Transcripts For CSPAN3 History Of Investment 20160319

President of the nations only finance museum with a mission to preserve and teach about our financial his trade. We are a smithsonian affiliate. Now our friends at the Coffee Business school have done it again. This time it is a book on investing. It is the history, written by Norton Reamer and Jesse Downing. Covers thousands of years. All the way through to Warren Buffett in the legends of today. Along the way will meet any of individuals, many products, themes from investing. Market learn about manipulation, Insider Trading, and fraud. This book is very well researched with a very comprehensive emily auger fame, so much so that it was just talking to norton a little while ago and he tells me they have 10 , so it will this is work. Norton has had a story career. He was a former ceo and chief Investment Officer of investment putnam investments. And he left to manage a holding withny for over 20 years, 200 billion in assets under management before it was sold. He is still active with a Consulting Firm called unicorn. ,is coauthor is Jesse Downing and an investment manager profesional. The book will be on sale after, so i encourage all of you to buy it, if you like what you hear, and the others would happy authors would be happy to autograph it for you. Speculation is as old as the hills. Today we will learn is investment is has ultimately kills as well. His old as the hills as well. Now i will turn it over to them. [applause] we are honored to be here in the center of finance and wall street. I must admit, i was not knowledgeable about the museum of American Finance until richard offered to be an endorser of our book. He is very active in this, something you very much for having this. I am probably the oldest author you ever heard, at 80 years old, and jesse may be the youngest at 25 years old. The book was put together by this group david mentioned of 10 Different Research associates. Most of them are harvard undergraduate economics majors, and it benefited from a lot more wisdom than the original author ever had in his possession. Let us talk about this now in an organized way. The Research Project that led to this book, investment, a history, began in 2010. Me interrupt already with an anecdote. We had trouble convincing the publisher of columbia Business School publishing to add a history, because i suspect he thought people would be more interested in investment than in history. But an amazing fact for all of the hundreds of thousands of books that have been written on investment over the years. Nobody, i mean nobody, has written a longterm history. We were astonished. And jesse admitted to me before became a research associate, he became a research on the because he did not think it was true. But weve bee verified it. On the point on, this book stands uniquely. I sold my last company to chris wiese in 2008 credit squeeze in 2008, with no wisdom on my part. The transaction occurred in august of 2008, 20 days before lehman brothers. [laughter] not because i figure that out, and not because credits we figure that out and out. [laughter] in 2010 i had a further to your commitment, and i discovered it was not taking all of my time. I came upon this idea of researching the history of investment. A book was not uppermost in my mind at the time. Learning more about a field to devoted over 50 years of my life was very much in my time, and in my mind. I began the project and i began by visiting with a harvard Business School professor by the name of david moss, who said to me, you need research associates, and boy was he right to the fact of the matter is i have never done research in any way before. I started with the Harvard Economics Department and i submitted to the secretary a request for a research associate, and they advised me to pay the going rate. Zero responses. Iti called her back and said you tell me what is the going rate . Shes attended 15 an hour. I said how about 20 an hour . It worked like a charm. [laughter] event, jesse was the second of these research associates, and hes the project and stuck with it so effectively that about three years later i asked him if he would become my coauthor, as they goodness he did as my friends and i have debated it over the more we cannot figure out if he is five times smarter than i am, or 10 times smarter than ibm. [laughter] friend said 100 times, but i dont that. Early on in the research we had a revelation. Literally there was nothing like a longterm history available. To relieve your minds of potential readers, this may be a misuse of a warrant, but the book is written logarithmically. 16 first chapter covers pages or so and about 3000 years. It gets more micro as he gets 20 president , which is more useful. Event, we came to feel understanding the history of the field is incredibly important in being able to protect future being an investor who wanted to thathat was going before, would be incredibly valuable in understanding what it is like in the future. In addition, significant changes have occurred over the millennia , that investing is been underway. There has been widening of Investment Opportunity over time that is remarkable. If this is a 4000 year history, the common man, and i do not just the common man, but Business People like ourselves, simply could not invest until the last 400 years. The time that investment as we define it has a list did it is not only been available to. Powerful elite let me talk about the highlights of what were going to try to cover. Number one, the overarching team of this book, and this may astonish you, is the democratization of investment. Democratization and equality are not the same. Were not saying all investors are equal. We are saying is now available to somebody, billion, and billions of people in the developed world, and we would not have had anything like that until 400 years ago or so. The second point we emphasize is the concept of retirement, unfunded retirement. Thes amazing to consider fact that funded retirement is no more than 150 years old at the outside. When roman soldiers were ready to retire, they decided they did not want them around rome so they gave them stipends and land far distant from rome. New,eal retirement is brandnew. It is an installer shooting to think about. And astonishing thing to talk about. The next thing is the roads in the fields. Kicking and tracked screaming into this subject because i do not think it was dominant in what has affected investment, but it is interesting. Section, we goor from ernie, to meet off, and ponzi. Jesse will talk about that in a few minutes, and very interesting area. And the fourth thing that we is the increase in sophistication. One thing is because of the investment area. That was not really born until about 1900. The second area, and was made a controversial to some of you, we think we have gotten a lot better, as a national economy, and managing Economic Policy for the benefit of investors. Grandson, we put an establishment in the book, about how everything was done wrong, and the time of the Great Recession, we may have been inadvertent, but almost everything was done right and then the outcome was very different. Lets talk a gunman about investment and why it is important. The commitment of resources in the hope of earning a return in the form of income gain or both. Remarkablyis pervasive and it is not just pervasive and economics. It is pervasive in culture, is pervasive in all kinds of institutions, and in the development of society. Without risking capital effort andaverage treasure, it is difficult to advance any type of program. The role of leaders, executives and so on is to make decisions that advance the students. The head of a museum is making investment decisions. Civilization and society depend on investment to improve. We have claimed that this is a basic element in society, not just a basic element in economics. Democratization for a moment now. If you study the history of realizent, you begin to that at the same time, especially during the 17th and 18th centuries, the political life was democratizing, including the American Revolution for example, investment life was also being democratized. Was leading to certain important developments that were crucial in that stage of things. , the corporate form was essential, even during this timeframe. You all heard of these joint Stock Companies that were the First Corporate form to exist. It had its limitations compared to modern corporations, but it was an important step forward. The second vital step forward with the Industrial Revolution, because for the first time it created sources of capital for every man, every woman in that sense. And before that time all the capital was in the hands of the nobility or the church or the military. Joint Stock Companies begin in about the 16th century. There was a Company Called the Muskogee Company which treated with the russian empire. Createdon company was which was changed to the Virginia Company thereafter because most of its effort were in the new world they do not produce a plot that they made an thert at it and some of early joint Stock Companies do not have all of the characteristics that we take for granted today. One of those was limited liability. Think about it for a moment how important the fact that the corporation has limited liability. Of this,he early age you were on the hook. That made for great suspicion between investors. They cannot want to do business without a lot of resources, because when it came around to pass the hat for losses, one person was going to be empty and the other people would be left with responsibility. Time, the joint Stock Company became more sophisticated, one of the first examples of the higher level of sophistication that you have heard of it is with the east India Company because it was one of the first times that management and ownership were separated. Not everybody, and if you buy stock today you know do not expect to run the Company Expects to invest in expect some videos to have responsibility and will run the company. The skeptics about the separation of ownership and management were impressive. Denounced joint Stock Companies and denounced the east india thatttee because he argued fiduciaries cannot be fully dutiful and completely concerned about the welfare of shareholders because the capital was not their own. We still have this problem today but we have gone to great efforts to improve situations. From oury, we believe, research, that he was much influenced by something you have all heard of, the south sea bubble, which was a case where that was of companies not in the interest of shareholders, eventually shareholders suffer the consequences and so did the promoter. Equity toant managers, to do stock options, we do performance fees in case of funds and reservations on that as well. We encourage managers to be invested in the business. An improvement, not all the problems have been solved. Now we talk about the Industrial Revolution. It was of course, a transformation that we all know about. Ran,gan in the 1760s and the First Industrial revolution. Basically until world war i. The first one involved textiles and iron production and things of that sort. The second one was much more sophisticated, and involves technological advance. Revolution has a bad rap in certain ways and earned it. Condition ing ratchet working conditions, urban squalor, working strife, but they all reflected the trajectory of the nonelites. For the first time, common people, business owners, factory workers, inventors, entrepreneurs were able to create and share in the economic surplus. They did not have access to surplus before. Revelation. Prior to industrialization, most of humankind, and this is for thinking about for a minute, lived their lives without the assumption that their standard of living would or could improve over time. I think, this is not her directly in our book, but i think you can look at 1000 years for the Industrial Revolution were the standard of living basically did not rise. It is interesting to me, and probably to you, there is some question being raised about that right now, about off we are done with that if we are done with that. My only thought is that is not right. We will continue to advance the standard of living, perhaps at a slower pace than we got used to for a while. Generational growth, we think, is still part of the outlook. The emergence of Public Markets was the third element. Companies, corporate form, Industrial Revolution, the emergence of Public Markets. That is incredibly important because for the first time, people became empowered savers, savers with their own money who could invest in some way, and they met investment opportunities. Creatinge effect of brokers or securities. Market,prices, that the and to lubricate the exchange of shares. It also created the opportunity to diversify. Think about how difficult it was to diversify your ownership of king before they were Public Markets. Investments, it was virtually an impossibility. Even for the very wealthy and very powerful, until Public Markets were created. But even with all of these advancements and improvements democratization of investment is far from complete. Just as there are countless constituencies in the world that remain marginalized, so also are there large numbers of people excluded from participating in the enterprise of investment. Ourselves intoe thinking that the work of democratization is done. It is not, hit has a long way to go. Now let me talk for a moment, before i pass to our key speaker , about retirement. I want you to think about retirement. Funded retirement, as i onlyated a moment ago is emerged 150 years ago. Most of history people did not expect to retire. You died at your workbench or in the field. When you could not work, you relied on your family to see through, not some funds you had created. There were no Financial Resources dedicated to providing security in the final years of life. Her were a few early steps. In english created for laws 1861. Or laws in 1861. There were always houses created in the united date. The presbyterian ministers created insurance and retirement in theor themselves 1700s. Saving societies began in the 1800s. But it was not until the rise of employment in urban areas, more employment inor the early 1900s that private Pension Funds began in earnest. Mostly funded by corporations , most funds that we know about survive depression. 1930s Social Security was created. It survived by a onevote margin in the Supreme Court in 1937, the same way that obamacare survived more recently. It is amazing to think about that. Starting in the 1970s, defined Contribution Plans in the form of 401ks at 403 bs grew rapidly. 403 bs grewd rapidly. It is probably a call crawl amount in other developed countries around the world. They are the singles largest impact of the democratization of investment. Phenomenal growth has raised questions because gradually over the last several decades, responsibility for funding your retirement has moved from corporate shoulders and government shoulders to our shoulders and that is raising some doubt about the efficacy of retirement funding despite the second number i just cited in the future. It is something to be thinking about and worrying about as well. Despite the vast sums devoted to requirement retirement there uncertainty about the adequacy of these funds in the future. Now let me step aside and have jesse come talk to you. [applause] thank you. Ng i was just saying the other day up, if three people showed i would be thrilled. Im very happy to see all of you today. I have a history of regulatory reform, and that sounds like a cure for a case of stubborn insomnia. So instead i will title it the history of malevolence in the Investment Business. As a wick worthwhile preliminary, the vast majority of these Investment Businesses today is highly ethical. It is only a few small bad apples the capture all the headlines. But it is worth looking at all those stories and learning something from it. Athave gotten better regulating pernicious behavior because democratization of had ament has also gradual leveling of the Playing Field between the affluent on those in need on the other. Is always with us. Many of the perpetrators have become household names. , party mader, mad off, on and on. Their brand of malfeasance is always around and always criminal. Only behaviors are not ones that are perfectly legal, but regarded as the prerogative of the wealthy. If you have y would you not manipulate the market . If you have information why would you not enrich yourself by trading on the . At . Today, fortunately these are illegal activities and this demonstrates the point remarkably. There was a war raged over the gary railway. And will stars one drew, a cattle driver, a steamboat business operator and whose little formal education belied his remarkable cunning. Biding his time for when the erie railway was in deep distress, he eventually forced his way on the board. Made his position personal profit center. He took a short position in the shares of the company, and then started a rumor that one of the Construction Projects was in trouble. The project might have to be abandoned. None of this was true, but the stock price dropped and he profited handsomely. Actionsone of many such that he took us company director. He might have continued into phill indefinitely is not for cornelius vanderbilt. He was highly adept at operating railways and set his sights on the area railway. He eventually united enough shares to exercise the control he wanted. When you realized what happened, you assumed he would get the boot from vanderbilt. He no longer has the necessary information he needed to manipulate the Companies Stock prophet himself. Vanderbilt and persuaded him to grant to more seats to his close compatriots. Came up with a clever scheme to retake control of the company. Figured by issuing bonds converted into stock, they might get an edge. They drove a long list of railroad projects that needed new capital and issued millions of dollars of worth of convertible bonds which caused many of them to be exchanged for stock. Vanderbilt, not knowing this was going on, had alerted his progress to continue to add to his position and buy off the erie shares as they became available. So they did just that, they snatch them up. These maneuvers reduce and control of the company. Eventually saw through the skin, and released that realized through was behind it. The three escaped to new jersey. William bostn weed, the head of tammany hall, known for its willingness to deal with bribes. Drew and company enticed him to help legalize their scheme. Money was handed out on both sides. Some legislators received money from vanderbilt, others from drew. In the end, drew settled with vanderbilt. Gould was arrested. Unrelated, cisco is murdered by a rival for his affections with his mistress. The war revealed a need for an effective body of regulation with regards to market manipulation. Today, the regulatory and legal enforcement bodies have matured since that time where now disclosure laws prohibit schemes of this audacity from occurring. Market manipulation, once a privilege of the elite, and a common practice in the 19th century, is now a criminal offense. Incredibly, the wild west which was the market was also true regarding Insider Trading, even so, quite recently. Astonishingly, it was not until the 1960s that trading on inside information was rendered illegal. It was president kennedys appointment of William Kerry and i can succeed one of as chairman of the sec that would alter the trajectory of Insider Trading. s 10 year there was a long string tenure there was a long string of transactions. 1868 there was a court ruling in new york that stated the directors of publicly traded companies did not have to make the rest of the market a quote aware of nonpublic information required before acquiring or disposing of shares to their personal accounts. The same idea was reiterated in massachusetts in 1933 in a court odysseyled goodwin the versus busy. The companys directors purchased stock in the open market. After they had the opinion the land they owned might actually own it can significant amount of copper. The court ruled the directors were not required to make this known to shareholders before trading. See large case, you allowed to exist between investors and managers of the public, to companies. People with the information as well as others they tipped off could profit. William carey arrived to break up the party. William carey had impeccable academic credentials. He was a yell undergraduate and law student. Ale undergraduate and law student. He went on to become a professor at columbia law school. As chair of the fcc, he was not afraid to ruffle feathers. To the chagrin of many, he declared, Public Institutions still seem to have certain characteristics of a private club. He wanted reform, and quickly. 1961, time come in security laws were enforced by the states, most of which did a rather poor job. It was a patchwork of different laws across state. Those laws were interpreted differently. A solution of a federal level seems necessary. Congress however was not interested. Differentrey took a attack, he decided to find a different way to change the interpretation of a rule called fcc rule 10 b five. It was created in 1942 to prevent fraud in the purchase and sale of securities. Obvious the fcc commissioners and the role should be instituted. And he passed him a one of the commissioners said, we are all against fraud come army fraud, arent we . It was obvious, this rule was never to be applied to Insider Trading. Commissioners of the time in 1942, certainly never imagined that 20 years later this rule would be invoked by the successors to try to prosecute Insider Trading. William carey realized he had to do something. He made a vigorous and compelling case that rule should be applied beyond the most flag rent, cut and dried cases of security fraud. He was undeterred, he saw his chance to do so in what became the famous and regards to Kathy Roberts and company case. Involved a publicly traded Company Called the curtisswright corporation. In 1961, the board of directors voted to cut the dividend for the quarter. One of the directors was a and companyoberts which provided Brokerage Services and managed money on behalf of the client. Public, hevote was passed along a key piece of information to a partner. The man realized the dividend would cause the stock to drop. He sold many of his clients shares of their behalf. Helm,c would carry at the maintain his action was an infraction against sec rule can be five. 10 b five. The roberts decision introduced two critical changes in the treatment of Insider Trading. The first was the passing on of information to others to trade illegal. It was not going to be forgiven by the fcc. The second change was that trading based on inside information was not permissible for transactions on exchange. It was previously assumed those of facetoface transactions were exempted from that rule it the fcc rendered invalid. Corporate insiders who had information cannot transact so long as the information was material and nonpublic. William carey laid the cornerstone. Wright of the curtiss decision, it did not take the fact that it was commonlaw precedents until a couple of years later in the 1960s when the Supreme Court finally cemented his interpretation in what was called the texas case. Was it Insider Trading it became genuinely illegal in the wild, wild west. The market was finally being tamed. Second thing i want to talk about lesbian history of investment science. We all know about thompson, curie in physics, who are the equivalents in the Investment Business . To answer that we have to ask ourselves, what is investment. Investment the array discovering investment theory describing . Oft is the appropriate price an asset, and what can cause the asset to change price. Humanity has understood some of the basic ideas about investment. Eory for time thoer some time. Ecclesiastes it says ship your grain across the sea. After many days you may receive a return. You do not know what disaster that may came come upon the land. Shakespeare also considers the issue diversification. Merchant of venice, in the first scene, antonio declares, i think my fortune for it. Ranked my fortune for it. My fortune for it. My merchandise makes me not sad. Has come prevention of these principles for some time but lacks in the theoretical and quantitative framework for understanding. Man calledn with a the father of mathematical finance. He presented his ideas in a paper called a theory of speculation and 9900 in 1900. He provided models of randomness that einstein would use later. Theoryd to arrive at a of derivative pricing. They would take a subsequent economist, a man named paul santos and to revive and recognize the insight. It was one of the first major steps of crafting a theory around asset prices. A prolific american economists came up with an idea similar to todays. He advocated looking at the rate of return over cost. And looking up the profile of a cash flow for an investment overtime. This goes back to the present. The present value is a simple idea today as we know. It was powerful and versatile to the framework. In the 1930s, John Williams applied similar ideas to stocks. He said to look at dividend through time and discount them back to the present. Arey we know that dividends a poor proxy for what you care about, the Free Cash Flow that a firm generates. Insight was to involve logic to the Public Markets. Just as the. Of asset pricing began to develop, he gained a better understanding of risk. That is to say, what does it actually mean to be diversified . How do i know a collection of assets are actually diversified and diversified against what . We learn from theorists like William Sharp in what became the famous Capital Asset pricing model to distinguish between what we call systematic risk, the risk that comes to your portfolio from macroeconomic shocks, and idiosyncratic risk. Diversified portfolios are one composed of lots of little bit bets that have nothing to do with one another. If your bets are cornered with a macroeconomy, you have a lot of risk. Lead up tohts todays Investment Strategies that look for ways to diversify risks. And get you beta or broad market exposure. How markets are in affected by our Cognitive Biases is a field called behavioral economics. How are we affected . What are the consequences of the fact that humans react more strongly to losses than gains . Humanity is destined to live in a certain problem hayes, but is less dense than the time of sugar. Shakespeare. Through news frameworks for understanding how to manage the economy. In the book we spent a lot a lot of time comparing the advocacy of Government Intervention in the wake of the Great Depression and also in the Great Recession of the late 2000. 1930s s and early policy officials, especially those in the Hoover Administration had a liquidation world you. A view. They said it was essential to ringing out a sense accents access. At the time people of course failed to understand deficit spending like we do today. There was the believe the government should behave in a similar manner as normal and visit individuals and families to. At a time of distress, you cut spending. We know today, the opposite is true. That point ofy at distress, the government should come in and be a source of native and. New demand. This is not just hoover, as history likes to believe. Frank when roosevelt, in his first election actually had a set of economic beliefs similar to those of uber uber, with respect to cutting the budget. Mainstreams were not and well expect well accepted. We were subject to the Gold Standard. For some reason there seems to be perennial interest in reviving that among a small clinical constituency. The Gold Standard with a truly corrosive regime. It forced nations to behave in ways that were selfdestructive. Under the Gold Standard, the flight, theyapital had to raise standards to encourage investors looking for higher returns. The raising of rate for that time rates at that time had an immediate impact. It is hard to truly convey how much better equipped we are for crisis than in the 1930s. The intellectual tools have developed and evolved over time. Work ofthrough the these men. Combined with the dismantling of the Gold Standard and the development of theories about money supply and model money multipliers, fraction reserve systems and rate changes. The economy is the context in which any investment fails or thrives. And our ability to moderate and our ability to moderate in what otherwise could become a longduration contraction is in a norms victory for both capital an enormous victory for both capital and labor. I would like to turn it over to norton with final thoughts. [applause] Norton Reamer we are running long, but what we have to cover is important. Things to the current day. That is what the last few chapters focus on. Creativity is central to the investment process. Picking an unusual stock, doing a deal, whatever. Eventually the idea of creativity reached the Investment Management business itself. People began to develop entrepreneurial, independent, new ways of thinking about managing investments. The first element in this is what we call the independent movement. It began in 1970s when firms, for the first time, this was employmenthe retirement act of 1974. It began to break away into independent firms of their own. In the beginning, and prior to that, they had worked for large institutions. In the beginning of his mostly bond managers, stock managers, sometimes both, but that was it. Little by little innovation began to creep in to the factors at work. Not only in the form of the types of investments that people undertook, but innovation in a form of the way they were compensated. For the first time, not only were Investment Managers compensated as a percentage of assets under management, which we were used to. They began to be compensated as a percentage of the profits earned. Both if a client did well, the investment manager did well. Assets underime, management were growing. What was born at this time was something we have come to call alternative investments. These are hedge funds, private real estate funds, all kinds of new investments which have not been undertaken before on a widespread basis. Time, assets under management began to grow enormously. As recently as 1980, when i said started my, own company, 50 billion under management was considered in or miss. Today the largest money manager in new york manages almost five chilean dollars. 5 trillion. To 2016, the largest managers have gone from about 50 billion to 5 trillion, 100 times. This has dramatic impact. Some of you may know the name of the first Hedge Fund Manager in the 1940s, the Alfred Winslow jones. We talk about him. When jones developed concepts of two and 20, 2 of assets, and 20 of profits, it was good compensation, but reasonable. But now that hedge funds for example can be as large as 150 billion and you have some good years, and bad years, upside for a Hedge Fund Manager compensation sometimes gets the highestpaid individual we have a chart in the book. Jesse and i disagree. We thought it was not very diplomatic. The highestpaid Hedge Fund Manager in 2015 made 3. 5 billion. The lowest paid of the top 20 Hedge Fund Managers in 2013 made three and 20 million. Three under 20 land dollars. The punchline is less than half of those managers did well that clear year, compared to the s p 500. This book is not meant to be a criticism. It is meant to lay out the facts. As alternativee, investments in a prosperity that they have engendered for the Investment Management community have grown, the dow has begun to creep in. You are familiar with the contention of a of efficient markets. Etfsve had index funds and. Time when very compensation is burgeoning in one element of the field, doubt ineping and about about how effective is active management really. How much do we have to think about this . You know the these as of efficient markets is that low fees and market managed market matching strategies actually produce competitive, maybe even superior returns. This is an issue that we have to consider as the new elite, that is the way we refer to them any book, have been born. Many of these managers earn more than was ever earned by the most successful tech entrepreneurs. Most of the top ones are earning ceos ofn the major major corporations in the world. I think we have a statistic in the book that 25 of the midteens were the from the financial industry. That employees way below 1 of all the people employed. The world has changed in a dramatic way. At the same time other factors have developed. Brain drain from other industries into these forms of money management. In some ways it is ok, other ways, not so ok. We also have other things to think about. For example, we need to think about how investment can work in the direction of advancing public policy. We have a section and there, there have been as you are well aware, the government has put its weight for a list of 100 years behind housing finance. Inre have been disasters 2006, 2007, 2000 8 but the fact is, it made owning a home, which is considered to be a desirable social development, a much more feasible for many more millions of people than ever was before. We need to do more things in that direction. There were some questions we have to think about. How can you assure appropriate alignment between your investment manager in yourself . That your goals are the same. How can you benchmark the Investment Performance you are experiencing against proper indices . Going up a lot in the given year does not mean you had good performance. You mightve had a lot of what we all know is beta. Do you understand the drawbacks and benefits of accepting varying degrees of liquidity or illiquidity in your investment . Sometimes it is worthwhile, sometimes it is not. Are you clear about how active management can truly improve riskadjusted returns in comparison to the many instances because of efficient markets, index approaches may be better. We have no doubt that the democratization of investment can increase the availability and fairness of Investment Opportunity for all. However, most of us have not yet fully accepted that this greater availability is not only a privilege, it is a responsibility that we must accept and take seriously. Only by understanding investment more thoroughly, and mustering the courage to address the questions we pose, can we fill our duty to create the best, most comfortable, and most secure economic lives for ourselves and our families. Thank you for being so patient. [applause] fire away. The scope of your research, but Norton Reamer we will take it. I think it is 19 trillion and , projection is that in 10 or 15 years, it will grow more rapidly. Is there any impact on investment results that you see historically between public debt and investment result . Norton reamer i have told you that jesse is wiser. Let me take the first shot. Public debt is not in irrefutably that. Bad. There is an attitude that have a large amount of public debt is a bad thing. Our belief is that public debt cancer important, can serve important purposes. If it gets out of line, a can create other problems. Theg debt to stimulate economy at times when it needs stimulation can be a favorable thing in terms of the wellbeing of wage earners and consumers. Attituden objective about public debt. We do not Just Announced growing public debt in itself. It probably has helped investment because it has helped the economy at certain times. It has to be managed carefully. The only thing i would add, there are different issues people take with public debt. One classic concern is does public debt crowd out private market. Today we are next to zero, that is not an issue. The other topic that often comes up is what is the right threshold . The percent of gdp number . That is part of economic debate. I dont think the discipline has a great answer. The harm has been relatively needed. Muted. Thank you for writing this wonderful book. Amazon has this. , credit default especially with the new movie, the big short. Could you give a history of derivatives . Norton reamer jesse might have a better shot. By the way, i have a confession, i have only seen one movie in the last year. It is not that i am antimovie, i dont seem to get there. I did happen to see the big short, a few weeks ago. It is a wonderful movie. Brilliantly korea did created. Withnly part i disagreed was the last few minutes where the government was accused of they bring the big banks. Our book maybe this will turn off all of the readers, our book takes the position, we believe it, obviously, that government actions posts 2008 were mostly intended to restore consumption and workers situation. The bailouts were not the dominant theme that we for example, on bernankes mind. Most of the bankers to talk about who did not go to jail. People somehow think they should. We could debate whether they should or not. Erred did notho survive. Most of them who did survive, Jamie Donovan actually helped the government to bail out washington mutual. A lot of the executives were scattered. If youre looking for a muck racking in this book, you will not find too much. I probably did not do the right jesse, do you want to take a shot at derivatives . Jesse downing the thing i would add, you think about about securitization. It is an effort to socialize risk. Lets say you have Mortgage Backed securities, you will package together a bunch of these securities. You will sell them as a hand it out toan people who only want to extend aaa credit. Aa, based on first, second, losses. That is a remarkable innovation that is relatively new. Creates the that fact that people are underwriting the loans. New ives likewise our new. Are it is a hard question to answer as to what the role is. Buying options on your portfolio to try to prevent left tail skews you want to have protection. Is another form of insurance. We have to answer the cases where derivatives are used extensively for speculation. They are not tied to an underlying Economic Security that you on. Own. That is where regulation has to make a decision. Norton reamer if you in case you are confused, this is the guy with 55 years of experience. This is the guy with two years. [laughter] i want everyone to know the museum offers a history of derivatives class. Feel free to sign up for that. [laughter] or, there is another book. One income a we are a finance museum. We have a lot of Amazing Things in the archives. Jesse was referring to the railroad fight. Here is a document signed from 1869. We brought that out for fun. You can take a look. Norton reamer it says signed in new york newark. I want to thank the authors. Thank you for coming, we will see you again soon. [applause] [captioning performed by the national captioning institute, which is responsible for its caption content and accuracy. Visit ncicap. Org] [captions Copyright National cable satellite corp. 2016] you are watching American History tv. All weekend, every weekend on cspan3. To join the conversation, like us on facebook at cspan history. On lectures in history, dickinson professor David Oconnell examines president to legacies and what factors contribute to making a president ial term successful. He