Transcripts For CSPAN2 Connectedness And Contagion 20161029

And be sometimes several screens simultaneously. And were getting messages sometimes from the same person in different channels, and then tough figure out you have to figure out did this text message come first or did this email saying, no, im going to meet you at the movie theater, and then you have to look at the time stamps, and the past is mixed up with the future. Meanwhile, we have tremendous is access to the past. We know more about the lives of bach and beethoven and mozart and mahler and have zinn sky than any of them knew about their predecessors. We have instant access to all of their music. The music from our personal pasts, the music that we loved when we were kids, its as available to us as music from ancient times and music thats just being recorded yesterday. And it all gets mixed up together. So were in a kind of eternal present. You say that theres a philosophy in our society that we should live in the present. Thats exactly where we should be. But that doesnt really make sense to you. No. Ive developed doubts about that. Be here now and yeah. Be here now. Youve spent a lot of time trying to do that. Live in the now. Were told dont waste brain cells agonizing over what might have been or whats coming. Dont waste brain cells wishing for something you can never have or fearing a future that might happen. Live in the now. Immerse yourself in sensation. Ive decided that thats not how i want to live. Thats not thats how plants live. Plants live in the now. [laughter] how do you know that . Im pretty sure. Okay. What makes us human is that we know a lot about the past now. We are able the to imagine the future. I keep using these same hands. We think the future might be there or there or there. Anyway, we can imagine it. And we can mix memory with anticipation and still enjoy the present, and i think that thats good. Were going to take your questions in just a few minutes here. Theres a microphone right here if youve got a question for james gleick on time, time travel. Do you have a wish list, if you could have three time trips, where youd take off for . Ive always thought i wanted to go to the future. And then with a little surprise when it turns out that so many people just have no interest in that and would rather go to the past. I mean, i can imagine going to the past and meeting isaac newton. You know, i have some questions for him. But i really would like to see do you want to be there at the moment when he put the knife into his eye . That wouldnt necessarily be my favorite moment. Why did he do that again . Now were digressing. [laughter] yes, we were talking about that before. Its true that isaac newton, believer in experimentation, wanting to figure out whether light was different from pressure or the same as pressure actually poked a bodkin, as he called it, into his eye and wrote down the funny stuff that he saw. Anyway is it an equivalent experiment about time . What would you do . I dont know, throw a knife forward and try and beat it. [laughter] i dont know. We dont want anybody here going home and starting to play with knives. No, no, no, right. A rubber ball. You didnt let me answer your question. I do want to go to the future. I dont know when. Im not as thrilled about it as i was a few years ago because the future is, in so many ways, starting to look a little bleak. But i really do wonder what is, you know, i want to go to wherever it is that we turn into the proverbial hive mind, the world brain. You want youre ready for that. Collective im not saying i want it i mean, you want to see it. I want to see what thats like. What interests you about it . Just plug you in and make you a cipher. Im thats exactly what im curious about. Im wondering whether thats a good thing or a bad thing. Im wondering whether because i do think its happening now. We are partly made of sill silicone. Most everybody in this room has a device in his or her pocket by which they access all the worlds knowledge, and in a few years its going to be contact lens or implants. I hope im not bringing bad news here. [laughter] but we estimate that. The thing im genuinely curious about is the extent to which we will be able to retain our individuality. And yet these story thes of travel, i mean, its appropriate, were at a book festival, whats more effective than a book in the kind of time travel that youre including, letting our minds roam. Yeah. I think its fair to say that the best time machines we have are books. You say we need these stories for history, for mystery, for nostalgia, for hope. Still hopeful . From time travel . Lets say yes. Well say yes. Look, there are people lined up. Awesome. Lets take your questions. Yes, please. Thank you. I wonder how much timerelated management techniques are synchronized with this fictional investigation of time travel because i think of, you know, looking back at some of the management techniques that are, you know, a little over a hundred years old, but i also look at the now where were using data and analytics to understand the past and use that to understand the future do you mean like for an assembly line, henry ford with his stopwatch . Exactly, yes. And i just sort of see the fiction of time travel sort of going along with the use of that in the industrial world. Yeah. Thats an interesting question. Its not something i go into in this book, but it is true that a hundred years ago, a little more than a hundred years ago not at the beginning of the industrial revolution, but closer to our time people started to get very obsessed with measuring time very precisely in factories. And making their workers more efficient. And that is a nightmare, may i say, that continues to this day because were all too good at clocking one another. And now we have all of this machine power dedicated to the what ifs and the whats coming next. Yeah. We start seeing time a measured portion of eternity, and pretty soon youve got a clock on your work on the assembly line. Yes, please. Thank you very much. So i wondered if you could address the idea of ideas and creativity as a time travel. I mean, the idea, that spark in ones imagination that can help to create new technologies, new ways of doing things. Is that time travel, when you create something thats going to be used in the future . I wouldnt go so far as to say that i think every spark of creativity is a form of time travel. I certainly am saying it the other way around, that to think about time, to imagine the past, to imagine the future, we need to be creative. Thats a creative act either way. And what about premonitions . Do they fit in . Well, premonitions are another kind of time travel fantasy, and there are people who, there are people who started writing books about time in the early part of the 20th century that were based on their experience of waking up after a dream and discovering then or sometime later that their dream was actually true and thinking, oh, i have had access to the future. Which, of course, i dont believe actually happens. I think it does. Okay. [laughter] well thank you. People do. You do merit imagination as a kind of and we imagine the past, we imagine the future. I dont know if maybe, i dont know how close premonition and imagination lie to one another. Yes, sir. Ive heard the story told that when the modern day keyboard was invented, it was designed to actually slow down typers because they would get stuck, the old mechanical typewriter. So today were still stuck with that keyboard qwerty. Right. So we think about time and we go through time during the course of the day, for whatever reason weve divided it into 24 parts per day. So as youve thought about time, im wondering, is there a more effective way to divide up the day instead of just 24 parts, would it be 10 or 100 . Did you think at all about that . Well, im the meaning of an hour . I am loathe to give advice, personal advice to anybody, but i would say the most effective and Creative Things to do would be not to start dividing the day into regular parts, but to let our obsession with time slip away. Be. Why . What is the advantage in that . Because we need a little, we need a little of everything. We need some balance. We dont always need to be multitasking and working at high speed. We dont always need to be acutely aware of the passing seconds. Sometimes we need to let our minds drift. I mean, thats a what we do when we read a book. I mean, does that change reality . You go all the way back to 1814 where they talked about what they called the universe rigid, the effect of its past and the cause of its future. As if all these things in sequence necessitated the next, and everything was in a logical kind of firm chain, unbreakable. Yeah. And there are still physicists who like to think that way, as though everything is determined by the laws of physics. I think we know better. You write the universe rigid is a prison, only the time traveler can call himself free. Sir. Thank you. I dont know if you mention it in the book, but my favorite time travel story is a sound of thunder by ray bradbury, and i wondered if you could comment on it especially because it rubs up against chaos will you tell us the central premise for those who, like me, havent read that one . I can tell you. Oh, good. My basic nightmare, by the way, is people are going to mention their favorite time travel story or movie or tv show, and the odds are that its not described in my book, but in this case, bingo jackpot. [laughter] thank you. So the sound of thunder by ray bradbury is a terrific story. Im sure a lot of people here know it. It involves, it involves a sort of timetraveling safari operation. Safari. Safari, where for money big game hunters who are tired of elephants and lions can go back into the past and shoot dinosaurs. You know, i imagine that, i imagine these are the trumps of their time. [laughter] awesome. And not to spoil the story totally, the twist is that somebody steps on a butterfly, goes off the path, and and just stepping on this butterfly changes the course of history so that some terrible stuff happens in the present. And this is before, this ray bradbury story is before chaos theorists invented the notion of the butterfly effect which is based on the same premise. But it also raises yet another of these issues that come up when youre doing time travel stories, that the Science Fiction writers were the first ones to have to deal with logically. You ask yourself if you go into the past, first of all, would you be able to interact with it, or would you just be a sort of freefloating consciousness . And then if you can interact with it, can you change things . And then if you do change things and this is a more sophisticated question with, but its one that the Science Fiction writers got to first if you bump, you know, if there are [inaudible] in history, would history tend to get back on to its natural track, or would it get into wild divergences so that stepping on the butterfly would mess everything up . Dont expect me to give you the answer. Okay. [laughter] were on the edge of our seats. No, you can take your pick, thats the point. The Science Fiction writers, you know, you can pick isaac as moves the end of eternity which very clearly expresses the former view that, yes, you can mess things up, but mostly history tries to right itself and get back on to a path. Or your now is not my now, and again your then is not my then, whosed head is competent to these things . Im really glad you mentioned eric trump, because as weve been talking oh, i meant to not do that. Im sorry. [laughter] as we keep talking, i keep thinking about this desire that people have, a certain element of the country seems to have to return to the past, this idea of make America Great again, the idea that maybe the trump train is a vehicle for time travel. Have you thought about at all how politics is affected by the idea of time travel in our culture . Could you touch on that . Honestly, i dont think theres any politics in my book. I do, i do think about nostalgia, and you can think about nostalgia without having to discuss its political consequences, you know . Nostalgia is another kind of mental time travel. Its another, its another way in which we imagine the past and sometimes our imagination misleads us. Were overly creative. And nostalgia works both ways. You can remember the past and make it out to be rosycolored, or you can imagine the past and make it out to be more dire than it was. And it could be a matter of personality. Do you feel its happening now . No, im not going to ive said enough about the current election. [laughter] thank you. Its a good question though. Thank you very much. Yes, please. So from the earliest recorded evidence of humans, theres issues of spirituality and religion that are recorded, and it seems like its something that humans have always needed to do to sort of make sense of their present in terms of a larger picture and maybe explain their curve problems and concerns in their current problems and concerns in terms of relief, you know, from this larger system. And as, during the course of the conversation this afternoon, it struck me that time travel sounds like a rational, mechanized response to this ancient human need. I mean, in a way you can modify or get away from your current needs by going to the future, going to the past, making changes or just getting away from what youre in the middle of right now. In your research and writing, did you rub up against ideas like that at all . Is that something that what i would say is many religions, maybe every religion, when they construct a spiritual view of time, when they try to think about time, its common in religion to think about being outside of time. Eternity, whatever it means to you, is not just a length of time, its also a way of being outside of time. When the ancient egyptians, when the pharoahs buried themselves in order to preserve their bodies, they werent so much thinking about the future. I mean, they certainly werent thinking about being dug up by people in the 19 and 20th centuries. They were thinking about another world that was outside of time. And i think a lot of religions when they imagined Something Like heaven are, again, thinking about timelessness. So maybe this is the thrust of your question. Both spirituality and time travel are a way of escaping from something that otherwise is, has us in its grasp. I mean, you say that anyone who thinks about time travel is ultimately thinking about death. Escaping death. I do i did eventually arrive at that unhappy conclusion in a way that thats what time is. I was thinking like a good time, like a party. Yeah, well, its fun to go back in the delorean, but i do feel that lurking in the background of every time travel story and sometimes in the foreground is a desire for immortality. Yeah. Because what does time do . Time buries us. Yes, sir. Thank you. And im, look forward to reading the book even if the answer is no to my question concern. [laughter] because i dont have the index yet. Do you talk about or delve into george cubeler . He wrote a book called the shape of time for kind of alternative trajectories to think through art history and visual art no. Give us the youve got me. Whats his idea . Hes kind of a precolombian art historian expert. And hes thinking it through, you know, alternatives to the western canon and different ways of looking through art history that arent about iconography but, actually, really about form, and he starts off talking about how all tools are works of art and tries to adjust whats on the what the hierarchy is of artistry as well as the record of human production. I love it. Again, alternate ways of looking at time or history. Yeah. Its a Yale University art historian, 1968, i think. Cubeler. Cubeler. Okay. Thank you very much. Yes, and another. Are you from the past, future or present . [laughter] present. All right then. Anyway, its fine. So im a junior in high school, and we were having a conversation in english class about how authors use their writing from the past to communicate with people from the future or to continue sort of to live on through their writing. So i was wondering if you touched upon anything like that in your book. I think thats a really good question. I think people who write books, people who do any kind of creative art that is meant to last must be thinking in some way about the future, about posterity. When you write something down, its a way of sending a message to the future. People might not have expressed it that way hundreds of years ago. It might be that your more immediate impulse is to send a message to people in the present, you know . We do think about posterity, and sending messages to the future is something we are sometimes more conscious of and sometimes less conscious of. Another thing that i write about at some length in the book is the phenomenon of people burying time capsules. Which became very popular about 50 years ago, maybe a little more. And theres a way of sending a message to the future and saying heres what we were like, heres what our culture was like. Im going to assemble a bunch of objects and books and magazines and artifacts and bury them in a capsule so that somebody whos curious 100 years from now will dig them up and say, aha. Youre a junior in high school, we love that you brought your question. Thank you. I wonder if theres a different perception of time by age. You quote saying being young, i was skeptical of the future and saw it as a matter of potential only, a state of things that might or might not arise and probably never would. Have you found yourself or observed other more or less interested in time, time travel, texture of time with different portion to or stage of life . Maybe the young just dont need to care. No, i think, i think certainly the interest in time travel starts earlier and earlier. I dont have any sense that either the young or the old h. G. Was into it. Are more obsessed with time. Sir . So planet of the apes. Yeah. Shootout, come back, approaching the speed of light, sort of sounds like the einsteins way of explaining it, right . I mean, e we spend i dont know how many millions of dollars serving out messages to the universe that they may be receiving 10,000 years from now. Are we not looking at the past and the future at the same time . Were looking at the past, yes. When we look at stars, were looking at the past of those stars. And thats an idea that people recognized even before einstein. As soon as i hope i dont mess up the history too much here, but it was in the middle of the 19th century that people established not only that light has a fixed, has a finite speed, but exactly what that speed was. Maxwell did that in establishing electromagnetism. He actually determined the speed of light. And so immediately a few smart people recognized that that meant that light that was coming to us from very far away in distance was also coming to us from very far away in time, and thats why we measure distance in terms of light years. I dont think we can see into the future. Yes. Just a couple more. Hi. So in the beginning of your talk, you started out mentioning h. G. Wells and 1895 and how he was a futurist thinking about future times. Im wondering about darwin and how by that point evolution, you know, was more or less in the popular consciousness. The age of exploration, and so thinking about the past was definitely kind of a newer vivid. Newer thing and pretty vivid in the popular imagination. So i wonder if you touch on that as well and whether kind of, you know, the urge to think about how do humans fit in the past, was that part of what influenced h. G. Wells as well as thinking about the future . Absolutely. Thats exactly right. And ive hardly, ive really only given a sketchy view of the things that made it possible finally in 1895 for h. G. Wells to invent this wacky idea. Darwin was part of it, and wells as a student studied darwin ask and also lyle who was and also lyle who was creating a new sense of geology that involved visualizing ancient ages of the past buried in rock strata. And as you suggested, archaeology was also a new thing. People were digging up ancient civilizations and really for our sense of how old the earth was had changed dramatically, no longer 6,000 years old. Forgive me, but i want to end with a reading from this wonderful book. Would you be kind enough to read this paragraph for us . Next to the last there. Okay. Live in the now, certain sages advise. They mean focus, immerse yourself in your sensory experience, bask in the incoming sunshine without the shadows of regret or expectation. But why should we toss away our hardwon insight into times possibilities and paradoxes . We lose ourselves that way. What more terrifying revelation can there be than that it is the present moment, wrote virginia wolfe, that we survive the shock at all is only possible because the past shelters us on one side, the future on another. Our entry into the past and the future, fit beful and fleeting fitful and fleeting though it may be, make makes human. James gleick, time travel a history. Thank you very much. Wonderful to have you here. [applause] wonderful to have you here. The book will be available at the back of the hall. Thank you very much for being here today. Thank you for coming. Thank you so much, enjoy the rest of the festival. Thank you, jim. [applause] that wraps up coverage of booktvs look at this years boston book festival. You can watch any of these program ares online at booktv. Org. Cspan, where history unfolds daily. In 1979 cspan was created as a Public Service by americas Cable Television companies and is brought to you today by your cable or satellite provider. Heres a look at some of the staff picks from politics prose bookstore in washington d. C. Olivia lang explores the solitary lives of prominent artists in the lonely city. In the great derangement, Climate Change is being ignored. Siddhartha knew car gee examines the future of genetic manipulation in the gene. Another staff pick from washington, d. C. s politics and and prose bookstore is grunt by mary roach who reports on the science thats being used to improve the safety and effectiveness of americas military. Islamic exceptionalism. And in the request ordinarily well, peter d. Kramer looks at the Science Behind antidepressant medications. Thats some of the staff picks from politics prose bookstore in washington d. C. Many of these authors have or will be appearing on booktv. You can watch them on our web site, booktv. Org. Youre watching booktv on cspan2, television for serious readers. Heres a look at whats on prime time tonight. We kick off the evening at 7 20 p. M. Eastern with bert and anita folsom. The Hillsdale College professors discuss their long friendship with a former death row inmate. And at eight, susan quinn reports on the 30year relationship between Eleanor Roosevelt and Associated Press reporter lorena hickok. Then at 9 p. M. Eastern, james rosen talks about a torch kept lit, a collection of essays written by the late william f. Buckley. And at 10 on after words, tim wu provides a history of advertising and its current use. At 11, Andrew Scott Cooper look into the history of iran and the role of the last shah. That all happens tonight on cspan2s booktv. 2340bgs knox. [inaudible conversations] welcome, ladies and gentlemen, to our discussion of hal scotts sobering new book, connectedness and contagion. Here it is. And if you didnt notice, we have copies for sale out in the hall. Its my pleasure to remind you that your welcome youre welcome to buy a copy and that hal will be available to autograph them during the reception which will follow immediately after the panel. Im alex pollock of the r street institute, and here we are in aeis stylish new Conference Center to discuss a very old problem; namely, how best to survive financial panics of which there have been many across the centuries. How to survive the contagion of fear and distrust when financial actors try to withdraw from risk to protect themselves, a rational strategy for each. But, as we all know, not when they all do it at the same time. This is highly interesting he is to haveically historically but much more pressing when we consider, as hals book does in scholarly detail, what well be able to do in the next panic which is assureedly to aive sooner arrive sooner or later. Two centuries ago David Ricardo accurately observed, quote on extraordinary occasions a general panic may seize the country whenever one becomes desirous of possessing himself of precious metals. Today thats of treasury bills or equivalent. Against such panic, ricardo concludes banks have no security on any system. That is to say that private banks on their own. Walter badgett commenting on this statement in 1873 draws the conclusion we all know was true then and is still true now, to wit if all the creditors or demand their money at once, they cant have it. Moreover, badgett goes on, when apprehension passes a certain bound, no private banker is safe. For as badgett also says every banker knows that if he has to prove he is worthy of credit, however good may be his arguments, in fact, his credit is gone. And thats what happens in the panic. Everybodys credit is gone because nobody can prove hes worthy of credit. And theyre not even sure about their own solvency. Well, what do you do then . Then you have to finance the bust. So the central bank and the governments treasury provide new debt, and as hal says, also new equity. Expanding their own Balance Sheets so everybody elses Balance Sheet can shrink, expanding their own risk so everybody elses risk can go down, and thats what you have to do if you want to avoid driving asset prices into a wild downside overshoot. Hals book discusses how this survival process has been made much harder by the postcrisis legislation in the u. S. And notably the doddfrank act. And he interestingly points out how this is different from other countries. For example, he says the United States is rather unique in its apparent resolve, however unrealistic it may be, to fore swear any use of bailouts in the future. Hal predicts there will be bailouts in the future, but that therell be a lot more theyll be a lot more cumbersome, slower and harder to do. And he predicts that in time we will greatly regret the changes which have been made if theyre not corrected before the inevitable next crisis and that those changes will make that well make things the next time a lot worse. Hal is going to present his book, which hell do for about 25 minutes, then well have comments from our outstanding panel whom ill introduce at that point. Our author, hal scott, is the director of the program on International Financial systems at the Harvard Law School where hes taught since 1975. Hes also director of the committee on Capital Markets regulation and independent director of lazard limited, a member of the Bretton Woods community and the institute of International Finance and a past president of the International Academy of consumer and commercial law. His books include International Finance transactions policy and regulation which has gone through 20 editions, i see 21. 21 . [laughter] and the Global Financial crisis, that means the last crisis. Tonight in presenting connectedness and contagion, he will address how to be better prepared for the next crisis. Hal, welcome to the aei podium. [applause] thank you, alex, for a clearer presentation of my book than i was able to make in many more pages. And thank you to aei for hosting this event. So the thesis of my book is that the heart of the 2008 crisis and most other financial crises was Systemic Risk in the form of contagion, that this crisis was successfully stemmed with three weapons; lender of last resort, liability guarantees and capital injections. Postcrisis all of these weapons were eliminated or limitedded or eliminated primarily by doddfrank be as undesirable bailouts. Doddfrank purports to solve the contagion problem, what i call two wings and a prayer. The wings are heightened capital and newly liquidity requirement, and the prayer is new resolution procedures. But you dont abolish the Fire Department even if you believe you have more fireresistant buildings. Thats, basically, what the attitude has been postcrisis. Thus, we need to restore and, indeed, strengthen the three powers we weakened or took away. But, bad news, the likelihood of doing so in the antibailout consensus that exists today is very low, so we are dangerously exposed to future crisis. Thats the thesis of the book. So let me talk about the elements of Systemic Risk. The main point of the Financial System, of Financial System regulation is to prevent risk of which there are three varieties, what i call the three c correlation, connectedness and contagion. Creates losses for a large number of important Financial Institutions like a Housing Price collapse, that was part of 2008, but its not the focus of my book. Connectedness comes in two flavors; asset connectedness where the losses of one football football Financial Institution causes losses of other Financial Institutions which sets off a Chain Reaction of failure or liability connectedness where the failure of one Financial Institution endangers the funding of other Financial Institutions. Largely, the focus of network theory. For example, of the settling, of a bank settling triparty repos were to fail, that would create a problem. The third c is contagion where the actual failure or fear of failure of a Financial Institution causes shortterm creditor investors to withdraw and withhold funding for Financial Institutions either out of the lack of information or irrational panic or some combination of the two. So the first part of the book looks at whether the problem in 2008 was contagion or connectedness. Contagion, in my view, was the primary driver of the 2008 financial crisis. Basically, asset connected. Excuse me, it was not the primary driver of the 2008 financial crisis. Neither form of connectedness. Leading up to lehmans fall, major banks saw some deposit runs including wachovia and washington mutual, but the Lehman Brothers in 2008 put contagion in overdrive as shortterm creditors headed for the exits fearful that the institutions to which they extended credit might meet the same fate as lehman. Lehmans failure triggered a major run on u. S. Money market funds starting with the reserve primary fund which broke the dock on september 16th, 2008, eauing mainly to owe owing mainly to master [inaudible] from the funds exposure to lehman, an example of connectedness. The run spread quickly across the Money Market Fund industry, however, including institutions with no significant exposure to lehman. Contagion also spread to shortterm assetbacked commercial paper markets as Money Market Funds shifted their holding to government securities. In the lending market, the london interbank off bank, libor, rose sharply, and many banks continued lending on the [inaudible] thiss what happened. Thats what happened. The book examines this claim in detail. While investors in the reserve primary fund, which had overly invested in lehman, lost money lets remember it was less than a penny on the dollar. And no Financial Institution connected to lehman failed as a result of the failure of lehman. Moreover, no Financial Institution exposed to aig would have failed if aig had failed. For example, Goldman Sachs would have experienced a maximum 18 loss of capital from its cds collateralized positions with lehman, less than the conventional 25 loan loss secured lending limits for banks, and this does not even take account of the cdss goldman had on aig which further protected goldman from loss. Nonetheless, the scenario coming out of the crisis was there was a can connectedness problem, and doddfrank reforms largely focused on those. Sifi designation by fsoc is largely built around connectedness. Look at the terms of designation. A lot of connectedness. As a Central Clearing for the counterderivatives, the idea is we have to mutualize the losses or well have a Chain Reaction of failure and, certainly, bilateral exposure limits. These were all parts of doddfrank. Now, one can argue that these reforms are desirable as preventive measures generally apart from the experience in 2008, connectedness was not the problem in 2008. So doddfrank also did Something Else which was to legislate with respect to contagion. As i said at the outset, three measures were deployed during the cry is sis to stop the crisis to stop the runs on banks and nonbanks, lenders of last resort and capital injections in the banks. Funder of last resort. The fed was created in 1913 to stop financial panics, the latest of which was in 1907. Interestingly, that panic of 1907 started the nonbank sector at the nickel boxer trust nickel boxer trust company. The fed discharged its responsibility through a variety of means, a lower penalty rate at the discount window, wider access for primary dealers to the window and a term auction facility were major changes. And a number of new facilities were created for nonbanks. I cant go into all of them here, but they included the commercial Paper Funding Facility to purchase unsecured and abc piper from corporate paper from corporate issuers and the money market investment funding facility to purchase assets from Money Market Funds to provide them with liquidity. The supply of this liquidity to the Financial Sector doubled the feds Balance Sheet to 2 trillion by 2009. In 2007, before these actions, 91 of its Balance Sheet was invested in u. S. Treasuries. By 2009 it was only 25 due to this lending expansion. Supply liquidity to the nonbank system was very important. It provided nonbanks with almost a trillion dollars in loans and general market liquidity. More importantly, the very availability of these facilities helped stop the run. The fed, and in turn the taxpayer, actually benefited from this new lending. Balance sheet expansion generates more profits. The fed pays not much on the liabilities, bank reserves, interest on reserves which actually didnt exist until the crisis on the current i and makes money on the facets, and the fed profits and the remittances have risen to 40 billion. As i said, the key part of the fed lending was to nonbanks where the contagious run was largely centered after the 2008 failure of lehman. I estimate that today there is about 7 trillion in uninsured shortterm funding in the u. S. Financial system with 60 of this in nonbanks primarily Money Market Funds and brokerdealers. The ability to lend to nonbanks in a crisis is essential, and i would expect this percentage to increase as lending and Capital Market activities are increasingly driven out of the overregulated banking system. The Legal Authority for this lending no nonbanks was the thenquite broad section 13. 3 of the Federal Reserve act. It provided that, quote in unusual and exigent circumstances, the board could authorize the reserve bank to make loans to, quote, any individual partnership or corporation, end of quote, where such loans were, quote, secure to the satisfaction of the Federal Reserve bank, end of quote. This authority to loan to nonbanks, by the way, is quite separate from the discount window authority under sections 10b and 13. 2 of the Federal Reserve act to lend to depository institutions like banks. Now, while use of this Broad Authority to lend to nonbanks was crucial in stopping the con contagious run, after the fact it was and continues to be widely attacked as bailing out wall street. This is despite the fact taxpayers benefited from this lending. Now, legitimate moral has a ard concerns have been hazard concerns have been raised about this lending. But the beneficiaries were largely victims of a panic. Without panic withdrawals from these institutions, alex kind of alluded to this, they would have been solvent. Notable exception was aig. But in general, totally solvent institutions were beset by these runs, making them insolvent. Would have been insolvent but for the lending. Now, this antibailout concern triggered radical calls for Lending Authority for nonbanks, and oddly such concerns did not translate over to the feds use of the discount window. Kind of focused on the nonbanks. The result was the doddfrank act placed significant constraints on the feds 13. 3 Lending Authority. What are they . First, the fed can only now lend to nonbanks with the approval of the secretary of treasury under procedures adopted in consultation with the treasury. Interestingly, this requirement for approval was first put forward by the treasury itself, then headed by secretary geithner. Perhaps this was just another chapter in the fed treasury turf war, or maybe geithner thought this was a way to protect the fed from even greater restrictions which, indeed, were then actively being considered in the congress. One can argue with the importance of this restriction, though it is clearly taking independent authority away from the fed. Some point correctly to the fact that paulson was bear mantys cheer bernankes cheer leader during the crisis. But the new antibailout environment, will they all be such willing cheerleaders . Treasury approval would now carry a significant political risk. And the markets will know fed support may not be assured which itself could accelerate a run. If we think it is important for the fed to have independence to lend to banks, why not to nonbanks and everincreasing, important factor in our Financial System. Second, the amendments to the 13. 3 provide that the fed can no longer make oneoff loans to single beneficiaries such as it did in 2008 to aig. It must, it must im okay. It must now do so according to doddfrank under a broad program. A fed regulation implementing this provision provides that at least five institutions must be eligible for any fed program. Now, if this means eligible at the time the fed provides the first lope, it may make it harder to nip it in the bud. Youve got to wait until five institutions have a problem. If it means, on the other hand, ever eligible for a loan, then it is not much of a restriction. But under that interpretation be, the first loan could trigger cries of inappropriate behavior or even illegality. Third, doddfrank required that all loans must be collateralized. Before it was just to the satisfaction of the fed. And a lendable value was assigned to all collateral. This reined in the feds authority, among other things, to buy unsecured commercial paper which it did for major nonfinancial issuers in the crisis and more generally discretion on setting [inaudible] fourth, the fed can only lend to solvent institutions. Again, a requirement not tied to banks, just nonbanks. Now, while a solvency requirement is a cardinal principle in the 19th century formulation of the appropriate role of the lender of last resort, many have pointed out, Charles Goodhart for one, that this has often been honored only in the breach, okay, here and abroad. Now, one reason for not requiring that the central bank determine that its power was solvent is that judging solvency is extremely difficult. Should assets be valued at marktomarket, a price which might already reflect fire sale prices . Or should they be valued at what they would be if the fed won . An underlying argument is that lending to an insolvent institution should be a fiscal issue in which the congress would play a major role through appropriations as it did, indeed, in t. A. R. P. And i sort of agree with this point of view. But if youre going to have that point of view, then lender of last resort needs to be coupled with what i would call standing t. A. R. P. Authority so that there is the possibility that the treasury can act when the fed cant. A fifth provision of doddfrank provides for disclosure. All loans to nonbanks must be reported within seven days to the two chairmen of the house and senate Financial Institution committees and must then be disclosed to the public within a year. On the banking side, one change on the window, all discount window loans must now i be publicly reported within two years. Now, the concern of such disclosure requirements, much more stringent, by the way, than those facing any other major central bank, is that the prospect of disclosure certainly within seven days and even within two years may discourage borrowers concerned with stigma from seeking needed support. Thus worsening the rob. You want them to get the support. Banks a avoided the discount window out of fear that their borrowing might be weak, thus needing the fed to create the term option facility where all banks, whether in trouble or not, could obtain cheap funding. Sixth, doddfrank provides that banks can no longer pass on discount window loans to their nonbank affiliates such as broker dealers without being subject to the normal section 23a limits on interaffiliate lending which would be precluding a full passon. In this means the substantial borrowing by bankaffiliated broker dealers would have to occur under the new restrictions of 13. 3. It couldnt be by the window and then passed on. Indeed, the multiplicity of restraints that are now imposed under section 13. 3 but do not apply to discount window borrowing prompted new york fed president dudley to suggest last may that congress amend its discount window authority to permit loans to many banks. However, this would in effect represent a repeal of the doddfrank 13. 3 restriction ares. Some of the fed, including governor powell and exchairman bear manty bernanke, have said they can live with these restrictions, but they have taken this position, in my view, to stave off further restrictions. On november 15th of last year, the house passed the socalled form act largely along party lines, 241185, republicans for, democrats against. The bill has not been enacted into law, but its passed the house. Under the form act, the Federal Reserve could only lend to nonbanks if at least 9 of the 12 Federal Reserve Bank President s voted in the affirmative. Further, all federal regulators of the potential borrower which would often include the sec or even the cfpb would have to certify that the borrower was not insolvent. Chair yellen said at the time that these provisions would essentially end Federal Reserve lending to nonbanks. This form act has now been incorporated into the house financial reform package. Now, these attacks on the feds role of lender of last resort are not recent. My book recounts how opposition to any role for a, quote, federal bank whether lending to commercial or Bank Borrowers goes back to the early controversies in our history over the first and Second National banks. Andrew jackson vetoed the renewal of the charter Second National bank in 1832. Its this debate, federal bank institution, that took us so long to create the fed in 1913. This debate still dose on. All right. So still goes on. All right. So the second part of the fight against contagion were guarantees n. October of 2008, the fdic used its authority to remove any limits on deposit insurance for transaction accounts which are key to the Payment System and increased insurance limits on other accounts from 100,000 to 250,000. While doddfrank permanently increased deposit insurance limits to 250,000, it removed the authority of the fdic to raise any limits in the future without joint resolution from congress. In addition, the fdic established the socalled temporary Liquidity Guarantee Program in october 2008 which ghei depository institutions and their Holding Companies authority to issue new, senior unsecured debt guaranteed by the ftc. This power was also taken away by codfrank. Doddfrank. And by the way, the fdic made money on these programs. There were no taxpayer losses. In addition, in 2008 following the breakout of the run on the Money Market Funds, the treasury used this authority under the Exchange Stabilization fund to guarantee the Money Market Funds. This had a major impact in stopping the run on the funds. This power was also taken away bid doddfrank by doddfrank. Not by doddfrank, actually, by the earlier t. A. R. P. Legislation. And by the way, the treasury made 1. 2 with in fees billion in fees on this program and never paid back a cent. Not been cured by the secs required floating Net Asset Value on prime institutional funds. Even a even if funds post their true values, investors will expect values to go lower, and sec rules may just accelerate runs as commissioner stein observed in her dissent to that reform. The final tool used to combat contagion was t. A. R. P. As of june 2016, there had been 204. 89 billion of capital injections into banks. And on this injection treasury made, not lost, 16. 28 billion. So treasury made money on this program. The taxpayer did not pay for this. T. A. R. P. Expires by its own terms. Unlike the e. U. Or japan which have Standing Authority for capital injections, if the u. S. Needs such injections in the future, authority would have to be obtained in the might have to be obtained in the midst of the crisis itself as it was in 2008. Now, while contagion fighting powers have been curtailed, defenders of doddfrank [inaudible] two wings and prayer. The premises, since contagion is much less likely, we need not worry much about it anymore. The seconds wing was liquidity we adopted liquidity coverage ratio which has a o 30day horizon that requires banks to hold high quality liquid assets. These requirements affect storage shortterm legending. Again, they do not apply to nonducts. As with capital roorms there are significant issues and high quality luck liquid assets. In my view the adoption of private liquidity has a retreat by the fed in private as wonder of last report. If i can now say it will only be a backup source of liquidity. The front line is the liquidity but the requirements may actually reduce collect private liquidity because it requires each bank to hold their own liquidity rather than make it available to others in a crisis. So whether it really comes, you know, to prevent legending as open to question. So the two minutes. [inaudible] so resolution procedures frank gives new powers to resolve nonbank Financial Firms and bank Holding Companies qhiewz family upon a twothirds vote of the fed gone and directors and the treasury can determined to pose serious adverse affects of substantial will be and set procedures in my view are unlikely to that. But the outset without the new proceed injury may never be used. If it is used, the fdic is designed to single point entry procedure requiring restructuring at the holy Company Level in major consequence of which is that shortterm funding at the operating subsidiary level for almost all shortterm funding exist mainly through bank and their broker dealers subsidiary will be effective some hope there will stop since the fdic resolution will not endanger existings shortterm funding. But whether such about whether such restructuring will actually work particularly for a major Multinational Bank is problematic. Highly problematic and procedure is never been tested. Thus, this is a prayer. The reality is that creditors of the Financial Institutions will one if a large Financial Institution is put into any kind of resolution better safe than sorry. And we need to be prepared for that. So resolution proceed yours are good. But dont think that you can get rid of contagion fighting just because you havent. It works the other way easier to resolve a solution if you know you can prevent that might follow from its resolution. I wont comment for alex will be jerking me off of this platform on kind of other solutions to the problem like limiting shortterm funding. But if we have time to discuss it, in the q and a ill talk about that. What are had the conclusions. Contagion in nonbank as well as bank sector not connectedness is the major systemic concern but dot frank was focused on connectedness. We know how to stop contagion u due to use and wonder of last resort guarantees capital injection. But these powers have been greatly weakened by legislation and due to the fear of bailouts wont easily be restored. Third, capital liquidity and resolution will not safe prof the system from contagion. Even if homes are fireproof you still node a Fire Department. Shortterm funding which they dont have time to go also i dont think the answer. Lets just hope we do not have another crisis before we can move beyond the fear was bailing out wall street and are able to rectify the situation. Thank you very much. [applause] thanks, al. We have coming up three outstanding discussions in which they will speak after they do well give him a chance to respond to them and then the panel ideas as to which some time for your questions. But we are going to adjourn promptly at 6 15 to our reception. First discussion that will be brought president of the Federal Reserve bank of rich monday from 1993 to 2004. And join the Banks Research staff economist in 1970 and become director of research in 1985. As a Federal Reserve president , of course, these served as member of the open market committee. Al is member of the board of virginia counsel on economic education. The advisory counsel, the school of business of the university of richmond, executive committee of richmond and numerous other boards. Et other is pete kyle the professor of finance at the university of Maryland Smith School of business. Petes Research Includes merchandise and market manipulation, price volatility, market widty and contagion. Hes been a staff member of the president ial task force on Market Mechanisms consultant to the security and exchange commission, the cfdc of the department of justice, and a member of the cfdc Technology Advisory committee. My third will be paul who is a resident scholar at aie focus on management and regulation of Financial Institutions financial markets, Systemic Risk, and the impact of financial regulations on the economy. Previously paul was director of the center for Financial Research at the Financial Department and chairman of the Research Task force of the committee on banking supervision and held positions also that the imf fannie mae and freddie mac, j. P. L moore begun and board of the reserve. Fall also organized this event so thank you paul for getting us all here, and al will start with you. Thank you. Thank you very much alex i hope i didnt scare anybody when i knocked my sign there punished trying to get to that and i got to it and i couldnt open it. Another sign of age. Liquidity problem. Couple of minutes from now ill be able to solve it. Very good to be here. Panelist struck it firmly in advance to try to hold our remarks to 8 minute which is made me think reminded me of mark twain famous should have been a shorter letter. Any case ill try to meet the requirement i know maybe a little late here. I believe that professor scott is a very good book as you all know well, a lot of books have been a number of books have been written from various perspectives about the financial crisis and several i would argue are really essential to appreciating the scope, nature, and significance of the event of ben bernanke and secretary pauls book. They all think helps us understand what it was like for policymakers who actually confronted crisis on the frontlines, and i would add to that list ellen blinders book which i think is in the one that has i think Musical Chairs somewhere in the title. Seem when is i read it struck me as a review of the broader causes of the crieses and questions how to effectivelies it was dealt with as it played eights out. For me house book is a very valuable and highly useful edition to this, that provides an intense and penetrating seen this already in his remarks intense and penetrating analysis of the anatomy of the crisis. I want to say the section of the crisis. Which stands for a Solid Foundation for evaluating the steps that have been taken subsequently especially in the dot frank law to prevent a more realistically mitigate. By the crisis i have in mind clear to linnuation which he has already reviewed in che underlined by books title. Between woody terms as connectedness from contagion as systemic drivers of the crisis and is conclusion is he noted that contagion was the primary driver. And has to be appropriate focus of efforts to remediate. The book arguing convincingly that asset and liability connectedness did not play major role it is in the the core collapses of Lehman Brothers and aig rather contagion simply today augmented version of an Old Fashioned wonderful life bank run. Turn these events into a broad and extremely dangerous crisis given this scott believes that the fed, the fdsc address appropriately and smooth and prevent a much more outcome with my background at the fed which has been reviewed and i acknowledge my bias but i happen to agree with him. From this premise, professor scott received what i take to be the Central Point or one of the Central Points one of the political charged provisions of the dot frank uhuh law are largely based on the mistaken belief that connectedness was a problem and that the provision it is that restrict the last resort powers and feds complimentary powers risk severely weakening the governments ability to successfully contain a future crisis if one arises and i have to say that if you know history teaches us that thats a very likely occurrence. As weve her heard scott analyze each of the limitations does this in chapter nine in the heart of the book i cant review them all. Al has done a pretty good job of doing it already. But an example of one hes already mentioned which i think really give use the flavor. During the crisis the fed as you mentioned was able to make section 3 launch independently nonbank Financial Institution dot bank requires such loans to be approved by the treasury secretary. This may be understandable and understandable provision given the Political Climate in which the dot frank law was written. Ben bernanke seems to conclude in a recent blog piece on emergency legending that the requirement is not necessary and workable compromise in a Democrats Society and maybe thats right. What had if treasury secretary who is afterall a political appoint at the time of the future crisis a highly political figure not experienced in or well informed about managing financial crises i fir to say thats not difficult imagine a scenario and such to the worlds. A strong perception indeed absolute confidence among Market Participants that the fed and the fdsc together can and will act forcefully an immediately to stop a run qowb essential to actually doing so. More typical the credibility in this regard would need to be complete and robust. If there were doubts in markets that treasury secretary could go along or o that they would delay unduly majorities qowb at high risk of running. If think theyre going to be hit think somebody else will be a hit let someone else take that hit. I would say thats professor scotts insis finance on the primacy of this reality with respect to the treasure secretary prooflt brought provision and for me the principle contribution. Said that concerns about hazard in reducing risk of taxpayer loss it is that help drive the dot frank restrictions or, obviously, not frivolous. Professor scott i think does not deny that the enhanced capitol standard and liquidity requirement, liquidation, authorities and other actions taken to reduce the livelihood of another crisis in the term or severity if it occurs, may prove beneficial although argument i think u youve already had had argued with some of the details. But the book argues persuasively that none of these reforms individually and all of them collectively are sufficient to prevent a run or to stop one once it starts. There is one on the point i need to make here almost on a personal note for many years, led by my colleague moore begun and jeff lacquer. It is warned of the danger or policy of action that involve in credit allocation what marvin all time colleague and a good friend referred to as credit policy distinct from Monetary Policy. I share this concern and i have to confess but i have to common fess that i generally thought about it in a mackerel Monetary Policy context rather than in the context of the letter of last reare sort role. Scotts book challenges me but demonstrate convincingly that the financial crisis largely Old Fashioned run. In a new costume portion me to ask myself whether it would be feasible to deal with a similar crisis to involve a credit policy risk. I need to think about this because you have me thinking, and asking the fundamental question here is. I feel compelled to offer at least one nitpick if i may. I feel like i have to do it. I found reasoning in a few sections a little on the tense side. One section of chapter 21 is discusses the possibility that