So today I wanted to talk about crises, misbehavior, and regulation, it's a huge topic, financial regulation. So I wrote a book with George Akerlof called Phishing for Phools. We're using the word phishing more generally than its usually mean, to mean manipulation or deception. And we inclined a new word phool. Well actually, it's already a Hindi word, and it's used in India in English to mean a flower, I guess, or it's somebody's name. But for us, phool with a P-H is somebody who doesn't appreciate how much he or she is being manipulated [LAUGH], and most people are phools. That we want to open their eyes to manipulation. So regulation is substantially aimed at dealing with human problems and with manipulation and deception. We just talked about it for example, with the mortgage regulation, which is intensive. It has to be detailed because there's so much involved. So many people playing games, they're not all playing games. One theme of our book here, is that it's not that people are bad, it's that people are constrained by the market. If everybody else is doing something, you have to do it too, or you won't stay in business. If there’s some manipulation that works, so for example when you go to the store, this is a trivial example. You go to the store and look at prices you'll see something priced at $9.99. Now you think, wait a minute why don't they just round that to $10? Well you know why they don't, there's a psychological tendency to just look at the first digit, or to count how many digits in the price. You don't want to add another digit, and go from $9 to $10. You're playing a trick, it's phishing as we define it. Why do you do this? You do this because everyone else is doing it, and in a competitive market with narrow profit margins you can't escape it, you've got to do it too. I remember in my own company, Allan Wise called me one night, Case Shiller Wise, and he said, what should we price our online mortgage service? We had an online, I think we were the first, I am sorry, we gave price estimates for individual homes. You'd type in your address, and then we would give you an estimated value, instantly, based on our models. Zillow later came in and took over that business, but we've had it for a while. What should we price it? The question is should we price it at $29.99, or $30? And we fell in a quandary, because you know that business is better if you lower the price a little bit below a pricing point. But we finally decided no we don't play that game, we're a firm of integrity and we priced it at $30. But you know what we had no competitors, there was nobody else on the web at that time, giving you an instant value for your house. So it didn't matter, we did all right, finally. We sold that company by the way in 2002, a long time ago. But I remember the doubts we had about playing the game, and some companies stay above it. But you can't do it in a tightly competitive market, you can stay above it, but you'll be thrown out. You won't make any profits, and you'll go out of business. That's what we call the Phishing Equilbirum. So you need regulation, and our book is a plea for regulation. And when I mentioned that the QRM rule was 689 pages long, I'm not saying it was evil or corrupt. I'm saying they're dealing with a very complex problem, and a huge industry, with tons of lawyers representing their interest. I have to hand it to the people in the regulatory agency, it looks like they came up with a reasonable set of regulations. Now one thing we have to do is distinguish between microprudential and macroprudential regulation. Actually, these words are, I haven't looked them up on Engram, but I think the word macroprudential is a relatively new word in the last ten years. Most regulation in the past has been to protect individuals from abuse. But now after the financial crisis, that's called microprudential, because it was looking at one guy or one small business. Macroprudential is regulation to help prevent big crisis, big events, the macro economy. And it's a revolution in regulation that occurred since the financial crisis, that regulators are not just there to protect you as a stockholder, or you as a purchaser of a product. It's to protect the whole economy, business wants regulation. Well when you bring up a specific regulation, there will always be some business people who will oppose it. Namely the business people who's interests are harmed by the regulation. But on the other hand, business people want regulation, because they don't want to live in a system that forces them to do corrupt things, or to do things that are obviously not in the public interest. They would rather compete in an environment that encourages good behavior, otherwise they're forced to having the lowest common denominator. It's analogy to sports events and you have a referee. Do the players want a referee? Sure they want the referee, they want it to be a good game. They don't want rough-housing, they don't want someone who's going to kill them during the game, or risk killing them, or give them lifetime injuries. They want a regulator, but of course when they get regulated, when they referee says you've just committed a foul, they object at that point. But players, they have a hate relationship with regulators, but they know that they need regulators, namely referees. >> With more regulation obviously the key is to lower the risk, but do you think by doing that, is that hindering the entrepreneur? >> Right. >> And all of these being [INAUDIBLE]? >> Yeah there is a trade off there. I've found in a couple of companies in my life, and I am very aware of the lags that were imposed on us by regulators. But on the other hand, the regulators I met, I thought were impressive people and public spirited, that was my impression. So I don't know that they're not driving a good balance.