 So today, I want to talk about what I consider the most, I don't know, hated industry in our country. Maybe the most hated industry in history. An industry that throughout the last 2000 years has been blamed for every crisis, every problem, every economic disaster. It's always their fault. And it's not just their industry. It's the practitioners themselves have been demonized time and time again in our media, in our literature, in our songs, in our plays, in our movies, certainly in our movies. You know, Shakespeare wrote one of his most famous plays, The Merchant of Venice, on Shylock, The Money Lender. I'm talking about finance. I'm talking about financiers. Every way you look, finance is denounced. Finance, oh, these Wall Street guys, they're just greedy. They're just, you know, they'll come in fraud in a second and they cause every financial disaster we had with the Great Depression. The 2008 financial crisis or whether it was, you know, they were thrown out of the temple by Jesus after all. For 2000 years, since Jesus threw them out of the temple, we have blamed every financial crisis on financiers. Is that just? Is that right? How should we approach the whole area of finance? How should we judge whether finance is this evil industry? Because because we've evaluated basic is evil. We regulate it. We regulate it extensively. Every aspect of banking, every aspect of investment banking, every aspect of finance today is controlled and regulated by the government. We don't trust them. We believe that if we left them alone, they would bring about disasters. They would cause major crises and they would destroy life as we know it. You know, somebody did a survey a few years ago, maybe quite a while ago, but I think it still holds about who commits the most murders on television. Who commits the most murders on television? And the result is overwhelming. Almost 50% of all the murders on television and our TV shows are committed by businessmen. And a significant percentage of those happen to be in the area of finance. We don't trust business, but we certainly don't trust finance. As I mentioned, Shylock is one of the most famous villains in theater. Dante, I don't know if you've ever read Dante's Inferno, but the moneylender, the banker, is like on the seventh rung of hell. He's got a bag of money around his neck and the bag is being drawn downwards towards the fire, dragging him into the deepest pit of hell. These are horrible, evil people. And we need, we need to control them. We need to tell them what loans to give out. We need to tell them how much interest to charge. We need to tell them, you know, what kind of products to sell and what they can and cannot do. We need to have say into every single part of how they do their paperwork. And, you know, this is what we have today. We have an unbelievably regulated controlled industry. And yet, and yet, if you think about it, if you think about the value of this industry, the value to human success, the value to human flourishing, the value to ability to live our lives in almost every dimension, in almost every dimension. Finance, financiers, financial institutions, financial markets, a crucial, essential, for ability to live well. And I don't know about you, but my standard of the good is, is individual human flourishing. Is, does this thing, in this case, does this interest industry, promote human success, promote the creation of wealth, promote flourishing, living well, living as a human being well. And when you look at finance, everywhere you look, in every quarter that you look, what you see is finance helping start businesses, whether it's through venture capital or through banking. Finance helping grow businesses, whether it's through debt or through bank loans or through allowing companies to go public or buying and selling their shares. Finance, seers and bankers allowing us to buy homes we couldn't otherwise afford until we accumulated enough cash, which would take us 20, 30 years, but because of mortgages, we can now buy homes that we can't complete, that we can afford over time and allowing us to do what I call consumption smoothing, buying stuff today that we will pay for tomorrow, credit cards, and we don't have to store all our cash, you know. Under the mattress, in a safe in our home, we can have it at the bank and conveniently use credit cards and checks, if anybody still uses checks. Now electronically, we can transfer money. We buy our cars, but debt provided us from bankers. Every aspect of our lives, our business lives, our personal lives, lives as producers, lives as consumers, every aspect is made possible by the existence of these financial institutions, these financial markets, and these financiers that we so, so, so love to hate. So what's going on? What's going on? Is my assessment of the value that financiers create in our lives right? What am I missing? Are these guys really the bad guys? That our TV series, that our movies, that our literature, that our, what do you call it? Drama, poetry, portray them to be? Is this really true? Which one makes sense? Because you can't have them both. You can't have contradictions. I mean, I used to be a finance professor, so I know a little bit about this topic. I used to teach a class called finance and ethics, and people used to look at me and say, wait a minute, that's a contradiction of terms. You can't have finance and ethics. Really? Really? We think that lowly of this profession that makes all the world we have around us possible to the extent that we don't believe it's compatible with ethics? Well, it's true. It's not compatible with a certain type of ethics. We're going to talk about that. And I used to ask my students, this was their first and most difficult homework assignment. I used to ask them to go find a movie or book or novel, where the hero in the movie or the novel was a financier. Not just any financier. Not some loser financier, but a successful financier. A financier who'd made a lot of money by being a financier, by working in this profession, made a lot of money, being successful, and portrayed in the movie positively or in the book. Now, this was the hardest homework assignment I gave these kids. They didn't know what to do with it. Because it's hard to find anything. I'll give you an example of one or two. It's positive, and I'll give you some examples of negatives. But they really went out and they really couldn't find anything that portrayed financiers. Now, you could find loser financiers who feel bad about all the money they made and then become good guys. You can find loser bankers like the hero in It's a Wonderful Life, who runs a failed bank and is therefore the hero of the movie. But the successful banker in It's a Wonderful Life is a really, really bad guy. It's somebody we love to hate. So you think, think about a movie or a play or a TV series or anything, any work of art, any work of fiction that portrays bankers positively. All right, when we get back, we'll talk about why that is and what the value of finance really is. You're listening to your own book show, we'll be right back after this. So today we're talking about finance. Everybody's going. We don't like those guys. And I actually am excited by the fact that I've got a book coming out about exactly this topic. In the books out now, you can pre-order it on Amazon. It'll be out, you know, it'll be shipping in a few days. It's called In Pursuit of Wealth, the moral case for finance. In pursuit of wealth, the moral case for finance. Go to Amazon, you can get it on Amazon and it'd be great if you purchased it. And, you know, maybe when I come to your town and give a public talk, I'd be happy to sign it for you. It's also going to be available in the Kindle and I know, I can't really sign Kindles or iPads and stuff like that. But I think you'll find the book interesting. There's no other book like it. Nobody else, nobody else out there will actually go out to defend finance, not just a economic defense of finance. Not only an explanation about finance benefits us all economically, but an actual moral defense. Why being a financier is a noble profession? That's a pretty strong statement. Why Wall Street? Wall Street has problems, we'll get to that. But why Wall Street is always vilified, unjustifiably, for every problem, every crisis we ever have in this country, and really this is a, to a large extent a global phenomena, but it more intensely felt here in the United States. And why we could not have the world we live in. We could not have the world we live in. And I'm talking about all the good things in the world we live in, because we could have all the bad stuff. We could not have all the good things that we live in, whether it's your iPhone, or the nice home you live in, or the computer you're using, or anything. The furniture you have, the car that you're driving, without robust, healthy, functioning financial markets. And yet, you know, these guys are vilified. So I was talking about It's a Wonderful Life. Think about that movie. You've probably all seen it. It's a classic Christmas movie. I consider it one of the most anti-American movies ever made, one of the most anti-capitalist movies ever made, and certainly one of the most anti-finance movies ever made. Because the hero of the movie is a failed banker. He's a banker with a golden heart, which makes him a failed banker, because he won't foreclose on people who won't pay back their loans. So he's subsidizing failure, and he drives his bank into bankruptcy, basically, which is going to hurt his customers. It doesn't help to lose money. Now, we sympathize with him. We like him because our culture has a very weird view of profit. We resent profit. We dislike profit. And if somebody, nobility is associated with not making money, right? The best people in the world, we think, are people who work for nonprofits. So here's a loser not making money, losing money, but still helping people. That's how he got into trouble. That's how he lost money. He's obviously a good guy. We love him. Across town, there's a banker who's been very successful, made a lot of money. Why? Because he actually thinks about what kind of loans he issues. He only gives it to people who can pay him back, or he thinks he can pay back, or when they can't pay him back, he actually forecloses on. He does what an owner of the bank is supposed to do. He actually runs his business as a business and makes money and makes a profit. We'll get back to him in a second and show why it's so essential that he does that. And why that's actually virtuous. Now, the movie makes him out to be a scoundrel and he's a lying and a cheater and he steals and everything. But to make the point, to make the point that he of your successful banker, you're lying, cheating, stealing SOB. It's the loser banker with a heart. Who is the good guy? Who is the nice guy? That's it's a wonderful world, but you see this pattern repeated over and over and over again. Now, why is making a profit virtuous in the mortgage business? Let's take the mortgage business for a second, right? Why was it a good thing that, I forget the guy's name. I forget the name of the villain in It's a Wonderful Life. You know, you get to a point where memory, memory is the first thing to go. But what is it that makes profit in that context actually virtuous? Because we think of it in terms of, wait a minute, he's foreclosing on people. People who have a loan, who've signed a contract and who now, for whatever reason, fault of their own or not, or accident or just bad luck, cannot pay a back. But who does he have a fiduciary responsibility to? To people who deposited money in the bank. People have opened up saving accounts in the bank. They've given the back money under the assumption that their money would be lent out and make a profit. And that that profit would partially pay to give them interest on their saving account. So people are saving with the expectation of getting a return. That return is generated from the return the bank gets on the loans that it makes, on the mortgages that it makes. If the bank stops taking in the return on the mortgages, it can't pay you interest on your saving account. Who loses? You lose. It might not even be able to pay you your principal back. If the person they lent the money to can't repay it. And if you don't foreclose, foreclosure means you take over the house and you sell it. How are you going to get the principal back to pay the savers? So you're basically, this goody chuteuse banker, is basically sacrificing his depositors, sacrificing savers for the sake of people who can't pay back their mortgage. It's a contractual violation. It's a violation of fiduciary duty. It's a disaster. Now, making money off the mortgages is what makes it possible for the banker to pay you interest on your saving. That's a good thing. And those saving, the fact that you're willing to save, is what creates the mortgage markets. But if you start having bankers all over the place, not foreclosing, letting their banks basically not be able to pay back savers in a sense driving their banks bankrupt, then not only do the savers lose, but mortgages in the future lose. The whole industry gets wiped out and where, how do you fund your next home? Most of us don't spend our whole life putting money aside and then buying a home for cash. Luckily, there is a whole industry dedicated to the fact, to making it possible for us to actually purchase a home before we have enough cash to buy it. That's what a mortgage is. Wow. It raises a standard of living dramatically when you can buy a home that you're only going to be able to accumulate enough money to purchase years from now. And by giving you a mortgage, making it possible for you to live in a nicer, bigger home than you could ever imagine. That's terrific. It's fantastic. And if you land up making more money than you expected, you can sell the home, pay back the mortgage and get a mortgage on a bigger, nicer home. And if it turns out things are not so good, you can sell the home, pay back the mortgage and buy a smaller home. Wow. The flexibility. I mean, the way in which this simple little thing, this simple little financial product, this simple little financial institution called a mortgage bank has made your life better. Every one of our lives better by making it possible. First to buy and sell. One minute. First to live in homes without having to worry about, you know, putting them on your side and in the meantime, what are you doing? You're renting or you're living in a crummy home and you really want to live in a nice home. I love mortgages. I love that generally. If you do it responsibly, if you use it responsibly, which a lot of people don't, but if you use it responsibly, it's incredibly life enhancing. You can buy stuff and pay for it later. You have to be responsible not to buy too much stuff that you can't afford to pay. But it's truly a beautiful thing. Think of your mortgage, think of your car loan, think of your other loans. All right. So in a way, it's a wonderful life. The villain is actually the good guy. And the good guy is actually the villain. All right. You're listening to the Iran Book Show. We're talking about finance, the morality of it. And we'll be back after this break. All right. Today we're talking about finance. We're talking about my new book, In Pursuit of Wealth, The Mall Case for Finance. It's co-authored with Don Watkins, who this is our third book together. If you haven't got the first two books, you should go out and get them. Free Market Revolution is our first book. Came out in 2012 and then in 2016. We had equal is unfair. Equal is unfair and free market revolution. And now, in pursuit of wealth, The Mall Case for Finance. So get your Iran Book and Don Watkins collection of books. The Goodreads, I think you'll enjoy it. I think you'll enjoy it. And of course, I might even offer to, if you mail me the book, I'll sign it and mail you back to you. Or if I come to your town and give a talk, happy to sign the book. But I think you'll enjoy it. I think if you like the show, if you like listening to the show, I think you'll enjoy the book. It's a book of essays, The In Pursuit of Wealth. A book of essays that covers a variety of different issues related to the field of finance. Anything from what I'm talking, some of what I'm talking about today, kind of the Mall Case for Finance. So breaking that up into two aspects of it. One is how finance contributes to human flourishing. How finance makes possible. The ability of individuals to go out there and make their lives better and flourish and pursue happiness. Also, why it is that financiers are doing something inherently self-interested, rationally self-interested. And to me, that is what morality ultimately is. It's the pursuit of your own rational long-term self-interest. Making your life the best life that it can be. Living a flourishing, successful life. So the book has a chapter really just delving into that, into the productive nature of finance. It also does a bit of history. History of finance. Why have we had a banker so long? Some examples of that hatred. Some examples of the things they have made possible during that history. And how without financial institutions, we wouldn't have had all the economic progress we've had over the last four or five hundred years, and certainly not over the last 200 years. We'll also talk about the fact that it's heavily regulated in the book. And we'll talk about greed. We'll talk about Wall Street greed. Good, bad, neutral. There's a chapter. And then there's a bunch of chapters, some about inequalities related to banking. Some about luck. Oh, bankers, they're just lucky. Some about, you know, bad stuff that happens and we'll talk about CO pay. And is it bad? We'll talk about, you know, other issues that relate to specifics, like insider trading. We talk about hedge funds. And yeah, it's an exciting book. It's, you know, and I encourage you all to buy it. It's called In Pursuit of Wealth, The Moral Case for Finance. And you can get it on Amazon as we speak and in the weeks to come. So, you know, and there's a long, by the way, there's a long epilogue in the book, which is just an interview with me covering all kinds of issues and all kinds of questions that come up. You know, what is a hedge fund? Why, you know, what is it that hedge funds do that is even mildly productive? There's a chapter on central banking and bankers, central bankers and so on. You know, we'll talk a little bit about central banking in a little while. So, a lot, a lot, a lot of information, even if you think you know a lot about finance, I think you'll gain something from reading this book. So, we discussed a little bit how finance, banking, mortgages, debt financing for us individuals makes our life easier. And the flip side of that is that a savers it makes our life easier. We can actually now, because of banks, because of financial institutions, because of the industry, I can output money aside for retirement. Now, I know some of you are saying, well, I don't need to do that. I got Social Security. Well, you don't want to live off Social Security. First of all, it's not a lot. Secondly, it might not exist, particularly if you're young. Social Security is going bankrupt. We'll do a show on Social Security, but Social Security is going bankrupt. So, if you're in your 20s or 30s, certainly if you're in your teens, I wouldn't count on it. Put some money aside, save. And it's not just that you put money aside, and it just sits there. I put $10 and then put another $10. Now, I have $20 now. You put $10 in. And it earns interest. Now, I know interest rates are pretty low right now. But you know, returns in the stock market have been pretty good the last few years. And they have been periods in the past where interest rates have been higher. And when you think about the compounding of those returns over many years, your money grows. If you do the math, it's pretty amazing. And you know, I'm not in the business of giving you financial advice or doing self-help and finance, although I know there's a big industry of that, and I could probably make some money doing that. But let me give you this advice anyway. Save. Save. It's the most important thing you'll do for yourself. If you're a long-term thinker, and I think we should all be long-term thinkers, they are going to be emergencies. And you don't want to rely on the government for help for emergencies. You don't want to rely on your family for help for emergencies. If you save, if you build a little nest egg or whatever you want to call it, an emergency fund, save yourself in those emergencies. Retirement. You don't want to count on Social Security. You certainly don't want to count on your kids. Your kids are not going to fund you when you're old, right? That's how we used to do it 300 years ago. The kids would take care of you. Now, you put money aside, you save it, and then you can spend it once you stop working, once you stop making a living for yourself. Save, save, save. You want to buy a nicer computer. You want to buy a nicer home. You want to buy a, you know, a nicer automobile. Save, save, save. Saving is the way to do it. We focus so much on consumption, on buying stuff. And now economists, really, really bad economists, in my view, keep telling us, oh, the economy is driven by consumption. No, it's not. No, it's not. Economic growth, ultimately, is driven by saving. It's driven by production, by building stuff, creating stuff, making a profit, or making income and spending only part of it, and then keeping the rest and investing in. It's the investment that allows factories to grow. It's the investment that allows startups to be created. It's the investment that creates the future jobs that are going to be created in the future. And investment is just a flipside of saving. You save by giving it to the bank, or giving it to a hedge fund, or giving it to a pension plan, and they invest the money so that they can give you a return on your saving so that you can one day buy that nicer car that house you've dreamt of or just retire in much better condition than if you had to rely totally 100% on Social Security. What really drives an economy is saving. Now you shouldn't save because it drives the economy. This is the beauty. The beauty is that if we all act as individuals in our own long-term self-interest this is one example of that. The economy benefits. The economy benefits. The extent that there is such a thing as the economy. Job creation and the future will benefit. New product creation in the future will benefit. So all you have to focus is what's good for you. What's good for you is to save and save and be diligent and disciplined about it and by the way you're also helping the economy. Not why you should do it. You should do it for yourself. Alright, we'll be back after this break. We'll be talking more about the morality of finance. You'll listen to the Run Book show on the Blaze Radio Network. Alright, today we're talking about my new book. My new book The Suit of Wealth, the Marl Case for Finance co-authored with Don Watkins. We talked about savings and we've talked about investment a little bit and we talked a lot about using debt to fund some consumption. All good things. All wonderful things and this is great and if you think about how banking really started if you know the history banking really started by people wanting to be able to store money, money and money in those days was real money none of this paper stuff that anybody can print anytime and just create out of thin air money was gold or silver mostly gold. It was real and you had to carry it out or you're gold and you had to bury it in the ground and it got difficult and it got cumbersome and it got people could steal it from you and there was no way to get recourse how do you identify your gold versus somebody else's gold? So people started taking the gold that they had made the gold that they had saved maybe and putting it up storing at the goldsmith and the goldsmith would give you a little certificate a little piece of paper saying I owe you X amount of gold and you would have the certificate and somebody at some point probably accidentally had the certificate and wanted to buy something and needed to use the certificate to go run to the bank in a sense to the guy who was storing all the gold and get gold to buy the stuff and he said you know what let me ask the guy if I could use this piece of paper instead and the guy said yeah I'll take the piece of paper the guy took the piece of paper the piece of paper said that this goldsmith owes X amount of gold and that was the beginning of paper money with these IOUs and it turned out that you could circulate these IOUs and once in a while people would go and withdraw their gold but mostly they kept the gold in the vault and all that was needed was circulating IOUs these pieces of paper call it paper money but every piece of paper was backed by gold in the vault and this is how money came into being modern money how paper money came into being basically came into being with these deposit receipts IOU deposit receipts and these deposit receipts became their money that was being used again finance made life easier by instead of lugging around bags of gold or bars of gold which are heavy cumbersome dangerous risky all you had to now carry were pieces of paper walk around with pieces of paper right so even just at the very basic level of a payment system of ability to pay for stuff to buy stuff or to take that money and invest it which is what the goldsmith discovered they had all this gold and it was just sitting there and then they figured out ok not that many people come and take the gold out the deposit slips are just being transacted independently we can take the gold and issue more deposit slips and give people loans and now you got modern banking all of this was kind of created out of the marketplace all of it created out of the marketplace in order to make a profit but the only way to make a profit in any industry but certainly in the financial industry the only way to make a profit is by providing a service that people want at a price they're willing to pay which exceeds your costs of delivering it so you cannot make money without making other people better off you cannot make a profit without providing a service that people really desire and are willing to pay for now you can short term steal, lie and cheat but putting aside fraud, lying, stealing, cheating all of that profit is a reflection of how much value you have created for other people the people who trade with you the people who are transacting with you profit is this amazing wonderful thing and people who make a lot of money a lot of profit do it because they provided huge amount of value they made people's lives better this which is just by the way so let me just say it every point in financial history from those early goldsmiths the creation of money paper money for the first time to the building up of whole banking networks that made investments to the complexity of the financial industry today every one of those steps value is being created lives were being made better every one of those steps every one of those steps financiers could only make a profit by making by trading with people around them by providing services to people around them services that those people really really desired and were willing to pay for and by the way at every one of those steps financiers were being demonized were being often criminalized sometimes burnt at the stake sometimes put in jail but generally victimized until this book really have never received the kind of credit the economic credit the moral credit most importantly the moral credit for making the world a better place for filling our world with wonderful wonderful products and goods and everything again everything is being touched by finance you can't build a hospital you can't build a school without bonds that are financed by somebody without a banker in the middle at every point everything that we do in life one minute these people touch and again we vilify them we harass them we condemn them we prosecute them we put them in jail often put them in jail ah frustrating frustrating so and yet here they are they've created this immense value and they keep creating the value because there's money to be made they're doing it for self-interested reasons they're doing it in order to make a profit 30 yay for profit yay for self-interest if what self-interest and profit do is improve my world if they enhance human flourishing then I am all for that all right you are listening to your own book show on the blaze radio network that was our number one and we will be back to discuss more about finance when we come back all right you are listening to your own book show we're talking today about my new book in pursuit of wealth with Don Watkins my co-author we've this is our third book together in pursuit of wealth the moral case for finance I know some some people's heads are spinning how can finance be moral finance is all about the pursuit of profits and the pursuit of profit is moral the pursuit of profit is good the pursuit of profit is what leads to all of the successes we have in the material world around us so don't slam profit profit is good profit is moral profit is virtuous the pursuit of profit is good it's when people start lying, stealing, cheating, committing fraud but we've always had laws against fraud we don't need new laws against fraud Bernie Madoff is not self-interested Bernie Madoff is just a creep Bernie Madoff is the guy who had that pyramid scheme and basically stole 50 something billion dollars from people he didn't really even steal it for himself he just he just defotted people huge pyramid scheme it's all wasted, most of it was gone a lot of it was returned to people but the guy's a massive crook but he's not a financier he's a fraudster you don't blame the whole field of finance for the actions of one fraudster which is what he was alright but people are bewildered okay so they get saving and they get the creation of money they get maybe you know some loans, mortgages some business loans but it can be what is the productive function of a stock market you know why, or how's the stock market productive how does it add to my life I don't own any stocks so how does my life benefit from the existence of a stock market well I mean you wouldn't have you wouldn't have the computer you have on your desk you wouldn't have the car that you're driving you wouldn't have most of the products particularly the more expensive ones but also the cheaper ones there would be no Proctin Gamble there would be no Johnson & Johnson all the big consumer goods companies where you buy your toilet paper without a stock market a stock market is what makes it possible for companies to raise vast amounts of capital so that they can go out there and build substantial substantial companies and I know people say oh big business we hate big business but the fact is the most of the good stuff we have is built by big business and the most if not all small businesses want to be big businesses and they will be big businesses if they succeed they stay small small businesses if they fail but success means growth success means growth it really does so a small business if it's going to be successful it's going to become a big business so I'd love big businesses and think about all the goods and services that you get on a daily basis that you benefit from at prices that if you actually thought about how much it takes to make this thing unbelievably cheap and we get them easily efficiently on Amazon Amazon couldn't have built those warehouses the infrastructure, the logistics the variety of products without the capital that it raised when it went public when it joined the stock market stock market is essential for raising large quantities of capital, a lot of money so you can build plant, equipment, logistics warehouses and higher people higher people I mean nobody goes to work saying that's okay, I don't need to be paid if the company makes money I'll take a percent I may be small some small businesses function that way but how many people would actually join an auto company if that were the case how many people would actually join a biotech company where it takes 10 years before any profit is seen no capital is raised salaries are paid and if the company turns profitable and if there's money left over after all the debts and everything else is paid off then the shareholders make some money hopefully that's a lot but they're the ones taking all the risk so stock market facilitates raising large quantities of capital so that people can be employed so that we can buy factories and machinery or warehouses and logistics in Amazon's case or software servers and everything else you can have a thriving successful economy you can have a thriving successful economy that creates jobs unless you have a thriving successful stock market and indeed the fact that since Sabine's Oxley was passed Sabine's Oxley was a law passed in 2002 by Bush in a Republican House passed the Senate 98 to 0 one of the worst pieces of legislation in American history passed the Senate 98 to 0 not one not one conservative voted against it probably cost the US economy I hate these kind of measures because you can't really tell they always underestimate but the estimates of economists are somewhere between 1 to 1.5 trillion dollars trillion that's with a T stock market a lot less efficient because it made it very expensive to go public so a lot of companies are not going public the number of IPOs initial public offerings has collapsed gone down dramatically since 2002 Hutt the US economy one of the reasons we have slow growth today because we don't have enough companies going public and going fast using those vast quantities of capital and this has been going on for 15 years now you think a Trump administration Republican House and Senate would do away with something like that oh no God forbid we actually get rid of any regulations even as Republicans without a stock market without a thriving IPO market without that kind of growth without that kind of investment in capital the economy is not going to grow very fast and you as an individual are going to suffer it hurts you every one of us not only because our jobs might not be as productive as they could be but because our neighbors our friends our family members are not as productive but also because the economy is growing less that means less innovation that means less new products it means less cheaper products it means a lower standard of living than we could have otherwise as an individual it means job opportunities that we never had that we can only imagine and yet nobody cares nobody cares we continue to vilify financial markets Janet Yellen just a few weeks ago came out and said oh we can't do it with regulations don't do it with regulations because it's ultimately it's regulations that will save us from the next financial crisis because it was lack of regulation that caused the financial crisis we're going to talk about that after the after the next break about where the financial oh maybe actually the second half of the show today but we're going to talk about where the financial crisis was caused by too little regulation that's a bizarre surrealistic claim but that's what she holds it but my point is stock markets even though we want to regulate and control them because we don't get it incredibly valuable but here's another way in which the value of people don't think about when people trade stock market they give a price to a particular stock what that price reflects is the value of that company and what that value reflects is what the market what people in the market estimate to be its future cash flows how profitable this company will be in the future talking about economic profit how profitable would we be in the future it's saying this is a successful company stock price declining that's an unsuccessful company to the extent that the market is right and the market is very good at getting this stuff right that is unbelievably important information to other participants in the market often to the companies themselves they don't know that the company or their industry is dying imagine when automobiles were first produced you in the buggy industry you might have not known your industry was dying until you saw the stock price go down and then you looked up and you started looking around and discovered there was an automobile industry what the stock market does is it helps allocate those resources towards the next big thing automobiles away from the dead dying thing buggies it's a beautiful thing to allocate capital on a grand economy-wise scale to its best and most productive uses you're listening to your one book show on the blaze radio network alright today we're discussing financial markets and the morality of finance the last segment I talked about the stock market I want to reiterate this one of the things the stock market does and really all financial markets and institutions do is they allocate capital across the economy they choose winners and losers they decide which industries are going to thrive and which industries are going to die and how do they do that what's the basis by which they do that they do it based on what they think is going to be profitable and what they think is going to lose money in the future now how do you make money in industry by providing goods and services to customers by creating new things that customers are going to want you want those industries to grow when do you lose money in business when you're not providing services to your customers when your customers are not willing to pay for the service and the product that you are offering them in other words when you're a drag when you're not adding value when you're not contributing to success to growth to human flourishing so financial markets allocate capital to industries and companies that are going to or are already and are going to in the future because finance is primarily focused on the future they're providing capital to industries and companies that are going to provide for human flourishing and they're taking money away they're driving the stock price down they're not lending money to industries that are destroying or not providing for human flourishing they're taking money away from buggies which nobody's going to want because everybody's going to shift to automobiles and giving it to automobiles during the 1980s in the United States we were shutting down a lot of what's called the rust belt and the reason was that American business was not competitive anymore in a lot of the heavy manufacturing other people could do it better and what you saw were people coming in selling off a lot of those assets shutting them down firing people, laying people off and taking that capital and putting it into the future a lot of capital huge quantities of money flowed from the rust belt to silicon valley this is the era where Apple was created Microsoft was created and built up IBM shifted completely where all the personal computer industry and ultimately the internet industry were all built that took a lot of money where did that money come from? to a large extent it came from shutting down the old industries that were not worth that much anymore shutting down the industries that were not providing a value not providing a service or where you could get the value you could get that service cheaper, better, somewhere else and yes there were many jobs and they had to get retrained but you know what happened to their kids their kids didn't go into the steel business their kids didn't go into old manufacturing their kids figured it out and they went to silicon valley and got into computer engineering jobs programming jobs there are millions of jobs today they have to do with computers and games and technology generally that didn't exist 30 years ago those jobs were created because our economy was flexible enough to reallocate capital from losing industries to winning industries and we demonized that we demonized that we think that's horrible but that's wrong that's how economic progress happens that's what makes human flourishing possible it's not holding on to any plant or to that steel business it's not profitable anymore got to take your capital and put it into something that is profitable because that profit again represents value creation making people's lives better human flourishing and that's what happened in the 1980s people ask me in the 1970s back in the 1970s the US economy was struggling US businesses were struggling badly we had massive conglomerates inefficient, unproductive we couldn't compete with the Japanese we couldn't compete with anybody we had inflation in the US we had stagflation unemployment was 13, 14, 15% and inflation was 15% it was a terrible time and then by the time we got to the 90s we had low inflation we had an incredibly robust lean efficient productive businesses in America hiring like crazy economic growth had accelerated in the 70s to the 90s how did that happen in the 80s what happened what happened in the 80s is we had the restructuring of America we had financiers like Michael Mirkin Michael Ikan like the hostile takeover artists going to companies and restructure them sell losing assets in order to invest in winning assets move capital from poor uses to excellent uses and therefore yes create create an employment in a sense of firing people but unemployment during the 80s plummeted it went down dramatically why because when you allocate capital efficiently more jobs are created than are being destroyed so more opportunities are created more opportunities to build to create to make stuff to flourish to succeed so people used to ask me in the 90s when I was a finance professor used to say who's responsible for the good economy we have is it Bill Clinton is it Alan Greenspan the chairman of the Federal Reserve the politician and it certainly is not a central banker what made the 1990s what made America industry lean and efficient and successful and growing what made Silicon Valley but what made all of American companies so successful were people like Mike Milkin that's who made America great again and that's only thing that can make America great again is to free up businessmen and importantly of all businessmen is to free up financial markets so they can more efficiently allocate capital more efficiently kill off losing businesses losing industries and fertilize fertilize growth industries the future industries this is exactly what happened in the 80s shut down the rust belt the country where technology and technology companies have thrived and the people who support technology companies have thrived it was all made possible because of this obscure thing called reallocation of capital which financiers and the private equity and the hedge fund business in the stock market make possible and having the stock price reflect the real value of the company is incredibly important so that the rest of the market knows where to allocate capital to it's an incredibly powerful tool a valuation and a value of something the financial value of something reflects its future potential reflects its potential to be successful or not in the future a stock price that's going down means that companies prospects for the future are declining a stock price going up means that the company prospects for the future are getting better we want stock prices to be reflective of that information to do that we need a free market in finance we need financiers who are incentivized and motivated to buy and sell to invest but also the short shorting is a form of selling stocks so that whatever they think about the future of these companies they do the research and discover new information discover new facts about them can be reflected in the price and make the markets more efficient and therefore make the allocation of capital more efficient which leads to more jobs more economic growth new industries and the kind of human flourishing that the world makes possible we're talking today about my new book in pursuit of wealth with my co-author Don Watkins it's available on Amazon and everywhere else the mall mall case for finance we'll be right back to talk more we're talking today about the mall case for finance I've been giving you a bunch of different arguments about how productive financial markets are and so on and how they allocate capital and why that's all a good thing I want to talk a little bit about a different aspect of finance now and then I want to talk about the financial crisis, the Great Depression and all the things blamed on finance so we're not going to get into we're not going to be able to cover everything today after all I have a six hour course that I did years ago the financial crisis where I analyzed the financial crisis from 8 to 6 hours it took me so we're not going to be able to do it in a few minutes that we have left on the show but in the book we cover a lot of this so again I encourage you to go out and buy the book in pursuit of wealth the mall case for finance with me you're on book and Don Watkins my co-author the other aspect of finance is its ability to reduce risk core risk in a sense to take on only the risks that we want to take on now this is somewhat hard stuff it's complicated and this is why people get so confused about this and I think why people are scared of it and why people want the government to come in and help them because they're scared this is the whole area of derivatives derivatives options and futures I don't realize debt obligations and credit default swaps and on and on and on it goes the kind of different types of derivatives they are but I'm here to tell you they're not that complicated and they're all good they basically serve one purpose these derivatives and that is to protect, to cover the downside all of these derivatives in one way or another are forms of insurance it's just like you and me, we all buy life insurance or property insurance flood insurance, fire insurance in order to protect the downside and we hope we'll never need them derivatives are the same thing derivatives are a way to protect us from downside now for most of us insurance is enough insurance covers the kind of risks that our house will flood or be destroyed by a tornado or something like that you know hopefully that doesn't happen to any of us but we know what that risk is and we can go and there's a whole business called insurance that covers that risk now notice insurance is a financial industry it's a financial industry whose responsibility is to help you protect yourself from risk and all these insurance products we buy health insurance life insurance property insurance and all this stuff and now notice again from the financial perspective all these insurance companies have to make money on the premiums that you send them in order to be able to finance you when something bad happens and the way they make money is by investing that money and thus by investing the money they're adding to production because they are financing new plants and equipment and new jobs and new industries that's what insurance companies do with the money it might be in bonds it might be in stocks but they are investing even in some cases they can even invest in hedge funds so the insurance business is a great financial business crucial financial business that protects individuals and businesses from a certain type of risk but there are other types of risk that are harder that you can't use straight insurance kind of products and that's what derivatives were created for and the simplest derivative to imagine or to explain is a futures contract on let's say a barrel of oil so an oil refinery produces barrels of oil but the price fluctuates a lot from $100 a barrel to $50 to $20 even back up to $100 that goes up and down and what the producer would like to do is cap that price it's going to be producing oil over the next year but it doesn't know the price at which it can sell a barrel in a year but let's say it wants to make an investment and it wants to know how much oil at what price it can sell oil in the future it can sell a future it can a sense ask somebody to guarantee the price so I come along and I say you know what I'm willing to pay you 80 bucks in a year for any oil you produce now I'm taking the risk that the price might drop to 50 but I'm also there's also the possibility you might go up to 120 so I'm basically betting that the price is going to go up and the oil refineries betting that the price will go down and we're both coming together mutually agreeable and agreeing on 80 I protected the risk of the price going up let's say you know I own a fleet of trucks and I'm worried about all prices going up so I've just locked in a price for oil I cannot price all my deliveries based on this price that I've locked in and the old company is locked in a price that they know they can sell it at so if the price goes down then I'll worried both of us are happy what's interesting is that if the oil price goes to 20 and I bought the oil for 80 I'm going to feel like I was screwed even though I wasn't if the price goes to 120 and the oil company locked in a price of 80 they're going to feel like they were screwed but you know what the adults and they understand that what they really did was buy an insurance policy and sometimes you buy an insurance policy and your house doesn't burn down so you feel like you've wasted money but no what you bought is peace of mind what you bought is certainty about the future that's what derivatives allow companies to do you can now swap loans you can swap interest rates you can do all kinds of fancy things but the essential characteristic is you're locking in payments in the future you know how much something will cost you in the future so you don't have to worry about it you're creating peace of mind you're reducing risk you're making business decisions more rational by using these products called derivatives and generally what that does it makes the economy more efficient it makes the economy more productive which means more jobs which means better jobs because productivity is going up jobs are allocated to the right kind of industries we don't have these wide huge good times and then crash bad times again if the markets were free we'll get to that in a minute and that's how this financial crisis which I'll have to do a whole show on because I'm only going to get a short segment to discuss but that's okay we'll do seven minutes on boom and busts and why financiers are not at fault so derivatives are not evil they're good we should celebrate derivatives they make the economy more efficient they make the economy more stable and the more we regulate the more we control them as we'll see in a little bit the less stable they will be the less efficient economy will be so we want we want companies finance companies regular companies we want them to be in a position to reduce their risk make wiser investment thirty and again that's all derivatives do all derivatives do now yes they can be used for gambling but the gamblers lose and the gamblers get wiped out and what's left are the people who are using them to actually reduce risk and benefit enormously from them alright you're listening to the only defense of financiers you will ever hear on the radio the Iran book show on the blaze radio network will be right back alright today we're talking about financial markets financiers is finance moral and I've argued it is because it enhances human flourishing it enhances individual human flourishing and the people in finance the value creators they make goods and services they make products possible they provide the financing they make it possible for us to live well for companies to grow for companies to start there would be no Apple there would be no Microsoft there would be no Intel there would be no Walmart without finance none of the goods and services you have in the world around you without efficient productive good so institutions and markets you wouldn't have and if we hadn't regulated them oh we would be so much richer the products we had would be so much better oh no Iran that's impossible unregulated financial markets that's what caused the financial crisis really that to me is one of the most bizarre statements ever and I hear it all the time and Janet Yellen the head of Federal Reserve said this recently it's a lack of regulation it's a lack of regulation that created the crisis we need more regulation to prevent it that is just nuts to me because in 2007 before the financial crisis financial crisis started in 2008 finance banking wall street with the most regulated industry in America every aspect of finance was regulated everything they did they needed to get permission so the financial crisis happened how can you blame it on the lack of regulation with so much of what they did was regulated I argue the exact opposite I argue that in a fundamental sense it was too much regulation indeed regulation is what caused the financial crisis and I'm going to give you a quick outline of this you want more buy my book in pursuit of wealth in our case for finance it actually has a whole section on the financial crisis the role regulations played and the role the central bank played and let me just quickly say this about central banking the number one product of finance is money money used to be private banks used to issue money based on the reserves that they had you remember the story I told you earlier in the show about the goldsmiths they would issue receipts to their customers that used to be money and then at some point in the United States in 1913-14 money was nationalized money was taken over by the government and since then the government decides how much money should be in the economy who should get it who should get it first who should get it last the Federal Reserve is a government entity that monopolizes money and it messes up constantly it provided too little money too little liquidity during the early 1930s and drove us together with a few other factors into a great depression I know they still teach in high school that Wall Street caused a great depression but it didn't the Federal Reserve along with a lot of bad decisions by Hoover and FDR caused and sustained and perpetuated the Great Depression not perpetuated and sustained it for a long, long time could have been just a simple recession if they kept their hands off and if the Federal Reserve had behaved themselves and done the right thing but it's hard to do the right thing when you're a central planner money should be private but that's a big, big topic we'll get to another time same thing happened in the Great Recession of 2008 2002 the Federal Reserve lowered interest rates to below the rate of inflation and it kept it there for two and a half years now when you have interest rates at below the rate of inflation what are you doing you're incentivizing people to take on debt to borrow money like crazy and we did, all of us we all borrowed money like crazy because it was so cheap it was insane not to borrow money and we all borrowed money to buy one specific asset housing we took out all kinds of mortgages and usually variable rate mortgages at a really low interest rate remember the days of 1% variable rate mortgages 5% down, 10% down if you were really, really conservative 20% down but mostly you could get 0% down some mortgages why mortgages? because the government was heavily incentivizing Freddie and Fannie the government institutions were subsidizing those mortgages and encouraging us to invest in those mortgages and our politicians were telling us we should buy homes we have housing policy at the federal government housing policy that is geared towards maximizing the number of Americans who own their own house why is the government telling me whether I should buy or rent why is the government telling me what house I should buy why is the government intervening and the weight of mortgages and what kind of mortgages and how much down we should put down why not let the market do its job the market would have never done it this way zero down mortgages not a market phenomena interest rates below the rate of inflation not a market phenomena giving mortgages out to people who no way can afford those mortgages not a market phenomena the banks were doing that then taking the mortgages and selling them to government entities Freddie and Fannie and then Wall Street started competing with Freddie and Fannie and why did they do that that's kind of stupid because there was money to be made yeah but if you do something stupid and you're in business you know then ultimately you'll go bankrupt oh wait a minute but that doesn't apply to Wall Street banks if Wall Street banks do stupid things take a lot of risk and make a lot of money they get to keep all their money but when they lose when they go bankrupt the government bailes them out it's called too big to fail and now it's in our laws Dodd-Frank institutionalizes too big to fail so we have a system where banks are told you're too big to fail and we're going to bail you out it's a trouble now that's not free markets that's not unregulated industry that's a heavily regulated industry heavily controlled obviously heavily subsidized deposit insurance is a subsidy that banks get and then we have to control them because we subsidize them and we give them too big to fail so then we have to watch everything that they do and make sure they don't take too much risk and we regulate and regulate and regulate distort and pervert the incentives and make them do stupid things because we create incentives for them to do stupid things and then we're shocked when they actually do the stupid things that's what regulations do that's what the federal reserve does so what caused the financial crisis is stupid regulations a lot of them not any one, lots of them primarily regulations of housing and feddy and fanny and a whole gamut of housing policies that incentivize us all I mean my the woman who cuts my hair bought two investment houses I mean that's insanity but it was subsidized by the government so why not and then when she couldn't pay the mortgages on them she just walked away with no penalty all of that isn't it but that's government and then the federal reserve the people who control the industry it's way too low but anyway if you want to know more about the financial crisis and why it happened and why it was not a failure of capitalism why it was not a failure of Wall Street it was a failure of Washington DC and government read in pursuit of wealth the mall case for finance by myself and Don Watkins it's available on Amazon go get your copy today and keep on listening this is the Iran book show on the blaze radio network right? cool sounds good of course we will talk to you on Sunday sounds good bye