Hans good afternoon, everybody. Let me say on behalf of the world bank and prospects group, we welcome you to this book event. Very much we want to welcome robert samuelson. We will introduce him in a moment. He has written a remarkable book,the great inflation and its aftermath. I read it over the weekend, cover to cover. That does not happen often. It is a very readable book. It is really remarkable. First of all, of course, because of its timing. At the moment that everybody tries to catch up on what actually the Great Depression was and he tries to focus our attention on the great inflation of the 60s and 70s. And the aftermath, when everybody is thinking of the threat of deflation we are , focusing on the consequences, negative consequences of inflation. When all of the policymakers seem to be having tensions at the moment, he explains in this book, the start of the application of thought since the kennedy administration. So currently this is remarkable , because the book was, of course, written a little bit earlier than today. He basically finished the book at the end of last year. Partly also because Bob Samuelson is a very independent thinker who looks ahead also. It is also very remarkable me because it , goes way beyond the macroeconomic description of the inflation process and how inflation was brought under control here in the United States. It is much broader than that, he looks at the consequences of politics, the consequences of Business Practices and in that , way it gives almost a sociological description of the phenomenon. It very much focuses on the United States, but it is very good that we discuss it here at the world bank, because i think you can argue that it is even more relevant for many developing countries who brought , inflation under control much later than the United States did. Most of them in the middle of the and for whom the 1990s. Consequences of the inflation before that were even more disastrous than what was described here for the United States. I do not have to introduce bob, everybody probably knows him from his columns in the washington post. He graduated from harvard. And for 40 years has written columns, mainly in newsweek and the washington post, but in other places. He has been a journalist and editor. I saw in his biography that he had at least 10 awards for best columnist or best editor. So we are very pleased to have him here. He will talk for some 20 minutes. Then he will raise a lot of food and thought for discussion. We are very pleased that we will have good discussions that we will introduce later on. And apart from that really more debate. Bob samuelson everyone. Robert thank you. Thank you. Appreciate it. I want to thank the info store for setting this up. Appreciate everybody coming here. Foruld like to thank hans taking the trouble to read the book and commenting on it. Im not sure he would have gotten through it as quickly as he had if he did not have a deadline on his back. In journalism we know that nothing ever gets done unless you have a deadline. With an audience like this i want to make my two conventional disclaimers. I am not an economist. So anything that i say that seems contradictory to what a freshman in college would learn in your basic principles of economics course, i should be absolved of anything of that, because as i say, im am not a cardcarrying member of the fraternity. The second disclaimer is that i am not related to Paul Samuelson. [laughter] again, anything i say that seems ridiculously silly should not be attributed to him or anybody related to him. He does, however, have a son who i am told is not only called robert samuelson, but whose middle initial is j. It is not me. [laughter] he did write the newsweek column on economics before i did. Newsweek pioneered having economists write columns in the 1960s. And they had Milton Friedman on the right, Paul Samuelson who was a liberal, and Henry Wallick who was a professor at yale and you actually discontinued the column in the 1970s as a sort of middle of the roader. When he was appointed to the Federal Reserve board to read samuelson gave up the column in the 1970s, he was basically tired of writing it. And it was passed to his colleague at m. I. T, lester phil thoreau. Ster but when newsweek named me to replace them, having decided a journalist might be a breath of fresh air, samuelson sent me a nice letter. I think it was one sentence. I think it was as follows. Somebody named samuelson cannot be all that bad. [laughter] robert he may have learned to regret that. I want to talk for about 20 minutes. Hans will stop me if i go too long. I would like to talk about the book and its main thesis and its main thesis is simple. It is that the rise and fall of doubledigit inflation was the most important economic event of the last 50 years. And that he really cannot understand the economic history of the last half century unless you understand both the consequences of rising inflation and falling inflation, this is not to say that other economic events were not terribly significant. Globalization, the decision of the chinese to end their selfimposed isolation from the rest of the world, obviously, the development of the internet. But my view is that if you do not understand the consequences of the rising and falling inflation, you really will not understand the context in which many of these events actually occurred. For an audience like this i really am going to emphasize the , consequences of falling inflation. Because our popular world, those , are these recognized, and i think it will be most interesting to you. Whereas the consequences of rising inflation or more familiar. Thosed like to go over consequences of rising inflation, before i get to the consequences of falling inflation. Are, in the facts beginning of the 1960s, inflation as measured by the United States was virtually nonexistent to read it was at about 1 in by the end of the 19601961. 1970s it was double digits. Nobody knew how high it would go. It was roughly 13 in 1979 and 1980. So there was a huge change in the actual behavior of inflation. And again as i say, in the late 1970s and early 1980s, it was not just that inflation was high, it was that nobody knew how much higher it would go and people did not expect that it would go higher. If you look at the consequences of this rising inflation the most obvious political consequence was the election of Ronald Reagan as president. That was in 1980. Four president s had been unsuccessful in containing inflation. People did not know whether Ronald Reagan could do it. But if you look at the opinion polls, rising inflation was the issue that terrified people and concerned people the most. They did not know whether reagan could control it but they knew , for certain that carter could not. In the american political system, if you do not like that guy you have, the basic alternative is to vote for the other guy. That is what happened in 1980. When reagan reassured people that he was not going to blow the world up with a thermonuclear war, basically people said we will try this guy, because he cant be in a worse than the guy we already have. That is what happened. A second consequence of inflation which most people are familiar with is that the economy became increasingly unstable. Between the late 1960s and the early 1980s there were four recessions of increasing severity. The last recession of the early 1980s, when inflation was the size of was the worst recession since world war ii. It may endure as the worst recession since world war ii, although the current recession may exceed it or rival it. But unemployment at the end of 1982 got to almost 11 , at 10. 8 . People did not know when the economy was going to come out of this tailspin. Again, people were terribly frightened by the specter of inflation and the ensuing recession, which was engineered by the Federal Reserve when paul volcker was chairman. To crush inflation. There was a purpose to it. Unlike todays recession which is basically the outcome of the Financial Market excesses, the recession of the 1980s was an active policy. That is a fundamental difference which people tend to lose sight of now. There are several other consequences to the rise of inflation. Again, i think they are reasonably well known among economists. One, i would say, was the stagnation of productivity. That is somewhat controversial, because we do not really understand what caused productivity to grow and to decline or stagnate in any detailed way. But there is a coincidence between the stagnation of productivity in the late 1970s and the rise of inflation. And in the book i argue that the two of them were not unconnected and that, rising prices essentially caused diverted managements attention from the details of actually running their businesses to the more pressing task of how much or how often they should raise prices, because it had more to do with their profits than any operational changes they could make. I also argue in the book there was something of an inflation illusion during this timeframe, because although the real profits were not doing very well, nominal profits were doing quite well. So the Business Executives tended to point to nominal profits and not real profits. As a measure of their success. They actually resisted measures which would have adjusted profits for inflation which would have given a lot more grim mer picture of how they were doing. I suppose that is not a surprise, that the managers would not want to embrace reform that would reflect poorly on their performance. Finally, i would argue that high and rising inflation devastated the stock market during these two decades. If you look at the stock market by the Dow Jones Industrial average, in 1982 the market was no higher in nominal terms than it had been in 1965. There had been a fair amount of fluctuation between the mid 60s and the early 1980s, but basically the market had gone nowhere. And in the late 1970s, businessweek ran a famous cover which said, stocks are dead. The equity markets had been killed by inflation. That was the prevailing wisdom. The underlying statistics support of what happened. Again, those are the consequences of inflation. We can go into more detail if you want to. We can talk about the economic mistakes and theories that led to it, but i dont want to dwell on that for the moment because i think the story is probably familiar to most of you. Less familiar, i think are what , i see as the consequences of falling inflation. I want to talk about three or four Different Things here, which i think falling inflation had a great deal to do with. One is the change in Financial System. Second is the rise in expansion of globalization. And a third is the current financial crisis. I see all of these as a link to the fall of inflation. So let me explain what i mean. If you went back, to in a time the late 1970s and early 1980s and look at the American Financial system you , will see it was heavily based in depository institutions, commercial banks and savings and loan associations. Savings and loans, as they were known, provided half of Residential Housing credit, banks provided another good chunk of it and the rest of it tended to be spun off into the Securities Markets and usually sold to insurance companies. The Financial System was heavily depository institution based. Consumer loans and Business Loans were made by banks and s ls. And the stock market and bond market, although they existed, were less important. That system, we talk about how todays new Financial System is very different from that. That you have a huge amount, or you did have until about 18 months ago, a huge amount of credit mediated through Securities Markets, through various securitized instruments which were bundled together such as mortgage loans, credit card debt, auto loans, commercial realestate, mortgages and the like. And the increased importance of the stock market. And people talk, people talk about sort of the child of the triumph of marketbased finance, and how it has collapsed over the last 18 months or so, which is responsible for our crisis. There is no doubt that the excesses of the Financial System are responsible for at least part of the current crisis. And people talk about the new Financial System, as if it was a conscious change, a shift from what we had, a more regulated depository based system to what we have now. That is just revision is in, it is makebelieve. It is fiction. The old system was not an exchange for a new system, it was a conscious act a policy. Act of policy, the old system collapsed. It was basically caused the collapse by inflation. The s l industry was destroyed by inflation. Collapse used the caused to collapse by inflation. It was a very simple Business Model. They took in lowcost deposits, which were generally shortterm in nature, but very stable. And they let them out about two Percentage Points greater than the deposit rate. It was a simple business, they earned their profit on the spread between their deposit rate and their mortgage rate. There was a saying, you could be out on the golf course by 3 00 in the afternoon because the business was so simple. Well, that Business Model was great in a time when he did not have any inflation. But when you had inflation and shortterm Interest Rates went up, the s ls were put in an awful position. Essentially they faced a fatal dilemma. It they could raise their deposit rates and keep , but theysit base, or would become unprofitable because they put out all these , longterm mortgages at 5 or 6 . All of a sudden, their deposits were costing them about 7 or 8 as inflation went up. So they would become unprofitable. Or they could keep their deposit , rates low, and lose all of their deposits in which case , they would also go out of business. So that is basically what happened to the s l industry. Money market funds came along in the late 1970s and offered a consumer friendly alternative to bank and savingsandloan deposits. And the savingsandloan industry was put in an untenable position. There were various efforts to get to reconcile or somehow defeat the dilemma by giving them new powers. The powers were abused. The regulation that of these new powers was inept. And so you had not only inept investments made, sometimes criminal or fraudulent investments made, but the basic problem was not in the regulation, not in the new powers. It was in the dilemma created by high inflation. To some extent a commercial bank to some extent, the commercial banks were put in the same position. Their loan portfolios went bad as well. Especially the large banks in many developing countries who had made loans to developing countries such as in latin america. Some of the realestate loans went bad. The banks were not in quite as bad a position, because the majority of their assets were shorter than the longterm mortgages of the s ls. And so, with some regulatory forbearance they did survive, but they could not increase lending very much. So what you get in this situation is a search for new ways of mediating credit flows and new ways of creating a conduit between savers and investors. And securitization is the most obvious way that arises. So securitization in my view is a direct outgrowth of the calamity of inflation and the consequences it had for the Financial System. The second effect of falling inflation on the Financial System is that it made finance extremely profitable because as real and nominal Interest Rates came down, asset prices went up. So the cost of borrowing is going down. The cost of what you could how to invest in was going up. So high finance became very profitable. You got a lot of experimentation and a lot of innovation during this. I do not want to claim that everything that happened in finance, of which i am not a great expert on, was the result of falling inflation. What i would claim is the context and climate in which the new Financial System arose was fundamentally affected by first , the rise of inflation which describes the old system, and the old Financial System, and the fall of inflation that created an extremely favorable climate for this new, innovative, experimental form of finance of which we got plenty of the last 20 years. I would say that if you want to understand the origins of this Financial System that we are dealing with today, you have to go back to high inflation. Second effect i would say of falling inflation was to promote globalization. It was of myth, although it is now a widely shared myth, that globalization is a phenomenon of the last 20 or 25 years. In fact, globalization is something, we call free trade and open World Markets or whatever the United States , proceeded avidly after world war ii as part of its postwar , economic Foreign Policy and foreign economic policy. There were reasons for this. Memories of protectionism during the depression. We can go into this later if you want to, but i suspect most of you are familiar with that history. But you get to 1980, for example, and world trade had expanded fivefold since the 1950s. And tariffs have come way down. Whatever. But i do think it is fair to say that the globalization we have experienced in the last couple decades has really qualitatively gone beyond just the expansion of trade. There has been a greater integration of supply chains than ever before. Many products really are not made in any cou