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tv   Big Problems Big Thinkers  Bloomberg  December 3, 2016 4:30am-5:01am EST

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terre: we asked some of the best minds in the world from business, government, the arts, and academia, what are the most urgent problems facing humanity, and how do we solve them? the result is "big problems, big thinkers." ♪ >> what is the number one major problem facing mankind? >> i think it is the lack of education. >> politics has been getting dumber and dumber. >> there is a balance of green spirit. >> if we don't have a more sustainable way -- >> everybody has the capability of making a difference.
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>> remember your humanity. and forget the rest. terre: hello, this "big problems, big thinkers." i'm terre blair. in this series, we confront the greatest problems facing the human race and we examine each issue by asking if there is an ethical framework to help us solve them. to do that, we'll hear from an extraordinary group of leaders as they search for answers and perhaps inspire us to take action. in this episode, threats to our economic future. after the world financial system teetered on the brink of collapse in late 2008, many new policies were put in place. and you'll hear about those. but what about other changes, in values, motivations and incentives? after all, markets rise and fall and rise again. but what are the lessons about markets and about ourselves that could mitigate the economic pain? so many lessons, but what have
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we actually learned? warren: the fall of 2008 was something different than anything any of us had ever seen. ♪ warren: it was even more extreme -- what was going on immediately -- than what was going on in 1929 or the subsequent depression in a big way. the train came close to a stop and now it is again regaining speed. so that period was a big lesson to people who operated on leverage and demonstrated the interconnectedness of our system. and it demonstrated the destructive aspect of certain kinds of incentives and that sort of thing. >> we came to a period where situationally i could, if i were a bank, give a mortgage to somebody that wanted to buy an $850,000 home and showing no income statement.
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people who should've never taken out mortgages, took out mortgages. people who never should have given mortgages, were giving en mortgages. people who should have not bundled them into bonds and selling them all over the world, bundled them into bonds and were selling them all over the world. people who were stamping them aaa, even though they were garbage, never should of been stamping them aaa and rating them that way. they were doing what was legal, ok, in that sense. and it all blew up. and when it blew up, the collateral damage has been devastating. michael: people just didn't want to pay attention. the big mortgage crisis came about when the banks took mortgages, put them all together , and then sold the package. they were sold to professionals, the trustees of pension funds, the managers of mutual funds and hedge funds, the treasurers of corporations. these are sophisticated people, supposedly, and if they are not, then they should have never had
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those jobs. they looked at those and knew exactly what was in these packages. it was all disclosed. they looked at them and said, "oh, the ratings are aaa." they are only aaa if everything did not go wrong at the same time. but they bought these things and when they had higher yields, they had to stop and think -- this must be high-yield because it is riskier. but nobody wants to blame themselves for -- oh i took a risk. >> the famous charles prince quote, who was running citibank at the time, and he said when the music is playing, you need to get up and dance. so when every other major bank is doing this and earning incredible quarterly profits, that the shareholders are celebrating and the board of directors is applauding, if you're the guy that stands up and says, no, i will behave sustainably and we will not do that, that becomes professionally risky. we got into a very short-term loop.
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there were banks that did the right thing. jpmorgan did not get anywhere near as caught up as other banks. and at the time, no doubt their ceo was looked at as being stodgy. >> could we have foreseen it? yeah, there were a lot of pele that saw it. but who is going to stop making money because you're going to make too much money and you will collapse. stop selling your product. stop taking that job. sell your house for a lower price, because if you sell at a higher price, the next person has more leverage built in, and it is more dangerous. we wanted everybody to have a mortgage, whether they could afford it or not. so freddie mac and sallie mae and companies like this, the quasi-government organizations, they encouraged everybody, encouraged the banks -- make the loan, regardless. the argument was if you do not make the loan to people who cannot afford it, you are discriminating against people.
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who cannot afford it. and all of us are guilty. we wanted to help everybody. there are nos quick, simple answers, and we tried to create one. and you create a bubble, and then the bubble collapses. warren: we have had bubbles throughout history, and they manifest themselves in various ways, the dot coms, whatever it may be, and we will have them in the future. human beings, we get smarter about a lot of things in terms of how to produce things and become more productive. we do not get rid of the basic human emotions. and greed and fear will always operate the same way. thomas: you are dealing with a balance of greed and fear, greed and fear, greed and fear. and every decade or so, greed gets out of context and eventually leads to enough fear and something blows up, and we all just say, how could we have been so stupid? michael: to go back and revise history and say i did not know, you are a professional, you
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should of known. the information was there and common sense says if you are earning more, you are taking more risk. i think if you look back at bob steel and people like that that went to treasury, saved the country because the rewriting of history says you should not have bailed out the companies. to not bail out the biggest companies and banks is ridiculous. you have no choice but to do that. were they overleveraged? yes. but everybody wanted them to be overleveraged, and congress was as guilty as everybody else. and we live in a world where somebody else has to be guilty, it can't be you, it has to be somebody else. so we go after the bankers, which we have always done. they are hardly without sin, the worst thing they did was none of the documentation and those kinds of things. but they were part of something that everybody wanted. we wanted the world to keep expanding and the good times to keep rolling. until one day they don't. ♪ warren: if you look at 2008 and
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the institutions that failed or came close to failure. if you take aig and citigroup and wacovia and washington mutual and freddie mac and fannie mae, the stockholders of those companies lost hundreds and hundreds of billions of dollars. citigroup did not go under, but when the stock holders lose 90% of their value, it really does not make much difference if you have $1000 invested and you end up with $100 or not. so there in my view, there has been no moral hazard created for stockholders by the fact that the government came in and rescued those institutions. the moral hazard exists i think with the top executives who walked away with hundreds of millions of dollars and really did not pay the price for their failure. we had bigger and bigger financial institutions that had all kinds of activities where their problems became other people's problems.
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and then we had improper incentives, we had people running the huge institutions whose upside was lots of money and lots of glory, and the downside was still a lot of money and no glory. thomas: one of the points my teacher makes, when you're in a world that is a flat and technically interconnected, it is also ethically interdependent. because when greek bankers basically were going nuts, giving mortgages to greeks to build their third vacation home or their second swimming pool, whatever they're doing -- [chanting] thomas: when it suddenly blew up and you discovered your portfolio was down 5% because people were worried whether greece could default or pay back all of these sovereign debts they had accumulated, you said, wait a minute. i'm not technically interconnected with them, i am ethically interdependent.
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well, that can really affect your 401(k) and your happiness, not to mention your retirement here. so, we all have to think much more globally. warren: trust makes the world function better. commerce without trust is very awkward, and we saw that in september 2008, 30 million americans in a period of a week lost trust in the money market funds. the government had to come in and essentially guarantee those funds. but, if you have 30 million americans that believe something to be the case in august and in september where their money was, they don't believe in it anymore, the economic train comes to a halt pretty darn fast. so a functioning, trustworthy economic system worldwide is a huge plus, and it is even more of a plus for those countries who have not had it. we are used to it in the united states. terre: do you believe that international financial stability is essential to world
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peace? michael: we will never have perfect international financial stability. people will continue to make the mistakes they've made in the past, with small variations. you know what mark twain said, "history does not repeat itself, but it rhymes." that is very much the nature of financial history. terre: as warren buffett says, we will never have perfect international financial stability. that is the history of markets. but can individuals create a financial future that improves on that history? can investors, governments, and political leaders transform their values to mitigate the pain of future crises? that is next on "big problems, big thinkers." ♪ >> do we really have to pass a law that tells bankers, you cannot give a loan to someone who cannot pay it back? warren: i have 20 iq points over
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him, and he is getting rich and i'm not. that drives people crazy and it will continue to drive people crazy 100 years from now and 500 years from now. michael: as soon as you had two cavemen with caves, one of them looked at the other and said, why does is his cave look bigger? why does he have shrubs it, and we don't? i compare you to me. ♪
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♪ terre: welcome back to "big problems, big thinkers." i am terre blair. after the near collapse of global markets, former federal reserve chairman alan greenspan said, "no two crises have anything in common except human nature." and that is where we pick up with pulitzer prize-winning journalist thomas friedman.
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what part did we as individuals play in what went wrong? what can we do better? thomas: when someone comes to you, selling you a home mortgage, and telling you the only thing they need to do is check if you can fog up a knife, and not show your income statement, that is a pretty good sign that it sounds too good to be true. it usually is. also, should we really have to pass a law that tells bankers, "you cannot give a loan to someone who cannot pay it back?" i mean, do we need to pass a law to do that? so people were doing such manifestly obviously unsustainable things because they always thought, what i call ibg or ybg, i will be gone or you will gone. i will do this mortgage, because i will be gone. i will package this into 1000 bonds, i will sell it to somebody, and i will be gone. they pawn it off to another investment bank in france and they will be gone. you cannot pay for your house?
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now that the money is actually due, no problem. just sell it, because we know that house prices only go up. then you will be gone. so we are all practicing ibg and ybg values basically. it was an epidemic of that. warren: the people that got big institutions into huge trouble, which sent not ripples but tsunamis around the world, they went away with a lot of money. that should not have happened. we need a greater balance of incentives. you need a person, if they are running a bank or some other large institution, so important that the government needs to save it because it needs to save the economy generally, those people, in my view, should be bankrupt if they screw things up. and that has not happened. terre: even though we will have bubbles and we have always had bubbles, do you believe people have the ability to transform their values?
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warren: i would be fairly pessimistic about people learning to control greed and fear any better in the future than they have in the past, but what gets them in trouble is the fact that a fellow goes home at night, and a neighbor is making money easily and his wife reminds him that that man is dumber than he is, yet he is making more money on dotcom stocks or he has been financing more than he can handle, but nevertheless -- looking at that guy and thinking, i have 20 iq points over him and he is getting richer and i'm not, that drives people crazy and will continue to drive people crazy 100 years from now and 500 years from now. steven: i think it will be very difficult to unwind our materialistic impulses, partly because it is tied to something that is very basic. as soon as you have two cavemen with caves, one of them looked at the other and said, why is his cave bigger? why does he have shrubs and we don't? i look at you and i compare you to me.
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>> people who make a lot of money in our country tend to trade in some of their money for other kinds of rewards, including the rewards of honor that come from being recognized as a great philanthropist. but there is a muddle that comes when there is a conflict between doing the thing that will bring you honor and the thing that will bring you money. in many cases. and i have a name for this, the bernie madoff problem. he was an american financer, a man who invested money for other people. and he was incredibly honored, and all the time he was cheating people. he was someone that was getting money and honor for doing something profoundly antisocial and dishonorable, and then he was caught fortunately. you want to create a world which encourages people to be successful and do things that
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are worth doing. and finance is necessary and worth doing. but you want them to see that money is not the way to measure, measure your life. warren: there is always tension between the market system and unleashing it while at the same time not causing it to go to excess. we learn certain things need to be controlled and we will learn that other systems will unleash potential of humans. and different societies will come at it in different ways. the chinese are coming at it at somewhat different ways than the u.s. you will see that around the world. but i think overall, we will learn more from others and their successes as time goes by. and humanity as a whole will be living better 50, 100, 200 years from now. and i incidentally, the world is not a zero-sum game. if somebody discovers penicillin in the united kingdom, it crosses borders and does me some good.
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so we want the rest of the world to prosper. we should want it anyway as human beings, beyond that there is a utilitarian aspect to wishing the world well. because you do not want the united states to be an island of 300 million people doing magnificently well, 6 billion people are sitting there, envious of us. ♪ steven: money is a powerful force. i would argue it is more powerful than nature in some ways, just because of the economic forces. we do a bad job often in attributing an accurate value to something, and the economic crisis is a perfect example. somebody created fake value out of something that did not really have value. and eventually it was going to crash, which is what it did. >> the dow had its biggest drop ever, falling a little more than 777 points.
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michael: we do not want to have banks that are too big to fail. we do want to have gigantic banks, because that is the only way to compete in the world and fund companies that will create the jobs you want and a better life for all americans and people around the world. so instead of keeping the banks from being able to make money and with that money make loans and take risks, what you have to do is find ways to protect the banks from going under. or have an insurance policy in case they do. but not keep them, not try to change them so that they can't possibly go under, because then they can't do their function. terre: right. michael: they are a very important part of the function, and unless somebody finances development, there is no development. if there is no development, there is no way to create jobs and wealth and good lives and good education systems and good governments that depend on tax revenue in the future.
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>> one thing we know about growth is it is not everything, but it is the source of all good things. in the sense that you have a growing economy, people are more relaxed and open to new ideas and open to cooperation. they are dividing a growing pie. when you do not have growth, people are competing over a shrinking pie. and they will get more snarly, angry and probably racist, more homophobic -- people will use whatever emotional hooks they can to get their piece of a shrinking pie. so growth is very important to the underlying tenor and climate of the whole discussion. kwame: i think we need to think more about growth with equality, rather than the inequality based growth that we have seemed to have been good at creating in the last few years. thinking about anything that
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makes a radical change in how we live our lives faces you with this problem that there are going to be winners and losers. and the people that are currently winning risk becoming losers if we change the game. so that they have an interest in keeping things the way they are. michael: i am concerned that we are burdening society with so many rules to protect ourselves from every eventuality that it does not work. the real world is full of risk. and if you want to prevent all risk, then you do not have anything. warren: i send out a letter every two years or so to the managers at berkshires, and i basically say, do what is legal obviously, but also do not do anything you would not be happy to have written on the front page of the newspaper tomorrow
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morning to be read by your neighbors and friends and family. and i tell them one other thing, look, if the reason you are doing it, if the reason you give me why you are doing it is, everybody else is doing it. that is not good enough. if that is the best you can come up with, there is something wrong with what you are doing. it is not -- can we do it? it is -- should we do it? it is important in all aspects of life. i've heard more dumb things rationalized by the fact that the other guy is doing it and i tell them, if it is close to the line, it is over the line. nobody can see the line that well. i'm 80 years old, and my eyes are going bad, so do not do anything close to the line. it makes me nervous. terre: the post-crisis response has included lines upon lines of new laws and regulations, including increased capital and liquidity positions for financial firms. and yet, the question remains, after the financial equivalent of a near-death experience for global markets, are individuals around the world -- enough
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individuals -- closer to being able to say when enough is enough? the answer to that question may determine how many are hurt when, not if, the next crisis comes. i am terre blair, and thank you for watching. ♪
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