Transcripts For CSPAN3 History Of Investment 20160327

Our friends at Columbia Business School publishing led by miles thompson, who joins us today, have done it again. This time, it is a book on investing. It is the history written by Norton Reamer and Jesse Downing. It covers thousands of years. Interviewing socrates on Real Estate Investing all the way through to Warren Buffett and the legends of today. Along the way, we will meet many individuals, many products, themes from investing. We will learn about the sinners, an entire chapter on market manipulation, Insider Trading, and fraud. This book is very well researched with a very comprehensive bibliography. So much so that i was just talking to norton a while ago and he said they had 10 researchers for this, which is unheard of and terrific. They have done their homework. Norton reamer has had a storied wall street career. He was a former ceo and chief Investment Officer of putnam investments. Aner that, he left to grow Investment Management Holding Company that over 20 years and accrued 200ns billion in assets under management before it was sold. He is still active with the Consulting Firm called unicorn. As coauthor is Jesse Downing, mentis an investment manage,me professional who graduated from harvard where he studied economics and math. The book will be on sale after so i encourage all of you to buy it if you like what you hear. The authors will be happy to autograph it for you. We all heard the phrase speculation is as old as the hills. Today we will find out if investment is as old as the hills as well. It is my pleasure to turn it over to norton and jesse. [applause] here ine honored to be the center of finance and wall street. I must admit i was not knowledgeable about the museum of American Finance until richard offered it to be an endorser of our book. He is very active so thank you for having us. Pan was then and youth. I am probably the oldest author you ever heard at 80 years old. Jesse maybe the youngest at 25. The book was put together by this group of 10 Different Research associates. Most of them harvard undergraduate economics majors. It benefited from a lot more wisdom than the original author had ever had in his possession. Let us talk about this now in an organized kind of way. The Research Project that led to this book, investment a history, began in 2010. Let me interrupt with an incident anecdote. Add a with publishing to history because i suspect that would be more interested in investment than history, but an amazing fact. Thousands ofeds of books that have been written on investment over the years, nobody, i mean nobody has written a longterm history. We were astonished. Jesse admitted to me before he became a Research Associate that he did research on that because he did not think it was true. We verified. There is no such thing as longterm history. On that point alone, this book stands uniquely. In any event, i sold my last 2008 by way of back patting although it was no wisdom on my part. The tradition of heard in august 2008, 20 days before lehman brothers. Not because i figure that out and obviously not because someone else to get that out else figure that out. In 2010, i had a twoyear commitment, but 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 really uppermost in my mind at the time, but learning more about a field in which i had devoted 50 years of my life was very much in my mind. I began the project. I begin by visiting with a harvard Business School professor by the name of david moss, who said to me you need Research Associates. Boy was he right. The fact of the matter was i had never done research of this kind in any way before. With harvard economics department. I committed to the secretary a request for a Research Associate. They advised me to pay the going rate. Zero responses. I called her back. I said can you tell me what is the going rate . She said 10 to 15 an hour. I said how about 20 an hour . Worked like a charm. Was thevent, jesse second of these Research Associates. He stuck with the project and stuck with it so effectively that about three years later, i asked him if he would become my coauthor, and goodness he did. Thank goodness he did. We cannot figure out if he is five times smarter than i am or 10 times smarter than i am. Another friend said 100 times, but i dont accept that. Early on in the research, we had a revelation. Although there had been a vast amount of books written on investment, literally, there was nothing like a longterm history available. To relieve your minds of potential readers, this may be a misuse of a word. The book was written logarithmically. The first chapter covers 16 pages in 3000 years. It becomes more micro as it becomes to the present, which i think is more useful. Feely event, we came to that understanding the history of the field is incredibly important in being able to predict its future. Being an investor who understands what has gone before investing would be incredibly valuable with expecting what it is like in the future. In addition , significant changes have occurred over the millennia that investing has been underway. There has been widening of Investment Opportunities over time that is remarkable. Think about this. If this is a 4000 year history, the common man, and i dont mean very common man or woman, i need Business People like ourselves and so on simply could not until the last last 400 years. 90 of the time that investing has existed, it has not been available except for what we referred to in the first chapter as the power elite. Let me talk now. We cannot go over the 4000 years, although as new authors we would probably if you would give us a chance. Let me talk about the highlights of what we will try to cover. Number one, the overarching theme of this book, and this may astonish you, is the democratization of investment. Remember, democracy and equality are not the same. We are not saying all investors are equal. We are saying and investment is no available to so many of us, to billions of billions of people in the developed world. It was anything but that until 400 years ago or so. The second point that we emphasize is the concept of retirement, of funded retirement. It is amazing to consider the fact that funded retirement is no more than 150 years old at the outside. That were some gimmicks the roman state worked out for roman soldiers. When roman soldiers were ready to retire, they decided they did not want them around rome so pends and her the them land away from rome, but retirement is new. That is the second area we want to cover. The third area is what we call rose and benevolenc malevolencee field. I had to be dragged kicking and screaming into this subject because i do not think it was dominant in one expres affected investment in what effective investment. We have a major intersection. It begins with bernie made and ks back to carlo ponzi off and works back to carlo ponzi. Is therth thing we cover increase in sophistication in the handling of investment in two categories. One is the growth of investment theory. Investment theory was not born until about 1900. That is interesting. It has cast lots of doubt in some areas and lots of affirmation in others. And this may be controversial with some of you, we think we have gotten a lot better as a National Economy in managing Economic Policy for the benefit of investors. There is all kinds of opinions on that. I would not want to Poll Congress on how they feel about it, but the fact is we think we established in the book and we put an acquisition the. Period ofat the the Great Depression and how it was wrong and the Great Recession and how it was in over was inadvertent. Lets talk about investment and what is important. Iswe define it, investment, the commitment of resources in the hope of earning a return in the form of income, gain, or both. The activity of investment is remarkably pervasive and not just pervasive in economics. It is pervasive in culture, all kinds of institutions, and in the development of society. Without risking Capital Investment effort and treasure, it is very difficult to advance any kind of a program. Executives,leaders, and so on is to make decisions that advance these things. The head of a museum is an investor and is making investment decisions, for example. Society dependd on investment to improve. We have claimed this is a basic not just asociety, basic element in economics. Let me talk about democratization now for a minute because this may be controversial to some of you. If you study the history of realizent, you begin to at the same time, especially in the 17th and 18th centuries, that political life was democratizing. Investment light was also in need to be democratized. It was leading to certain important developments that were crucial in that stage of things. Example, the corporate form was essential during this period. You all heard of these joint Stock Companies. It was the First Corporate form to exist. It has limitations compared to modern corporations, but it was an important step forward. The second vital step forward was the Industrial Revolution because for the first time, we created sources of capital for every man and every woman in that sense. Before that time, all of the capital was in the hands of the nobility or the church or the military or royalty itself. Began inck companies the 16th century. There was a company which treated with the russian empire britain. Out ofh century britain. A the 17th century, it was Company Called the Virginia Company that did not produce a lot of oil but they made an effort at it. Joint stockearly companies do not have the characteristics we take for granted today. One of these was limited reliability. You can think about how important the fact of a corporation has limited liability. Days, if youarly invested in a company and the company went bankrupt, you were on the hook. That would lead to great suspicion between investors. No one wanted to go into a venture with an investor who did not have a lot of resources because when they came around to pass the hat for losses of the company if that happened, one person was going to be exempted and the other people left with the responsibility. Over time, the joint Stock Company became more sophisticated. Maybe one of the first examples of the higher level of sophistication that you heard of was the east India Company because it was one of the first times that management and ownership were separated. Everybody if you buy a stock today, you dont expect to run the company. Ou expect to be investing and someone wil have the responsibility. The skeptics about the separation of management and ownership pretty impressive. No lessple, adam smith, than adam smith, denounced joint Stock Companies and denounced the east India Company because he said and see if i can quote him here, he argued that fiduciaries could not be fully dutiful and completely concerned about the welfare of shareholders because the cap capital was not their own. We still have this problem today, but we made great efforts to improve situations. By the way, we believe from our research that he was much influenced is something you bubble, the south sea which was a case where promoters promoted a company that was not in the interest of shareholders. Eventually come the shareholders suffer the consequences and so did the promoters. Now we grant equities, we do stock options, we have performance fees. We encourage managers to reinvest in the business. While there has been improvement, not all the problems have been solved. Now that we talk about the Industrial Revolution. It was of course a transformation that we all know about. And rann the 1760s basically into world war i. The first one was basically involving textiles and iron production and things of that sort. The second one was much more sophisticated and involved much more technological advance. Revolution has a bad rap in certain ways and earned it. Richard working conditions, urban squalor, social strength, but they altered the trajectory of the economic fate of the nonelites. For the first time, common people, including merchants, Small Business owners, factory workers, inventors, entrepreneurs, were able to create and share in the economic surplus. They did not have access to surplus before. This was a revelation. Prior to industrialization, most of humankind, and this is worth 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 covered directly in our book, but you can look at a thousand year period before the Industrial Revolution where the standard of living did not rise. It is interesting to me and probably you that there is some question being raised about that now. With only the claim of having done a little Historical Research is that that is not right. We will continue to advance the standard of living, but maybe at a slower pace than we got used to for a while. Growth we think is still part. Element the emergence of Public Markets was the third element. That was incredibly important. For the first time, people who became empowered savers, savers with their own money who could invest it in some way, met Investment Opportunities. Dt happy effects of it ha the effect of creating brokers. I am not sure what they were called early. Listing prices, depth of market, regulation. Very important. We have a section on this. 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 things before they were Public Markets. You would have one investment. Tohave multiple investments, think about a diverse portfolio with virtually an impossibility even for the very very wealthy and very powerful until Public Markets were created. Even with all these advancements and improvements, the democratization of investment is far from complete. Just as there are countless constituencies that remain marginalized, so to there were large numbers of people still excluded from participating in the enterprise of investment. s not deepened ourselves lets not delude ourselves to thinking democratization is done. There is a long way to go. Levy talked for a moment before i pass it to our key speaker here, and i mean it, about retirement. I want you to think about retirement. Fund in retirement, as i indicated a moment ago, as we know it today only emerged about 150 years ago. It is a blink of an eye over the history of investment. Most of the history of investment, most 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 you through, not some fund you had created. There were no Financial Resources to provide security in the final years of life. There were a few early steps. The english created poor laws in 1601. Houses created in the colonies in the united states. Whopresbyterian ministers must have led a suitable lifestyle and to this created insurance and Retirement Funds for themselves to retire from the church in the 1700s. Savings and societies began in the 1800s. It was not until the rise of employment in urban areas, more factory like employment in the early 1900s, that private Pension Funds began in earnest. Most were managed by insurance companies. They survived the depression very well. Better than most funds we know about throughout the depression. There were 1930s, hundreds of thousands of workers covered. Also in the 1930s, Social Security was created. By ae way, it survived onevote margin in the Supreme Court in 1937, the same way obamacare survived by one vote of margin recently. It is amazing to think about that. Defined in the 1970s, Contribution Plans in the form of 401 k s grew. Today, private Retirement Funds in the u. S. Alone totaled 24 trillion. There is probably a comparable amount in other developed countries around the world. They are the single largest impact of the democratization of investment. Even this Phenomenal Growth has raised questions because gradually over the last several decades, the responsibility for funding your retirement has moved from corporate shoulders and government shoulders to our shoulders. Bs, and403 that is creating some doubt this fight the number i decided in the future i just cited in the future. Despite the vast sums devoted to retirement, there is increasing uncertainty about these sums in the future. Levies that step aside and asked jesse to come up and talk to you ask jesse to come up and talk to you. [applause] i will be back. [laughter] Jesse Downing thank you. If three brave souls showed up and we were two of them, i would be thrilled. Very happy to see you all here today. The first part of my talk, a history of regulatory reform. I realized that sounded more like a cure for a case of stubborn insomnia than it did a topic for today. Instead, i will entitle it the history of malevolence and the Investment Business. As a quick worthwhile preliminary, the vast majority of these businesses today is highly ethical. It is only a few small battles that capture the headlines. Nevertheless, it is still worth looking at those stories and learning something from it. We have gotten much better at mitigating the behaviors of fraud, market manipulation, and Insider Trading because the democratization of essman involves the democratization of the rules of the game, the gradual leveling of the Playing Field between the affluent on one hand and the common man on the other. It is easy to bemoan the state of markets today from a regulatory perspective. The markets of yore were a wild wild west. Us. D has always been with many perpetrators have become household names. Adoff, carlo ponzi. Their brand of malfeasance has been understood to be criminal. For more interesting than simple fraud is the Insider Information and marketing equation because these behaviors are not only ones that are perfectly legal, but they were regarded as the prerogative of the wealthy and powerful. If you have capital, why would you not manipulate the market . If you are in a managerial position, why would you not enrich yourself by Trading Information . Today, these are illegal activities fortunately and the socalled eb war of the late 1860s demonstrates this point remarkably. It was not a military engagement but rather a financial conflict. It was waged over the ownership and control of the erie railway, whose lines connected new york city to urban centers westward. Drew, ay stars daniel man who spent time as a cal driver, steamboat business owner, and relied his remarkable cunning. The pushed his way onto the board. He spent little time making his decision a Profit Center through stock price manipulation. And took a short position in the shares of the company and started a rumor that one of the construction projects, a tunnel, was in trouble. Cost was exceeding budget. The project might have to be abandoned. None of this was true with the stock price dropped and he benefited handsomely. You might have continued his manipulations indefinitely if it were not for can you realist Vanderbilt Cornelius vanderbilt. He set his sights on controlling the erie, the last linchpin of his growing monopoly. He discreetly purchased stock and acumen enough shares to exercise the control he wanted. Drew to realize what happened and assumed he would get the boot for vanderbilt. Drew would no longer have the necessary information needed to integrate the company stock. Vanderbilt and convinced him to not only keep himself but also to grant to. Ore seats to his compatriots they triggered by issuing bonds into stock they might be able to get an edge on vanderbilt. They drew up a long list of railroad projects and need a new capital and issued millions of dollars worth of convertible bonds and caused many of them to be exchanged for stock. Vanderbilt meanwhile not knowing this was going on, at woodwards brokers to continue to add to his position and buy out the eerie shares as they became available. Vanderbilts brokers did just that and snapped them up. Nevertheless, these maneuvers effectively reduced vendor of control of the company. Sawoftened his scheme and drew was behind it. They escaped to nearby new jersey. Some things dont change. That gave a bit of time to maneuver. They called on the head of tammany hall, a new york political machine known for his willingness for deals and drive. He helped them pass legislation to legalize their scheme. Money was dealt out in droves on both sides of the issue with the legislators receiving money from. N the end, juris settled on relatedly, fiscal is murdered by a rival. A body revealed manipulation in regards to market and edition. Matured meaningfully. Disclosure loss prohibited this audacity from occurring. Once the privilege of the elite and a common practice in a 19 centuries now a criminal defense. Also true about Insider Trading. Even so, quite recently. Astonishingly, it was not until the 1960s that markets were trading on inside information was rendered illegal. As chairman, that whatever for forever alter the trajectory. A little bit of back story. Prior to the tenure, there was a long string of commonlaw statesnts in various that allowed nonfacetoface to trade while in possession of material nonPublic Information. In 1868, a court ruling in new york stated the directors of a publicly traded company did not have to make the rest of the market aware that they did not have Public Information before acquiring and exposing of shares. The same idea was reiterated again in massachusetts 1933 and a court case. In that case, the plaintiffs sold stock in the mining company. After the sale, they learned the afterys directors had they learned the geological opinion that the land they owned might actually have contained a significant amount of copper. Ruled the directors were not required to make this known. Case after case, we see large information was allowed to exist between investors and managers of public companies. People with Insider Information their ownit on behalf. Then William Carey arrived to break up the party. Carrie had impeccable credentials, a yellow graduate and a law student there. In world war ii, working for the office of strategic services. Then he went on to columbia law not afraid to ruffle some feathers. Speech though a Public Institution seems to have certain characteristics of a private club. He wanted a reform and he wanted it quickly. As a patchwork of different laws across states, the laws were interpreted differently and not too imperfectly. Federal levelthe seemed necessary. Decided he would find a way inchange the interpretation 0b5. Le called 1 obvious1942, it was this should be implemented. Passed unanimously. They said, were all against fraud. In 1942, it was 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 partner in roberts and company which provided Brokerage Services and managed money on behalf of the client. Before the vote was public, he 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. The sec would carry at the helm, maintain his action was an infraction against sec rule can be five. 10 b 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. Because of the Curtiss Wright 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. Discovering investment the array discovering investment theory describing . What is the appropriate price of an asset, and what can cause the asset to change price. Humanity has understood some of the basic ideas about investment. For some time theory for some time. In 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. In the merchant of venice, in the first scene, antonio declares, i think my fortune for it. Ranked my fortune for it. T hanks my fortune for it. My merchandise makes me not sad. Humanity has come prevention of these principles for some time but lacks in the theoretical and quantitative framework for understanding. Change began with a man called 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. He tried to arrive at a theory 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. Today we know that dividends are a poor proxy for what you care about, the Free Cash Flow that a firm generates. John williamss insight was to involve logic to the Public Markets. Just as the theory 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. These insights lead up to 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 that haze 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. Billy 1920s and early 1930s 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. It is precisely at that point of 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. The theories were not mainstream 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 country had capital flight, they 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. Largely through the work of 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. Lets bring 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 helped by the employment 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. At the same time, assets under management were growing. What was born at this time was something we have come to call alternative investments. These are hedge funds, private equity, other real estate funds, all kinds of new investments which have not been undertaken before on a widespread basis. At the same time, assets under management began to grow enormously. As recently as 1980, when i said my own company, 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. From 1980 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. At the same time, as alternative 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. We have had index funds and etfs. Now at the very time when compensation is burgeoning in one element of the field, doubt is creeping and about in 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 more than the major ceos of major corporations in the world. I think we have a statistic in the book that 25 of the fortune 400 in the midteens were 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. There have been disasters in 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 . 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 growing rapidly, 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. Using debt to stimulate the economy at times when it needs stimulation can be a favorable thing in terms of the wellbeing of wage earners and consumers. We take an objective attitude 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. Jesse downing 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 . Is that actually that is part of economic debate. I dont think the discipline has a great answer. To date, the harm has been relatively needed. Muted. Thank you for writing this wonderful book. Amazon has this. Recently, 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. The only part i disagreed with 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. Most of them who erred did not 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 security, you can hand it out to people who only want to extend aaa credit. Others want aa, based on first, second, losses. That is a remarkable innovation that is relatively new. The issue to that creates the fact that people are underwriting the loans. Derivatives likewise our new ar are new. It is a hard question to answer as to what the role is. For example, 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] interested in American History tv . Visit our website. You can see our upcoming schedule. To the white house rewind letters in history and more. At cspan. Org history. Each week until the 2016 election, road to the white house rewind brings archival coverage of president ial races. Film a 1968 campaign created for Richard Nixon can theard nixon, showing former president meeting voters in New Hampshire and wisconsin. He went on to win votes in both of the states. He then defeated democrat Hubert Humphrey and independent andidate George Wallace in president ial election, winning 32 states. Courtesy of the is in. Of political campaigns, you have sure is one of the few places where people have a chance to meet the cat meat as well as the New Hampshire republican president ial primary, the start of the 1968 campaign trail. Beginning, the candidate who really has been seen and heard by the people of New Hampshire is Richard Nixon