10. Financial System Challenges & Opportunities

Key Takeaways

The following content is provided under a Creative Commons license. Your support will help MIT Open Courseware continue to offer high-quality educational resources for free. To make a donation or to view additional materials from hundreds of MIT courses, visit MIT Open Courseware at ocw.mit.edu. Thanking everybody to coming back. I think there'll be a few people coming in late still sitting the send button on the papers. Um I want to thank everybody that submitted papers uh before the ninth class uh because I actually had a chance to read those 26. Since there actually officially 84 85 people registered for this class, I'm intrigued to see if 59 papers came in a minute ago. Um Human nature being human nature, these are just the statistics on this class uh and um as as those of you who may have seen I chose that part of the experience here is actually eyes-on, meaning my eyes on your papers and giving comments. If you don't want the comments and just want a grade, you can always give me a heads-up and send me an email and I'll I will take less time. Uh I want to compliment everybody. They're good. I mean they there's a good engagement, a good dialogue. You will see occasionally that I don't give you everything you want back. Um but um but a couple observations, um it's really an opportunity on any topic you want to choose in the second half of the semester uh up to maybe the 23rd class, please uh if if 70 of you handed in on the 23rd class, that is your right, that is your option. It's just it's just going to be harder on uh Sabrina to lead them and me to grade. But um it's to use critical reasoning about that week's topic. So let me just mention two or three things some of you did. Uh I'm not going to be harsh about it, but some of you did that's not what I'm looking for. I'm not looking for just addressing the three study questions. The three study questions are about us together here and and just to sort of talk. Secondly, I'm not looking for you to take a reading from 6 weeks earlier and describe that reading uh or 3 weeks earlier. So that if you chose if you chose choose in in the future to take November 15th. I know November 15th cuz we're going to have it's going to be our second time with outside speakers and it's a really important uh time uh if you look at that class to write something on that class when um it's it's uh we're fortunate that Jeff Sprecher, who's the chief executive officer of the Intercontinental Exchange and Kelly Loeffler, who is the chief executive officer of Bakkt, are going to come and and do a class with us about payment systems and what ICE and the New York Stock Exchange is trying to do in payment systems. I'm just using that if you write about that, it's really about that, not about everything earlier. And when we get earlier, I'll probably say more about that class and and it we were fortunate to have one of America's true great entrepreneurs join us in Jeff Sprecher uh that week. Um who's from scratch created a 50 billion market cap company in 20 years. Um so those were my comments. The papers were generally good. Really looking for critical reasoning uh ground truths. What where do you take something? Some of you brought a great narrative voice by the way. I have to compliment. There are a couple a couple a handful that I really found um uh you're really good writers in addition to being uh a good business students. So those are my thoughts today. I'm going to go through uh oh and we have we have a interesting guest next Tuesday, but I'm not going to say anything more than that. You'll you'll find it fun. Tuesday the 16th. What's that? Na- Nakamoto. Satoshi Nakamoto. No. No. Any other guesses? I'm not giving any clues, but I will tell you you'll have fun next Tuesday the 16th. Um Be a guest you will not see at any other class. Um So today I want to talk a ah Tom's thinking about it, right? Intrigued. Um uh we're going to talk a little bit about uh finance. Now just as a way of background, I've spent 39 years in finance. So this is just my chance to take 80 minutes to talk about finance with all of you. We did have readings. It will tie into it. So overview, we're going to talk a little bit about the readings, of course, as we always do. Three slices of finance from a moment, finance and financial institutions. What is a financial institution? What does that word mean and and how do we think about it? Finance and regulation, finance and technology. So three quick slices of finance. What is credit? What are what's capital markets? Again, a broad sort of Gensler's view of it maybe, but still I think you could it's grounded in academic literature. Um then uh what are the risks? Uh I spent a bunch of time at Goldman Sachs. One of the last things I did as kind of the co-finance officer was also sit on the firm-wide risk committee. And and so sort of bringing insight into what is risk management in finance or at least in the capital market side of finance. Uh and crises. I'm going to spend a a couple of minutes on the '08 crisis. Uh some perspective from a guy who lived through it. Uh and then some of the opportunities in the blockchain world. We'll try to wrap and be out of here at 3:55 as as usual. Um So the study questions um which now I know there's probably 58 papers on this in the in the inbox. Um um I think. Um but does anybody want to uh lend a hand? I mean it's it's getting shorter. It's only 20 people on this list now, but that means that 25% of you are thinking that class participation is not that important. We're going to have to find a way that if if somebody's still on this list in a while that I don't give somebody a terrible grade because 30% of the grade is class participation. Um I just say that I'm humorous about it. I'm I'm willing to work with people that if your language skills aren't there and you're just shy or you have an issue, but does uh Monica want to help me out at all? Um yeah, so I'm back here. So um one of the tradeoffs that I talked about um in my paper was that we saw from one of the articles that as bankers were making more money, there was a greater um income disparity that we saw in the entire sector. Um and then one of the other things I talked about as some of these institutions combined, um they created like these huge conglomerates and uh the act kind of deregulated the space that allowed for that to happen. So Monica's raising two things from it's probably from the Harvard paper, but two things that about income uh disparities and also the concentration. An- Anything else that people took from that Harvard? I know it was a little dense, but the the paper. Um Is that a hand up? Is that No, you sure? I'll come on. What's your first name? CC Chen. Sorry, I'm not in the uh class list, but I'm visiting MIT and hoping I can audit this class today. All right. CC's here as a listener. Thank you. Is it my mic? Dan. Dan. Um So yeah, I I in the Harvard paper I just thought it was interesting um it was that that act in 1994 that essentially caused it was the catalyst for just massive consolidation of the financial services industry. And so that that's what ultimately led to just disproportionate uh wages or disproportionate economic rents uh when related to productivity. Okay, so can you remind me which act cuz I I '94 isn't ringing a bell. I mean uh the Gramm-Leach-Bliley was 1999 and I don't know if there was something in '94 that Uh What's that? Regal Neil. Regal Neil. Okay, Regal Neil. Okay. Um so uh Dan's raising that it's also regulation and law has a lot of effect on it. Consolidation is happening in many industries. Finance is not separate from those industries. Uh 50 60 years ago, you had the local drugstores. Now we have the big chains like CVS and and the like. So I just mentioned that the consolidation happens a lot. Um one thing that I would say on the other side of that having actually watched and observed some of it is there was the desire to merge a lot of banking, but the US, in contrast to other countries, didn't have interstate banking. All the way into the 1970s, banks had to be within their own fifth one of the 50 states, literally. That started to break down in the night late '70s it started. Regal Neil in '94 pretty much then it was Katie bar the door, we could have national banking. And then by 1999, we also could have commercial banking and investment banking together, which is Gramm-Leach-Bliley. Who's I want to come back here, but uh next to Dan. Oh, Aaron. Uh I was going to say that basically the paper was basically went through a process of elimination of what could explain the higher economic rents and basically checked everything off the list and said it was basically a bit of manipulation because there was more power by the the banks that had consolidated. Right. Aaron, do you see that as manipulation or just an opportunity to get some oligopolistic or monopolistic rents? And I'm just I'm just discerning the word manipulation uh Yeah, I guess I guess what they were Yeah, I mean I think it's I mean manipulation in the sense that higher maybe taking advantage in a way that wouldn't exist in a market that wasn't so consolidated Right. compared to other markets that were consolidated and regulated such as Canada cuz they made a lot of I I would note that every entrepreneur's desire in a business context, maybe not in a moral sense, is to be able to collect economic rents. Like you start out as a disruptor and along the journey you would actually wish to become somebody who collects excess profits or becomes the monopolist. I'm not I'm not speaking that that you literally want to take advantage of people but you do want to sort of collect excess rents. And so it's a sort of natural transformation. I'm sorry, it was a hand here. Yeah, it seemed to me that what Aaron said at the last compares also concentration by regulation or concentration by deregulating the market. And by deregulating it incumbents are able to take more risk and that was bad for financial stability. Right. Parish So uh not from the paper more from personal experience. So the way I see it is the financial institutions are increasingly kind of trying to be at the center of lot of different value chains of different businesses and with many innovative products they are kind of connecting like a pivot across big industry chain. So they kind of uh uh initiate some some sort of a counterparty relates lot of other players in those value chains and when a financial institution at risk it connects all the different players in the value chain and Right. So Parish is raising also that finance partly because of its centrality that it is in the economy tries to add other products or add other things to be at the center of the value proposition or chain. I would contend there's also non-financial firms that try to do the same thing into finance. So big tech right now you know, we think about Apple Pay or think of Ali Baba in China that then Ant Financial is one of the most significant. So so sometimes it comes the other way that if you can leverage a network leverage your your centrality to a market and and add products. But I agree with you, it goes both ways though. Um other comments from the readings? Isabella? I think the big picture of the articles also was sort of the idea of like innovation ahead of regulation. Like when I think about bringing new technology is that it does take time for the government to actually regulate it. Um and I know one of the articles talked or the interview talked about like needing to further regulate and restructure the banks and like that's not something that's going to happen especially with people trying to overturn Is it Dodd Oh, the Dodd-Frank. Yeah, yeah. So like it's not really going in that direction but something people talk about a lot. Right. So there's an ebb and flow of regulation and we'll chat in a couple minutes. Regulation in finance has been around for thousands of years. I mean uh literally back when the Hammurabi Code was being written there were regulated interest rates. We went through a long period in Europe where actually it was illegal to charge an interest rate for hundreds of years in different societies. So uh there's an ebb and flow. Now it's much more complicated today in a sense and Isabella's just mentioning that Dodd-Frank passed in the US was a post-crisis reform that that would be a time of period you would think well maybe the the public through its legislative body will lean into doing more regulation and then as you move away from a crisis moment you see some easing up and that there's always a sort of an oscillation uh over the over the decades. Uh why don't we take one more? And so Uh so I think one of the other interesting things that the article brought up was the case of Citigroup which basically highlights the trade-off perfectly. So on the positive side if you look at Citigroup Citigroup what it's trying to do is it's trying to provide universal services so it's a one-stop shop for all your financial services. Whereas whereas it's argued that one of the things that should have been done post a crisis was to break it up because the problem with having a universal one-stop shop is that if it fails then then it's an obligation on the Fed to actually prevent it. So Parish raising something about Citigroup or Citicorp that became a a sense of a one-stop shop a shopping center of financial products and maybe it should have been bro- broken up but who who wants to tell me what Sheila Bair, who was the head of the Federal Deposit Insurance Corporation, said cuz she in that interview with Sheila she talked about City. Uh Alpha? Yeah, she said she almost I guess regrets not letting them restructure and letting them fail because it created a sort of moral protection that people thought that the large banks were protected and that either large inefficient firms that shouldn't survive. Kelly, were you going to add something there? Yeah, I was and I thought her interview was it's kind of hard to to weed out what she's really saying because it's toned with like little strings of bias. Um obviously one because she's been through that crisis and pretty much broke her that deal and two because she throws in political maneuvers so it's hard to tell what she thinks is necessarily like best for the health of the financial system. Like she says bank profits are good, dividends are robust, they've got big tax cuts, they should be building their capital buffers. So Right, but you you mean it's hard to tell where Sheila is on Citicorp for instance? Well, and also the state of like how you know, she a lot of what she says the banks get too big to fail. So So uh Sheila Bair who is a was and to her core is a Kansas Republican who worked for Senator Bob Dole who was then when she worked for him majority leader in the US Senate on the Republican side. Um she's kind of a bit of a prairie populist if if those terms mean something to the class. And and she got into the role of running the FDIC and saw early, but frankly a little earlier than most, that there was a problem going on in mortgage financing and and and credit lending and the ease of credit in the US. Um when the crisis really hit hard uh she was part ultimately of the team, not at the head. Usually the chairman of the Federal Reserve and the Secretary of the Treasury or in any country it's usually the finance minister and the head of the central bank who is somewhere in a war room sort of setting literally in crisis and rolling conference calls and meetings trying to sort through things. But Sheila was certainly you know, at that next level in our multi-faceted regulatory system in the US. And I read her reading and also just uh knowing her personally and I was with her last Friday at a conference that she I guess she arranged uh in Washington about the crisis. I think her reading was was what Alpha's saying. I think it's but it you're correct. She is a political actor and is proud of that. I mean that's her her lifeblood and where she's been for 30 years. Uh but she's also deeply uh policy person and and tied to sort of populist vein and and in her she would have probably preferred to see City uh restructured or taken over because of what Alpha said that there is a quote moral hazard that that the the markets might think well there's always going to be a bailout waiting for the largest of the banks. Um that that would be the translation of what she said there. Um let me let me hit upon uh so what is the role of finance? Um what's the central role when we simplify it all down to its its essence? We have a dozen masters of finance in here so what what are they teaching and and what's Andy Low teaching? I don't know. Is anybody taking Andy's intro class or no? Nobody wants to tell me the role of finance? Here here we go. Are you a master of finance student? Yeah, MBA. Who's a master of finance? Oh, no. All right. What's the role of finance? Very simple. It's like elevator stuff. I I guess it's place the intermediary between like different different functions of business and also like helps the society to All right, so intermediary helps society. What's it intermediating? The two things it intermediates. M finance students. They allocate resources and also risk. Resources and risk. So, they move, allocate, and price. Really importantly, price. Allocate and move money and risk. Just easy pictures. Money is something of value and risk. And you will see this hourglass on a whole bunch of slides cuz I've thought about finance for the whole 40 years I've been around it is an hourglass. Wall Street is sitting right at the neck of the hourglass. Intermediaries. I I thank uh who What's your name? Joey. What's that? Joey. Uh intermediaries of financial assets and liabilities cuz there's both sides of the balance sheet. They can move around assets or they can move around liabilities. Again, at the neck of the hourglass. So, what are the key functions of finance? What are I'm going to list four, but what are the functions of of finance? As opposed to a role. Anybody else There were other hands up. Sure. Uh capital allocation. Capital allocation. I'll take that. It's not what I was looking for, but it's good. Market making. Market making. Capital allocation, market making. Jerema. Payment. Payments. Providing liquidity. Providing liquidity. I'm agreeing with all of them. You should have written my slides. I should revise the slides. So, I say it's basically investments, basically the store of value, and credit. In essence, borrowing value. Remember what money is. I know Ross is looking at me like, "Hmm." It's It's the two sides of of We have this social concept of money that goes back thousands of years and at some point in time, what if I want to store the value or borrow the value? It's the two sides of the the uh the It's again, centered on a social construct. And thus, financial intermediaries sit right at the neck of the hourglass and transform risk as well. It could be a bank that's transforming risk. Short-term deposits are then lent or loaned out long. So, right at the center of the banking system, the commercial banking system, is what's called maturity transformation. Short-term deposits versus long-term lending. And it's not something we're going to do away with. In fact, we should say that's a good thing. But because there's maturity transformation, you can also have what's known a run on the bank. Um what are the key sectors? I'm going to throw a bit up here, six or seven sectors. But what are the sectors you think about as Maybe some of you worked in. Um uh This like easy. Insurance. Insurance, one. Uh that I don't remember your name. Uh Ross. Ross. Uh asset management. Asset management, insurance, asset management. Anton. Um banking. Um broker. Oh, uh that's two sectors, commercial banking and brokers. Private equity. Private equity. I'll call that asset management. All right. So, I put commercial banks. Sometimes in the US, we have 7,800 credit unions and 9,000 commercial banks. Investment banks and brokerage firms. In Europe, in many countries, they're they're universal banks and they're inside commercial banks. But they perform a little bit different function. Commercial banks think about taking depositors' money and then lending. The central thing about commercial banks is a credit allocation, pricing of of credit, underwriting of credit. The center thing about investment banks is about still has underwriting, but it's usually related to market-based rather than using their own balance sheet, but market-based securities and brokerage. Insurance is a risk transformation. I need to be covered if I get into a auto accident. I need to be covered if my house burns down. So, thus, I buy that insurance. Classic forms of insurance. Um And then all forms of asset management and collective investment vehicles. I make it as two different buckets because a collective investment vehicle is when you actually put something into a shared balance sheet like a mutual fund. Asset managers are really just getting paid a fee, but the two overlap. And of course, all the infrastructure of exchanges and clearing houses. It might end up employing a quarter of you on one day, but you know, I think about the different sectors. When you're thinking about use cases for blockchain, it could be in any one of these sectors, in any one of these functions. Um Financial markets or capital markets. What's the difference between primary markets and secondary markets? Uh Kyle. Kyle. Uh primary market is when you issue a share that's new to uh the world like you bring a company public. All right. I'm going to pause you there. It's good answer. So, Kyle is primary market is when an issuer, if I can add a word, when an issuer is issuing a security for the first time and receiving something of value, which we call money. That's primary. Primary cuz it's the first issuance. What's a secondary market? Hugo. Trading of those primary Trading of those later. So, primary markets, secondary markets. Um It's relevant not only because they have different market structures and different uh ecosystems, uh but they have tend to have a little bit different regulation as well. Um What Which has the higher volume in the Uh secondary markets. Secondary markets. There are so many uh issued bond and equity over the mar- market. The but that's uh primary markets. The bond is uh some maybe some interval issue, but the equity is a random issue for each company. Well, it's interesting though the the secondary markets have much more volume than the primary markets. The ratio is not the same market to market. Some markets, there's a lot of profitability if you're thinking about finance and where you can make your own businesses and money, there's a lot of juice in the primary market. There's a lot of activity and very illiquid or not tradable secondary markets. Whereas like equity markets, highly liquid equity markets, uh all the action's in the secondary market. Apple, I don't think has done any primary issuance in well over a decade, maybe a couple of decades in the equity markets. But certainly the secondary market for Apple stock is quite robust. Whereas there's some things that it's only about uh the primary market. A loan syndication is really a primary market and there's not a lot of trading of secondary loans. So, it it's not all in one place. And again, when you're thinking about use cases, that matters because is it high volume or low volume? Is there a lot of juice? Juice is the margin, the profits, the earnings. Non-technical term, sorry. Uh um I include in capital markets the asset managers that earn fees, the the BlackRocks and Fidelities or the small asset managers as well. And then all the infrastructure, the exchanges, the clearing houses, and the like. Um So, again, finance uh to sort of drill back to where we were earlier, have ledgers and payment systems. Who's going to remind me what a a ledger is? It's easy stuff. No. Ledgers. Oh, wait. Wait. No. The It can record transactions. Priya. Priya. Record a record of transactions. It'll record of transactions. Um I know you're tired and you're quiet, but if I were to give you an exam, one of the 20 questions I would give you as on vocabularies ledgers because ledgers matter to blockchain and blockchain matters to ledgers. I'm not saying that there's no use for blockchain technology absent ledgers, but I'm hard-pressed to think, you know, of a really good use case within finance at least unless you have some ledger, some recordation of things of value. If you're keeping a record of things of value, then the immutable nature of blockchain becomes more relevant. Um if it's not things of value, I'm just saying I'm a little bit harder pressed to say why you need the complexity of this database structure. You could use other database structures to keep it. Um even though Stor Haber has that wonderful blockchain that's published in the New York Times for notaries. Um So, ledgers are records of economic activity and financial relationships. They are embedded in every part of finance. Insurance companies have ledgers, investment banks have ledgers, central banks have ledgers. If they're embedded in every part, and they have been around for thousands of years, and they're right at the center of blockchain cuz the UTXO set in Bitcoin is a form of a ledger. Um And there's an account-based ledger in Ethereum. What is a payment and settlement system? Um Anybody want to give it a shot? Alpha, I'm going to move money to you. A payment system is moving money from Gary to Alpha. You don't have to answer this question. Akira. Payment system is moving money from me to Alpha. What is it doing? It's also It's transferring? Good. Kelly. I'm just going back to our second class, but the method to amend and record the changes to ledgers. Right. It's just a It's I'm breaking it down. It is a transfer. Akira is absolutely right. It's transferring value from Gary from me to Alpha. But Kelly's right. It's amending two ledgers. It's going to amend the ledger on my side negative and hopefully meant Alpha's positive. So, it's amending and recording ledgers. It's also these systems they have to first authorize something. They have to do something called clearing. And we're going to get to all of these later in the semester. You might think, "Oh, that's the boring stuff about finance. It's the back office." But authorizing, clearing, recording, and the key word for blockchain is final transfer. The reason blockchain might have application is it is a way to finally move money. I don't mean finally like over the centuries. I mean, if I want to move money to Alpha through the US banking system, it might not move for several days. Blockchain is an application that could have more immediacy. Final settlement. Um Finance and regulation. We talked a little bit about this when we were talking about the readings. But it's long been part of public policy debates. This is not new. It's not just a post-financial crisis. It's not part of like the the post-industrial economies of the globe. It has been true for thousands of years. Um sometime to the point that people went to prison. Does anybody know what debtor prison is? Uh Kyle or Priya? You would basically have to go to jail if you didn't pay your debts off a certain amount of time to work off your your debt or just be there in jail. All right. So, Kyle is mentioning that debtor prison was that you'd literally had to go to jail if you didn't pay off your debts. Do you know when that went away in the US or in in Europe or in China in any country? Disturbingly recently. Disturbingly recently? Maybe in the 19th I thought No, I I thought it was 18th century, but you're saying you think it was 19th century. I haven't researched when debtor prison finally went away. But so, regulation also is this this horrible thought. What What did we do when people couldn't pay their debts? And how bankruptcy laws reflect cuz bankruptcy laws are a social construct in essence that you don't go to jail, but you have an opportunity to work through those debts. Um I just highlight this that it's not a new thing. Blockchain isn't the We don't have regulation because of blockchain, and we don't necessarily need a new set of regulations. It's because finance is so central to economies, we've been grappling with regulation for a long time. Now, you saw this this little framework before, but I restacked it. This isn't This is now the stack I think of in terms of financial uh regulation. Financial stability is first. And And while you can't see closely, this is a bank run and a wonderful picture by Dorothea Lange called White Angel Breadline. But this is basically financial stability is probably the first and foremost thing that regulation around finance has been for a couple of centuries. It's how do we make sure that the banks have backing when they take the the the money in in house. And how do we make sure that we don't have calamitous thing? And even before fiat currency, well before fiat currencies, we had economic cycles that had uh boom and bust. Uh like in the 17th century, the tulip bulb craze. Um that that the tulip bulbs in Holland, I guess. Um but we also had uh incredible boom and bust periods around the South Sea uh the the the the stock companies that were being created over uh exploration and so forth. Um protecting the public just as we've talked about uh in blockchain, uh I would say that non-blockchain, there's a lot more emphasis on consumer protection. Uh tremendous amount of emphasis on consumer protection. Of course, we've talked about investor protection and so forth. The illicit activity conversation we've had all around blockchain is important around finance, but it's not the leading It's not the tip of the spear. It's not where this debate has been over the decades or centuries. Um it's it's frankly more something in the last 30 or 40 years. As money has moved to digitized electronic means, governments have have stood up more uh emphasis on any money laundering laws, bank secrecy act laws, and the like. But if you look at the history of like 19th century uh or early 20th century financial regulation, uh uh there was a little bit about guarding against illicit activity, but by and large, most of the regulatory regimes uh even in in the 1930s at during the financial crisis of its time, the Great Depression, most of it was about bank runs, shoring up the banking system, standing up deposit insurance, and protecting the investors. And it was this concept of money laundering and so forth was it's when we moved from physical forms of cash to electronic forms that you you found more of that. Yes, please. In the public policy discussion, how is financial stability defined? Is it like more like inflation? It's a very good question. Remind me your first name. Jihee? Jihee. Jihee's asking, is financial stability about inflation uh or otherwise? It does include inflation, but financial stability is broader. In essence, it's the thought of does the financial system uh um lead to instability in the economy? And what is true again for probably a couple thousand years, but the research that that you could read Ken Rogoff's book. I don't know if any of you have ever read Ken Rogoff's book. It was a wonderful book about uh the the history of crises and economic cycles that came out 4 4 to 6 years ago, and I could get you the name of it. But um finance adds to and leads to uh booms and busts. Um booms and busts existed well before fiat currency and banking, but there's booms and busts in the cycle. And so, financial stability in essence is trying to smooth out the cycles that you would say. Central banks came along uh initially in the late 17th century. But then by the early 20th century, most nations had central banks as a check on the sovereign in terms of currency. And that's where Jihee, your question about inflation. So, if if if the sovereign could deflate if the if the currency could be devalued through inflation, that can lead to instability. But it's all forms of instability, particularly because leverage is at the center of finance. Leverage meaning that a financial institution's assets are what? What is What are financial intermediaries' assets? If you If you look at a balance sheet, Aline? Uh loans. Loans. Broaddus? The value of the securities Loans. Deposits. Well, deposits are usually on the liability side, but Akira? Capital. Capital. You mean capital in somebody else? Yeah. Yeah. All right, one more. I mean, loans These are all good answers, Anton. Uh the securities that you invest in and carry on your balance What's that? Uh the securities that you invest in. The securities you invest Investments. The difference between a commercial balance sheet or a non-financial balance sheet and a financial balance sheet easy to figure this out. Commercial balance sheets have physical assets. They own plants, equipment. In the old days, I mean, now it's intangible assets like like uh movies and and and software development. But in a financial balance sheet, almost all financial balance sheets you look at, all their assets are other financial assets. A loan is a financial asset. A security is a financial asset. A deposit is a security They're assets. They have a little bricks and mortar, maybe a little bit of goodwill or intellectual property, and a lot of other financial assets. And they're the the right hand side of the balance sheet is a bunch of liabilities and a little bit of capital. Um and so, they're they're leveraged. Um and that leads to instability. Um finance and technology, I contend finance has long been in a symbiotic relationship with technology. It just depends on the technology of its time. Blockchain is just in that long history. Um and we've talked about it. Money started you know, looking like this. We we we sort of done done down gone down this path. Or then technology came along and it could look like this. But it's all technological evolution or at times revolution that we went from uh that to paper money. Um Now, sometimes technology veers off and we have private bank notes instead of uh fiat notes and so forth, but it's just forms of technology. And the modern money fiat currency is just another evolution in technology and regulation. So, that's why I'm saying it's sort of finance, regulation, and technology all have this symbiotic bit together from debtor prison to where we are now. Uh and thankfully we don't have debtor prison. Yes. Yes, um I was just going to say reading the readings for today's class, I was kind of thinking that maybe it's it's the very nature of the financial market and its configuration, uh big companies with uh very high barriers of entry because of the regulation and then substantial capital requirements. And that their relationship with technology innovation hasn't been that fluid in the recent years up until the recent upcome um showing of uh fintech startups. Because there's a certain sense of complacency in the sense that they've been approaching technology innovation. You see current incumbents and I was I was surprised by kind of noticing the same here same here in the United States. Big banks still use really old legacy systems and they can innovate by incrementally. They put the brand new mobile application. So so Eric, I think Eric's raising at least three points. But maybe there was four or five and I missed some. Um that concept that yes, finance is always been about technology. Uh uh but do you think something's accelerated in the last period of time that it's even more about technology. That's point one. Point two is they seem to be slow at adaptation. That they're they're really kind of lumbering of the bunch of of legacy systems and and and they're slow. Those were the two main points. Maybe there's a third or fourth. I I would I would concur though I wouldn't overemphasize the first. Uh they they had to grapple with what it meant when when the telegraph wires came and the telephones came. I mean, maybe not in the same maybe it has accelerated, but they were still um and and it's said that uh they said that the people that did the best in the London Stock Exchange about 200 years ago uh the battle the Battle of Waterloo happened. Does anybody know where the Battle of Waterloo I mean, it's it's before me, too. I wasn't around then. So, thank you. Is that good? What's that? Was it Brussels in Belgium? In Belgium. But who was the great general? Who was who was Wellington. So, it's said that Lord Wellington sent carrier pigeons back to London. This is supposedly a real story. Those carrier pigeons carried the information and the traders in London who got the carrier pigeons traded before others knew the results. The carrier pigeons in a sense were the technology of the time. Um So, I'm just saying the intersection of technology and finance uh but particularly for those who have the best carrier pigeon um uh it works. Now, I used to use this story sometimes in hearings when high frequency traders would be coming in front of the Commodity Futures Trading Commission. They go, "Oh, the the the chairman's going to pull out his carrier pigeon story again." And they said, "Please don't call a high frequency trader a carrier pigeon company." But my point is is I think you're right, Eric. I think it's accelerated but it's not that it wasn't and I do think that the big incumbents are sometimes slow to adapt and that's part of the opportunity uh of of blockchain. Blockchain may not be better than what they're doing, but blockchain might be the tool of a disruptor to get someplace that the incumbents are too invested in their current legacy system to get there. So, it might be that opportunity to get underneath what they're doing. Elon. Are you talking about building a bank that is built on blockchain as an opportunity to disrupt the banking industry or using the blockchain within the activities of Well, see, that's not a It's that's not a question I'm going to answer. You all get to answer that in your final projects. And and and I suspect you're going to be narrower if your project is disrupt and build a whole bank, I look forward to reading the project. But I suspect you're going to be a little bit more targeted. Uh and that the most successful opportunities to the extent any will be successful and most will fail. But to the extent any are successful, my hunch will be more targeted than that. But but I leave it to the creative minds in this class. Um fiat currency we've talked about. It's a it's a liability of commercial banks and central banks. It's accepted for taxes and legal tender. I do this in in terms for repetition. Cuz if this is a class today about finance, I can't do it without talking about uh fiat currency. And yes, it relies on a system of ledgers. Sorry, had to get that in there. But ledgers at the central bank that has an entry that there's 9,000 commercial banks in the US. I don't mean to leave out any other country, but the form and fashion is the same. If there's 600 commercial banks in the UK and I don't know the number or there's a thousand in China, it's always sort of that same thing. One big ledger at the central bank and then every bank commercial bank has a reserve account and that reserve account is on the master ledger at the central bank in essence. Um So, this is just some of the technology of ledgers from from the proto-cuneiform, the IBM 360 in 1961 revolutionized finance. And IBM was not only the best disruptor company uh but it was revolutionizing finance. That IBM 360 really started to get adopted in a lot of finance in 1970s. In the 1960s, there was the paperwork problem. The New York Stock Exchange had to shut down for a couple days in the late '60s cuz they had basically had too much paper. Physical limitations for finance. Payment and settlement systems have come a long way. That's Thomas Jefferson writing a check to himself. But a check from Thomas Jefferson to himself in 1809 was a form to change two ledger accounts. Telex believe it or not, there were still some Telex machines when I started at Goldman Sachs in 1979. I was six. Um I was 21. Um but uh uh Telex machines were a very big innovation in the 1950s. It allowed for the communication and sending around. Now, overcome by the important technologies later. All of these technologies were before the big boom and what I'll call encrypted cryptography and how to secure communications and and and the whole form of public key and private key cryptography and other forms of cryptography. All of which are used in banking today pre-blockchain. Almost everything that's done in blockchain has some form of cryptography that's being used uh for it and with it. So, blockchain in essence is just possibly a new technology using cryptography and using databases and doing it in a different way. And the question is can we can we find use cases in finance through that? So, what are some of the technologies today? And this is not a fintech course. If it was a fintech course, every one of the things that are going to go on this slide uh would be talked about. But does anybody want to just have some fun and name what's what's going on in fintech world? Blockchain is one of the eight things I'm going to list. Anybody want to do some guesses here? AI. All right, AI, GE. Biometrics. Biometrics. We've got two of the eight. Put the eyes in open banking. Open banking, good. We have three of the eight. This is good. We'll see how we're going. Daniel, thank you. Big data. Big data. Uh all right, it's not one Yes. Yes, I'm agreeing with it. I didn't put up there. What's that? RPI. RPA. RPA. You want to tell the class what RPA is? Robotic process automation. Yes, robotic process automation. Here you go. No? Oh, cuz it was test test taken. What about machine learning? Machine learning. Yes. All right, so AI, machine learning, blockchain. Nobody said cloud because now you all sort of take cloud for granted. Um and so maybe cloud shouldn't even be on this page, but it's still sort of changing some open API. I'm sorry. I would say that I thought about cloud, but uh we have a lot of regulations about putting data on cloud. At least in Brazil we like we don't we can't put any data for I use I work with IT in a bank. And you just can't put any So you're saying you're saying that not even on cloud. We have We do have a cloud department cloud that we use, but it's not the same as using AWS. So Leonardo was saying in Brazil you can't put certain information on the cloud. It's probably true in many countries that certain information but a lot of bank information, a lot of financial information in most countries are now up in the cloud. 10 years ago it wasn't. So it's it's still sort of shifting and probably country by country, jurisdiction by jurisdiction. And I suspect in a lot of countries the the official sector doesn't even know what's in the cloud, but And then the other biometrics were mentioned. Interestingly, nobody mentioned chatbots, one of my favorites. But chatbots is a big piece of what's going on in finance and so forth. You know like chatbots, Hugo? How many people like chatbots? Can I see a show of hands? So what what is it that you like about Tom, what do you like about chatbots? Uh If I'm going to go through a robotic system, whether it's like an automated press a button, I would rather go through the automated system that gives me the answer. So like pressing the add button until until I end up knowing what And Eric, you said you like chatbots? Yeah, but not from the customer side, but from the other side. All right, from the customer side, how many people really kind of don't like chatbots? All right, I mean it's not a great customer experience, but maybe that's where somebody's going to spend a lot of technology and money and ingenuity and some Sloan MIT group will solve that that it's a better customer experience. Just an observation for anybody listening if this film's ever seen, you know. Um Credit. Let me just sort of say What's credit? I you earlier already defined this, but what what is credit? It's basically borrowing something of value, but importantly with an agreement to give it back later. As old as time can be. It's probably good to probably goes back 20,000, 30,000 years. Some of the earliest writing is about what it is. But here's a chart about US private uh and public debt as a percentage of GDP. It's based on um the Federal Reserve numbers. I got a chart. I looked hard for this, a 140-year chart. And just say if you can't see it, we are currently the debt in the US is about 350% of our economy. Our economy's 20 trillion and debt totals around 70 trillion. Just easy easy math for these days. When did it peak the last time was in 1929 at 300%. We we zipped past 300%. We had the 2008 crisis. It's sort of been coming back down. I'm not suggesting we're going to come all the way back down to 140%. But I I raised this chart to say debt in modern economies is a big part of how economies work. Um The US uh total credit market. You know, those are the slices: government, commercial, financial, household. Each about 1/4 in the US. It would break out a little bit different in other countries, of course. Um And then here's the US bond market. Now the US bond market's only about 40 trillion. And the debt market's 67. What's the difference between those two? What's that? Uh well So this is the bond market, that's the credit market. So all that government debt's in the bond market. Um but a lot of the commercial debt is bank loans. And you're right, a lot of the household paper is also then securitized, so you you got to get rid of some of the double counting. And there's all sorts of questions of double counting and so forth. 40 trillion dollar bond market, but the total is closer to 70 trillion by Federal Reserve statistics. Um I thought it'd be just interesting to say what's the bond and equity markets around the globe. Our bond and equity markets combined are about 360% of our economy. The EU and China you can see. Now that might mean that we have an overvalued stock market. Our stock market right now is about 30 well today it might not be as good. Maybe but it's hovering around 30 trillion. Uh I think it was up to 32 or 33 trillion. What what's Is it done poorly today again? It's still good. Yeah. Yeah. Um But it gives you a sense. It's it's not just the US that there is about these numbers. Uh this is how financing of non-financial corporations in in the four big jurisdictions. The US is far more securities focused, meaning we have very well-developed bond and equity markets. And loans, as you can see, only provide about 11 or 12% of funding for commercial. If you're a small company, you get your borrowings from a bank. If you're a big company, you go out in the securities market. James. Are these publicly traded companies or just any company? I I didn't do the research. SIFMA, which is a securities industry association, put out a report annually and I grabbed these from the SIFMA report that came out 2 weeks ago. So I I could look at the report, but I don't know. I think it's more than public companies. I think this is broadly the the economies. Um I I'm not going to go through this, but I I have two slides here. One is the equity market, one's the bond market to say the holders of US bonds pretty diverse, but it's a lot of other financial companies. Who holds bonds? It's a lot of other financial companies. Whereas equities is households. It's either household directly, a household through a mutual fund, or a household through their pension. Um Now only 40% is direct. About a third is through mutual funds and about 12 or 15% is through pension funds, but it's kind of households own a lot of the equity. And finance firms own a bunch of the debt. Just rough rough guidance. Any of you masters of finance, you can tell me if you know I'm going off the rails. Um And also uh household debt and then I'll stop with the slides just as I Household debt is primarily mortgage debt. The orange on here is all the mortgage debt. We're at about 9 trillion dollars in mortgage debt. But red red is what you all probably identify with. Yeah. You don't have to self tell me, but you're probably all in the red. That's the student debt. Student debt in the US is now 1 and 1/2 trillion dollars. And I'm just expressing my own public policy perspective, but it's it's not I don't think this is I don't think it's good to mortgage everybody who's just going through college and graduate school. Uh but that's a bigger public policy debate and I'm just expressing uh a point of view. It did not used to be like this. This is an interesting chart to me is the number of accounts. Again, US, we could have gotten broader countries. There's 500 million credit cards in the US. There's 328 million Americans. There's about one and 1.6, 1.7 per population. Um but auto loans and mortgage and and mortgages or which are the left access are 70 or 80 million. So these are big markets. These are just numbers of people who have an auto loan or number of auto loans. These are numbers of mortgages. And then uh HE is home equity revolving. These are the four big slipstreams of household debt. Mortgages number one. Student debt number two, unfortunately. Credit cards uh and then home equity. And auto loans are I can't see on this chart, but auto loans are behind them. Um Let's talk about risk. This is a couple of ideas uh from my time in risk management. Uh anybody want to give me the three big risk if you were managing Goldman Sachs you'd be worried about on a daily basis. Not whether the euro is going to crash, not that but broad topical risk. What are the three or four big risks? Idea? Market risk. Market risk. Credit risk and operating risk. All right. Market risk, credit risk, operations. Any other? You know. Counterparty risk. Human capital. Human capital, that's a good one. I like it. It's usually not taken up at a risk committee, though. It's an important risk, though, but it's not usually taken up. So what do I have? Market risk, all sorts of different type of market risk, credit and underwriting. Credit is is will somebody pay me back? Underwriting is usually have I judged the risk well? So it could be an insurance risk as well as underwriting securities. Three things I didn't hear from you all I I'm not surprised I didn't hear, but these are the three that lead to crises. Market risk, credit risk, and underwriting risk, even if even if firms blow it, they usually do it. And usually the board of directors understands it. My experience in looking at failed firms, it's liquidity, funding, and settlement risk. Liquidity means can I sell something when I want to sell it? Or can I buy a hedge or cover when I want to cover? Funding is can I roll over my funding because so much of finance is about short-term funding and long-term assets. And it's usually misunderstanding liquidity in a crisis. You can sell things all day long when things are good. But when markets start to get frail and thin, your liquidity dries up. So it's a crazy thing to model. It's a very tough thing. I mean, great economists, great finance academics can model it, but at the end of the day it's a little tough because it goes away fast. Uh and it's kind of a funny mathematical formula when you see something just go away. Uh and the math doesn't matter when you can't sell something and you think it was worth 98 bucks and you can't sell it for 88. Um And the other big one is model risk or correlations. And you can build a correlation matrix around all sorts of of financial assets and it could work in most markets. It can work in in a market which I'll say out to two or three standard deviations from the norm, but will your correlation matrix still work when you're in a market environment that's four or five standard deviations out from the norm? I'm sorry, think of a bell-shaped curve and just think of tick but some people call it tail risk. But I'm not talking about the price, I'm talking about that all your correlations in your model just you know, throw them out the window. Um and those four, liquidity, funding, and settlement, and correlation in my experience is kind of where firms get into a bunch of trouble. Um or they're not. Maybe it's not actually a bug, but it's a feature. It's sort of saying I'm embedding all this risk. This is why I'm get earning excess returns when I'm in finance. And you know, one in a hundred times my firm's going to go bankrupt, but that's just that's the risk I take. Kelly. I don't know if we're going to talk about this in the next few minutes, but can you talk a little bit about how well stress testing within banks addresses these? Okay. So I've got operation and cyber risk. It would would have been operational in the past and now everybody's all focused on cyber and it's the right thing. It's a big risk the banks and and insurance companies are all focused on. Legal and compliance and reputational risk. Literally, if you went back 30 years ago, people would not be managing reputational legal risk at their risk committee. But a well-run risk committee at a big bank takes all these things. Every one of these categories should go up to the risk committee in some way or or another. Dan, and then I'm going to try to do Kelly's question in in Of course this isn't something that a company could control, but can you talk a little bit about political risk and kind of context it might impact a bunch of these things. Generally speaking, uh Dan's asked about political risk. Um Classic sort of thinking is is that you don't manage that at a risk committee. You might manage it at in your your Washington or Brussels or London office dealing with with and there's policy risk that the policies can change, the regulations can change, you try to influence it uh and get ahead of of changes uh that lower your profit margins. But you usually aren't going to be managing it in the same way here. So Dan, you're right, there's political risk. There's a second thing which is expropriation risk. In many countries it's no longer a big challenge, but it is it is. And certainly for for big banks there was a lot of expropriation risk in in earlier decades. Um Crises. You can see the hourglass is kind of broken and it's broken right at the neck where finance is. Um Here's some just I hate to say it, but in my memory I hope all of you have such a rich career that in 30 or 40 years you can be teaching somewhere like MIT, but you will have this no matter what country you live in, you'll have some list that you can I didn't go to Wikipedia. I just said, "Oh yeah, there was that Latin debt crisis." I did go to the internet to remind myself what years and in the 1970s I was in high school, but I'm just saying that I actually remember all of these crises. They happen. They come, they go, they're part of it. Let me just mention something about the subprime mortgage crisis 2008. So what what what's my quick take on it? Like what what happened in you know, in 10 minutes or less, you know? But I'll take any questions. One, I think at the core were weak underwriting practices, mostly in the real estate sector for housing. Underwriting is the word as to a bank is making a loan or insurance company is taking a risk. It's whenever somebody takes a risk, you have to sort of sort of make some probability waiting how what's that risk like? Let's take a bank. Will I get repaid? You're not going to get repaid on 100% of the loans, but underwriting is this concept of sort of sorting that out. Or an insurance, the underwriting risk of the house burning down and so forth. There were weak underwriting standards and on top of it a lot of bad practices and predatory lending. Kyle. Um just a question. Do you think that the predatory lending and you know, accepting loans when maybe you won't be able to pay back as well as extending loans is a is a symptom of willingness to take on more risk or being unaware of the risk that you're taking? So Kyle raises sort of a whatever you want to call it, the $64,000 question in the middle of bed uh risk management. I mean, cuz we could go back to this page. Every one of these pieces of risk management, you can't do perfectly. It's only so susceptible to to higher math. Every one of these there's math around. But poor risk management can be just not even being aware that the risk is there. I think that's what your question was. Like, was there just an unawareness that there was such bad things going on in the street? Or was it um well, we're aware of it, but we're willing to take that risk. Um I think it was a bit of both. I think that the the the major investment banks, the Lehman Brothers and some of the others that were underwriting a lot of the subprime mortgages, were aware that um there were no doc loans. No document loans was called no doc loans. That the um the down payments were shrinking cuz that was susceptible to math that you could see that was lower and lower down payment. But I don't think that they knew everything that was going on on the street, the really bad action. I testified in the US Congress in the spring of 2000 um as as a Department of Secretary Under Secretary about predatory lending. Uh it wasn't that I was prescient. I was asked to testify. Um and we did a big study between the Department of Housing and the Department of Treasury and we went out we had public hearings in a bunch of cities. And we wrote a report and made recommendations. And and Ned Gramlich over at the Federal Reserve was very helpful. Andrew Cuomo at the Department of Housing, uh who's now governor of New York, and I was running point at Treasury. Um so it was known in a sense, but I think a a lot of the the broad community, the policy community and the banking community, tended to look the other way, partly cuz there were so much profits and partly because in the in the upside of a boom, it feels like it's it's it's it's never going to turn and that that even a small report like we did in the spring of 2000, uh in in fairness, we didn't we didn't bang the table enough maybe. You know, there I was testifying and I left and that that was that. You know, Al Gore's running to succeed Bill Clinton and you know, the administration uh couldn't have gotten a law changed even if we tried at time, but nonetheless, that's So I think sometimes it's a bit of both. Uh from personal experience. But back to the crisis. So I think that weak underwriting and predatory lending uh mixed in to have a subprime mortgage crisis and then a big housing bubble. Um But also beyond that, beyond that easy credit. Easy credit partly cuz interest rates were so low. We came out of the late part of the 1990s, we went from an asset bubble in the stock market, the internet bubble burst, and we kind of moved that that that bubble valuation into the housing market. The Federal Reserve lowered interest rates, kept interest rates low for a very long time to kind of keep the economy going. And we even see now President Trump and and and and Fed Chair Powell a little bit at odds about where should interest rates go and and the Federal Reserve is moving interest rates up in the US now. But there's always that sort of dynamic, a little back pressure in every country. We like to think we have independent central banks, but in some countries it's it's a tug-of-war, and we're seeing that play out a little now. So we had easy credit for a long time, partly supplied by foreign governments, even China in a sense. I mean, people were willing to buy the US paper. But also financial derivatives, credit default swaps in particular, led to a lot more leverage, and and also the interconnectedness. The the derivatives tied everybody together a lot more. Part of the leverage was also accepting model-based capital rules at banks. The other thing is I think we had a lot of poor risk management, back to Kyle's point. So poor risk management incentive structures. The basic incentive structure at banks have a lot of bonuses, and some of you worked at banks, but on some level it's sort of heads I win, tails you lose. I mean, if you put a big position on and it pays off and you're a trader and you're managing the mortgage desk at Lehman and it pays off, you say, "All right, where's my five or ten million-dollar bonus?" I'm saying if you're running the department. I mean, if hopefully some of you will do that. Um but if you're on the other side and the firm fails, they don't say, "Please give me back that five or ten million." So there's asymmetric incentive structures, Broaddus. And and those have been written about widely academically. I mean, we do have a lot of asymmetric incentive structures in banking. Broaddus. At this point, do you also add the impact of the rating agencies as well in the prices? So Broaddus asked, "What about the rating agencies?" I would absolutely say their incentive structures, within those two words a lot's packed. Thank you. Rating agencies got paid for issuing ratings, but they not, you know, give some money back if you got it wrong. So it's it's it's perverse incentive structures, both in terms of the bonus structure, employment payment structure, rating agencies fees. Inherently finance has a lot of conflicts of interest. We're not going to We're not going to get rid of that. Conflicts of interest There's There's There's There's always somebody in finance who wants to separate their customer from their money. That's the That's the nature of things. But in a sense, Starbucks wants to separate you when they say, "Do you want the large cup instead of or the grande instead of the large?" So that's the nature of commerce. And and and it's just that you want some market base and and regulatory things to feel back. So multiple failures started to happen. In the US, Bear Stearns started to fail in 2007. So well before the epicenter of all of this, you had in the UK, what Who James, what was the first one that failed in your country? What's that? Northern Rock? So, you know, where did the where did the But the timber was dry. It was like like the fire was going to go, but the system could maybe withstand one failure, Northern Rock or Bear Stearns, but by the summer of '08, in this country when the large financial mortgage companies, Fannie Mae and Freddie Mac, had to go into receivership around Labor Day of 2008, it it was just it was teetering, and then of course, if anybody remembers, by September 15th or something, it was it was just the system would have collapsed. Without government intervention, the system would have fully we were kind of And we would have been in one of those moments from the 18th or 19th century where we and or even the 1930s where it's likely we'd have blown out to 20 or 30% unemployment in this country. And there some of your countries, that is the case. You You You saw it happen. I don't know all the countries represented here, but So that's my little quick read of the financial crisis, but if any This wasn't meant to be a lecture on it, but I thought, "Well, why not throw it in? It's finance." Any questions on that? Hugo? Not exactly on the crisis, but if you had to gauge the state of the financial like US finances right now, what do you think? Are we in a better place than we were 10 years ago? So Hugo's asking are we in a better place than we were 10 years ago? Yes, in a number of ways, but as Sheila Bair's writing said, in other ways it's not all that different. So I think that we have uh high valuations in the stock market, but it's not a levered asset class. So real estate bubbles usually are very higher probability that a real estate bubble will lead to calamitous outcomes cuz there's a lot of borrowing against the asset bubble. So what we had in '08 and you had in in in in Iceland when the banks failed, in many countries when you see huge failures, it's when you have a real estate bubble with a lot of borrowings against it. When the revaluation comes, the debt the debt on that asset class is higher than the valuation on the asset class. And that's a usually leads to some either calamitous outcome or government bailouts. Um and and it takes a while. Debt debt-led bubbles A debt-led bubble is much harder. So back to today, I think we have a bit of a bubble because we've had low interest rates for a long time. We've had pretty good economic growth even though it's not fully and equally shared, but it a lot of economic growth. Um uh I think the banking sector is stronger. Uh it's more capital. One of the results of the reforms in Europe and the US is a lot more capital in the system, meaning less leverage. Um But on the other hand, the banking sector is a a bit more concentrated. And concentration leads to additional risk. Um The other thing, and this is maybe my feeling, is as we're not sharing the economic well-being broadly in the economy, that middle-income America, middle-income Europe, in particular, is not sharing as much. I think that that hurts us in two ways. One is if we have the downturn, there's not as much uh All economies these days are led by consumption. There's not as much ability to respond with consumption. And two, I think it also tears at our social fabric. And now I'm talking more about the political, but it it's sort of there's less of a social fabric for consensus when things hit. Sorry. Going and touching on the consumption aspect, I think Sheila mentioned that consumer spending was a big part of the financial crisis, and she suggested that instead of providing relief to the banks, what the government should have done is provide relief to consumers instead. I was wondering what your take on that is. So Sheila Bair's point was we did a bunch of things bailing out big institutions. We didn't help homeowners enough. I think factually she's correct, and then you have to say are the adjectives correct? Like we we did provide trillions of dollars of support for big institutions and not for individuals. Um and and there's where the debate is and all the challenges. I think it's correct. Tim Geithner wrote a book, if you ever get a chance to read it, it's very lively and easy read about the crisis, and he said sometimes it's like, you know, um uh bailing out the arsonist. You know, they I think those were his Tim's exact words in his book, but if I'm wrong, sorry, Tim, for misquoting you. Um but it it it's a hard public policy challenge that that that Ben Bernanke and Tim and others were facing at that point in time. But I think Sheila is right factually, and then I leave for you the the the policy debate. Let me just mention the financial sector, I'm closing on this. Legacy customer interface. When you're thinking about any blockchain solutions, as Eric said, it's legacy. Are they slow? Are they moving slow? It's got to be data intensive at some point. I don't think blockchain has a lot of use if it's not data intensive. Are there economic rents? If there aren't economic rents, it's probably less likely you're going to be able to tuck in. But if there's big economic rents, like two 2.7% on payments and the like, that might be a place you can tuck in with a new disruptor strategy. Sometimes there's concentrated risk. We talked about that. Or the infrastructure costs. I know there was earlier talk about counterparty risk and so forth. Um The good news is there's a wide acceptance of adoption of new tech. I'm I'm going to say it's going to bail out a bad blockchain idea, and I'm not looking for a bunch of ideas about, you know, scams and frauds, but there are wide acceptance. And there's 7.5% of the US economy and similar numbers, probably 5 to 7% of most economies are in finance. Um By the way, because the capital markets and the equity markets are about 500% of the economy, it's about $100 trillion when you add up all those other slides. Finance are in 7.5%. So, that's about 1.5%. Vig. That that's an old term from a, you know, the gambling house. What's the vig? What's the take? Finance takes about 7.5% divided by over about 500% or it's about 1.5%. That's not true everywhere, but asset management might take 50 or 80 basis points. Banking might take wider. But largely, that's the opportunity that I keep mentioning. Let me just mention one more thing. I want to skip through this. Next week's readings. October 16th, you'll have a surprise guest. You'll have some fun with the surprise guest. I guarantee you. I guarantee if you just want to have some fun and you'll remember next Tuesday for a while. But I added an additional reading that's from today. Nouriel Roubini testified in the in front of the Senate Banking Committee today. I read it before I came to class. I can't say it's required. It's just additional. But it is lively and he just does a slap down on blockchain technology. But for those of you who read it, that will be part of our discussion next Tuesday as well cuz we're talking about the economics of blockchain. I'm going to focus more on Christian Catalini's paper, but Paul Krugman is his is a two-page slap down. These are kind of the the Bitcoin and blockchain minimalist. And next Thursday is a little bit towards the maximalist, but I want to talk about the economics, what I'll call act two. So, I thank you. I'm supposed to let you go. I've gone 2 minutes over. So.