Separation of powers, the legislative power clause of the constitution giving Congress Power to make laws, the story behind that, why we didnt want a king, and how the system of government was set up, how we stood up and proposed we have a king and the Founding Fathers objected to this idea, soundly rejected it. Too much power in one person or group of people in the drift away from separation of powers is something incompatible not just with the constitution itself but stories behind it. Booktv wants to know what you are reading. Tweet of your answer at booktv or posted on our facebook change, facebook. Com booktv. [inaudible conversations] good evening, everyone. I direct Foreign Policy institute and im delighted to welcome you to this evenings Foreign Policy institute conversation with Michele Wucker, she produced an excellent book, the gray rhino how to recognize and act on the obvious dangers we ignore. It is wonderful to welcome michelle, i am grateful to her for putting the site as a stop on her book tour. I had the pleasure of traveling with michelle, and heard about this book, been anticipating it and it is an exciting read. Asking the question why we ignore crises we can see coming until they literally stampede us, a new paradigm, excited to hear her ideas this evening. This book follows two others, haitians and dominicans, i didnt realize you were the author of that exclusively written book and a marvelous book on immigration asked why we get immigration so wrong even though our prosperity depends on getting it right, she is a prolific writer, had a distinguished career in journalism and also received numerous awards for her leadership including Global Leaders awards are World Economic forum and she has been recognized, as the president of World Policy Institute and other leadership roles. Leading our conversation this evening, doctor jeff leonard is the ceo of the Global Environment fund which is a private equity fund that invests in growth companies, Renewable Energy and environmental cleanup as well as energy efficiency, he is chairman of a number of boards including the board of the washington monthly, he served on the board of new america and he is himself a prolific writer who has produced 5 books including the struggle for the world products, we are grateful to have him lead the conversation this evening and hope all of you will stay and at the end of their discussion and q and a we have a raffle and raffle off some books the publisher was kind enough to make available, she will sign books and hope you will enjoy the reception and discuss the ideas we are going to talk about this evening, so welcome. Thank you, everyone, for coming. It is great for me as a washington person to be here. A number of people, especially people who have done finance programs here because the worldliness and precision is what we really need to have a big policy picture and the ability to deal with serious financial skills. I was very fortunate because i have been able to as an idol friend of michelles we get together periodically in the mail often about ideas so i have been able to be present since the early parts of the gestation of this book and it is very exciting. It is an extraordinarily wellwritten book. I dont usually say that about policy books or books like this. It is very well written. It unfolds in so many profound layers and we only scratch the surface of the gray rhino how to recognize and act on the obvious dangers we ignore in our conversation. We keep it to foreignpolicy but the book itself, the richest parts of the book are on corporate behavior and domestic policy and individual behavior in political settings and so on. It will be fun, we will elicit ideas how to apply this in foreignpolicy. The concept i will let michelle do fine for you and tell us how she found her way to it. I want to say 30 something years ago as a graduate student i was traveling in what was then yugoslavia and kept a journal, i was studying Political Economic systems and wanted to understand socialist economics and what was going on in socialist system so travel all over yugoslavia, i kept a journal, i rose prolifically about it, articles and so on but one thing stands out in that journal, everybody i talked to hates everyone else. I said this country is going to blow skyhigh when tito dies. Anybody who was present there could see, could feel this was a country held together by the force of one man but 1980, he died, we had bosnia, all these horrors and terrible situations but that gray rhino was so apparent yet nobody talked about it. To me that is the opinion me of what michelle is going to talk about today so i want to start with you telling us about the gray rhino and tell us how you found it. He is quite an accomplished writer himself so thank you for that. It has a big horn, really dangerous, think of the elephant in the room, the big obvious thing nobody wants to talk about and we take for granted nobody is going to do anything about but is standing still, you get the elephant in the room together with the black swan, a book that came out 10 years ago, the we needed to pay more attention to highly improbable, unpredictable high impact events that as an individual it is hard to predict but as a group, much more than we think, get the elephant in the room together with the black swan and the love child is the gray rhino, something that is highly probable, predictable, within reason, you might not know every detail but it is going to happen, it is a matter of when, not if, unless somebody some does Something Big and dramatic to deal with it but it is not getting the attention it needs. Might not mean that it is completely ignored but it is certainly not being dealt with properly, not resolved. The way i came to the rhino was looking at sovereign debt crises. I was a financial journalist writing about emerging market, fascinated by argentina and many of you remember in 2001, a pretty dramatic falling apart, 9 months before that a proposal went around wall street, very smart bankers and academics saw the direction things are going, there was no way argentina could pay its debt if they kept going the same direction so heres a proposal, lets write down 30 of this debt and that is what it will take to turn the situation around. Argentina wanted to save face, banks were doing crazy restructurings that were very expensive and not solving the problem. 9 months later argentina collapsed and the banks lost 70 of face value, the idea of 30 versus 70 with a clear example of a stitch in time saves 9. Fast forward 10 years to 2011, Michele Wucker is having the same dynamic happenings and in this case threatens the European Union. I wrote a paper about that for the new America Foundation saying Michele Wucker can learn from argentina and if you dont the consequences will be bad and it went down to the last minute and they were halfway off the cliff and people got together and pulled them off the edge. They came to an agreement that was not perfect and not everything was solved but it helped keep Michele Wucker from defaulting and helped the European Union from falling apart. I started asking myself what is the difference between Michele Wucker and argentina, people who see this big scary thing coming at the man do something, and the ones who dont . You say it is not about weak signals. In both those cases the signals were there. It is about weak action to the signals and that is one way to distinguish a gray rhino from a black swan. There is one paragraph, after you defined it, where you say the biggest intractable challenges we face in the world today are gray rhinos, Climate Change, unsustainable debt levels, anemic rates, labor market dynamics, youth unemployment, on and on, we know of course a theory that explains everything cant explain anything. I want you to help since this is early in the book, the rest of the book describes why it doesnt explain everything but take us through the broad stages of recognizing and dealing with a gray rhino crisis and also help me because theres a great point where you say behind every black swan is a crash of gray rhinos. I read the part of the book that set a rhino group is called a crash. So why is a crash of gray rhinos behind every black swan and how do you recognize a black swan, distinguish it and cope with it . When you see a lot of obvious things coming together, when they meet you might not predict exactly how they meet or what the consequences are, but it is a combination of predictable things, the 2008 financial crisis is a classic example of that. The subprime crisis, questionable use of derivatives, loose supervision of banks, reckless behavior and a lot of warnings, a few months before everything went down, christine the guard said we are facing a financial tsunami. If you do a nexus search of news stories at the time and references to prime mortgages, credit default swaps, it is pretty clear we saw it coming despite what so many people said in hindsight. The black swan had come out and everyone was talking black swan, financial crisis, this is a black swan, nobody saw it coming even though everybody did. They misused the concept a little bit because it is improbable and unpredictable so the minute you actually see it coming, imagine it happening it is not a black swan anymore but on the flipside using perfectly opposite logic you had people after something happened who said that was a black swan, perfectly unpredictable, unforeseeable, 2008 really was a crash of gray rhinos, people who saw lots of elements of that happening didnt quite have a sense of how extensive the damage would be but a lot of people knew it wasnt going to be good. I was living in new york city at the time and had an apartment i bought a few years earlier and it almost doubled in value, a very small example but i sold my apartment and some other people may too much bigger bets that things were not going to go the direction they were. It is as if people in the beginning stage, you talk about denial and a modeling phase, sometimes people dont want to admit it, or how institutions systematically fail or dont allow people to call these things to their attention and one example is so striking about 2008, the chairman of the board of emerging markets, my board was filled with the smartest investor people on the planet and we had off the record dinner, washington dc, with the chief economist of Standard Poors in 2007 and some of the people on the board behind closed doors were going what is in this . They poll a read him the whole night and the guy said honestly we dont know. We are as worried as you are. All these comments, these institutions were praying it would go away. We are praying it is going to turn the other way and not come our way but sooner or later you have to reach the stage that you respond and deal with it. How did that unfold the we tried to deal with it . The s p example is a good one. A lot of people didnt know what was going on. There were a lot of journalists who wrote about things. This denial is interesting, it is the first stage. The first thing i did is find a copy of Elizabeth Cooper russells book on death and dying. Everybody knows the 5 stages of grief. She said it should be a temporary phase, it is protective, gives you enough of a cushion that you start absorbing what happens, you absorb it all at once it is too much of people will break down. That was interesting to me. Some of the psychological mechanisms humans have for dealing with problems are that denial but we also set up decisionmaking systems and there are some unconscious things we do, i spent a lot of time looking at denial and the biases we have the get in the way. One of the biggest ones has to do with decisionmaking structures we set up, groupthink. When you get a lot of people who are similar, have similar perspectives, whatever measure of similarity you want to use, when one person says something it is much more likely you will see all the heads not all the way around the table and it becomes difficult to Say Something that is not what people want to hear. That is certainly something that happens in markets. We are very tempted to think the party will keep going on and no one will take the punch bowl away but it is inevitable. Looking at financial crises, people who made this proposal on argentina in 2001 were fans of his, anyone who had ever read this had to have recognized that. We released his classic book recently, the first stage is denial. There are other reasons, people take advantage of this human tendency towards denial, things we dont want to hear, see no evil, hear no evil, speak no evil monkeys, the ostrich with the head in the sand, this wonderful menagerie hanging out with gray rhinos and black swans but once you go, realize people are susceptible to it you can manipulate that, look at the tobacco companies, the testimonies coming out about the Oil Companies that new very well what was going to happen and concealed that. There is a certain manufactured denial we can take advantage of or be aware of and question actively why are we denying it. And wishful thinking. It is better for me to fess up. Very much. Our culture is like that. Look at income equality and the people who look up at certain candidates, millionaires, billionaires and wealthy businesspeople, debates over taxes, debates over trying to address the problem of income any quality which is affecting growth which is helping create a poisonous Political Climate we havent a lot of people dont want to make the hard decisions, even people who benefit from them, i could have a big shiny building with my name on it. Use sites one of my old professors when you say the crisis takes longer in coming than you think and happens faster than you think and this is a challenge in markets and financial markets. I could never be Hedge Fund Manager because there are so many times i am right, it takes three years to be right. We went to investors in private equity and we said we think the stock market is completely and totally overvalued, two years or three years later they were saying the publicprivate markets by 280 basis points every year and we were sure but it was too early. How do you deal with that . You arrive and see this crisis so early but others dont or are not ready to act or institutions are not ready to hear you like we have heard so many stories from 2008. It is very common and it is a matter of when but exactly when that is a little niggling devil on your shoulder. You need to understand the later phases of a gray rhino, start with denial. I was so inspired by the book, maybe i could have 5 stages too and it worked out well that way. The second stage is muddling, like everyone is saying this is a problem but they come up with all sorts of reasons not to do anything about it. The stage after that i call diagnosing but you can think of it as blaming or bargaining, what do you do . Making sure you have the right solutions. The fourth stage is panic. A time when the rhino is on top of you and it is a doubleedged sword. On the one hand you are more likely to make bad decisions, we see that often in financial crises and economic crises, no one wants to cut the budget, no one wants to be responsible and it is on the way down they want to cut the budget and create the Snowball Effect and it gets worse and worse. The final stage is action. When you do something action happens in such a way that a group of people start acting and you create a ripple effect. How do you get these leaders and influencers that it is in their interests to do something, to make the hard decisions. That is a great transition, the biggest Inconvenient Truth of all, the biggest elephant in the room is Climate Change. I say that because 20 years or more into the diagnosis and so on i remember taking a course at harvard in the 1970s, talking about Climate Change and the greenhouse effect and so on, here we are, this year we have this on your mental set of agreements so how do you see where we are with Climate Change and where we are going in coming years in the theme of your framework . Climate change is an example of all 5 stages, the number of people in denial is shrinking after many years of very hard work by many people, you hear muddling, what do we do, what dont we do, some of the diagnosing questions become wild, we will see the clouds, technology will solve everything, some technologies can. There is one in the book that blue me away, the conversation i moderated a couple years ago where the company that created something to literally create plastic out of the air. If you like technology, it is Carbon Capture technology on top of the smokestacks, how i imagine it though this is not exactly what happened and they shoot some enzymes at it, they use it in a lot of smart phones, something that takes the carbon out and turns it into something good and saves whatever carbon might be produced otherwise. Look at the renewable technologies, lots of interesting things going on. When i was in emirates last october they were doing interesting things with clean energy and you see a lot of them across the middle east, a couple weeks ago morocco and solar power, there are things that can be done but at the same time you have huge subsidies of the fossil fuel industry, you are seeing the extent of the efforts they made to perpetuate denial and not seeing enough of a sense of the risks Climate Change is posing to those companies though the changes we have seen in oil prices over the last year are in some part due to the changing technologies, lots of factors in that as well but you are seeing action, some of the dramatic numbers and facts over the last few years, the crazy reseeding of arctic ice, look at those maps and it reminds me of the painting, the highest temperatures on record, violent storms and every time they happen you get predictions of the rising sea levels, it is getting harder to ignore and the more people are affected personally by at