 I'll also call our two distinguished panelists up to the front. Greg gets to sit down for a moment. Jared Bernstein, his formal title is Senior Fellow, Center on Budget and Policy Priorities. He's perhaps best known for having been chief advisor to Vice President Biden. I think of Jared as the economist who, more than anyone since the new deal, was described as being too progressive to be effective in government, and yet was in government and fully made that work in a serious and useful way. That, to me, is what he's become best known for. But he has plenty of research on income equality, mobility, other issues. Also, we have with us Alex J. Palak, who is a resident fellow at the American Enterprise Institute. He was president and CEO of the Federal Home Loan Bank of Chicago from 1991 to 2004. He is written on boom and bust, financial cycles, and human prosperity. A director of the CME Group, Great Books Foundation, and a graduate of Williams College, Chicago, and Princeton University. I'm going to start with two questions. First, we do two. And only then does Greg get to respond. The first conceptual, the second specific. Now, the conceptual, I ask myself, if I were to somehow add to or amend Greg's thesis, what would be one point I would make? And I would say it's this, that even though sometimes safety makes us dangerous, the danger created from safety may, in many cases, make us safe once again. So I think of adding in this extra dimension of risk communication. Simple example, we let lame and fail. And in retrospect, many people said this was a terrible error. It wasn't some ways a big error, but it was such a big error that it looked so dramatically bad that we then took other steps, which made things better. Or alternatively, you may try to be very, very safe. That may lead to a terrorist attack happening. But for risk communication reasons, you may need something really quite big and bad to then take the next level of steps, which will finally make you safer. So in the risk safety dialectic, I would just add on this extra step, this extra dimension having to do with risk communication. But I'll turn this over to our other two panelists. If you wanted to somehow add, amend, disagree, however you care to do it, at the conceptual level, something to Greg's thesis, what would you say, either? Thank you. I'll start if I may. As Greg said, Hyman Minsky, who begins this book or is right at the beginning, was quite a good friend of mine and quite a fascinating guy. Minsky's theory gets summarized as stability creates instability, as Greg said. It's a little more complex. Its periods of stability shift the subjective perceptions of how much of a margin of error or space is right. And as those subjective perceptions shift, financial models turn from safe ones or conservative ones to speculative ones to Ponzi schemes. I've always thought that Minsky's prescription was perfect. I'm sorry. Minsky's diagnosis, I'm going to start that over. Minsky's diagnosis was perfect. His prescription was bad. His prescription was, well, you need a great big government because then you can jump in and fix these mistakes. But the prescription doesn't take into account that it isn't only private actors, and this is the broader point I wish to make, whose perceptions are changing. It's everybody. It's central bankers and regulators. Greg points out in his book in 2007, which is really late in the game. Regulators, and not only in this country but around the world, were very sanguine as the thing was about to go over the cliff. So everybody is in this game. Everybody fails to understand what's happening. So you have central bankers announcing they have created the great moderation, which turns out only to be the great leveraging. It's the great leveraging that creates the great moderation. And when it ends, it's horrible. You have to view this whole thing as one large system. It's a recursive, interactive, expectational, strategic, game theoretic, and unpredictable system. And the system does not consist just of private actors with government actors looking down. The system is all of the actors together, including the central banks. And we have to ask, why is it that we can't predict it? And here, one thing I would have added if I were writing this book is I would have discussed Frank Knight and fundamental uncertainty. And that, I think, helps explain these very important things that Greg has seen, not only in finance, but in all these other areas, that our interactions create fundamental uncertainty. If you really believed in engineering and modeling, you ought to believe that you could predict successfully the reactions to what you're going to do. So you do something, the market reacts. You make it safe for market reacts. Why aren't we good at predicting those reactions? We're not good at them because the interactive recursive nature of the great system creates fundamental uncertainty. And with that, I'll just have one more quote, because Paul Volcker comes out as a sort of hero in this. Although I will say, the other thing is you're too sanguine about the 1980s. The 1980s were terrible, in fact. On average, over 200 banks a year failed in this country alone per year for 11 years, from 1982 to 1992. Anyway, Volcker, at one point, looking at all this, came up with a nice summary. He said, about every 10 years, we have the greatest crisis in 50 years. Jared, thank you. Thanks for inviting me. It's a pleasure to be here. Now that I've found this room. And it was a joy to read Greg's book. It's probably the most important thing I'll tell you that this is the kind of book. And I do a fair bit of book reviewing, and I'm not always this nice, even with the author right next to me, that I got the book in the mail, and I had to go do something around the house. Maybe it was something I didn't want to do, but at any rate, I started reading it, and then it was literally two or three hours later. So it's that kind of book. I've heard people into this kind of thing, really engrossing. And I suspect if you're here, maybe you're into this kind of thing. Just because I like the book doesn't mean I agree with it all. And I think there are a number of kind of conceptual things that I see a little bit differently. First of all, I think there is an implication, and Greg will correct me if I'm wrong, but perhaps you heard this in the presentation, that if we got this balance between risk and regulation or protection more accurately calibrated, then bad stuff would happen. And in the course of bad stuff happening to us, we would learn to implement better economic policy. I'm afraid that's maybe way too optimistic. The problem isn't just a matter of risk-reward balance. The problem is really, in my view, one, and I've written about this in citations I can give to you if you're interested. The problem, in my view, is really one of the way an economist would say it, of very massively discounting the future. People have very high discount rates. And therefore, or another way to say it probably more intuitively, is that we think much more about what's going on today, next week, if we really have great foresight six months from now. And what happened years ago and what happened years from now is very much outside of our purview. So one of the reasons why climate is such a difficult thing for us to wrap our policy heads around, I think we can argue about the science, but I think it's fairly solidly determined that if we don't do something about this, we're all really screwed in the long run. But the problem there is the long run. And so my theory is probably more that even if we took, if this is what Greg's saying, and if we took Greg's advice and let ourselves get whacked harder by some of the things that we're protecting ourselves from, I'm afraid we might not learn from them as much as Greg's thesis implies, in part because we have very high discount rates for the future. So if we actually wanted to do something more about this, we'd have to do something to get people to care more about the future. Now I've tried to do this in my own work largely through talking about kids, your kids. You care about your kids and their future and politicians say this all the time. That doesn't really work either. So I'm not sure how to crack this, not yet, but I continue to work at it. My second point is that I walked around before, probably before reading this book. It might have been to my advantage to read this book before I was a member of the president's economics team during the Great Recession. Because I was sitting in meetings. And I will argue that much of what we did, this may not be the argument to have today, but I would argue that much of what we did in the Great Recession, this may not fly well at the Mercatus Center, but generally speaking, much of what we did and what the Fed did, while very unpopular actually worked pretty well, except housing. I think what we did in, I think the housing interventions and President Obama has said this himself were inadequate to the task. And I can tell you from personal experience that that is in no small part because moral hazard was in the room. And by that, I mean, not like a guy named Moral Hazard, but pretty close, we would be talking and you know the characters. We would be. It was worse because he was inside the other people. Correct, but not the economists inside the politicos. So we would be talking about housing interventions that were considerably deeper than what you saw in terms of essentially bailing out people who were deeply underwater. And the political folks said, no, we're not gonna do that. And the reason we're not gonna do that is because Joan, next door to Jill, did everything right and it's not fair for Joan, for Jill to get bailed out when Jill was just out partying instead of working two jobs like Joan to pay for her mortgage. We're just not gonna do that. And our argument was, look, the time to worry about moral hazard is not when you're in the thick of it. That's when you have to throw moral hazard out the window. The time to worry about moral hazard is when you're writing the rules and regulations that you don't like so much so that you don't end up here. But what Greg kind of gets at is actually not so much. That you have to let Joan take a hit so that other people are correctly instructed. My final point is I'm not sure that the, what happened in the, that's the Tolstoy line, every happy family the same, every unhappy. So every recession, to my view, is more different than I think we're making them sound. We're kind of making it sound like every downturn occurs because of the kind of risk, Minsky phenomenon, the stabilization, destabilization phenomenon. I mean, they're supply shock recessions. And in fact, this recession was very much a function of underpriced risk inflating a housing bubble. Now that risk was inflated by the kinds of financial innovations that we're talking about. But there were people, precious few, and I was not one of them who did see it coming. And they did try to point it out. Some of them were in the Fed. And Dean Baker, economist friend of mine, I remember him and I sitting down with a reporter in the mid 2000s showing the divergence between the price of houses and the price of rent and how that was a signal that there was a bubble. And yet there were ideologically driven, and I don't think this comes out enough in the book or the presentation, there were ideologically driven masters of the universe who were controlling the levers who believed don't worry these mechanisms will self-regulate, there can't be a bubble. And even if there was, we couldn't see it anyway. In fact, there are noble laureates to this day who say there was no bubble because there can't be a bubble. And so I do think that ideology takes a hit as well. Second question is quite specific. The theme today is not just Greg's book, but also financial regulation. For our two panelists, if there's one thing we should be regulating less and another more, what would each be? And let me just add in my own comment. I think I agree with Greg that we should have higher capital requirements. But I worry if his own thesis may not bite us in the bum that if you raise capital requirements more is done off balance sheet and more lending goes outside the banking sector where possibly at least it is risky or less well-regulated or whatever other problems you might have with that. So I'll raise that question. But first Alex and then Jared, sure. And the question again is... Regulate one thing more, one thing less. What should they be? Well, I can... Good question. They're both... I can think of a lot of things I would regulate. Less remembering the regulation is one of the things that drives us into the troubles. I guess if I were going to have one regulation it would be enforced study of the financial past, of the long past. Because Jared said the problem is discounting the future but I think the problem is the rapid forgetting of the past. It's already six years and we're forgetting rapidly and our public and private actions are showing that. Nobody can remember the 1980s. As I said one of my disagreements with Greg would be an overly optimistic view of the 1980s. And there are lots of lessons from the 1980s already being forgotten. One of the lessons from the 1980s was that all of the main lessons drawn by the study of the 1980s disaster by the regulators when applied contributed to causing the 2000s disaster. And this is this problem of the recursive complexity and uncertainty that we're dealing with. I, about my old friend, High Minsky, I had a little joke. Knowledge of Minsky is a coincident indicator of financial crisis. Now... In fact... Thank you. In fact, Minsky became very popular in the 80s. He was lucky enough to live long enough in the 80s to see himself greatly praised. But when we got the 90s, boom, he faded out again and then he gets, he was rediscovered again in the 2000s and he will be forgotten again. And so it's this cycle of learning and forgetting that I really think. And I think Greg's book is very helpful. But not even, not strong enough on this point for me about how much you can learn if you can remember better all the things in the past. An old credit officer of one of my former employers had a saying, bad loans are made in good times. And that's true. It's a shorthand way of saying. And I think it's true. It isn't only in finance that we're viewing this just as the book discusses very interestingly. And I'll close with one other even older quotation. The common source, the most frequent source of disaster was a sense of security. This is Valerius Paturkulus writing a history of Rome in 30 AD. Jared. Yeah, well those dates confirm my thesis that we tend to forget such warnings and history repeats itself. I'm gonna maybe answer your question with a little bit of a curve ball, if that's okay, which is that I'd rather not think about or talk. I have a different view of regulation in this space, in this context. And I'd like to think about it through the tax code. I don't think we can regulate our way out of the problems that we've discussed here without dealing with the, in a sense I view the forgetting the past as very much a part and parcel as not worrying enough about the future. I think they're part and parcel of the same thing. And I don't think based on quotes from Roman times that are still valid, that we can solve that without accepting the limitation of human psychology to remember the past and to appropriately price the future. Therefore, we have to regulate by putting a price on the kinds of behaviors that get us into this trouble. And I'd like to suggest two simple ones. One would be a price on carbon. And I think most economists on both sides of the aisle think that that is a good idea. And I'd be interested if others, Tyler and everyone up here, others what they thought about that. And two, this is a more controversial but I think it would help a lot, a very small couple of hundreds of a percent tax on financial transactions. A very small financial transaction tax would I think dampen some of the noise trading and speculation that gets us into trouble. Where would I regulate less? That's a harder one for me. But I have two thoughts. One, the thing that all liberals and many liberals and conservatives agree on this day is that occupational licensing is overwrought and that there are people who ought to be able to start a nail salon or a hair cuttery without going through all kinds of different licensing, which sometimes isn't consistent across state lines. I wouldn't push it too far because actually you want those people to know what they're doing but I think there's probably something there. And then certainly in the world of patents, I think that we over-regulate to the point where we probably do stifle innovation. Greg, you can respond to any of that if you want. We do still need to leave time. Sure. Questions, so please go ahead. To your initial point that we need to learn from disasters, absolutely. I guess the point problem that I came across is that I would like them to be as small as possible, these disasters that we learn from. The problem is that we don't want too many 2008s in order to learn. And this goes to the point that you were making, I think, about hyperbolic discounting, which actually is really just the mirror image of our inability to remember the past that Alex was making. So there was a very fascinating study of hurricane damage and it found that first of all homes that are built within three or four years of a hurricane are much more likely to survive the next hurricane than hurricanes that are built later because they're built with the memory of what just happened. Similarly, that same research finds that people will often go out and buy hurricane insurance a few years after a hurricane and then they will let it lapse after a few years without a hurricane. Now this is natural human behavior because as you were saying, or I can't remember, I think you were both saying this, is that our sense of what is dangerous is highly influenced by what just happened to us. But what just happened is a very poor guide to what's gonna happen next. Even with something like a hurricane for which we have enough information to know that the frequency of a hurricane is not really correlated with how recently it happened. And in my book, one of the things I find that's fascinating is that this isn't just a problem for individuals, it's even a problem for insurance companies. The guys who are paid to do this have exactly the same problem. So you're really dealing with a big problem. If I'll take the opportunity to say one rule that I think is a real problem is that having the Fed as a lender of last resort is incredibly important. It was incredibly important in 2008. I think the lessons of 1907 are still valid. I think we've seen a lot of pushback on trying to make the Fed a less potent lender of last resort limiting what it can do. There was a bitter Warren bill that would have slapped all sorts of restrictions on it. The reason I think this is a bad idea is because to go back to my example of safety belts, I don't think any bank actually takes risks believing that 20 years from now there will be a crisis from which the Fed will bail them out. I think them having deposit insurance might increase the risk-taking. I think that having derivatives might increase the risk-taking. But the fact that once in a blue moon a crisis of catastrophic proportion happens doesn't affect the risk-taking. So I would not impose those kinds of types of restrictions on the Fed. Can we now open up questions from the floor? Please direct your question. Could I get one more comment in? Very quickly, 30 seconds. 30 seconds, thank you. One of the most important questions this book raises and it's really profound is, can you have long-term economic growth without cycles and crises? And the suggestion, which I think is good Schumpeter, is no. The book suggests to me no. I believe the right answer is no. That if we want the long-term growth that's created by taking risk and uncertainty, it's gonna give you cycles.