played no role in his success it's all these external and genetic things and the fact that he was born when he was born that led to his success now where does he get that from because that's pretty intellectual it's pretty sophisticated and pretty nuts in my view he gets it from a specific philosopher who taught at Harvard who died just a few years ago and John Walsh is one of the most influential philosophers of the 20th century and he advocated for the idea that everything in our lives is a product of luck it's a product of our genes or our environment and indeed most debates are like are you a product of your genes or are you a product of your environment well if you're a product of either one of them it's all luck I argue that yeah both of those play a role but you are a product of you of the choices you make we believe in free will one Buffett in a very very fundamental sense doesn't believe in free will and if you look at Walsh's language Buffett speaks it you know almost verbatim Ayn Rand wrote an essay of John Walsh in the 1960s she picked it up and she saw the danger and the evil in his philosophy he's about equality quality of outcome and if you want to advance if you want to be better that's okay only if everybody else is also better off nobody can go backwards if you go forwards that's the kind of world philosophy is interesting and complex and really really wrong and evil but one Buffett buys into it completely and what's interesting is Bill Gates from when he was younger and you watch him you can see a change in the language in the way Bill Gates talks about himself that starts when he first meets Juan Buffett you know they play bridge together and they're really good friends Juan Buffett has had a profound influence of Bill Gates in terms of his thinking and Bill Gates is now also John Walsh's students directly getting it from Bill Gates this is the power of ideas without philosophy it's not about experience it's not about what you do in life it's what you think that is going to shape what you hold and how you do it and in that sense Juan Buffett is compartmentalized he acts to be a capitalist and make lots of money because he has no choice his genes and environment has dictated that and he holds these ideas and the contradiction between the two doesn't bother him because it's all deterministic in a sense it doesn't matter and people can be compartmentalized they can hold opposite views of different parts at the same time but that's the importance of ideas that's why it's so important to understand fundamental ideas and to talk about fundamental ideas and to challenge fundamental ideas it's why people like John Walsh and Ayn Rand and Carl Papa and Emanuel Kant and Aristotle and these politicians they're a dime a dozen and they come in and out and even the more notorious ones they are just products of these philosophers who really impact the world and it's all about ideas, ideas, ideas thank you all