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and never proven to be the case
What happens is a crisis fades into memory
and then become history.
That is the reason we often give
why we learn history and why we teach history
is not having to repeat it past mistakes
You have seen the state Union address where the President came and said,
"Guys, we messed up."
This is a boom and bust will always be with us
It's human nature that they will be with us
And I told you before, Mr. Deputy Chairman,
"Don't go back to the boom and bust."
(all cheering)
(footsteps)
Human strategy we see on the real market
it's just that is evolutionarily really old
They are a kind of residual strategy from 35 million years ago.
WILLEM H. BUITER: Very difficult to, uh,
understand why economists
focus on the model where the crisis cannot happen
They run the economy based on science fiction models.
That's why they don't This crisis idea comes
because they ignore banks, debts, and money.
(hoof hoof)
GEORGE MAGNUS: We always think How lucky we are
that we never really have to live through in the 1929 accident
and the 1930s Great depression,
because we are now smart now
and we know how to avoid it this type of accident,
and actually, many economists
really insist that the worst won't happen
because we know how to handle these things.
And of course, Actually, we don't know how to deal with them
TERRY JONES: In 1928, President Calvin Coolidge
give the country from Union
address in the following terms:
On the domestic field,
there is peace
and satisfaction...
and highest record
from years of prosperity,
the great wealth created by our company and industry and saved by our economy,
has a wide distribution _ among our own people Countries can assume now
with satisfaction
and anticipate the future
with optimism.
(everyone claps)
(singing)
TERRY JONES: He doesn't do it know what we know now,
that the United States will almost suffer
the worst economy disaster in its history.
Our economy is healthy and strong,
and grow faster than others large industrial countries.
American people have changed to economic performance
That's the envy of the world.
TERRY JONES: He doesn't know what we know now,
worst crisis ever to hit Western countries
just around the corner.
The crisis of 2008
is often called as a subprime accident.
In less than 15 years, there are big increases in mortgage loans to people
who is basically can't afford it
Women and men, Harvey Rosen,
General Chair White House Council economic adviser
speak in 2007
The main thing is innovation in the mortgage market
has done more than the last 30 years is letting
excluded, young,
discrimination against,
people without a lot of money in the bank
to use a down payment.
(muttering agreement and affirmation)
JONES: These are careless loans to people who are unable to pay mortgages known as subprime loans,
But banks insist
they have eliminated the risk of with statistical processing
If you look at the way risk is managed by the bank,
especially before the crisis -
This is very interesting, and quite funny actually.
What they do is to take risk assets,
like, um, trash mortgage,
cut them into small pieces,
repackage them after mixing it with all the bits at risk,
and then sell it to other banks and financial institutions.
And so this risk becomes
uh, disband in financial markets,
and no one really knows where is the risk
or in this case, does anyone know exactly whether...
packages from financial products that he bought,
that he invests, risks,
whether it is very risky or not at risk at all.
JONES: They sell this package to investors as a very low risk product.
Indonesian banking organization all sizes have been made
big steps the last two decades
in their ability to measure and manage risk.
So, because we can't observe the risk again,
we say to ourselves, "There is no risk."
What's worse? when you do this,
the risk of being is connected to each other.
You don't know exactly how the risks are connected,
but they are.
In the pre-crisis period,
we tell a story
about big banks
able to spread their risk on their balance sheet,
which then
allow us as regulators
to allow them to run with a lower security margin.
Everyone happy and confident
that the mortgage market has become more efficient than before.
And I told you before, Mr. Deputy Chairperson
do not return to boom and bust.
and grow faster than others large industrial countries.
Everyone is sure
that at this time, This is different.
ZVI BODIE: Subprime crisis in 2008
basically a bubble burst
They lend a lot of money to the house I've seen them in Gary, Indiana, in Detroit, Michigan,
which you can now buy for ten grand
But they will lend u-usually about one hundred thousand,
so that poor people who want have never, ever had a house before being able to own a house.
When we take your income and wealth,
You measure 620 on the FICO scale.
620? it was great.
No, no, no, no, no. You see, we're financial wizards takes into account 850 on good FICO scale.
And 300 is very, very bad.
You see, most people score around 725 on the FICO scale,
and I'm afraid 620 is usually our cut-off point.
Oh dear, so, I won't understand my interest in mortgages (laugh) Not so fast.
You can still fulfill requirements for other income verified asset loans.
What is that?
That's where you declare your income and we verify your wealth
Well, I'm worth a million dollars.
Oh...
Can you prove it?
Not really.
Look, we really want your money
Uh-uh, I mean, we really want you to have this only mortgage interest
So, we can go down stated income, the asset route mentioned
What is that?
You declare your income and assets and we don't check them
Great!
Well, uh, then - that's how are all signed and sealed.
Believe it or not, this scene is or something like that,
must have been played countless
In 2004 to 2005,
more than one third of all mortgages
no income, no job or assets,
nicknamed "Ninja loans."
Hiyah! Hiyah!
That's how it is.
It's about forcing loans
to people who will never reply,
who will end get taken over,
to get a fee on origination
and other costs when they are sold to several suckers who will take the loss
Broadly speaking becomes, finally, a little trick Because, everyone thinks asset prices will continue to rise.
Unimaginable happens.
Housing prices start falling
That signals them they can never pay the debt,
because they rely on on rising house prices
as we all do in this bubble.
And then, um, like a, dominoes,
lenders who are very risky
knock risky lenders,
knock normal lender,
and then they all fall apart
* Don't have a home *
* Don't have shoes *
* Don't have money *
* Don't have a class *
* Don't have a skirt *
* Don't have a sweater *
* Don't have perfume *
* Don't have a bed *
* There are no people *
JONES: These banks take more and more risk,
Investing in financial economics not the real economy.
Financial economy, as it happens,
basically making money from money,
instead of investing in companies and companies
and contribute real economy
So what happens with bank and insurance companies
involved in subprime loans?
You can think of the-the end of 2007. What happened?
Banks start looking a little more carefully on their balance sheet
They see their assets they get and they say,
"Wow, so many assets are trash
" Okay, we know that this is bad,
"high percentage of them,
" and, um, some of our assets
"is I-O-U's from another bank.
I want to know if their balance sheet is as bad as us."
And they start thinking,
"Maybe so because we are all doing the same thing."
And then they say, "You know, maybe when the loan is due,
" We have to call,
"says we don't go to renew it again,
" Because we think, maybe,
You can get problems and we won't get paid. "
Suddenly, all banks start doing this
And, basically,
is when global credit markets freeze.
Banks do not want to lend to each other again.
And so changed to a very large liquidity crisis,
and that's how all go.
So this layering from debt to debt,
financial institutions because other financial institutions,
it turns out that is very dangerous
News that you build:
American investment bank Lehman Brothers
has submitted for bankruptcy in New York.
That happened in the last few minutes That means Wall Street institutions,
who have been in business for 150 years
and persist Great Depression,
is now the highest profile victims of the credit crisis.
JONES: Not only that Lehman Brothers is bankrupt.
In the U.S., Citigroup is rescued by the U.S. government with a guarantee for songs from 300 billion dollars AIG is redeemed 182 billion dollars.
The best thing in life free
* But you can give them to birds and bees *
Bear Sterns is taken over by by J.P. Morgan
after the U.S. government. secure them
with 30 billion dollars guarantee.
Fannie Mae and Freddie Mac,
government supported mortgage lenders
who is involved in sub-prime mortgage loans,
saved by Federal Housing Financial Agency.
Merrill Lynch was taken over by Bank of America.
In the UK, Royal Bank of Scotland
saved by the British government
for 20 billion pounds,
HBOS is redeemed for 13 billion pounds,
and Lloyds for 4 billion pounds,
on the exact same day, October 13, 2008.
* Money doesn't get everything, it's right *
* But what doesn't get, I can't use *
Sir, another insurance company is under.
Now determine the wisest move to an insurance company.
(cock crowing)
Bailout!
The wisest step is a bailout!
I remember sitting down, um... uh, in a room
A little like this, in the Ministry of Finance,
back in 2008,
around time from the Lehman crisis
We sit there.
During the first half hour from the meeting,
stock price
one of the largest banks in the country down 50 percent.
In the second half of the of the meeting,
share price from the same bank
up 50 percent
We knew at that time, this was not Kansas anymore.
I mean, if the 2008 accident doesn't wake people up,
um, I don't know what will
(yawn)
Where do we go from here?
How do we handle with this financial crisis?
and one of the most important first steps is understanding where we come from.
Financial crisis
It's not new that we will leave now.
We experience many financial crises.
The 19th century was filled with with the financial crisis,
and even on 18 and 17 and 16th century,
and when you start looking for in all these different examples
from the economy and their financial system and their crashes,
You start getting a much better understanding
of what the financial crisis is about.
Seeds sown
is the same seed which is sown
in all previous crises
So, if we see what works and what doesn't,
there are no better lessons there than history.
Tulip Mania starts back in 1562,
* Oh, tulips, valuable tulips *
For me to be healthy, makes me rich The tulip proved to be a sensation
among rich traders from Amsterdam,
then start in their golden age.
Traders build big houses
surrounded by flower gardens,
and prices start to soar.
In 1636, a tulip bulb could be valuable
a new train, two gray horses,
and complete harness.
Some tubers reported change hands
more than ten times a day
It looks like everyone can make money
if only they buy tulips
A kind of euphoria grips everyone
But, on February 5, 1637,
it's all over.
At a tulip auction in Haarlem, in the Netherlands,
only tulip sellers appear.
There are no buyers.
Harlem at that time in the grip of the Bubonic plague,
so maybe that's why No one wants to go out and buy tulips
But the damage is complete.
The bottom falls from the tulip market
Existing tubers ordered the price of from 5,000 guilders
sold for fifty.
This is what economists call bubbles
Well, that bubble a financial episode
where is the price of assets,
whether it's tulip, or equity, or gold,
basically being completely separate
of any intrinsic value.
Being in a bubble, like...
yes, it's a country extreme hope and excitement and ignorance.
And that can continue as long as people believe
that there is something magical or new
about today's assessment.
In each boom-and-bust cycle,
there are periods from extraordinary.
"This time, it's different.
Everything is different."
And, there are always cool reasons,
and things like, "Okay, You know, our demography is different."
Or, you know, "This time, really interest costs are very low."
Or "inflation has been solved."
Or, "Oh, there's an explosion in gold mining."
You know, tulip-- tulips are the first.
"This is the first time You will ever be able to buy this tulip
You must enter now."
There are always reasons why do you want
to suspend your rational faculty and buy this.
Usually, that's because you look around,
and you see everyone does it.
In 1711, the British government
being in debt, for songs of 9 million pounds.
Some entrepreneurs
named Edward Harley and John Blunt
designing a scheme to save the government
Instead of repayment,
anyone to whom the government owes money
is obliged to accept shares
in a company called South Sea Company.
At the same time, South Sea Company
given exclusive rights
for the trade monopoly with South America.
Comfortable to be ignored
is the fact that Spain,
with whom Britain is at war,
control all trade with South America
and have done it for 200 years
But hope is high,
and the scheme is phenomenal success.
In 1713, the war ended.
Spain then allows England exactly one ship a year
no more than 500 tons
to trade with South America,
and a quarter from the results
is to go to the King of Spain -
not a winning scheme for a bankrupt country
And, in 1718, the war with Spain broke out again,
and company assets in South America confiscated,
and any prospect profit from trading
disappears overnight
But, amazing, The hope is still high.
South Sea Company talks about its value
of trade potential with South America,
assisted by politicians and members of the government,
who is acting,
and stock prices up
from 128 pounds in January
to be 330 pounds in March,
890 pounds in early June
and finally £ 1000 in early August
All nice bubbles must explode,
and the South Sea bubble burst in a spectacular way.
Of 1000 pounds in August,
Stock drops to one hundred at the end of the year.
With the fall of of the stock price,
thousands of people destroyed,
including Sir Isaac Newton,
which loses equivalent
of 2.4 million pounds,
and about which, his nephew reports
he never likes Talk about.
Newton said, "I count star movement,
but not human madness."
I hope he is included himself in that matter
South sea bubble is a perfect example
from what is called euphoria
One of the things we must control
is this tendency
for people to go through this period,
a kind of mass euphoria and mass pessimism.
When people become very optimistic about the future
and they project this optimism
into asset prices,
there can be an asset bubble
And prices go up, and when prices rise,
people say, "Oh, it seems optimists about the future.
I also have to be optimistic."
So I bought the asset, and it pushed the price a little more.
Moving prices are completely out of line
with all kinds of reality
or any income base or, in the housing market,
whatever income base,
and that becomes a bubble that is filled by itself.
If you think you invest in tulips
because you can always sell tulips to other people
with a higher price,
You don't invest, You speculate.
And there are differences.
One of them is... has a real impact on the economy,
the other one
people give money back and forth,
and hope, that after a while,
when music stops, they will become one
who doesn't hold the package, who holds the money
And again, it's okay. Let them do that.
But don't do it with your family's house and all your money
When you're bubble, you can't see beyond that,
really know or recognize it as happened
It seems like success, it feels successful,
which is even more dangerous.
Past bubbles,
You know how they end.
And, when they end,
You understand, where they have ended
This one is not over,
becomes very different from your other memories.
It's very difficult to remind yourself of that
during the boom,
because everyone else makes a lot of money,
and you certainly want to make lots of money with them
And if not, Actually you are so stupid.
That's one of them great economic mystery
that if everyone decides it's okay,
it's okay
And if everyone decides it's a disaster,
it's really a disaster
So, everyone believes it is a certain way
make it in a certain way.
From 1950 to the 1970s,
John Kenneth Galbraith
maybe the most world-famous economist.
Recurring degrees into insanity
not entirely interesting characteristics of capitalism
J.K. Galbraith is intensively about--
about speculative euphoria,
and about why periods speculative euphoria
continues to occur over a period of time.
This is very much human behavior,
but also our failure, uh, to be able to handle
the worst consequences of the euphoria
(chugging train)
* You cannot lose by train *
They are things to come
So come and invest on the train *
Great luck for all they will bring *
TERRY JONES: In the 1840s,
trains are promoted as investments that are very easy to do.
The shares inside can be purchased for a 10 percent deposit.
The obstacle is the railroad the company reserves the right
to call the rest anytime.
Thousands of investors on simple income
carry a large number shares
while only able to pay a deposit
The family places them all savings into prospective companies
and lose everything When the bubble breaks,
without knowing they take ten times more risky than it makes sense,
and nothing prevents it from doing it
Not honorable history from financial euphoria
continue and continue
TERRY JONES: In the 20s the age of prosperity,
but the wealth is not shared at all
throughout the population.
In 1929, the top five percent of the population accepted around one third
of all personal income.
Now the richest five percent of humans
can't eat more than all of us,
so they are forced to spend their money on luxury goods like property or investing in stocks,
Thus hoping to increase their wealth.
Not only rich people, but middle-class Americans
showing what John Kenneth Galbraith is described as...
extraordinary desire to get rich quickly
with a minimum of physical effort
TERRY JONES: The Stock Exchange in New York exploded.
In May 1928, stock volume reached 5 million,
records of all time
The problem is that many investors
do not use their own money
They borrow money to buy shares
This is known in the financial sector of the world as "buying on margin."
TERRY JONES: Say two hundred dollars and you borrow eight hundred more
to invest thousand dollars in stock.
If the stock price goes up 30 percent,
You generate 150 percent profit.
After you pay back eight hundred dollars,
You now have five hundred dollars for yourself
But if the stock price falls 30 percent,
Your stock ends up being worth only 700 dollars,
but you still need to pay 800 dollars.
You now owe a bank one hundred dollars The problem is the loan money to buy shares,
"buy by margin,"
although it strengthens The advantage is also strengthens losses.
You can end because money to the bank without has one penny left.
TERRY JONES: At the end of 1928,
the people gather to buy shares on the margin.
In other words, speculation has detained people
unlike before
Never before or not has so much to be
very amazing, so easy, and so rich quick.
You can say it What is the difference
between speculation and gambling?
Well, uh, a reporter, Will Payne,
explain in this edition from Karya Dunia
A gambler only wins because someone else loses
When you invest in stocks and shares, everyone wins
An investor buys shares of at General Motors to one hundred dollars.
He then sells it to another for 150 dollars,
who sells it to one third for 200 dollars.
Everyone makes money!
TERRY JONES: It's like magic,
keeps pulling rabbits come out of hats
And like magic, is an illusion
What will Payne forget? is the stock price Can also go down.
But as long as the price is shares increase,
everyone is happy to run it.
The illusion continues from people who were previously rational.
from the National Democrats Committee, John J. Raskob,
who wrote an article entitled "Everyone should be rich."
RASKOB: Anyone who saves 15 dollars a month,
invest it in the voice ordinary shares,
and do not distribute dividends,
it will be worth several 80,000 dollars after 20 years.
TERRY JONES: Raskob does not aim at it scheme in the middle class,
but in men are ordinary workers
The press is round in its praise for Raskob's Debt Speculation Machine,
a practical utopia,
the biggest vision of the biggest Wall Street mind.
But not everyone sings from the same hymn sheet.
Roger Babson, a businessman and business theorist,
start warning about a market crash since 1926.
BABSON: Sooner or later an accident will come
The factory will be closed, Men will be thrown out of work.
The result will be serious depression TERRY JONES: Paul Warburg an early banker and advocate
from U.S. Federal backup system
PAUL WARBURG: If this orgies uncontrolled speculation
not stopped,
finally there will be into general depression
involve all countries.
Ah, Warburg is out of date!
Yes, he is sandbagging American prosperity
TERRY JONES: Wall Street is round denounced Babson and Warburg.
Consensus judgment millions that are evaluated
in this amazing market, Stock Exchange,
is the stock Currently not rated too high.
Economic conditions the world seems on the verge of a great forward movement.
Stock prices achieve what looks like permanently high highlands
Where is the male group with wisdom that embraces all
who will give their rights to veto the judgment this smart person?
This ad appears on Saturday Evening Post
a few weeks before crisis in 1929.
MAN: "In 1719, there practically impossible looking for facts. " How different positions from investors in 1929!
For now, every investor has at disposal, facility to get the facts. "
October 24 is the first of days
that identifies history with panic in 1929.
That day, almost 13 million shares changed hands,
Many of them had prices destroying dreams and hopes of those who have them.
now find the problem by buying on the margin,
as brokers sent telegrams demanding large amounts of cash
VINTAGE NARRATOR: This happened in 1929
when overinflated American economy,
and the stock market that triggers it, falls.
At the end of the year, banks across the country close their doors
Like the fear of people screaming to reclaim their savings.
For many people, many observers, that means that their dreams -
Actually, their short reality luxury -
has sparkled together with home,
cars, fur, jewelry and reputation.
(footsteps)
GALBRAITH: Tuesday, October 29, is the most devastating day
in history New York Stock Market.
(rustling paper)
TERRY JONES: Accident on Wall Street 1929
is in and a prolonged crisis,
different from some panic before in history
This is a combination of euphoria with large loans.
And combined speculation with loan money
is the most toxic combination in capitalism.
* Yes, yes, I need crystale to drop popping *
I need a diamond shake shake *
* I need the money
I need money, money
We are out of Great Depression
with almost no private sector debt.
Households and companies are not too indebted,
partly because they are bankrupt,
partly because they pay debts
and for generations of Americans are afraid to owe.
The corporation is afraid to owe.
Okay, but slowly Over time because of the economy done well,
slowly memories Great Depression fades
and the new generation become more willing to borrow,
both households and companies,
and this debt ratio starts climbing.
In the United States if you see a long sweep from, uh, history,
You will find it there have two big peaks from private debt
as part of income.
One of them happened in 1929, the other happened in 2008.
The road to financial crisis - often at least -
starting with the private sector being careless about debt
Debt is all about debt, uh...
people take large amounts of from debt hoping for that
Beautiful things will happen happen in the future that will let them pay it back
No one has ever studied for a long time. We forgot.
The person who studies the lesson, who is undergoing the lesson, dies.
And their children see Great Depression like,
as an episode of history.
But why did that happen? from time to time
for centuries?
TERRY JONES: In the 1960s, 70s and 80s, economist Hyman Minsky
proposes finance hypothesis of instability
-Hi father. -Oh, hello, kid
- Sit. -Sure.
-Now, listen, Alan. -I'm all ears, Dad.
The essence of finance hypothesis of instability
is that financial traumas -
Do you mean crashes and such?
Exactly. Occurs as normal function in a capitalist economy.
This does not mean that the economy is always
staggered disaster gap.
I have to hope not What kind of sys -
Son, be serious.
Normal function an economy
strongly financial situation
both are calm and overall success.
But peace and success are not independent countries
You mean stability causes more optimism
and therefore borrow more in stocks and homes.
Uh huh. And this leads to a transformation overtime
from the initially strong financial structure
into fragile structures.
Wait, let me straighten this
After experiencing severe depression,
the government applies rules in the financial world.
Following this period of stability,
but the problem is with this stability
is it breathing too confident
Overconfidence leads to financial euphoria,
during that time the politicians relaxed the rules.
This then leads to excessive loans,
and excessive loans and euphoria bubbles cause instability
By Jove, I think my child got it.
I have heard about that at the dining table
since I was six years old.
Hyman Minsky usually says, uh,
stability is destabilizing.
This causes people to be too confident,
That causes people to forget
about the underlying system properties,
that he is inherently unstable, is inherently unstable
But it's a strong hypothesis
And the hypothesis is actually, basically,
there is a long cycle where
people forget about debt danger
forgetting about danger is very leverage.
That applies to both borrowers, to lenders,
for government regulators, everyone,
And the last finances crisis recedes
into memory mist,
and that makes you ready for the next one
He predicts financially complex capitalism
creates crashes, creates big and bust explosions,
it can on several occasions reach the scale of 1929.
So, in 1929, could happen again
That is "Minksy-anism."
(playing piano)
Hyman Minsky said bubbles in three stages.
The first participant is hedged in line.
* What they save or make or get *
Pay interest on their debt *
* The economy looks beautiful *
The second stage involves some speculation *
* Speculators borrow cash to buy more shares *
* And as long as the market goes up *
* Nothing bad surprise *
* But when it falls This brings them unconscious *
* The things obtained are very unstable *
* This is where dangerous stage starts *
People borrow more
* To pay their interest as before *
* And in the end it's fair the bank wins *
But he is not himself, eh, a banker
Okay, he is not himself, So he has a bigger picture.
He is able back from this
and understand the overall system.
For someone to write about financial instability
in the late 1950s like he did,
You know, this is the period at least on the surface
is the most period financially stable The United States has ever had,
and it doesn't seem like that
what he says is relevant,
uh, for the kind of economy we develop
JOHN CASSIDY: And, everyone at Harvard and MIT
and Chicago and so on other universities
who says, look, the financial system is very stable,
Are you Speaking of, Hyman?
So, he was discredited, very,
in the profession
And suddenly, 2008, everything goes to hell,
financial system basically has been detonated World,
He is the one who warns
this can happen 25 years before,
so everyone suddenly becomes a Minskyite.
Whoever reads the item
can already see crisis coming
So, the Queen asked, you know,
"Why don't you guys? see that coming?"
The answer is They don't read Minsky.
If they have read Minsky, they really will have seen it coming
That's very clear.
You know, what is this kind of boom?
This is an euphoria... system.
This is what this is booming assets look like.
Minsky is right.
He is dead.
Which raises questions,
how do we forget
about not just his work
but someone else's work,
in that period before the crisis
I don't mean only three or four years,
I mean those three or four decades
when economic
chase the way
overridden Minsky type dynamics
for what's wrong
Like many others in my economic profession,
we may not even know who he is
Well, Minsky is not comfortable
He always works on the margins of...
hierarchy from economic profession
Uh...
and that makes it...
relative is easily ignored.
This is a paradox, actually, with my father,
why is he ignored,
because very, maybe, the reason he was ignored,
That is the reason finally becomes so celebrated.
Hy Minsky is a very warm individual.
And, I don't know how many economists have you met, okay?
But it's not so especially its nature
the economist is very famous.
In university lectures,
when outside the lecturer is brought in,
Minsky will do it
looks asleep
or reading newspapers
But, soon after Time Q-and-A comes,
it's always clear He is the brightest one the person in the room,
who actually knows what has happened,
and, um, know what's wrong with that
Minsky is a brilliant person.
I just, uh... go for some of his lectures
in Edinburgh and Cambridge,
But he is very charming.
Even Minsky predicted it
the warning will be no more
and he will be forgotten.
So it seems it's time When he is remembered,
and, hopefully maybe he's wrong,
we will not forget what he says
One of the ironies about the 2008 crisis is that, um,
Minsky book is not printed
The last book, Stabilizing An An unstable economy,
When the accident happened,
and as asset prices fall,
because everyone wants to read
the book about, uh,
about the crisis that happened
Stability leads to instability
Euphoria makes us blind.
And we take irresponsible risks
that finally causes disaster
So stable and a booming market
makes us blind increases the risk.
But can we measure it? this blindness?
OK.
There are indices based on prices
people are willing to pay
for protection against the fall of the market.
These are markets that are traded risk prices
And what's interesting
is that this price is risky
really decreases
to a very low level
during the period when the stock market
go sky high and instability grows.
So our perception Risk runs opposite to the actual risk
In a 2008 accident,
price risk at the lowest level ever.
You are not permitted to teach in college.
You can, but you won't do it get an economic seat
in major, prestigious, global universities
Only the economy says capitalism stability
can be thought of in these universities.
The conventional economic model
which is used to run the economy
known as a free market,
or neoclassical economic theory,
and that is based on the idea
that we are all rational when it comes to money,
that the economy will always find itself in equilibrium,
and bubbles can't happen
Neoclassical economy is this beautiful thing
This is useful, actually.
I use it myself all the time.
It is said, let's give us a world a very rational person
operate perfectly competitive market
and see how they interact,
and see what it looks like, You know, property.
And so it turns out if the world is true like that,
there will be various kinds nice things
Being an economist, uh,
think about the world
use, uh, model.
And what does that mean?
Okay, that's simplified version in the world,
um, take one or two or Maybe three important features
in the world
and act as if it is the only characteristic of the world,
and, and buildings--
build out consequences of that three kinds of features.
The model is just a story.
You know, they say, If you do this,
it will happen. That is it.
If you choose all three the most important features,
then you have a good model.
If you choose three features
that doesn't really matter,
then you have a model
That doesn't really happen helps you with your problem
This is useful - this is an intuition pump right?
This helps you think about it why markets sometimes work really well,
helps you think about something.
But if you start to believe it this is not...
help, ah, fairy tales,
but actually the truth is, then you are in big trouble,
because the world doesn't work like that,
and at times like this, when depression,
it really doesn't work like that
So neoclassical economy is a potential trap
So if I put it really the simplest,
You build a model where you say,
we consider depression not possible
Unfortunately, is not the world in which we live.
Conventional economists don't like debt models
into their economic model
because debt makes the model unstable,
so they eliminate it altogether.
This is modeling which is easier for the
model not what happens in the real world
They - they will not break up away from this 19th century,
eh, heuristics they think
will make it easier to solve problems.
Actually, they have made it much more difficult,
and that's why they don't know this crisis will come
because they ignore banks, debts, and money.
That is serious, serious professional problems
We have a situation -
to compare it with a doctor for a moment,
real doctors
We have a situation where patients bleed,
but we don't really recognize the presence of blood
Like, that's serious, you know.
Why doesn't it appear? silly for economists
to use the model without money?
Uh, I'm an economist myself,
So, at least there is an one exception to that,
and some others to make sure
This is very difficult to, uh, understand
the reason why economists focus on models,
uh, where is the crisis,
uh, can't happen,
not possible
I think the economy has this lure
that when we can explain something
in a beautiful model, it's just elegant
And you want the world to be elegant
One dream
* One soul
One prize
One goal
One gold stare
* What should be
* It's kind of magic *
One axis
* From light
* That shows the way
There are no mortals
* Can win today
* This is some kind of magic *
Bells that ring
* In your mind
* Challenging
* Door time
* The wait seems to be
* Eternity
* Day will dawn
* Sanitation
* Is this some kind of magic?
I think deregulation has about it
a kind of natural bubble,
that when you allow people
a large amount of freedom,
they enjoy it
Key section the regulatory apparatus
is being run by people
who does not believe in their work
They - they believe that their task is to
out of the way of the bank,
or for - or even to help the bank,
but not for - not to protect us from -
eh, from a bank jam.
We have a banking system
with regulators which encourages risk taking
They are positively recommended and are rewarded for taking risks,
and politicians stand up and say
It's not just taking risks well, guys,
they say risk taking is good.
The more risky the better.
* We believe everything
* What is hunky-dory, that's our story *
* All will work well *
Like good wine, it only takes time * Market freedom is the problem
* To cure all diseases and that is why we sing *
Keep the market free, free, free *
* For good, That is the only way to be *
We have a free market ideology that says
the more you delete country
from the market,
more and more markets are allowed to do what they do,
who is for -
to bring millions of decisions
by people, every day, together,
in a way that provides rational results.
So, the market Our collective rationality.
I should Free market ideology
is a place that you have a fundamental belief
that market optimal way
to create wealth
and to distribute goods and services throughout the community.
CASE: Alan Greenspan sort of exemplified his rise
or comeback free market economy
after that has been discredited in the 1930s.
You can really track
all of these increases through their actual careers.
He is a man who has, for decades,
Apply certain ways think.
And... and he--
And he makes very important decisions
affected world economy
based on that framework.
Alan Greenspan, I think, has deep conviction and deep
lack of regulation.
Right? And, so, basically,
many eliminated from regulations,
allows all economic agents
to act according to their wishes.
And the framework is assumed that--
that agents in the economy rational...
including banks.
There is a book called Maestro written about him,
describe it as a genius
because I don't listen to for naysayers
who said, "You have to slow down this expansion."
KRUGMAN: The accident, Even though, the proof is
Greenspan's view the market
self-policing, self-regulation all wrong
CASSIDY: So, he was transported before Congress, you know,
say, all right, you know, "you've told us all for years
we don't need financial rules,
we don't need to worry about the market
what's wrong? Is there wrong? " And he said, "Some. Something is wrong."
And they say, "What are you going to do?" I mean Mr. Greenspan?
You know, uh, What's wrong? " You find a defect in... reality--
GREENSPAN: One defect in the model that I consider
as a critical functioning structure
which defines how the world works, so to speak
In other words, you find that you -
your view of the world, Your ideology is not correct.
-It doesn't work -GREENSPAN: That's all How do I--
Right. You know, I -
Exactly the reason I was shocked
because I've been away for 40 years or more
with very much evidence
that's all works really well.
It's quite amazing when he says that My view of the world is wrong
that is a shocking confession,
an indication that...
There might be some--
some humility and hope for redemption
um, in Mr. Greenspan,
which turns out to be incorrect.
Uh, right away, he went straight back
utter very sure
and perfect errors about everything.
CUSACK: We really, sort of, make people like Greenspan
this, sort of, holy bishop,
and each word their words are strengthened.
I mean, they are or something whales, or cardinals.
And, so, I think for this person
to come - let's and I must admit
it's basically everything that he believes is wrong,
um, just show it this is - this is a joke
You are all individuals!
ALL: Yes! We are all individuals!
You are all different!
Yes! We are all different.
-MAN: I don't. -ALL: sst! Shh!
If you try and read economics pure rational,
I think it's a real mistake because
the economy operates with a herd mentality, of course.
But it is a flock made very human
You know, are complicated, and sometimes irrational.
I think the market is not our collective rationality.
It could be, but it can also our collective irrationality,
and what's wrong with the economy
is it ruled out Possible
irrational results
That is the problem free market economy
This is a kind of ideology,
and once you start believing it, um,
it sort of gives sort of framework
to explain the world.
And such people are trapped inside them Ideology itself, really.
JONES: I think it's time
for human nature into the economy.
We come to Puerto Rico
to go to the island, There, Kera Island.
Monkey Island is very funny place in Puerto Rico.
This is an island not far from there southeast coast
it's home for around thousand free rhesus monkeys
This is a beautiful place for
really observe monkey behavior in the wild
and organize studies to study
how irrational they are sometimes
I thought, Because I studied monkeys,
people think I'm interested in monkeys.
But really, I'm interested in people,
and I found that this amazing window monkey
what kind of person is that.
You are here, You see them, like,
associating with their friends, and men,
and try to get power, and get resources, And like,
only a few of these evolutionary microcosm
of what we like without language and cellphone
and all this 21st century.
One of the things we really want to do it
to understand human choices
is to see if monkeys will make
some smart decisions that are the same and bad decisions.
This tells us something about where we came from evolutionarily
and how we are designed to make decisions.
So we introduce monkeys
for them have a new monkey currency
I'm here. This is a monkey -
It's a little bite on it
Um, but this is monkey currency
We give it to them and teach them
they can exchange with humans for food.
I believe it is only a non-human currency in the world.
This is actually. This might be very - This is very valuable,
so I will save it in my pocket
SANTOS: First they only trade with one person
They managed to do it. And now,
they get real, people's choices,
and they can choose the they want to sell.
And everyone on the market, sort of,
shows monkeys, on small plates,
You know, "Here it is what can you buy?
And then, uh, the monkey can only choose
And they have a little token wallet
that they can, sort of, spend between researchers.
Monkeys meet researchers
who don't always give
the same amount of food they show
So, they have one amount of food on their plate,
But then, they can, like, vary from time to time.
Um, so, monkey can, uh, say,
meet with an experiment
that looks like he sells one wine,
which seems like a pretty good deal,
but every time monkey pays him,
Monkeys really get two.
So, the monkey likes, "Wow, this is great..., right?"
Monkeys also meet These other people and they realize
this person starts with three grapes
He looks like he's really good
But every time monkeys pay him,
he took one away to give the monkey only two.
Now, these two people, men who, you know,
It looks like he gave it but he gave two,
versus a man who looks like he gives three but gives two,
they finally Give the monkey two, right?
If the monkey is being rational,
he will only shop randomly between the two
But what we find is that the monkeys are
very much shopping to people
starts with one and gives them two -
the person who looks like he gives a bonus--
although, in fact,
monkeys increasingly same amount of food
JONES: I will return to the 2008 crash
What's the effect? who is in your research?
Often when you study monkeys,
You are learning, uh, can a monkey do it
all the smart things that humans do
like tool and language usage
and all this very smart thing what people do
And often, the monkeys come a little short
And, indeed a game-changer for research
not "Are monkeys similar? to humans because monkeys are very smart?"
We can ask, "Are monkeys similar to humans
because in some cases they are so stupid?"
Uh, my colleague, Keith Chen, likes to say,
You know, if you plan it monkey data
and you don't know the data comes from monkeys,
You will only expect they come from the real human market.
Human strategy we see
in the real market, evolutionary is really old
They are types of residual strategies from 35 million years ago.
KAHNEMAN: Not just people
results of values as gains and losses,
they value losses far more than profit.
But that leads to this bias is where the loss is,
this change that goes in a negative direction,
we go in red,
they just feel emotional stronger
rather than this change in a positive direction,
and that can lead us to do all kinds of crazy things.
We are very trying to avoid this
relatively small changes in red
that we do something like taking more risks.
JONES: What can we do? do it?
SANTOS: The idea is that we just have to acknowledge that we have this bias,
that they are old and difficult to get rid of,
and then we sort of have to design a policy
and the market and the system around them
I am quite skeptical
about the idea
individuals can make themselves smarter
or can make them de-bias themselves.
A little, not much.
In addition, I think the organization,
if they are very aware of what they want to achieve,
they are, very likely, can be placed
procedures that will Protect them
of various types of errors
We change the system not our behavior.
Yes, like, I mean, We have this strategy
for 35 million years.
That is evolution very large amount of time
We will not be fair sort of put them aside
because in 2008, we did some stupid things
Like, those things are here to stay
We will be much better
if we change the system around the bias.
So, hey, we're not rational,
but we can be smart enough to set the system
to enable us to develop
even though we have this bias is a little stupid
The real problem here
is not a particular event
that starts Accidents in 2008,
The real problem is the way The banking system is designed.
There are two things, really, about that
I mean, one is to understand
systemic nature financial instability
But another part of that, Actually, that's right
if you understand
systemic nature instability,
Then, many other things must change
If you have already been determined
to ensure that - does not return
uh, you know, within ten or 15 years and -
and bite you on the back again
We have come, as humans,
with the most fragile designs financial system
we might be able to think.
So, we need to rethink
what we need a financial system for,
and then design one
which will, uh, provide various functions.
And that might mean separating
retail, basic banking goods,
from somewhat higher-octane investment banking goods
And then, we can have it
other parts of the financial system
it's a riskier item,
but we don't allow them
for, you know, take
funds away from households,
from the company, from pension funds.
We can redesign cars,
so why don't we redesign economic system?
I got a hundred dollar check from my grandmother,
and my dad says I need to put it in the bank
so that it can grow for years.
Well, that's fantastic.
A very smart decision, youth.
We can check it in money market funds.
Then we will reinvest incoming income foreign currency account
with compound interest, and that is missing
Uh, what?
It's gone. Everything has disappeared.
-What is missing? - Money in your account
That doesn't work well. It's gone.
What do you mean? I - I have a hundred dollars!
No longer no. Poof.
Well... But what can I do to get me back -
Sorry, sir, but this line is only for bank members.
I just opened an account.
Do you have money? invested with this bank?
No, you just lost everything.
Then please stand beside for people
who actually have money with us. Next, please.
Today there, crisis in particular
has caused many students want to study economics
This happens with Depression generations too.
Many people, like Hyman Minsky,
enter the economy
because of that experience their childhood
They feel this is something important they need to understand.
They don't find the economy that they are taught
very helpful
Ph.D. average. economists will train for five years,
and they will never learn anything about history
from the economic system who have overtaken them.
If you will spend class, uh, for a full semester,
and you learn about one financial crisis after another,
that might happen to that student
the financial crisis regular parts of the economy,
whereas if not really makes it focus and you mention,
"Yeah, oh, yes, there is a crisis here, there is a crisis there,"
This is much easier to convince a student that the crisis is not natural,
it's wrong from a government
or certain actions
which causes the crisis in This strange situation,
But it's not normal economic tendency.
WOMAN: We are all students at Manchester University,
and we are members of the Post Crash Economics Society.
We arranged it at the end of last year
Because we feel that we economic education so far
is quite limited
One of the main issues is the economy
has been caught in this trap where...
uh... Funding for universities is fully determined,
good, generally is determined by research.
And the research will be published
is the mainstream, is a neoclassical economy.
As a result, that's how we are taught The beauty of science, from true science, physics, chemistry,
is that there is - There is a debate between the key theory,
between, you know, different ideas
Whereas, in the economic field, the debate is simple not big enough,
or it's not big enough, and that's what we fight for
Our education produces economists who believes it?
their type of economy is the only way to do the economy.
I mean, there are very few of our titles which is devoted to analyze
what happened in 2008 and what happened in the 1920s,
which I think should be a fundamental part from any economic level.
-Yes. -It's a shame...
go home and people ask, "Oh, so you do the economy?
What happened in 2008?"
And I can't tell them.
What I think we all like to see is, you know,
economists with critical minds out of university,
and enter the city and become a public policy.
And you will have-- and hopefully you--
You will have a policy that reflects too.
You will have financial sector that reflects that
not only, you know, this one-dimensional myopia.
We want to be economists and we want to see economists
leaving university
who can engage with the real world economy,
while now we don't feel we can.
That's what we think is an economic point.
I think it's kind of lost somewhere.
The way you change economic teachings
is changing the teacher.
It's that simple
You won't enter a situation where...
teachers who spend decades build skills
in a very primary approach will only say,
"Oh, yes, that's right all waste time.
I will go do something else." They don't want to.
Right. Now, listen.
(grunt)
So, what I think is, professors
start parachute this party line
I think you should just be Their pelt with vegetables
and rotten fruit, and maybe urinate on them.
That's what I mean, That is what I will do.
And there must be a different approach _ how this is taught.
It should not be taught as a branch of physics.
It must be taught As part of history,
or as an economic idea again is a social thought.
This is something that we all do together.
I - I at a conference once
with, uh, economist from Freddie Mac
That was one of the agencies that failed in the 2008 crisis I asked him about-- this is before the crisis what kind of planning
they have done it for a crisis
And he said with confidence, "We planned it.
So, we already know what will happen to us
even if the house price falls dramatically,
and we will do it congratulations from the storm
And I said, "Okay, how much dramatically?
He said, "We already know
what will happen to us If home prices fall 13%. "
And I said," Well, what if they fall more than 13%? "
And then, he said, " What do you mean?
They never fall a lot. "
He said," Well, not since then Great Depression. "
One of the things that we learn
from research history
is that people learn nothing from history,
or they tend to repeat past mistakes,
and I think that's because human nature.
(playing music)
* We are here forever blowing bubbles *
Enough bubbles in the air *
They fly very high
* Almost to the sky
They are like my dreams they fade and die *
(groaning)
* Fortune is always hiding *
* We have seen everywhere *
* We are forever blowing bubbles *
Enough bubbles in the air *
* We dream of dreams *
* We plan the scheme *
* We are building high castle *
* They are born new *
* Their days are a little
* Like Sweet butterflies *
(sighs)
* And as daytime is dawn *
They come again in the morning *
* We are forever blowing bubbles *
Enough bubbles in the air *
They fly very high
* Almost to the sky
They are like my dreams they fade and die *
* Belongs to Fortune always hide *
We have seen everywhere *
* We are forever blowing bubbles *
Enough bubbles in the air *
* We are forever blowing bubbles *
* Two, three, four
Enough bubbles in the air *
They fly very high
* Almost reach sky *
* Then like my dreams *
They fade and die *
* Belongs to Fortune always hide *
- * We have seen everywhere * - (groaning)
* We are forever blowing bubbles *
Enough bubbles in the air *
* Yes
(playing music)
* Financial instability hypothesis *
Boom boom boom boom
I need crystals drop and poppin '*
I have diamonds rockin 'rockin' *
* Boom boom boom keep bumpin '*
* Minsky is not a fool, said something '*
* Greedy bastards need to hear *
* Damn happens here all year long *
Bubble 'Blowin' more 'ninja loan *
Maybe greed only in bones *
* Blowin 'bubbles More' Ninja loans *
Maybe greed only in bones *
Boom bust bust bust
* Leaving the ghost town of a brother
* Negative equity drops
Boom bust bust bust
Subprime toxic in the city center
* Dip twice, triple-A meltdown *
* Piles of tulip maniacs, free market brains *
* Wall Street Apes buy ' two-for-one wine sales *
* Don't ever learn only turnin '*
Stamping the paper on the bridge then burning it *
- Give me, gimme it - * Money money
- * Need to get it - * Money money
- * I want to get that - * Money money
- Give me, gimme it - * Money money
* Blowing bubbles increasingly 'ninja loans *
Maybe greed only in bones *
* Blowing bubbles increasingly 'ninja loans *
Maybe greed only in bones *
Hyman Minksy never lies
John Cusack never lies
* Mr. Krugman never lies
Ted Crocker never lies
Terry Jones never lies
Bill and Ben never lie
Justin Weyers never lies
Chris and John never lie
*... never lie
Andre never lies
*... never lie
* Triple-A meltdown
* Financial instability boom hypothesis *
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