Immediately but it grew on me. And i look back now and i think some of my views involved in recent years to fall back on if i was stillwnhi wouldnt read t. Rose we conclude this evening with david kelly and his brother tom kelly. They have written a new book called creative confidence. Im thinking is that methodology that weve always used as designers. You know, its kind of like, you know, its a process like when a writer has a blank piece of paper and cant figure out how to get started, its our way of Getting Started on that. You know, understanding humans, building prototypes and telling stories about the future. I mean, the designers have this lovely job, inherently positive profession because your always painting a picture of the future with your new idea in it and see if anybody like it. Rose Alan Greenspan, david kelly, tom kelly when we continue. Captioning sponsored by Rose Communications from our studios in new york city, this is charlie rose. Let me start off by just saying, we had a terrible problem forecasting, because when we look out into the future, it is incredibly foggy and i want to try to indicate what it is and why that is the problem. Rose Alan Greenspan is here. He was chairman of the Federal Reserve from 1987 to 2006. He has spent a lifetime studying the complexity of the u. S. And global economy. The financial crises of 2008 took nearly everyone by surprise, leading economists and the brightest minds on wall street were forced to rethink fundmental functions, the map and the territory, risk, human nature and the future of forecasting is a guide to measuring economic vacialsz variables one thought to be immeasurable. Im glad to have Alan Greenspan back at this table. Welcome. How do we decide on the map and the territory. Its a little abstract and thats what its supposed to be. The map is supposed to be the conceptual framework what were doing with and the territory is reality. And economists always try to get the two of them to come together and a good deal of the times we fail. Rose all right. Lets talk about all that. Role clip. This is a clip with you and i n an interview before you wrote this book. Something you can never the quite cal brate is the human emotional aspect of markets. Im glad you raised that issue charlie because im just starting to write a economic. Its call the economytrics of human name. Rose so you do put numbers on. I dont know that yet. I know i can do it in a number of instances but whether i can do it in enough and when i finish the book i will know. Rose what have you learned. Now that you have done all this study, what have you learned about the measurement . Well, what i first started on is an extraordinary event. Its not that all the leading forecasters didnt know we were in a bubble at one point or another. Thats not the issue. Thats very easy to tell. The trick and the very difficult issue for forecasting is how can you pinpoint when the bubble breaks. But more importantly, what are the consequences of that. And this book attempting to attack those two questions was fundmental to how the economy functions. As far as im concerned, theres one critical issue which i think probably more than any other was, that was essential for writing this book. I had to discard the basic premise which all classical economists or those of us who were involved in that form of economics and computerbase models, and have to look at fundamental premise. And i basically assumed as we all did that not only, that fundamental premise is that human beings act in their own long term self interest most of the time. But the general belief of all economists who are forecasting, is while it is not only most of the time but when it isnt, its random. And you can disregard it because it cant be muddled. What shocked me is when i started to try to actually model it and i was getting extraordinarily, extraordinary results. Rose and what were they . Basically, that socalled animal spirits, which is a term rose talking about the john precisely. And they are deep seated aspects of human nature. Predictable ways. For example, you can measure fear. Everybody responds to fear when their values are say life and limb and net worth under stress. But how they react will be different person by person. By major problem that we deal with here is that fear is the most prominent factor in peoples decisionmaking response and which is far greater than euphoria or greed. The way we do that is if you take a look at the Business Cycle and put one on top of the other, they all go up as euphoria builds, greed builds and it gets to the top. And this is the top. And then it goes down very sharply. When fear takes hold, it is a very much stronger individual view or individual input i should say than as euphoria. Then we have a whole series of other inbred propensities, i guess thats what i called them in the book. Which are remarkable stabilities going through time which fix the new way im looking at the economy. I mean, for example. Theres such a thing as time preference which is a fundamental issue in economics, suggesting how People Discount the future. And the most important evidence of that is Interest Rates. We look back to 5th century b. C. And youll see Interest Rates are approximately where they are today. That tells you something about fundamental nature and that type of characteristic. If you look at the savings rates, we have data going back to the 19th century, no trend. For similar reasons. I dont want to go through all the full detail of this, i suggest you read the book. Rose thats a good idea. I do maybe 10 or 15 of these and then i bring it altogether. And i was quite surprised how much i learned in the process. I started off on the basic discussion that was introduced at the beginning of the discussion. Not really hopeful. Rose that you would be successful in finding a model you could project. I thought that i would try and probably succeed only in part or maybe even fail. In my judgment. I would like, you know, i suspect my judgment is slightly biased here, i admit to that. I think i made very significant progress. Rose nobody took more hits after, after the crash than you did. And then people said heres a guy who thought the market would work perfectly, you know. And it didnt. And hes to blame. Yes. Well, first of all ive been around 21 years and remember harry truman said if you cant stand the heat get out of the kitchen. Rose right. I found that opposition very useful. Im acutely aware who im dealing with. I got a late of praise during the 18. 5 years there that i didnt deserve. Rose why do you think that was. Because they gave you too much credit for being the guy who was going to keep inflation under control. It was more than that. Yes. Fundamentally. From the point of view of what was supposed to do, the Federal Reserve. That was it. But mainly people, people would come up to me all the time and say thank you for my 401 k . And i didnt know how to handle that and i said basically well i appreciate that but i had very little to do with your 401 k . Rose they thought you were the steward of the monetary side of american economics. I think so. Yes. Well, its hard to know what everyones thinking. Rose yes, but you read. You get out. I do, i do get out. But its very clear, it made me very uncomfortable. Rose what made you uncomfortable. The fact i was getting praise more than i deserved. Rose you were getting criticism that you didnt deserve questioningly. Not particularly more. Rose its hard for me to believe you felt more badly about the praise you were getting and didnt deserve than you did about the criticism that you felt you did not deserve. Im a human being. If you read my book, youll find one of the things i do in trying to determine whether certain of these inbred propensities are real, i start with myself. And i say how do you respond to certain things. And i say such and such. And then i realize so does everybody else in the same way. I mean for example, i say very early on in the book. I was brought up in canyons of new york and wall street and i really didnt get out into the real world until i got into music. And then later i got into National Economic events. And i realized one day that everyone smiles for the same reason. Pleasure. What pleases them is sphif. But i began to realize that we are a homogeneous species. Theres something about human beings and our nature, which is replicated time and time again. And for example, jane austin writes about culture and early 19th century britain. Its exactly the same. Teenage girls behaving precisely the same way back then as they do now. And ive now seen a number of generations of teenagers, and they have all the same rose fundamental aspects of human nature that dont change. Precisely. And that is what is critically important, because that determines how people act. And we dont want to know how the numbers would look if people were essentially operating on their own long term self interests. Rose let me just go back to Interest Rates very quickly. Do you believe that low Interest Rates did or did not drive, you know, the euphoria that led the Housing Market to collapse because of mortgages that were unable to be paid. As i say in the book, yes, its low Interest Rates but its low long term rates, not short term rates. And indeed as i say in the book, it really goes back to the end of the cold war when the cold, when the berlin wall cam down, the economic ruin behind the iron curtain was way beyond expectations of what most, even panelists in the American Intelligence Agency were saying. And as a result of that is a vast proportion of the socalled third world shifted from fabian socialism and regular types of things all to market economies especially china. And when that created a huge boom in the third world. They couldnt consume it, and theres a huge amount of savings flooded on the market which brought long term Interest Rates down around the world. And its those long term Interest Rates which fell very dramatically at induced housing boom everywhere. United states had a housing boom which was average, but the economist, the magazine used to follow 20 countries. And it looked all the same. And the reason was that when long term Interest Rates go down, the financing capability to invest in longer term assets goes up. And thats what we saw. The argument against easy money policy upon the fed might have been true. But there is no evidence that it was indeed i dont actually go into detail. Rose i want to make sure i understand when the change came and what exactly is the change in terms of your analysis. Youre saying here, i found out that there was something called fear that had a stronger punch than exhill race. Rose and you can measure it. To my surpriseness. Rose how much are you influenced and this always comes up with you in any extended conversation by what you learned from ayn rand and human nature. I think we had this conversation before. Before i first met ayn rand, i was already a libertarian economist. But i was a positivist. It really says if you cannot measure it, it doesnt exist. And that eliminated me from all contact of understanding how human beings behaved thats all irrational and not worth doing. She denied to me that i was wrong. And that didnt have a full effect immediately, but it grew on me and i look back now and i think some of my views that evolved in recent years fall back on if i was still a logical positive, i wouldnt have wrote this book. Rose knowing what you know now and what you express in this book, would it have changed any decisionmaking of the Federal Reserve under your leadership. Its very difficult to say. I suspect not but i cant say thats for sure. Rose would it have caused you to strongly recommend the fed not take a certain direction that it took after you left into the chairmanship of ben bernanke. Well one of the problems i have with questions like that is that paul vocar never commented on rose dont worry about the president or paul vocar. Just tell me whether ben bernanke made mistakes. I was about to say i applaud the same principle to bernanke, and thats as far as i go. Rose what kind of historian are you, and what kind of, we depend on you to bring your experience so we can understand the great issue of our time and you refuse to criticize no, its not necessarily criticism, i may be complimenting him. Rose why is not necessary for us to understand the kind of mistakes from the past. Isnt that what were supposed to do, learn from history. Wait for my next book. Rose come on. So let me just talk about where we are today. When you look at the most recent crises, can you give me your assessment of what happened in terms of the debt ceiling and in terms of using that as a weapon which Warren Buffett calls a weapon of has destruction. I think something very fundamental has happened in recent years. Going back to fundamentals. I discussed this actually in the back as well. Rose right. The people like we have in the United States have to agree on certain fundamental principles. Thats the bill of rights. Thats basically freedom of the press, freedom of speech, assembly, religion. Everyone agrees with that. And we go much beyond that. You have to be willing to compromise on all other positions because you cannot have a functioning society unless people recognize they want to live together because of the fundamentals. After that like weve done for a very long period of time, a degree of comedy in the political system, which weve lost. Thats what i love to use because it was so graphic is jerry ford, president ford used to rare against speaker tip oneill from 9 00 a. M. To 5 00 pm. Even though they served in congress tomorrow. At 6 00 m tip would come over to the west wing and have a scotch or bourbon with his old buddy jerry. Rose my interest is understanding how you might create a different atmosphere that would allow people now charged with finding common ground, to do that. I mean, do they, for example, Warren Buffett suggested maybe what they need to do is not have any, just go off somewhere and have the privacy of not a public discussion. They dont have to go anywhere. The troubles, im not sure that will work. Were going to find out soon enough. Rose exactly, by december 13th. Remember that the crucial issue is what you mentioned before the gerrymandering thats been going on. If youre sitting there with having one previous election, youre in the house, 8020 votes. And you have a very strong set of positions as you have people in your district. If youre interested in staying in the congress, you dont care what the president of the United States says or anybody else for that matter. Rose too big to fail. Does it continue to exist and should it exist. It continues to exist. Its getting worse, and its a danger to the system. The reason it is a danger is basically an issue which is a little complex but i hopefully describe it in there. Its how savings move into investing. The only way that you got a growing standard of living is that the scarce savings of a society are channeled through the Financial System into real Capital Investment which builds up the Capital Stock and thats the base of where our standard of living comes from. We have a limited amount of savings, to the extent that there are firms which are too big to fail. And, theres another qualification here that they are inefficient. They are absorbing the savings that would ordinarily go into High Tech Industries and enhance the standard of living, and i cant go both places so the main problem with too big to fail is that they are absorbing the savings which should be focused on high tech and more advanced type of Capital Investment. Im moving around. What problems do you have with entitlement programs . I have two things wrong with them. First, theres a general view on the part of the populous that the moneys they pay into the Social Security trust funds plus the interest is in fact adequate to fund the benefits they are getting. They believe sincerely that that statement is true because in many of the people in the political realm tell them its true. I mean for example, theres an aarp had a very interesting ad, which they basically said that its been my impression that if people believe they are getting charity, they will not take it. I go through a very interesting thing about what happened with the Social Security commission in 1983. Do you know rose yes. He said he never bought, he only bought right companies. Yes. Anyway. I assume that we were going to solve the problem basically by taking general revenue and sticking it into the trust fund. And he got up and said absolutely not, that would make Social Security welfare. And there is a very strong stream amongst those who essentially were there as he was when Franklin Roosevelt signed the bill in 1935. And that whole view was that this is very similar to private sector defined benefit programs, which they were actually intended to do. The only problem with this is while it is certainly the case that i would say the vast vast majority of people who are getting Social Security for example believe they are getting their own money back. Rose i think thats a perception. And that perception is actuaries of the Social Security trust fund say its fun. Rose whats false the reality or perception. Precisely. Sort of like the map rose so theres also the question of regulation. And does it act as not a perfect bill as tim geithner would tell you, but as creation of rules and regulations that would be a kind of monitor, so that circumstances that lead to bubbles wouldnt happen or in a sense, removing or restoring some of the kinds of oversight that both was a warning, you know, and intervention. As doddfrank is written now, the answer regrettably is no. Doddfrank, for example, t