I think that to describe this perfect storm which we have seen in the past two years, I think that if we combine the visible fist of the State with then invisible hand of private entrepreneurship, you get the worst of creative destruction.

So, I think that its a good summary of what we have seen here, the question of the relationship between Keynes with Adam Smith. I left out the other person,n the third member of the Triumvirate, if you will, and that is Karl Marx.

If you want to have three visions of how to run society, you could have Adam Smith representing the Laissez-Faire School, Mynor Keynes representing bign government and the welfare state, and finally you have the central planning socialist model with Karl Marx; normally the way that system is explained in political science and in the media is inn a left right dichotomy or a pendulum

swinging from the right of Adam Smith to the left of Karl Marx, and then in the middle you have the middle ground of Keynes. But as Ronald Reagan once said,n "There is no such thing as left and right in politics, there is only up and down."

So, what I did was, for a book I wrote called Big Three in Economics, I created the Totem Pole of the economics. So here we have Adam Smith at the top;n very optimistic, blue eyes, with wings that can fly, and the two wings are the Austrian and the Chicago Schools. Then below him, substantially below him is Keynes representing the middlen ground,

big government welfare state. And the low man on the totem pole is bloodshot and red eyed Karl Marx. And, Larry, youll be interested to know that theren are symbols on the back of the Totem Pole, and the symbols of Adam Smith are the invisible hand which, as you can see from the front, they are invisible.

So, at any rate, what I would like to talk about is how economics, the economics profession, has succeeded and failed in regard to this financial crisis. In wrote a book that was written largely before the financial crisis took place and it was called Econo-power, how a new generation of economists is transforming the world.

And it is primarily focused on microeconomics and all the fascinating things that are going on there in terms of peak pricing, on-roads, and solving all then auctions that go on for government assets and self cellular licensing and that sort of thing. There are some incredible things that economists are doing now in these areas.

And, even in the area of macroeconomics, there has been a great deal of advance by the economic profession. A point to the economic freedom index is ann example of macroeconomics moving in the right direction in many ways.

And yet, ultimately, this financial crisis is an example of failure on the part of economists and political leaders because, what we are facing is increasingn instability of our monetary and fiscal policies. That is ultimately what is at the root of this problem.

So, what have we learned? What would be the lessons...? I came upon six lessons. I tried to come up with seven because that is the lucky number, but anyway,n we are stuck with six. What are the lessons learned from this financial crisis?

Well, the first lesson, in my opinion, is that its really a contradiction of the famous paper that Milton Friedman made in 1964 in Sweden. He wrote a papern called Why the American Economy is Depression Proof and the lesson we have learned here is that the American and the world economies are not depressionn proof.

And this is a very important lesson; there is really no free lunch. I mean, Milton Friedman is really famous for saying this, but he made an exception in then monetary sphere, which I think was a mistake. He made the statement, "Federal deposit insurance has made bank failures almost a thing of the past."

And it took a long time to develop this, certainly for fifty years Milton Friedman was right, for sixty years Milton Friedman was right that we weren depression proof, or certainly depression resistant. He gave three reasons why we could no longer have another Great Depression:

number one is deposit insurance, number two is the abandonment of the Gold Standard, the abandonment of this discipline, of the Gold Standard, andn number three is the large seize of government.

He basically gave a very Keynesian argument. We all remember taking the Samuelson, or other courses, and how these talked about the built-in stabilizers, then built-in stabilizers of the Welfare System, and he is basically buying into that argument.

But the truth is that, while we are not depression proof, we have been depression resistant since the post war era, but not depression proof. And the mainn cause of this is because of the unstable monetary and fiscal policy that is built on a fragile banking system. We do not have it at least in the United States, and the country is veryn dramatically; I am doing studies on this right now.

Dramatically, in the banking system of the country, there has even been a ranking that a council for foreign... the CFR has done a rankingn for the sound in the banking systems. And, not surprisingly, the U.S. comes in number 40, but we will talk about that later.

The second lesson that we have learned from the financial crisis is that Keynes is definitely not dead, and frankly never was dead, but there were lots ofn articles coming out about Keynesian economics being dead.

And there is certainly an argument that could be made that certain aspects of Keynesian economics died in the last quarter century. But I would argue thatn Keynes is still very much alive and well in the halls of Parliament and Congress and in Central Banks around the world, as well as in the media.

I will give some examples of that. However, during this period where we said Keynes was dead, we came up with a view that this was the age of Miltonn Friedman, and Friedrich Hayek, and there are a couple of books that represent that. For example, Daniel Jorgen and Joseph Stanislaw of The Commanding Heights, we are all familiar withn that book, it came out in 1998 and then it was on PBS Special.

The quote from Jorgen and Stanislaw, "But half a century later, it was Keynes who has been toppled and Hayek, the fierce advocate of free market who isn preeminent."

And then, I got in the mail just this week, the latest version of the Journal of Economic Literature. And there is an article by Andrei Schleifer, who is then number one sided economist in the world at Harvard and is writing an article called The Age of Milton Friedman.

And he argues that for the last quarter century, and his article was completed in 2007 (right before the financial crisis came about), he writes thisn eloquent article by saying, "Look at all of the progress that has been made, who is responsible for that?"

And he cites the leaders of China, the U.S. and Britain that they all sided with Milton Friedman. So Schleifer makes the argument that it was clearly the Agen of Friedman over the last quarter century up until the point of the financial crisis.

I emailed him but I said, "Yeah, it is apparent that you wrote this article before the financial crisis, how would you amend this? Is it still the Agen of Friedman?" And he said, "I had the chance to amend the article but I chose not to, I stand by everything I wrote, it is still the Age of Friedman."

And if you buy into some of the Keynesian elements that Friedman still advocated in monetary policy then perhaps that would be an accurate view.

Well all of that quickly changed I think, as far as the age of Friedman with the crisis, the huge expansionist monetary fiscal policy, the Fed giving up anyn pretense of political independence, the fact that they are buying directly government securities, the long term treasury bonds, which is what they did during World War II, is an indication thatn independence of the Fed is in name only.

And what I find interesting is that, in this financial crisis, how Keynesianism really came back hard and good. I mean really fast and how the amount ofn spending is just gushing; any and all means are being taken, even threatening massive inflation of the future to avoid this so called Japanese style of the Great Depression, the Great Deflationn if you will.

This is the bugbear, the deflation; the feared deflation there isnt more but fear of deflation. And not just by the current President and by Bernanke, butn also by Greenspan.

In fact, remember how he would make his argument, "Well, we have to cut interest rate down to one percent because I fear a Japanese Stylen Deflation."? And Paul Krugman, I was in San Diego and I see Paul Krugman was also in San Diego, the recent Nobel Price, the headline was "Economist has Crowdn Gasping."

And I thought, "Jesus, there are a lot of things that cause crowds to gasp but I never thought an economist would cause a crowd to gasp." Anyway, hen says, "We forgot the lessons of the Great Depression. Another lesson unlearned was Japans crisis of the 1990s and Heinksein was a dress rehearsal for what the United States isn going through."

So we have this tremendous fear of the Japanese style deflation in this crisis. I take a revision is due, by the way, regarding the Japanese model. First ofn all, having spent time in Japan, and for those of you who have spent time in Japan, was there really this malaise that lasted forever?

You look at some of the Japanese companies, Sony and so forth, and some of the changes, the dynamic, the entrepreneurship that was going on there, I am notn sure I really buy in to this malaise that they are talking about.

In fact, one of the most interesting articles I saw over the last year in The Economist was a paper by an economist who was looking not just at, if you lookn at the G-Eight countries in terms of real GDP, the U.S. is at the top, has been over the last twenty years, and Japan is at the bottom. But, if you look at its per capita real GDP, it flips;n Japan goes to the top along with the U.K. and the United States is at the bottom.

So that is kind of an interesting. Revision is due isnt it? Its pretty startling suggesting depression isnt as bad as we always say it is. I also haven written an article called "It Was a Great Time to Be Alive; The 1930s" So I take a little bit of a contrarian view that the Great Depression was this God-awfuln terrible time that everything was bad, the breadlines and the brought about World War II, that sort of thing.

But let us not forget the positive things that came out during the Great Depression; for example, how many know that the five day work week came aboutn because of the Great Depression? It used to be a six day work week. And to spread the work, there was this view of, to spread the work, almost every manufacturing, big manufacturing firm,n switch from six days a week, to five days a week work week.

The amount of leisure time increased dramatically and lot of... Bridge for example became a very popular game, and it is interesting how Bridge involvedn social individuals. It was not an individual type of game, compared to the games that are played today. It was a lot of socializing as a result of leisure time. Softball became a bign sport, but again it is a social game, its not a game you play on your own.

This was the golden age of radio and film; there were tremendous advances in science and technology in the 1930s. The electronic microscope, networkn television, the radar, the jet airplane, Xerox; I mean, I was really shocked at how many advances had been made in science and technology.

So there are a lot of good things that came out and, in fact, a number people who have read The Forgotten Man by Amity Shlaes, inn which she quotes that her grandmother lived though the Great Depression and she said, You know, things were really not that bad, if you had a job. I think that its an important point since 25%n were unemployed.

But I mean, 75 percent did have a job and we are benefitting from lower prices and so forth. So I think we need to disabusen ourselves a bit about depression being this bad, evil thing that we must avoid at all cost, and we are very impatient people.

Keynesianism is all about being impatient people. We cant allow us to go through the full scale inflation, depression era, we just cant allow it, and we mustn stop it immediately and act quickly.

And Krugman makes that point. This is the biggest criticism to Obama and Bernanke; you didnt act fast enough to keep this from happening. It isn such a terrible thought that we might suffer a little bit, you see, because of this depression. So theres a lot of midst that is going out there in my opinion.

Another lesson is this anti-savings mentality. It is just amazing how the Keynesian mind said that never did I leave post war America you still constantlyn have this savings, you know, if consumers stop consuming, "Oh, this is the end of the world."

Its a terrible phenomenon; we must keep this from happening at all costs. And Ive looked at every single edition of Paul Samuelsons text book; from 1948 whenn it came out, all the way to the 19...

I think the last edition came out a couple of years ago; I am not sure if its still being published now. But all the way up until the 1980s, Paul Samuelsonn said "We still have an unemployment problem, therefore the Keynesian model of the Great Depression is still applicable, and saving is bad, paradox of thrift", all of this sort ofn thing.

And I see this is coming back pretty much in vogue. The reality is that savings is good, in good times and bad times. And why is that? Because one of then things we forget is the Pigou Effect, who argued of how a recession ends.

It comes to an end when those who own cash, who are smart enough to save, and businesses who were smart enough to have retained earnings and cut their costs,n they are the ones who have the money to say, "Hey, the bottom has been reached, lets start investing, lets start hiring, lets start engaging in RandD, research and development", that is hown that happens.

Savings is a virtue in both good and bad times. The other problem is this view that consumption drives the economy. One of the things I have tried to do inn my new textbook Economic Logic and in a lot of my writings is to criticize very heavily this argument that consumption drives the economy, when in fact, it is business investment, it isn savings, it is productivity, and it is entrepreneurship.

Thats what drives the economy, thats the truth of the supply side, it is not demand side, consumption is relatively passive and consumption is the effect,n not the cause of prosperity. And I could spend a lot more time on that but thats my basic point there.

Newsweek, by the way and this is an example of the craziness that goes on here, Newsweek had a cover story two weeks ago and the cover story said, referringn to you all of you as consumers, "Stop Saving Now". That was the headline, "Stop Saving Now", and it's this craziness of Keynesian economics thats still with us.

Number four, my number four lesson is supply-siders and monetarists have been proven wrong about the relatively harmless nature of asset bubbles and deficitn spending. And I remember all the times supply-siders making that argument; those deficits dont really matter, what really matters is cutting taxes and that will pay for the deficit dont worryn about it.

I think that is a major mistake, I think we should go back to classical Adam Smith model here, about living within your budget, I think it applies to then government as well as individuals. And then, the asset bubbles are relatively minor issue and they will take care of themselves, is more micro than macro economics, and this one was a bign one.

This one was a big real estate market, was pervasive that finally, that the Austrian view came forward, the Austrian theory, the business cycle thatn suggested that low interest rate, easy money policies, create a structural imbalance in the economy that is not sustainable that has real macroeconomic effects and so the Austrians have got itn right this time.

The Austrians deserve a great deal of credit, they predicted this and they deserve a lot of credit but unfortunately they are not getting that much credit. In read this book called Animal Spirits, by George Akerlof who is a Nobel Prize winning economist, and Robert Schiller.

Not a single reference to Hayek or Mises or the Austrian theory of the business cycle that demonstrate how the Austrians are not getting the word out there.n I think it is very unfortunate.

And that brings me to my criticism of the Austrians. Lesson number five, the Austrians have had one major weakness, they are very good at predicting then crisis just like in the 1920s, Mises and Hayek predicted the crisis.

But then they failed when it came to presenting a positive program for Laissez-Faire during the downturn, during the crisis, during the Great Depression. Andn that is, they are constantly advocating to, and I quote, "Do nothing. Do nothing; let the process work it-self out."

Mark Faber, perfect example, and Wall Street Journal quotes that the best policy response would be to do nothing, and the free market corrects the excessesn brought about by unforgivable policy errors. And there is a sense of, for some sympathy to that about letting the free market correct the excesses brought about by policy errors, I wouldn certainly agree with that part, but the problem is... it is a P.R. problem.

And it is not only a P.R. problem is light thinking. Its just not thinking through what that says to the public and to the media that is never going to carryn any weight. How do you fight a bad idea? Which is what the Keynesians are raging right now, thats a bad idea. Well, you dont say Do Nothing as the answer. You offer a better solution. As Benn Franklin said, "An empty bag cannot stand when the wind blows."

And so what I would like to suggest, the number six lesson in this financial crisis is a positive program for Laissez Faire, borrowing a title from Henryn Simons, of the University of Chicago. So I have a list here of positive programs for Laissez Faire.

Number one is do no harm in wasteful expenditures, raising taxes, unnecessary new regulations, and let me tell you, be prepared for a Sarbanes-Oxley numbern two coming down the road to regulate, over regulate the financial institutions.

I think its very dangerous thing. And also I would put in Fed policy, not only fiscal policy but monetary policy, Do No Harm. And that is by adopting at an minimum, a steady monetary growth policy, the monetarists rule of Friedman, if you will.

Okay, so you cant figure out what the money supply is? Then use alternative techniques, like a commodity index, a gold index. I believe gold plays a veryn vital role in the monetary system, and that is... You are doing something right in the gold price stays stable or even decline slightly.

I think that would be a positive thing, but if gold is going through the roof, you know you are pursuing the wrong monetary policy. And I would also suggest,n as Friedman suggested many years ago, stop manipulating interest rates. Let the natural rate of interest go where it will go, stop intervening, and encouraging interest rates to go above then natural rate or below the natural rate.

During Alan Greenspans 19 year reign, there were seven policy changes in monetary policies from easy money to tight money and back and forth. And numbern two; suspend or eliminate bureaucratic accounting rules and regulations, including that Sarbanes-Oxley, and parts of the Mark-to-Market accounting rule, FAS 157, which I think isn counterproductive.

And one of the interest things in Animal Spirits by Akerlof and Schiller, that I read was that not only is then Mark-to-Market rules been devastating in terms of the current financial crisis but Mark-to Market rules that were established earlier on by the FCC, allowed Enron to mark up the values of theirn securities far above, not below, but far above of what their realistic value was.

So thats a very interesting couple of pages in Animal Spirits which I didnt know about. Number three, we need to go back to this idea, we need a stable longn term fiscal and monetary policy, and in terms of fiscal policy and tax structure.

Look at Hong Kong, Hong Kong is a perfect example of what we ought to adopt. When was the last time that Hong Kong changed their flat tax, or their tax onn corporation? They dont make a tax change; they dont make a new tax bill every year. You do one tax bill and you stick with it, you dont to this constant change of the tax legislation everyn year.

So I would like to see a flat tax, just adopt a Hong Kong tax system and move on. Of course, we are going to have to solve the overspending problem so then Constitution amendment, Balance Budget Amendment makes perfect sense, we ought to adopt it, and that would be a great way to provide a fiscal stability long term.

And then, number four, engaging a quick, effective, financial cleanup of the balance sheets through bankruptcy. I think Bankruptcy Law is really a greatn institution to deal with this problem as a secondary solution, buying directly the toxic assets of the mortgages and so forth.

Which was the original Paulson plan, much smarter Equity investment in banks was one of the stupidest things the government did, and who knowsand that wentn down a rat hole. Who knows where that money went. So Equity Investing in banks was the Swedish model; I think it was a big mistake.

And then, ultimately, we need to have a long term, stable sound money banking system. Why is nobody talking about that? We are simply criticizing asn economists, as free market economists, our primary function is our criticism, "dont to this, dont do that, or do nothing." But, what are we doing in terms of,n what is our plan for a stable monetary system?

Thats what we really ought to be focusing on and then we should present it as our plan to stabilize finally the financial system. And in this regard, Imn looking historically, Im looking at what the banking systems are and I find it interesting that just to the North of us, and I dont mean the United States.

I mean north of the U.S., is Canada which according to the CFR report has the number one soundest banking system in the world. And there are a lot of reasonsn for that, the Canadian banking system had no bank failures during the Great Depression, none! While we had thousands, does anybody want to know, wonder why is that?

They have higher capital reserve requirements, they have nation wide branching, they have, it is an old acropolis, they have five or six banks and In dont think we should necessarily go to that, but the idea of allowing nation wide branching provides and incredible monetary stability and that is really a positive thing.

And I know Larry White talks a lot, and the free bankers talk a lot about this idea of nation wide branching and why that provides some stability. So I thinkn thats one of the key elements we should look at. Now, Canada has also adopted very clear, transparent rules of the game, and regulations and as a result, they simply did not allow supplyn rending to take place in Canada.

They simply did not allow No Doc Loans, like we did. So I think theres something to be learned here, Im not saying it is a perfect system but surely wen can start thinking now that we have got to adopt something that gives us stability. That is what we need so the entrepreneurial spirit, the Adam Smith spirit can flourish.

To conclude, I will mention Adam Smith. There are a couple of quotes Id like to give from Adam Smith and then I'll open up for questions. First, an wonderful great quote, from Adam Smith:

"All that is necessary for a nation to go from the lowest barbarism to the highest degree of opulence, is peace, easy taxes, and a tolerable sense ofn justice, a tolerable administration of justice" and I would add to that. I think he left out a very important a principle that he truly believed in and that is sound money, stablen money.

If you add those four elements; peace, easy taxes, sound money and a tolerable administration of justice, we are going to be able to get back to the businessn of earning money, making money, giving away money and enjoying the fruits of our labors.

And finally, to suggest a little bit of optimism, because I have noticed that a lot of free market economists, some are pessimistic about the future, Iven been talking to a number of you here at the APEE conference and a lot of you are still anticipating Armageddon and the collapse of western civilization.

So let me give you this wonderful quote of Adam Smith from The Wealth of the Nations that said "The uniform constant in an uninterrupted effort ofn every man to better his conditions, is frequently powerful enough to maintain a natural progress toward improvement in spite of both the extravagance of government and of the greatest errors ofn administration."

So in conclusion, yes, in the short term Keynes is alive and has toppled Adam Smith. But in the long run, Keynes is dead, long live Adam Smith.

Question: I have a question, before opening it up to all of you, there is a great deal that has been talked about deflation andn that we have to do this all massive monetary expansion because of deflation, but if gold is going up, that would seem to be contradictory wouldnt it?

MS: Gold is rising, you notice gold moves actually somewhat differently than other commodities including silver, so withn the inflation, copper prices have gone down dramatically, silver prices have dropped dramatically, aluminum, across the board, virtually every commodity oiln collapsed and so forth. But gold did not collapse because gold caries a premium as a crisis hedge.

And it is real money. I always carry with me a 20 dollar gold piece, as a reminder to me that this is real money. So when paper money, when you have thisn fear that the monetary system isnt working, then that' a contrary indicator. And that is why gold has held up as well as it has.

Now you have noticed in the last couple of weeks as the evidence is coming out of short term stability, we still dont know if we are really out of thisn problem. I mean, the latest news came out even today were suggesting still more trouble, reports from the INF and so forth. But in the last couple of weeks gold has been coming down,n so the premium, the crisis premium for gold dropped.

And so the price of gold came down. It is definitely a different commodity, it is as we old timers like to say, gold is money, and it is not just anothern commodity.

Question: I am not an economist, and I think economists neglect some other factors, looking into the future, particularly demography, demographicn factors. The world population is aging at a rate without precedents in human history;

dont you think that this poses a problem for the traditional ways of fluking and free markets relying on entrepreneurship andn relying also on consumption, old people consume a lot but do not produce much, and do not innovate much, so what is the future from a demographic point of view, and from the economic?

M.S. Demographics would not be a problem at all except for the entitlement programs, thats what creates the problem. And it is an problem through Europe, Asia, Japan, the U.S. because we have a system that, where you are not, the government pays for your social security and medical expenses and that sort of thing, so as an result you do have a problem.

So demographic is a very real problem and the sooner we act to respond to that by privatizing both social insurance and medical healthcare systems so thatn you are personally responsible or use private insurance, that would solve the problem and there would be no demographics problem.

So, it is a serious problem that every country is going to have, every Welfare State is going to have to address. And there is a solution, economists haven demonstrated there is a solution, we are going to have to cut benefits, raise taxes or go to a private system.

The United States ...What...? Well certainly immigration postpones the problem, but still those immigrants... Listen, all the studies show that as a nationn increases in per capita income, they have fewer children, they don't have more children they have fewer children.

So this demographic problem is still going to be a problem if you have an entitlement mentality in our welfare systems. As long as we have that, immigrationn will simply postpone the problem, as it has done in the United States, but it's not going to eliminate the problem.

Question: Before I formulate my question I want to reply to the gentleman, excuse me, John Stuart Mill used to say that ann economist that only knows about economics is not a good economist. Most economists do consider many other factors. You have Transaction Cost Theory, you have Public Choice, and you have manyn schools of economics that do attend those problems.

So my question is if you think that we are headed towards some sort of global currency, like a special drawing right. And I would like to hear your commentsn about the existence of two hundred trillion dollars in derivatives, in the hands of the five largest American banks, and its effects on the stability of the financial markets, considering then recent crisis. Thank you very much.

MS: Well, that is a lot to cover. First of all, I would like to suggest that my talk was on political economy and not just technical economics, andn economics used to be called political economy and I think we should go back to that because as the Public Choice Economists have demonstrated, economics are clearly linked with political actionn so, I think if we went back to that it would be a good thing.

Second of all, as far as the world currency is concerned, we already have a world currency; it's called the U.S. Dollar and it's not the end of the world.n You have to remember, I will give you an example of this, in the year 2001, right before 9/11, during the summer of 2001, and I had a very interesting conversation with Newt Gingrich, then speaker of the House.

And he came up to me and he says Mark, can you imagine, with the way the surpluses are going, we will eliminate the federal deficit in 2010, and you laugh,n but really the trend was in that direction, it was clearly in that direction. Now the government had a hard time spending enough money to keep up with the tax revenues that were coming into then system.

And then of course everything fell apart, starting with 9/11 and the financial crisis, you put all hose things together and end up where we are right now.n But the point, lets be optimistic, it isn't that difficult to reverse course and go back to a stable system and solve this problems and get back to a natural rate of interests and the dollarn would do fine as a world currency, which is really what it is.

I have traveled to 71 countries, and I have yet to see anyone of those countries where I pull out a couple of bucks and they don't take it. It is, forget then special drawing rights and so forth, if America it is in their hands, the American leaders to do the right thing and the sound economists who are in this group are telling them to do the rightn thing. So, I don't see any need for a special commodity based currency, which China and Russia are talking about; the dollar will work fine if we get our act together.

And then, derivatives. There is a lot of misunderstanding about derivatives. Everybody thinks that derivatives are purely for speculative purposes and theren are lots of problems with speculative side of derivatives.

But don't forget that a vast number of companies and consumers use the futures market derivatives in futures and options markets, and they use these marketsn as a conservative hedging vehicle.

And lots of studies by economists have shown that the futures and options markets stabilize make commodities less volatile, there are a lot of benefits ton it. So I am not really that particularly worried about the derivatives market. If you have a stable monetary and fiscal system, derivatives are going to work just fine. So lets go to the rootn of the problem.

The problem is, the best comparison I can give is to the way our financial system works and the way our Fed system works is backing a track or backing up an trailer or a boat into your backyard, or into your garage or into the water, has any of you tried that before? How easy is it?

It is very easy for the thing to swing out one way or another and then you have to pull it back up and then you have to inch it back very easily. That isn what our monetary system is like.

It's like backing up a boat or a trailer into the driveway or into the water. And if you don't do it just right, our system, you get this instability,n in the system. So we need to really focus, I think in providing a stable monetary system, we got the dollar already in place, I think that is the best way to go.

Question: My name is Clifford Thiesen; I'm from Virginia, USA. What would you comment on the competition among the nations ofn the world for a productive persons and wealth?

MS: So you are talking about immigration, transfers of capital are you talking about the free market?

CT: Keeping taxes low, regulations fixed.

MS: Oh I see what you mean, the competition between state and countries. There is a lot to be said, I think, a lot of times we ignore that sort ofn thing.

I really like what the freedom, the index freedom, the economic freedom indexes are doing that both Fraser students inherit foundations are doing,n because it highlights the differences between countries, and even the Fraser students are doing the state by state and providence by providence in North America competition.

And there have been studies showing that it does make a difference, I know that Art Laffer has been doing quite a bit of studies on his supply-siden views and states that have very high taxes versus low taxes and the fact that business and individuals do move is more difficult on a country by country basis because of that.

But the E.U. has been wonderful in terms of transferring from one state or once country to another for business or tax reasons or for even price competition.n The Euro I think it has been a wonderful success, in terms of price competition. I like that a lot.

The one thing I am really skeptical about is this new move to crack down the tax havens. Tax havens provide a really viable service and that is it forces taxn height, tax dates stop their excessive taxation. And these tax havens are there as evidence of the excessive taxation of the G-8 countries.

So the crack down on that is very bad because, eliminating tax havens is going to mean only one thing; that this eliminates another barrier to higher taxn rates. We should be fighting to denial any effort to regulate or eliminate the tax havens.

Question: Mark I appreciate your note of metaphysical optimism, my question though is, what you consider the chances of then Obama administration doing what you call, the right things?

MS: Well lets see, lets just look at what they have proposed doing. If federal deficit is outrageous, is proposed to push aheadn a major tax increase on both wealthy people as well as everybody else to the cap and trade tax which would be a tax on a basic utility bills and gasoline and so forth, that'sn negative.

It would be interesting, I don't know about barriers to trade, that is an issue certainly, what is happening to Mexico is not a good sign, what the U.S. isn doing there. So yeah, he is doing a lot of bad things, there is no question about that.

Bare in mind that he is using the Reagan Strategy here, I hope you understand this. Reagan when he came into office in 1981 came forward with his mostn powerful legislation, the tax cut, the regulation, beefing up national security, and he came forward right from the beginning.

And thats a strategy of a strong president. So Obama feels he was elected to propose these things and proposing big government, and by gosh you are gettingn it, good and hard. But it should backfire, I think it would backfire.

I mean, yes we are getting a stock market rally, either we will reach the bottom of the stock market, and start a recovery and he will look at that as an success, but we really headed for stagflation as the present system. I don't believe were headed to end of the world scenarios, but I do think we are going for stagflation.

We are going to see more inflation, interest rates coming back up, and more regulatory environment. It's going to be difficult to achieve the 4 or 5 percentn economic growth that they are predicting. So I expect 2 % economic growth and an inflation problem to deal with. That's how I see where we are headed for with Obama.

Question: Yesterday, Mary O'Grady said that if she were Queen of the World she would abolish the IMF; my question is, if you were the King of the World,n in general, what would you do, and in particular, would you abolish the Federal Reserve?

MS: Its true, I asked Mary O'Grady, why abolish the IMF. Look, for every thing the IMF does there is a private alternative. So there seems to me thatn the IMF can really do only harm from what I can tell.

Now it is possible that the IMF could provide some kind of a service, the slender last resort to help bail out companies, countries, but if they do that,n they need to have the right policies, and to raise taxes, and to engage in some other, specially the raising of taxes it seems to me, or maybe some other things that they do that theirn owners...

Its a real problem with the IMF, and its too bad because there was a period in the 90s, I mean there are reports by the world bank that they were very pron free market. And it seems that they have lost their way, so you know they are imitating the microcredit revolution that Muhammad Yunus and the Grameen Bank established.

You should read Yunus's books on what he thinks of the IMF and the World Bank. They are really unnecessary when you have these private alternatives to dealn with these problems.

And you also have the moral hazard, if you are going to have these institutions to bail out, not only the banks that are too big to fail, but also then countries that are too big to fail, then they keep making the same mistakes over and over again, and Argentina is your perfect example.

They just can never get it right. Am I not correct? And maybe it is because the IMF is always there for them. One thing I failed to mention; I think the FDICn insurance should now be reduced, gradually reduced.

Maybe get it down to the Canadian level or something, other countries have insurance but it is a very small amount. And that would really minimize moraln hazard with the banks and force the banks. And it would force customers to start looking at the banks balance sheets. Which I think is really important to know, which banks are doing well andn which aren't.

Its funny how small banks in the U.S. anyway, I don't know if that is true in Mexico and elsewhere, but the smaller banks are financially more viable thann the big banks. The big banks are the ones who knew all along that they were too big to fail; Citibank and Bank of America and so on.

And they are taking all these incredible high risks. So moral hazard has suddenly increased dramatically because we are guaranteeing everything. And I cann see providing some sort of FDIC insurance for the small investor who if the bank fails loses all their personal savings.

But someone who has a quarter of a million dollars ought to have the brains to know to look at the balance sheet to know if that bank is worth investingn in.

Abolish the Fed, see this gets to the issue to those of you who are pure academics, it is easy for you to sit back and say Abolish the Fed, and so on.n Me, walking the streets of Wall Street every day, and meeting a lot with government officials, I am not a government official but I always try to be in their shoes.

So I always think in terms of second best solutions, I mean, I wrote my dissertation on a hundred percent gold standard. Which is a prettyand you know, Maryn Rothberg said, abolish the Fed and replace it with a 100% Gold Standard.

But, or free banking, you know, we have talked about free banking. My sense is what I would like to see, and you tell me, what I would like to see is stablen long term fiscal and monetary policy, that is all I am asking for. That's all I'm asking for folks. And we are the best and the brightest here; surely we can come up with the answer.

Initial credits

Introduction

Totem pole of economics

Success and failure of the economics profession

Six lessons

Conclusion

Question and answer period

Final credits