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A Conversation with Alan Greenspan

Speaker: Alan Greenspan, chairman, Federal Reserve
Moderator: Carla A. Hills, Co-Chairman; Chairman and CEO, Hills & Company, International Consultants
November 19, 2002
Council on Foreign Relations

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C. Peter McColough Series on International Economies New York, NY

Carla Hills [CH]:Thank you, Bob. I want to add my welcome to the McColough Series, and I've been asked to make a few announcements before we get underway. One is to remind you that this council meeting, unlike many others, is on the record. And secondly is to ask you to please turn off your cell phones and pagers. Thirdly, I'd like to note that the next McColough Series will be held in New York on December tenth and that the speaker will be Peter Fisher, our Under Secretary of Treasury for Domestic Finance. And finally and most importantly, I ask you to stay at the end so that our guest can leave first.

And let me tell you that as Vice-Chair of the Council of Foreign Relations I'm stepping in for Pete Peterson, our chair, who has to be in Chicago today, and his loss is my great gain. I have the pleasure to introduce my friend Alan Greenspan, a most remarkable man whose words are parsed by global markets on an hourly basis, whose accomplishments led the Queen of England to bestow an honorary knighthood, and whose financial acumen caused his biographer, Bob Woodward, to dub him the maestro. Not only for his musical talents, but also for his, and I use Woodward's words, "his awareness of every instrument in the political and economic orchestra."

Now in his fourth four year term as Chairman of the US Federal Reserve and fully aware that his every word has the potential to shape markets, he has polished his discretion to a level that some have called "Greenspan Speak." Even he is quoted as saying, "If I seem clear to you, you must have misunderstood." (Laughter) Alan's life has been one devoted to public service. He has served six presidents starting with President Nixon, and we became good friends when he was serving as chief economic advisor to President Ford during the tough years of the mid-70s, when I was secretary of HUD. His analysis, insight and clarity gave President Ford the backing to make the tough political decisions that our economy required.

Both before and between his assignments in Washington, Alan led a very prestigious economic consultancy. Born in New York and the alumnus of New York University and Columbia University, he studied music at the Julliard School where he played both the saxophone and the clarinet with a swing combo. We will never know how much we may have been moved by his music, but we know full well how much the economic world has been moved by his wisdom. Please join me in welcoming the Chairman of the Federal Reserve Alan Greenspan to the podium, whose topic…(Applause)

Alan Greenspan [AG]:I usually have a retort for that sort of introduction, but Carla, you've left me speechless. But I thank you nonetheless. Today I'd like to share with you some of the evolving international financial issues that have so engaged us at the Federal Reserve over the past year. I particularly have been focused on innovations in the management of risk and some of the implications of those innovations for our economic and financial system.

Fostered by a lowering of trade barriers, cross border exchange of goods and services over the past half century has increased far faster than world gross domestic product. But what is even more remarkable is how large the scale of cross border finance has become relative to the value of the trade that it finances. To be sure, much global finance reflects growing investment portfolios, some doubtless with a speculative component. But at bottom, such finance is a central element of the systems that support the efficient international movement of goods and services.

We strongly suspect, though we do not know for sure, that the accelerating expansion of global finance may be indispensable to the continued rapid growth of world trade and goods and services. It appears increasingly evident that many forms and layers of financial intermediation will be required if we are to capture the full benefit of our advances in technology and trade. Indeed, the seemingly outsized implicit compensation for risk associated with many investments worldwide suggests the potential for a far larger world financial system than currently exists.

Among most of the large world trading economies, the bias against investment in foreign assets is apparent in the still high correlation between domestic savings and domestic investment. In decades past, risk was perceived to increase with distance. Opacity of information and surplus of regulation discouraged the cross border movement of funds. Even today with regulatory bars lowered and information and access much enhanced, bias against cross border investment remains high.

However, the continuous probing for enhanced returns, unless inhibited by governments, seems poised to create a much larger global presence of financial linkages in all of our economies. As in all aspects of life, expansion of one's activities beyond previously explored territory involves taking risks, and risk by its nature has carried and always will carry with it the possibility of adverse outcomes. Accordingly, for globalization to continue to foster expanding living standards, risk must be managed ever more effectively as the century unfolds.

The development of our paradigms for containing risk has emphasized dispersion of risk to those willing and presumably able to bear it. If risk is properly dispersed, shocks to the overall economic system will be better absorbed and less likely to create cascading failures that could threaten financial stability. The broad success of that paradigm seems to be most evident in the United States over the past two and a half years. Despite the draining impact of a loss of eight trillion dollars of stock market wealth, a sharp contraction in capital investment, and of course the tragic events of September 11th, 2001, our economy is still growing. Importantly, despite significant losses, no major US financial institution has been driven to default. Similar observations pertain to much of the rest of the world, but to a somewhat lesser extent than to the United States.

These episodes suggest a marked increase over the past two or three decades in the ability of modern economies to absorb unanticipated shocks. To be sure, the recent weakening pace of world economic activity has raised concerns that the full cycle of the past decade has yet to be definitively concluded. But the already clearly evident increased resilience arguably supports the view that the world economy already has become more flexible, irrespective of how events unfold in the weeks and months ahead.

This favorable turn of events has doubtless been material assisted by the recent financial innovations that have afforded lenders the opportunity to become considerably more diversified and borrowers to become far less dependent on specific institutions or markets for funds. The wide ranging development of markets in securitized bank loans, credit cards receivables and commercial and residential mortgages has been a major contributor to the dispersion of risk in recent decades, both domestically and internationally. These markets have tailored the risks associated with such assets to the preferences of a broader spectrum of investors.

Especially important in the United States has been the flexibility and the size of the secondary mortgage market. Since early 2000, this market has facilitated the large debt finance extraction of home equity that in turn has been so critical in supporting consumer outlays in the United States throughout the recent period of cyclical stress. This market's flexibility has been particularly enhanced by extensive use of interest rate swaps and options to hedge maturity mismatches and prepayment risk.

Financial derivatives more generally have grown at a phenomenal pace over the past 15 years. Conceptual advances in pricing options and other complex financial products, along with improvements with computer and telecommunications technologies, have significantly lowered costs of and expanded the opportunities for hedging risks that were not readily deflected in earlier decades.

Moreover, the counter party credit risk associated with the use of derivative instruments has been mitigated by legally enforceable netting and through the growing use of collateral agreements. These increasingly complex financial instruments have especially contributed, particularly over the past couple of stressful years, to the development of a far more flexible, efficient and resilient financial system than existed just a quarter century ago.

Greater resilience has been evident in many segments of the financial markets. One prominent example is the response of financial markets to a burgeoning and then deflating telecommunications sector. Worldwide borrowing by telecommunications firms in all currencies amounted to more than the equivalent of a trillion US dollars during the years 1998 through 2001.

The financing of the massive expansion of fiberoptic networks and heavy investments in third generation mobile phone licenses by European firms strained debt markets. At the time, the financing of these investments was widely seen as prudent, because the telecommunications borrowers had very high valuations in equity markets, which could facilitate a stock issuance if needed to take down bank loans and other debt. In the event, of course, prices of telecommunication stocks collapsed and many firms went bankrupt. In decades past, such a sequence would have been a recipe for creating severe distress in the wider financial system.

However, compared with decades past, banks now have significantly more capital with which to absorb shocks, and they employ improved systems for managing credit risk. In conjunction with this improvement, both as cause and effect, banks have more tools at their disposal with which to transfer credit risk, and in so doing, to disperse credit risk more broadly through the financial system.

Some of these tools, such as loan syndications, loan sales and pooled asset securitizations, are relatively straightforward and transparent. More recently, instruments that are more complex and less transparent, such as credit default swaps, collateralized debt obligations and credit link notes, have been developed and the use has grown very rapidly in recent years. The result? Improved credit risk management together with more and better risk management tools appear to have significantly reduced loan concentrations in telecommunications and indeed other areas, and the associated stress on banks and other financial institutions.

More generally, such instruments appear to have effectively spread losses from defaults by Enron, Global Crossing, Rail Track, Worldcom, Swiss Air and Sovereign Argentinian credits over the past year to a wider set of banks than might previously have been the case in the past, and from banks which have largely short term leverage to insurance firms, pension funds or others which diffuse long term liabilities or no liabilities at all.

Many sellers of risk protection, as one might presume, have experienced large losses. But because of significant capital, they were able to avoid the widespread defaults of earlier periods of stress. It is noteworthy that payouts in the still relatively small but rapidly growing market in credit derivatives have been proceeding smoothly for the most part. Obviously, this market is still too new to have been tested in a widespread down cycle for credit, but to date it appears to have a function rather well. The market for credit derivatives has grown in prominence not only because of its ability to disperse risk, but also because of the information it contributes to enhanced risk management by banks and other financial intermediaries.

Credit default swaps, for example, are priced to reflect the probability of the net loss from the default of an ever broadening array of borrowers, both financial and non-financial. As the market for credit default swaps expands and deepens, the collective knowledge held by market participants is exactly reflected in the prices of these derivative instruments. They offer significant supplementary information about credit risk to a bank's loan officer, for example, who heretofore had to rely mainly on in-house credit analysis. To be sure loan officers have always looked to the market prices of stocks and bonds of a potential borrower for guidance, but none directly answered the key question for any perspective loan. What is the probable net loss in a given time frame? Credit default swaps of course do just that, and presumably in the process embody all relevant market prices of the financial instruments issued by potential borrowers.

Price trends of default swaps have been particularly sensitive to concerns about corporate governance in recent months. The perceived risk of default of both financial and non-financial firms has risen markedly in the wake of company threatening scandals, though levels remain moderate for most. Derivatives by construction are highly leveraged, a condition that is both a large benefit and an Achilles' heel.

The benefits of risk dispersion are accomplished without holding massive positions in the underlying financial instruments, yet too often in our financially checkered past, the access to such leverage has induced speculative excesses that have led to financial grief. We are scarcely likely to reform the underlying human traits that lead to excess, but we do need to buttress our risk management capabilities as best we can to limit such detours from the path of balanced growth.

More fundamentally, we should recognize that if we choose to enjoy the advantages of a system of leveraged financial intermediaries, the burden of managing risk in the financial system will not lie with the private sector alone. Leveraging always carried with it the remote possibility of a chain reaction, a cascading sequence of defaults that will culminate in financial implosion if it proceeds unchecked. Only a central bank with its unlimited power to create money can, with a high probability, thwart such a process before it becomes destructive.

Hence, central banks have by necessity been drawn into becoming lenders of last resort. But implicit in such a role is the assumption that the burden of risk arising from extreme outcomes will in some way be allocated between public and private sectors. Thus, central banks are led to provide what essentially amounts to catastrophic financial insurance coverage. Such a public subsidy should be reserved for only the rarest of occasions. If the owners or managers of private financial institutions were to anticipate being propped up frequently by government support, it would only encourage reckless and irresponsible practices.

In theory, the allocation of responsibility for risk bearing between the private sector and the central bank depends on the private cost of capital. To attract capital or at least retain it, a private financial institution must earn at minimum the overall economy's rate of return adjusted for risk. In competitive financial markets, the greater the leverage, the higher must be the rate of return on the invested capital before adjustment for risk. If private financial institutions have to absorb all financial risk, then the degree to which they can leverage will be limited, the financial sector is smaller and its contribution to the economy more limited.

On the other hand, if central banks effectively insulate private institutions from the largest potential losses, however incurred, increased laxity could threaten a major drain on taxpayers, excess creation of money by the central bank or both. In the end we will be faced with a severe misallocation of real capital. In practice the policy choice of how much, if any, extreme market risk should be absorbed by government authorities is complex. Yet central bankers make this decision everyday, either explicitly or implicitly through inadvertence.

Moreover, we can never know for sure whether the decisions we make are appropriate. The question is not whether our actions are seen to have been necessary in retrospect. The absence of a fire does not mean that we should not have paid for fire insurance. Rather the question is whether ex-anti the probability of a systemic collapse was sufficient to warrant intervention. Often we cannot wait to see whether in hindsight the problem will be judged to have been an isolated event and largely benign.

Thus governments, including central banks, must balance the responsibilities they have been given related to their banking and financial systems. We have the responsibility to prevent major financial market disruptions through development and enforcement of prudent regulatory standards, and if necessary, in rare circumstances, through direct intervention in market events. But we also have the responsibility to ensure that the regulatory framework permits private sector institutions to take prudent and appropriate risks, even though such risks will sometimes result in unanticipated bank losses or even bank failures.

The inevitable rise in potential systemic risk as the international financial system inexorably expands can be contained by improvements in effective risk management in the private sector, improvements in domestic bank supervision and regulation, continued cooperation among financial authorities, and should it be necessary, by central banks acting as lenders of last resort.

In the past two decades, bank supervisors in developed countries have worked together through the Basel committee on banking supervision to improve bank supervision and regulation worldwide. This effort is ongoing and places priority on encouraging banks to further improve their risk management systems. Similar efforts toward shared objectives among individual central banks should also improve protection against systemic risk on an international level.

Endeavors to synchronize individual country's regulatory systems are far more than a technical exercise. Differences are more cultural than economic. They largely reflect differing conventions of business behavior, especially attitudes toward competition. Competition of course is the facilitator of innovation and creative destruction. The process by which less productive capital is displaced with innovative, cutting edge technologies is the driving force of wealth creation.

Thus, from the perspective of aggregate wealth creation, the more competition, the better. But unfettered competitive capitalism is by no means fully accepted as the optimal economic paradigm, at least as yet. Some of those involved in public policy often see competition as too frenetic. This different perspective is captured most clearly for me in a soliloquy attributed to a prominent European leader several years ago. He asked, "What is the market? It is the law of the jungle, the law of nature. And what is civilization? It is the struggle against nature."

A major determinate of regulatory regimes is how a rule of law is applied to strike a balance between the perceived benefits of wholly unfettered markets and the perceived societal costs of overly fierce competition. In most countries an uneasy balance remains between unleashing the forces of competition and reining them in when they are perceived to threaten the social order. With markets continuously evolving as technologies advance and the political perceptions of the proper extent of regulation also changeable, it is no wonder that our regulations always seem to be in flux.

While regulation must change as financial structures do, such regulatory change must be kept to a minimum to avoid fostering uncertainty among innovators and investors. Moreover, shifting regulatory schemes unavoidably leave obsolete regulations in their wake. Business people both here and abroad complain, perhaps with some exaggeration, that so many regulations are on the books that they are probably at all times unknowingly in violation of some of them. We at the Federal Reserve endeavor periodically to review all our existing regulations in order to revise or resend those that are out of date. It has worked well for us and is probably a good practice to apply to regulatory systems in general and to the Basil supervisory process in particular.

The extent of government intervention in markets to control risk taking beyond the commonly practiced control of systemic risk is at the end of the day a trade off between economic growth with its associated political instability and a more civil and less stressful way of life with a lower standard of living. Those of us who support market capitalism in its more competitive forms might argue that unfettered markets create a degree of wealth that fosters a more civilized existence. I have always found that insight compelling.

But the resistance by many to such arguments suggests a more deep seeded aversion to the distress that often accompanies the process of creative destruction. The choices that we make in our societies on these critical issues will importantly shape the opportunities for the unforeseen but inevitable innovations that have the capability to advance the economic well being of the citizens of the United States and our trading partners. Thank you very much. I look forward to your questions. (Applause)

CH:Thank you, Alan. As the Chairman said he has graciously consented to take questions. I would suggest that those who have a question when you are acknowledged please stand, wait for the microphone, and state your name and affiliation, and exercising the prerogative of the chair I'm going to ask the first question. We have seen an impressive growth in productivity since the mid-90s that has appeared to continue, even in current times of considerable slow down. Now how do you explain the underlying causes of our productivity growth and what steps would you recommend that we take so that we can sustain it?

AG:The first signs that something unusual was occurring I believe appear probably around 1993 when there was an unexpected surge in orders for technological equipment, which is not unusual because you often get a surge in new orders which then peter out for technologies which while perceived to be highly profitable somehow were not. But this surge continued and mounted, and as we now look back in retrospect, I think the major reason or the timing of why it happened then was the confluence of a number of technologies.

Many of them developed in earlier periods, but they all seemed to come together at about the same time, in the early 1990s. We had, for example, fiberoptics which was a very interesting technology but not all that practical, until it was joined with the laser and we had this extraordinary telecommunications information technology revolution. Then with the development of the micro processor and computer technologies at approximately the same time we had the makings of something really quite unusual. But if the underlying economy was not structured to essentially exploit those technologies, nothing would have happened.

As it turned out, the inflation rate as you all know had been coming down fairly dramatically and risk premiums were falling at the same time, so we had in a sense the platform for technological advance occurring at about that time as the new insights and the new technologies arose. So there's a whole series of necessary conditions, but we don't really know what the sufficient conditions are yet. We may in retrospect as we look back.

What I think we need to do to keep it going is to first recognize that we had this very major fall back in capital investment in technologies. That occurred as a consequence of a very major set of cyclical risk premiums and more recently the geopolitical risk, so that there is a very large hurdle at this stage against making any capital investment. Indeed, in doing anything. And while we may, and indeed very clearly do have very large unexploited rates of returns on most of these networking technologies, because the cost of capital and the perceived risk is so high short term, even though there are very substantial long term rates of return, nobody is doing anything, or I should say most everybody is doing nothing. (Laughter)

The result of this is that we have very gradual movement forward of these markets, and it's fairly evident that once the risk premiums fall, once we get beyond the residual effects of the very large decline in stock market wealth, for example, and once we get beyond, as we shall, the geopolitical risks, short term risks will fall and the large rates of return will then become very attractive, and in my judgment, I don't like to say anything is inevitable in economics, but as close as you can make that sort of judgment I think that will happen.

We need to be sure, however, that we have, as I indicated in my prepared remarks, an effective, competitive environment, one in which the rules of the game are clear, that patents and copyrights are appropriate. I incidentally sat in on a Supreme Court hearing on copyright law, and it was fascinating what the real problems are in this area. You would know far better than I, Chair Counselor. But we've got to get the right balance because you're not going to get technologies moving without it.

CH:Well, that was a fairly sunny answer. Questions from the floor? Yes, Mr. Murray?

Audience:Thank you, Mr. Chairman, for a very thoughtful talk. My question is about the budget deficit. The deficit appears to be growing reasonably rapidly. We have many pressures, actual and potential, to make it continue to grow, and I wondered if you could discuss the deficit and how we should be concerned about it.

AG:Yeah, this is an issue which I think is inevitably going to emerge as an important factor, important element for discussions amongst economists and obviously in the political arena. And the reason is that something different is happening about our budgetary processes. I remember when I first got into the economic forecasting business, we never had to forecast budgets beyond a year or two because everything was discretionary and there was nothing in there of a long term nature. Over the years, as you know, gradually an ever increasing part of the budget has become centrally entitlement or other long term, essentially irreversible commitments.

And what this has meant is that we have had to begin to look at the budget in an ever longer time frame. We used to be one year, then we got two or three years, then we got up to five, now we're at ten. But the problem is that as we begin to look beyond the end of this decade, we find that there is the one statistic which we can be almost certain of, and there are very few that we can be, and that's the inexorable aging of the population and the fact that the ratio of retired workers, or retirees to workers to fund many of these federal programs is going to rise very rapidly.

And that essentially sketches out some very major increases in benefit programs as you get beyond the year 2010. Indeed, it starts probably in '08 or '09. And that means we need a budget structure which can enable us to plan in that particular time frame context. And as I said before the Joint Economic Committee last week, we've got to put in place some setting of programs, because we have so many long term commitments. Unless they are continuously reviewed, we are going to end up with commitment levels which we'll have great difficulty financing.

So we have to review them periodically, and we also need triggers on programs which stipulate that in the event of certain things happening those programs get automatically altered or something happens. Because we cannot forecast with any degree of accuracy what those budgets that we now construct will look like ten years from now. We can limit the range within a very modest amount, but unless we have a process in which we can fine tune both receipts and expenditures so that we get a level of debt that we can tolerate, we're going to have considerable difficulty.

CH:(Overlap) Let me say…I don't want to take one single word away from you…next question?

AG:Yep.

CH:All right. Yes, at this table, Mr. Marron. Please state your name and affiliation for the record.

DM:Don Marron, Lightyear Capital. Alan, thank you for encouraging all of us that there are going to be higher rates of return on the future of investments. That's a great start in all this. The last cut in interest rates of half a point presumably limit your flexibility in using further rate cuts to stimulate the economy. What other actions would you advocate if the economy does not move forward as predicted, particularly, and you might comment on the big issue of growing state and city deficits?

AG:Well, first of all there's a general view that as the federal funds rate gets closer and closer to zero, that at zero we are out of business. (Laughter) That is not the case. We have a whole set of treasury bills, bonds and notes that go out a very long number of years which if we were down to zero would still be yielding quite significant interest rate levels, so that we would just move out on the curve and we would be functioning, as indeed we have in the past. People don't remember that from I think it was 1942 to 1951 when the fed treasury accord took place.

We essentially at the fed supported 25 year treasury bonds. We fixed them at two and a half percent, so you could imagine how many treasury bonds we accumulated as a consequence of that. So we are very far from the fed being restricted. Because we are, I'd just assume not answer the next question. (Laughter)

CH:The next question? Mr. Schwartz.

BS:Yes, Bernard Schwartz, Loral Space. I think you partly answered the question I had in mind, and that is the position you earlier described in terms of the mixture of new technologies changing somewhat the impact on the changing economic circumstances. What we're going through in terms of an economic downturn seems less a conventional cyclical impact and more structural. And under those circumstances, other than rate modulation, are there some other stimulative opportunities to create a positive impact on the economy that you would recommend today?

AG:Well, first of all, it is true that we're all struggling to move up and in this cycle, as you implied, there's something different going on. And what's different is we had very little in the way of contraction. So if you don't have much contraction, you don't have much traction going forward. Now obviously I prefer it that way rather than having the economy go all the way down, then come back quickly, have very large numbers and have the system accumulating. And the reason, of course, is you can never be certain when you're on your way down that it's not going to go down very sharply.

So we've had a very shallow recession here, and in part because of that, as I've indicated perviously in numbers of conversations, it's very difficult to get very rapid recoveries. But it is certainly the case that if you look across the spectrum of the globe, there is an awful lot of structural rigidity out there, which is impeding recovery. I think it is clearly less in the United States, as I tried to make clear in my prepared remarks, but there is no doubt that certainly in Europe and Japan there is fairly extensive structural inhibitions to growth. They differ by country and they differ by economy.

You cannot overcome that, except in the very short run, by monetary and fiscal policies. You can get the GDP up, you can get it to appear as though it's growing. But if you have structural impediments in the system, they are transitory. Those stimuluses are transitory and they work their way back. The only way to address those type of structural problems is to do it directly through increased competition.

Do what we did. I mean, we have had 25 years of extraordinary deregulation in this country, started by both Republicans and Democrats and followed by all administrations. And I don't think we're acutely aware how important that has been to the flexibility on our resiliency in this period when we are being pounded by every known economic shock. And I think that there is really no alternative to addressing those structural issues directly, because it is they which determine growth to create incentives, create a system which moves forward. And while I'm certainly not against short term economic stimulus, it is not a substitute for structural form.

CH:We promised the Chairman that we would conclude this meeting so that he could get back to his office by 2:00. We will do that. We will abide by our promise. I regret that I've seen hands and nods around the room and we didn't get to all the questions, but I think you will all join me ...

AG:I can take another one if you want.

CH:All right, one more question. (Laughter) All right, Dan? State your name and your affiliation.

Audience:Dan Yergin from Cambridge Energy. I would like to ask you, Mr. Chairman, if you might give us the benefit of your perspective on your thinking about the crisis in corporate governance

(SIDE B)

... its implications and its economic impact. Thank you.

AG:Well, I guess once every several generations we go through this. And one of the problems is that a very significant part of what constitutes corporate governance is not stipulated by law. Indeed, we have a number of laws on the books which are supposed to guide how companies run. Having, before I'd gotten my current job, served on innumerable corporate boards going back into the early 1960s, I don't remember the types of things that have recently been happening back then.

There are cultural changes that have been going on, and I've just been appalled by some of the practices that some have been engaged in. And I have been a strong supporter of a Sarbanes-Oxley bill because I think it essentially directs where the problem is, which is in the chief executive officer. We no longer have a corporate governance issue essentially run by shareholders. We used to, when people owned companies. But now with huge financial pension funds and institutional investors who when they don't like what a company's doing, they just sell the stock, it has turned out that the CEO is where the action and power is.

And I think the most egregious activities have really resulted in a failure of chief executive offices. And I think Sarbanes-Oxley in part is going to do that, but the market has already done it, if I may put it that way. We need Sarbanes-Oxley, not for today, tomorrow or the next day, because I don't see any CEOs doing what they have been doing for a number of years. They're going to go back to the old regime. But unless there are statues out there which focus on this, it will just start to happen again and we want to avoid that.

But having said all of this, and having said as I implied in my prepared remarks that the economic consequences have really been quite severe, corporate governance has not broken down fully, because were that the case the extraordinary efficiencies which the American corporate structure has evidenced in recent years through very large increases in productivity could not have happened. If corporation governance was not working, you couldn't have the productivity. So it's an odd situation where it has clearly undercut, I think, the ethical base of the capitalist system.

Remember, capitalism requires an ethical base or it will not function. If there is not trust in the system, if individuals don't trust each other in their transactions and everything has to be adjudicated, the system would collapse. I mean, theoretically everybody has the right to have every contract that you write go to court if necessary. And yet we all know if anything more than a small fraction of cases ever had to be adjudicated, the legal system would be swamped into immobility. So we know that there's a very important ethical cultural issue which is involved in this system. That broke down badly. The laws that we pass will not change that. Fortunately, the market has punished an awful lot of people, but it really gets down to the chief executive officers and the people with whom they work to make sure that this system works, because it's the best system in the world. Thank you very much, ladies and gentlemen. (Applause)

CH:I always worry about the last one. (Laughs) Please remain in your seats and let the Chairman get to his car first, and I thank you all for your attention, your very good questions, and I know you join me with great appreciation for the splendid presentation that you have just enjoyed. Thank you. (Applause)

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