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How capitalism will save us.steve forbes.wealth conference


How capitalism will save us.steve forbes.wealth conference.Bermuda

How capitalism will save us.steve forbes.wealth conference.Bermuda

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  • 1. Private Wealth ConferencePresentation TranscriptsSteve ForbesChairman and CEO of Forbes MediaHow Capitalism Will Save UsINTROMAN: Good morning. Sir Grady Gibbons, Lady Gibbons, ladies and gentlemen, welcome to the First Annual Capital G WealthConference. We welcome all of you here today for what we hope will be a very informative day on a lot of topics that we thoughtyou’d all be interested in hearing about.As you know, we brought to Bermuda G Speak, and we were just as pleased to remove G Speak, so there will be no discussion ofG-banking or G-wealth today, we will be having a wealth conference, and having a very serious discussion about a subject that all ofus in this room have a great interest in.This has been a very extraordinary two years for all of us. Many of the things that we believed were disrupted in September of 2008with the economic meltdown that occurred across the globe. And it’s given all of us a pause to rethink exactly what our strategy isfor accumulation, maintenance and increasing wealth.And one of the factors that’s involved in that process, it’s who you talk to, it’s who your advisors are, and it’s what kind ofinformation do you get. And so today we’ve brought together a group of international advisors that we believe will provide you witha great opportunity to ask questions about some investing alternatives, and also gain some insight about how to choose an advisor,and how best to manage an advisor.The stories of the last two years have included Bernie Madoff, and Mr. Sanford, and trust is not the only thing that has to be in placebetween an investor and advisor; there has to be more. Ronald Reagan said it best when discussing the Russians, “trust, but verify.”Advisors should be part of your trusted network, but they also should be part of your performance network. And discussions abouthow advisors should behave in that environment will be part of the discussions today as well.Capital G has grown considerably over the last few decades. And we are at a point in our history where we’ve providing a significantamount of services to the high net worth and the ultra high net worth market both here in Bermuda and abroad. And we’re pleasedto be able to bring the expertise of a very talented group of staff, who also will be involved in the breakout sessions today, to discussmany of the issues associated with wealth management.A few, and I apologize, one of the things about getting older, even at 16 point type, I can’t read it.(laughter)MAN: I do wanna give you a couple of items. I wanna, first of all, welcome both, Steve Forbes and Dr. Lawrence Chimerine here today.Steve will be doing the keynote address this morning, and then we’ll be talking a little bit more about Steve here in a few moments.
  • 2. And at lunch, Dr. Chimerine will be giving an address from the economics standpoint that I think all of you will find very, veryinteresting. We have given all of you delegate bags, and yes, there’s stuff in the delegate bags, and we’re gonna ask you to do a fewthings for us.One of them includes a conference survey, and I’m going to remind you now, and then at the closing session I’ll remind you again, wereally want to hear from you at the end of this program, whether we hit the topics that were of value to you, whether the speakersthat we’ve brought together in this forum were the right speakers, and what you would like to see as we develop these conferencesgoing forward.Being the first, it’s an opportunity to improve at the second. So we really value your input and look forward to getting it. Questioncards have been issued to you, both in your delegate bag, and they have also been handed out this morning. And the question cardsare really an important part of this. Obviously with this many people it’s very difficult to take questions from the floor. And nooffense intended, but some tend to turn their questions into messages. And, well, time is at a short amount for us. The questioncards are going to become very important, and they’ll be submitted to the moderators, and the moderators will pose thosequestions to the panelists in each of the groups and the breakout group. So please, as you are sitting there today, and you havequestions, or thoughts come to mind, fill out that card, get it passed to the various folks who are standing around the room today,and they will get them to the moderators to get those questions posed.And I want to thank our sponsors today. Colonial Insurance, the Ministry of Finance, the Bermuda Department of Tourism, Rego(?)Sotheby’s International Realty, KPMG, Tetrin(?) Capital Management, Trilogy Global Advisors, Fours(?), MFS Investment Management,Electronic Services Limited, Franklin Templeton Investments, and I cannot say enough thanks to the Tucker Pointe(?) Hotel and Spa. Thisis such a fabulous place to hold a conference like this. What more beautiful place on a gorgeous day in Bermuda could we be? The onlything missing are windows. To be able to see outside.Now I’d like to say a couple of words about Steve Forbes, before he comes and addresses the group this morning. And there are(sigh) … I’ve been to a lot of conferences in my 38 (laughs) years in banking, and occasionally you’ll get somebody introducingsomeone, and they’ll say this man needs no introduction. And usually that’s because the introducer is too lazy to read the bio. Well(clears throat), I assure you I’m not too lazy, but I have to say this is one of those individuals that really needs no introduction.For myself, both his father and he, are part of my history in banking. From the time I started in 1972, when his father was editingthe magazine, to the time that his father passed away, and Steve, just like every one of you who has a business, had to reorganizethat business and reposition the business and take over that business from his father, and successfully did that, he has been in theconscious of certainly the American public, but has had an international presence as well.His messages have always been about things that resonate with all of us. Capitalism, yes. When the capitalist tool would land invarious countries, and various airports, there was a certain amount of pride that always landed with him. Democracy? Absolutely,the man believes in it, he lives it, he breathes it.Hope? Always. There’s hope in everything, and everywhere. And there are many foreign countries, Poland comes to mind mostspecifically, where his message of hope and capitalism and democracy had particular resonance. He’s one of those individuals whodidn’t stand on the sidelines, who didn’t become a man of influence who had the ear of somebody in the arena. He actually steppedinto the arena himself.And, with the rock-solid beliefs and values that he had, and the knowledge and the confidence that his position was right, hestepped forward as a candidate for president in two different elections. And didn’t win. But he changed the face of American politicsin the process. Having run for only one elected office in my life, and yes, it was only Parks and Recreation, for …(laughter)MAN: And there were only 5,000 votes cast, and I lost by 400. And it was a terribly disappointing experience, particularly when I’dpick up the paper and read the editorials of people who seemed to know me and know my position, which always fascinated me,that Parks and Rec could generate an editorial on someone.Private Wealth Conference -2-Steve Forbes
  • 3. But as you can imagine, you make that into a national campaign, and you take a position like on flat tax, democracy, capitalism,you’re not just going to engender a few editorials, you’re going to get, the full media onslaught. And through that whole process, hestood firm, he stood strong, and he has a message that I think all of us today will value. And the final thing that I wanna say is thatanybody who is succeeding, a generational succession in a business, has a choice to make at the time that you succeed.One is that you can continue the business as the father may have had it. Or you take the business and you do something more withit. And this is another one of the fascinating things about Steve Forbes. His father had built a great old media company. He turnedit into a new media company. And through the introduction of a variety of e-commerce and e-portals, has turned it into a magazinethat is getting well over 40 million contacts every month. In the business and finance world. So this is a man who isn’t stuck inthe past. He’s absolutely in the future. And I’m just terrifically pleased to welcome him to our conference today, and then lookingforward as much as all of you are, I’m sure, in hearing his address to us this morning. Mr. Forbes.(applause)SPEAKERFORBES: Thank you very much, John, for those very, very kind words. And it is a great pleasure to be here for the First Capital GConference. It’s also good to be back in Bermuda. One of the questions you get on an occasion like this is, have you been to Bermudabefore? And I almost responded when I first got the question, yes. But I can hardly remember. It was when I was four years old. And,we’d come over on the Queen of Bermuda and spent some time here at the old Coral Beach Club.So it is great fun to be here. And as the title indicates, of the remarks I’m supposed to make this morning, it’s about a book that I wrotewith a co-author, called “How Capitalism Will Save Us. Why Free People and Free Markets Are the Best Answer in Today’s Economy.”It’s not a title engendered to get you on the bestsellers list. Especially in the aftermath of the financial crisis. Capitalism is not themost warm and fuzzy word right now. But that’s precisely why, being contrarian, I insisted we put it in the title, to make the pointthat, because there was a crisis, it doesn’t mean that capitalism has to go on the junk heap of history. Or that there is somethinginherently wrong in free markets.As a matter of fact, if you look at the economic crises of the past 100 years, and I’ll touch on this in a few moments, each andevery one has their origins not in some sudden failing of free markets, but rather catastrophic government policies. Yet, it’s freemarkets that get the rap for what happens, not the failures of government policies. Before I get into that, and then I’ll make someobservations about the economy in the United States, I should perhaps, as a word of warning, give you a favorite saying of mygrandfather, who started our company back in 1917.He was an immigrant to the United States, came from Scotland, one of ten children, grade school education, very little money. Butlike millions who came to the United States, he had dreams and ambitions, and had an opportunity to realize them. And when hestarted Forbes magazine, of course people would ask him what’s going to happen to the economy, where are interest rates going,what stock should you buy? And my grandfather, being an honest individual, would invariably reply, he would say, and some of youwill appreciate this more than others, he would say, “You make more money selling the advice than following it.”(laughter)FORBES: So, full disclosure, word of warning, here we go. But the thing about capitalism is we live in relatively free markets, mostof us. And yet, in that sense, we are like fish in water. The fish do not know they’re swimming in the water. And we do not really fullyrealize the extraordinary system that we live in, we just take it for granted.So there is a lot of mistrust, misunderstanding, which in turn leads to bad economic policies. So we decided to write the book ina conversational style, as if you’re around the kitchen table talking to friends or relatives. Do it in a simple Q&A format. So thatrather than these books about economics, which even if they’re supposed to be simplified, get into terms that just have your eyesspinning and leaping for some alternative. We wanted to do it a little differently.Private Wealth Conference -3-Steve Forbes
  • 4. But capitalism is a moral system. It is the best poverty reducer in the human history. And the reason is that it does give a widerange of opportunity for creativity. It’s not enough to invent something. The Chinese, after all, invented paper, they inventedgunpowder, they invented the compass. But those inventions were developed actually in Europe, because Europe, by thestandards of the time, were much more open economies than what they had in China.So the compass, as we all know was developed, was improved and improved and improved. In terms of navigation. Same thing inpaper and other things. And that’s why it’s not invention, but innovation, taking these things out and giving it broader use, thatreally is what counts. For example, we all now know about the extraordinary impact of the Internet. The Internet originally had avery narrow focus, invented by an agency inside the U.S. Defense Department for communications with universities.But throw it out in free markets and is now turning the world, including my industry, absolutely upside-down and doing things thatjust would have been absolutely inconceivable just a few years ago. Imagine 20 years ago, or imagine today, bringing somebody backfrom the dead, who passed away 20, 25 years ago, and try to explain the Internet. It would be pretty difficult thing to do. You know,there’s just so much intangibles involved. Is it about telegraphs, telephone? What are you talking about?And there’s more TV, interactive TV, it would be extremely difficult to try to explain to somebody what this thing is, and what itsmeaning is, on a day-to-day basis.So the thing about free markets is it’s about transactions. Two people or two parties, have to make something happen. I don’t wantto be simplistic, but it is something that gets overlooked time and time again by policy makers, time and time again by the popularculture. You go to look at novels, you look at movies, and the villain is invariably somebody from the corporate world. Alwaysplotting to figure out how to poison your water, how to pollute the environment, how to take the weak and ground him into dust.Usually they’re grossly overweight, jowls just, you know, blah … and … (laughter) … this, or they’re thin-faced, and you know, youcan tell there’s just evil lurking there. It’s ubiquitous. And yet, if you think about it, in free markets, you only succeed by providing aproduct or service that somebody else wants.So even if you live up to the stereotype of just a person lusting for money, greedy and all that sort of thing, you don’t get the moneyunless you provide a product or service that somebody else wants. So you can be the kind of personality that makes babies cry, thatmakes dogs bark at you in the streets. But again, you’re not going to get it unless you provide something in return.Adam Smith talked about the butcher and the dinner, where you go to a restaurant today, restaurant wants your money, you want thefood. They give you the food, you give them the money. You each get something out of the transaction. And that’s what makes thesystem work. It is mutually beneficial.Now, life is full of transactions we don’t like to have to do, such as paying for electricity. Or paying rent to the landlord. We begrudgeit, we get angry when the price of electricity goes up, yet human nature being what it is, we don’t think anything about spending $150or $200 for a pair of blue jeans that look like they came out of a dumpster.(laughter)FORBES: But that’s just human nature. That’s just human nature. But all of these things involve transactions. And one of the worstthings economists ever did was define economics as the allocation of scarce resources. Oh boy, that’s really inspiring, allocation ofscarce resources. Absolutely wrong. Wrong definition. It’s about the creation of resources. It’s about turning scarcity into abundance.That’s the virtue of free markets.And think of it, it happens all the time. If people want something, or even if they don’t, somebody figure out you might wantsomething. And they take a risk in providing it. And so it is turning scarcity into abundance. Take the automobile, 120 years ago itcost the equivalent of $150,000, $200,000 today. Truly a hobby thing. A toy for the rich. Along comes Henry Ford, develops a movingassembly line, turns a toy for the rich into something every working person can afford and we can’t live without.Private Wealth Conference -4-Steve Forbes
  • 5. Or take cell phones. You look at pictures of cell phones 20 years ago? They’re clunky, big as a shoebox. Often didn’t work. And nowtoday, everyone has them. The poorest of the poor in Haiti have cell phones, India have cell phones, four billion around the world.And it’s not just telephony now, it does everything. Except, perhaps, dress you in the morning and grow hair if you don’t have it.(laughter)FORBES: But it’s becoming absolutely ubiquitous. And cheaper and cheaper. And more and more of what it can do. And that’s therelentless drive of innovation, you take for example, the iPod. If you had said iPod ten years ago, you’d have thought is this aremake of some movie about aliens? Pod people, iPod? And so Steve Jobs comes along, brings some failed technology of the past,or failed products like the Newton, updates them and does some other things, now it’s something that tens of millions of peoplecan’t live without.And if you take the memory of an iPod, it costs $25? Fifteen years ago it would have cost $10,000. So that kind of process ishappening all the time. And in terms of innovation, it’s not always the big things, it’s little things that just accumulate. You go to acoffee shop, often, now, a Starbucks, notice even though they offer different sizes, the lids are all the same size. That is just not anaccident. So whether it’s a 12 ounce, 16 ounce, 20 ounce, the lid fits.Well, that saves in inventory, saves in production cost, little things like that happening all the time. And creativity, again, is not justcoming up with something like the Internet. Take, for example, mentioning Starbucks, coffee is ubiquitous. Every country that can,grows it. Everyone can make it. Everyone sells it. Even the airlines still serve a version of it for free.(laughter)FORBES: And yet along comes Starbucks and recreates what their version of a Vienna or Italian coffeehouse and obviously updatesit into one that the Viennese of 100 years ago would not recognize. But it works. People like it. Which is why they go to it. And again,it’s small things.I mean, you go to most fast food places, you get three sizes; small, medium, large. In Starbucks, what do you do when you go intoStarbucks and look at the size? Small is tall. They call this little thing tall, you know, so if you have self-esteem issues, go to Starbucks …FORBES: … small is tall. And medium. Medium sounds bland, mediocre. In Starbucks land, they call it grande. Oh, grande, yes. Andthen large is venti. I have no idea where venti came from, I have no idea what latte means, but you say venti latte, line up, pay $20,and off you go. Off you go.(laughter)FORBES: There are millions of examples … but just take something like clothing. I mean, since cave days, we’ve been skins …you know, we’ve been wearing clothes. And yet, innovations happen all the time. A number of years ago, a young fellow playingAmerican football in high school, and then in college noticed, especially in late summer, early fall, in practice, you would sweat. Andyou’d go through eight or ten T-shirts because you’re always constantly sweating during the workouts, and the practices. He got theidea, not seemingly revolutionary, but hadn’t been before, why can’t you have a fabric that absorbs the sweat so you don’t have tokeep changing the shirts?And he actually did research on it, came across in medicine a fabric narrowly applied, narrow purpose of absorbing moisture aftera certain kind of medical procedure, and thought why not expand the use of it? He did. Went to a tailor, had some prototype shirtsmade up, went to his teammates, and said why don’t you try this?And, of course, initially they resisted it. They felt it, it felt silky, which they thought was sissy. I’m not going to wear sissy stuff out onthe football field. And so he finally persuaded them to do it, and it worked. And now it’s a large company, hundreds of millions ofdollars, Under Armor. Kevin Plank. So again, these things happen, even in the oldest of industries and businesses. Finding new waysof doing things. And bringing about these seemingly small but cumulatively extraordinary improvements.Private Wealth Conference -5-Steve Forbes
  • 6. So in terms of capitalism, you know, we tend to think of commerce on one side, it is sort of when you say money it’s hard to think ofmorality. But think … remember, serving the needs and wants of others. But the tendency is to think of commerce on one side, kindof grubby something you try to rise above eventually, but you have to do it; it raises the standard of living, sort of a Faustian semi-corrupt bargain, but hey, makes us better.And then if you make money, then of course you atone for your sins by giving it away. You become a philanthropist. And so thephrase we now use, and we all use it without thinking of it, not giving, but we say in the States, giving back. Now, if you think aboutit, giving back implies you took something that didn’t belong to you in the first place. You know, like you’re in the sandbox and yourkid took something, now give it back.So you make money in commerce, well, you give it back and you put a sheen on yourself, try to go from devil to angel by showing oh,I’m not just a grubby guy in commerce, I’m a philanthropist, helping the world. Yet the real help comes out of commerce.And if you think of it, you look at the United States, the paradox in the United States, seemingly, is we’re the most commercialnation ever invented, but also the most philanthropic nation ever invented. But if you think about it, serving other people, eventhough you’re in it, maybe even in it for yourself, you don’t succeed unless you do something that somebody else wants. Or needs.Really, commerce and philanthropy are two sides of the same coin.Skill sets may be different, but oftentimes some of the most innovative philanthropists came out of commerce. John D. Rockefeller,called a robber baron. Chicago University. Rockefeller University. Restoration of Williamsburg. Numerous things that come out of it.People using that kind of innovative mind in ways that hadn’t been done before.So it is about creativity. And people say, well, what about the Bernie Madoffs and the corruption and all that sort of thing? Well,news flash: human nature has not changed since we came out of the trees, or wherever we came from. You know, you read the Bible,people have done bad things forever. But just because you have bad actors in a certain walk of life or a certain sphere doesn’t meanyou throw the whole thing out. You have fraud in elections. In the United States we have it all the time, but that doesn’t mean, oh,democracy bad. They have fraud, let’s get rid of`it. Whereas if you get corruption in business or wrongdoing or pushing the envelope,as we say, oh, it’s inherently corrupt and bad. And therefore we must regulate it to a fair-thee-well.So you get this false choice of either rigid, massive regulation on the one hand, or anarchy on the other. No. That is an absolutelyfalse choice. Free markets, like anything, means sensible rules of the road. Hyack, the great economist, talked about rules of theroad. Sensible rules of the road.James Madison, the father of the United States Constitution, said if we are angels, we would not need government, we would notneed laws. But manifestly we are not angels, except perhaps our young grandchildren. But most of us are not, so you do need laws,you do need rules of the road. You do need regulations.But there’s a difference between regulations such as speed limits so you don’t, in the U.S., go 120 miles in a school zone, you don’tdrive when you’re drunk, put on the indicator when you make a turn, sensible rules of the road such as that, such as those. Versussomebody telling you when to drive, where to drive and what to drive. So sensible rules of the road.And then the system will work. Now what is the government role in this? Very, very, very basic. It’s providing everything from safetyand security, safety nets, responding to disasters, infrastructure, but also government has a role in responding to change. Not in apunitive sense, but when innovation comes along, you do need new rules.I mentioned automobiles. You had a whole infrastructure, you needed more highway patrols, you needed rules of the road, insurancecompanies, new courts and the like, to deal with this thing. Or take Xerox, late ‘50s, early ‘60s, invents the copier. Well, what did thatdo to copyright law? Could it mean you’d go to the library and just, uh, copy off a book? No, you had to develop a fair use doctrine.Or today, still grappling with the Internet and what it’s done to the distribution of music and video.Private Wealth Conference -6-Steve Forbes
  • 7. So government needs to respond to those kind of changes. And one of the reasons we got this economic crisis was that governmentfailed to respond to innovations in the financial world. Did not respond to the rise of CDSs, credit default swaps and derivatives, andthe new variations of derivatives. Now, as a result, the rules of the road weren’t properly applied. But that, again, doesn’t mean youhave the government take over a financial system, it means you do today what should have been done ten or 12 years ago.So, to get back to the economic disasters, you understand human nature being what it is, you understand that in true freemarkets, with rules of the road, it does give a scope to creativity that had never been there before. Enable people to do thingsthat have never been done before. People go out there, offer products and services; if you don’t accept them, they fail. There’s noguarantee of success.Then you can begin to understand, okay, look at what went through. And to put things in perspective, and this gets to how we’recoming out of this crisis today, between the early 1980s and the summer of 2007, when this crisis started, when you saw thebeginnings of it in July/August of 2007, reached a devastating peak in the fall of 2008, and still lingering with us today.But, between the early ‘80s and the summer of 2007, the world went through one of the most extraordinary periods in humanhistory. Never before had so many people in so many parts of the world advanced so quickly economically as happened in thatquarter of a century.Particularly after the fall of the Berlin Wall. We know about the rise of India. They made reforms starting in 1991. China actuallybegan theirs with Deng Xiaoping’s reforms in 1978, which you want to look at Chinese history, was really taking up where Chiang Kai-shek left off in 1937, before the Japanese invasion. And in essence, Deng Xiaoping was taking up where the Nationalists left in 1937.But everyone recognized, yes, India and China are rising up. But you take Central and Eastern Europe, that region as a whole grewfaster than the Asian region in that period of time. You look at Africa, at least a dozen countries were starting to get real growthrates. Even in Latin America, several countries like Colombia, were making changes and moving up economically.United States did very well in that period. Our actual share of the global GDP from the early ‘80s to the early part of the last decadewent up. And certainly in terms of the global financial markets, the equity share value went up in the United States. And so whatin the world went wrong in 2007? Well, first and foremost, and this gets to a boring subject; we all know it’s important, monetarypolicy, federal reserve, interest rates and the like.And I can even see, even though you all know the importance of money, when you start talking about monetary policy, the eyelidsdo get heavy. And so if you have any caffeine with you, take a shot of it. And by the way, yeah, monetary policy is boring. And nogetting around it.So let me just give you a travel tip: if you ever find yourself on an airplane, in coach, middle seat on a runway, watching your life passaway, you want a little bit of elbow room? Talk to your seatmates about monetary policy. You’ll …(laughter)FORBES: … you’ll have all the room you want. Or if any of you are single, or have kids that are single, on a bad date? Start talkingabout monetary policy, and you’ll never see that person again. Just guaranteed. But to simplify it, just think of it this way: thinkof it as you would an automobile, truck, whatever it is you drive … scooter, whatever it is you drive. You can have a magnificentvehicle, but if you don’t have sufficient fuel, you stall. Too much fuel, you flood the engine, just the right amount, you have achance to move ahead.Same is true of monetary policy. You can have an economy with very real basic strengths, but if you don’t see that there’ssufficient credit supplied to it, it will stall. If you do too much, you get the economic equivalent of flooding the engine. The rightamount, you have a chance to really grow in a sensible way. Long story short, early part of last decade, the Federal Reserve madea fateful miscalculation. It thought the U.S. economy was about to do what Japan’s economy did in the 1990s, and so the FederalReserve, coming out of the 2000/2001 recession, mild by today’s standards, ginned up the printing press.Private Wealth Conference -7-Steve Forbes
  • 8. Turned out a lot of money. Kept interest rates at artificially low levels. And when that happened, strange things happen. And theykept up for much, much too long. So what happened? The first thing that happens when you print too much money, especiallyfrom an institution as critical as the Federal Reserve, is it first goes into the commodity markets. We saw this in the 1970s. As youknow, with commodities, usually they’re all over the place. Some are up, some are down, some tread water. When they all go in onedirection, something is amiss.So in 2004, what happened? Oil zoomed up. Copper went up. Gold went up. Silver went up. Soybeans went up. Heck, even the priceof mud went up. Everything was going up. And everyone was wondering what in the world is going on? Oh, it must be India andChina, they’re gobbling up all the world’s resources. Not enough around.Or if you’re a populist, you’ll blame those evil oil companies. You know, they’ve been around 130 years, but they finally figured itout, those evil people. And you saw the same kind of stories in the 1970s, oh, the oil companies are parking tankers offshore, tomanipulate prices. But it was a classic, classic commodities bubble. Yes, commodity prices in real terms were going up because ofIndia and China, but to the magnitude that we saw in those few years? No way. Classic commodities bubble.And what John Maynard Keynes said about inflation rings true. He said not one in a million people, he said, that’s why, he quotedLenin, inflation’s the best underminer of the social order, because it disrupts everything, disrupts patterns, and not one in a millionpeople understand what is going on. And you saw it play out when the Federal Reserve missed the mark.So money, especially global liquidity, just doesn’t stop with commodities. Then slurped over, and why commodities? Well,commodities are traded globally, denominated in dollars, cash markets, that’s why they’re the first recipients. But it doesn’t stopthere. In the 1970s, in the United States, the excess money went into the areas like farmland saw it zoom up in places like Iowa andthen crash in the ‘80s when the inflation was conquered. The energy patch, commercial real estate this go-round? The real recipient,the biggest recipient was housing. Even more than it did in the 1970s. Housing, in 2004, was already booming in the United States.Because of a tax law change we made in 1998. In 1998, we virtually exempted capital gains levy from your primary residence, so ifyou’re a couple, your first $500,000 was free of tax. So as you know, when you remove or lower tax on an asset, the value of theasset goes up.So if you look at housing prices pre-1998 and post-1998, you’ll notice there was a sharp difference. So by 2004, 2003, housing wasalready booming in the United States. Then with this flood of money coming in, it just went berserk. It went on steroids.And so, lending standards went down, everyone got into it, housing was a no-lose proposition. After all, it had been going up, evenif only nominally for over 60 years, so how can you lose? It was written in the U.S. Constitution that housing prices must go up eachyear. Somewhere it was written in there.And so a new mortgage was invented. The new mortgage was why have an income?(laughter)FORBES: Why bother? After all, the value of the asset was always going to go up, so what if the borrower got in trouble? Theasset would always bail you out. So you have the president of the United States saying no down payment is needed. Got toincrease home ownership.So no down payment, no principal payment, no interest payments, they call it negative amortization. So no surprise, you had aclassic bubble. In modern times, that means a very big bubble. Then made worse by what we call government-sponsored enterprisein the United States, in this case Fannie and Freddie, Fannie Mae, Freddie Mac. Implicit guarantee of the U.S. government went, andthanks to their guarantees, where we’re actually owning some of this paper, guaranteed $1.5 trillion of junk paper. By the end of 2007.And so this kind of thing brings out the worst in the financial world. Again, not having rules of the road of these new instruments,they went crazy. Wall Street … they’re geniuses, they’re actually making this money. You know, John Kenneth Galbraith liked to say ina rising market, everyone’s a genius. So everyone was a genius as this thing went.Private Wealth Conference -8-Steve Forbes
  • 9. As inevitably happens, the bubble burst. Then another catastrophic mistake was made. If you look at the actual amount of badpaper that was out there, or suspect paper, compared it to bank capital, assets and the like, this crisis was gonna be bad. There’d beblood on the floor, but it should not have done what it did in the fall of 2008 and bring the financial system to near cardiac arrest.The first true panic since U.S. 1933 or 1907, it’s something we thought we had banished in the modern world, an absolute, sheeremotional panic. Why did it happen? Again, another absolutely boring subject, in this case, accounting. How do you value the capitalof financial institutions like a bank?Like insurance companies. Regulatory capital. Capital is supposed to be ballast, to keep you from getting too giddy in the up-side,restraining you on the up-side, but also providing you cushion on the down-side. Reserves for losses, reserves to meet futureobligations, basic stuff. How do you value capital? Well, to simplify, until recent years, capital is valued at, for regulatory purposes, atwhat you paid for it.But a $1,000 bond, it stayed in the books at $1,000 unless the thing became impaired, or you sold it. Otherwise, for regulatorypurposes, it stayed at $1,000. Well, along comes a thing called mark to market accounting. Which in essence, and I know this is alittle simplified, but in essence, it turned regulatory capital into a day trading account.It became pro-cyclical instead of counter-cyclical. It went against the whole purpose of capital. So what it did, when you started toget shaky markets, it made the equivalent of a flood into a tsunami. If you look at the losses the financial institutions took? Most ofthe losses were actually book or artificial losses, not actual cash losses, from the bad paper. If we had done that 20 years ago whenwe had a banking crisis in the United States, you remember the savings and loans, hundreds of them went under? Commercial bankswere loaded with Latin America debt and commercial real estate loans. We’d have wiped out virtually all of the major commercialbanks in the United States.If you look at the top eight commercial banks in the U.S. in the late 1980s, they had Latin America loans on their books, equivalent of260 percent of their statutory capital. If you had mark to market then? So what’s the value of a Latin America loan, if you threw it onthe market in that minor panic? Would have been ten cents on the dollar, even though most of them were restructured and workedout. Losses were nominal. If you had thrown it on the market, ten cents on the dollar.In other words, if you had mark to market then, you’d have wiped out the capital of the largest commercial banks in the country andyou would have had the same thing we saw in the fall of 2008.So that doesn’t excuse the excesses on Wall Street. But remember, if the Fed hadn’t printed the money, the juice for this kind ofbubble wouldn’t have been there. If you hadn’t had Fannie and Freddie, this thing couldn’t have reached the size that it did. Andwhen the crisis hit, mark to market nearly put the system absolutely under.And so this TARP that we passed, $300 billion in the fall of 2008, uh, first to buy toxic assets from bank balance sheets, well, theyquickly discovered you can’t do that, because if you did, they’d have to mark down all their other assets. But if you pay above whatthe market was, which didn’t exist, then you’re going to have political problems; oh, you’re bailing out the banks. So they decided todo what the Brits did, and sensibly, and that is shore up the bank balance sheets.Well, so $300 billion was pumped in, but it, in effect, went into a black hole. ‘Cause mark to market was continuing to mark downthe value of the capital, so you had the strange situation, before Lehman Brothers went down in September of 2008, U.S. banks hadcash on hand of about $250 billion, an amount that had been roughly the same for years. For everything from ATMs and everythingelse you need cash for.By the spring of 2009, American banks had over $800 billion in cash, and the regulators were saying your capital is inadequate. That’swhy the system nearly collapsed. What happened early last year? Well, mark to market was finally amended. Not because of theWhite House and the new president, not because of the Federal Reserve or the Treasury Department; it came out of … and I knowthis is shocking … the U.S. Congress. Occasionally the U.S. Congress gets something right.(laughter)Private Wealth Conference -9-Steve Forbes
  • 10. FORBES: And in March of 2009, they heard the rumblings about mark to market, stock market, you remember, was still crashing,you know, down almost 60 percent. And they announced … one of the Congressional committees announced … they’re going tohold hearings on mark to market.And everyone knew, when that announcement was made, they were going to bring in the regulators and force a change. Whenthat announcement was made was when the stock market turned. The S&P was at 666, Dow was about 6500; as soon as theannouncement of those hearings, markets tried to anticipate the future, they started to go up. The hearings were held a few dayslater, they brought in our Securities and Exchange Commission, brought in representatives of the Financial County Standards Board,just beat their brains out. Not literally. But just knocked them about.And markets went up. And a few weeks later, the thing was amended; I wish they’d gotten rid of it. Mark to market was banned inthe United States in 1938, precisely because it was deepening the Depression, but like monsters in movies, bad ideas keep comingback. Sequels. So this thing was finally amended. It didn’t go far enough, but at least it stopped the bleeding.And so what happened was, the system wasn’t going to collapse. Markets went up, even real estate investment trusts, which weregiven up for dead, were able to float stock again. And even though it was below their book value, people bought it. Prices of thestock went up because everyone knew those proceeds would be used to restore their balance sheets, and the thing started to getback on its feet.So where are we today? Where are we today? Again, remember what brought the crisis on, cheap dollar. This was not partisan.John Kennedy said the dollar should be as good as gold, Ronald Reagan, a republican, killed the terrible inflation of the ’70s. BillClinton understood that, for political reasons, a weak dollar was political poison. He had a strong dollar. But George Bush and so far,President Obama, have continued the idea of a weak dollar.So Federal Reserve, Fannie and Freddie, mark to market accounting, and not putting in sensible rules of the road. So what should wewatch out for today? Fortunately, more than I think most experts realize, the U.S. economy will have some very real growth this year.Probably in the range of low three, but I think it may even exceed four percent in real terms.Inventories have to be rebuilt. They’re absolutely knocked down to the bare bones. They’re being rebuilt. Companies have to makesome capital expenditures. That’s starting, and consumers who still have jobs, they’re spending again. Not on the scale they didbefore, but compared to what it was in late 2008, early 2009, it is upwards.For example, automobile sales have gone up. Well, it was bound to. On an annual basis it was down to eight or nine million vehiclesa year. We scrapped 12 million a year in the United States. So you knew that had to come up. And you’re going to see the samething in housing, in the U.S. In a normal economy, we need one and a half million new houses a year in the United States becauseof population growth, and wear and tear. Now, in the bubble, obviously it went above that; today it’s way below that. It’s about570,000 being built a year.Inventories are still large, but if you look at inventories, and even if you get foreclosures on mortgages that have gone bad, if theyfinally allow that to work its way out, you could see in a year and a half, we’re going to have to really start building houses again inthe United States.And prices will go up. So we will get good growth this year. The real question is not are we going to have a good year in 2010; the realquestion is will it be sustainable? Will it be sustainable? Will this be similar to the 1970s? None of you are old enough to rememberthe 1970s. It’s called pandering.(laughter)FORBES: I tried it in politics, didn’t work. Which is why I’m here today instead of my library. But …(laughter)Private Wealth Conference - 10 -Steve Forbes
  • 11. FORBES: … in the 1970s, and you saw this written all the time in the ’50s and ’60s, stop/go. You get a spurt of growth, then you’d hitthe wall again. Or will it be similar to what happened after the early 1980s, where, except for two minor recessions, you had almost aquarter of a century of growth. Extraordinary boom filled with innovation.So which will it be? And here are the things you have to watch out for. Here are the things you have to keep your eye on. One, ofcourse, is the dollar. You know, if you study economics, eventually you begin to realize what is money? Money in and of itself isnothing. It facilitates transactions.You know, in ancient times you had barter. You know, you give a bottle of wine for a few loaves of bread, and stuff like that. Moneyenabled you do barter much more efficiently. So if you sold your bottle of wine, you could decide whether you wanted goat cheese,or stay here, or something else. And so it just facilitates commerce. And that’s why coins came along; that’s what made Athens acommercial and cultural center. Lydia was the first, but Athens really grasped the potential of coins. And coins could go beyond anarrow community because they had intrinsic value, gold and the silver. But over time, and I’m combining 3,000 years in a couple ofsentences but just remember, money facilitates barter.In an extraordinary, complex way. And so when you went from coins, after a while, that became clunky, trying to carry bags of coinsaround, assuming the emperor hadn’t, you know, clipped the coins. But, so you rose up alternatives. You had the clunky system,the Templars, they were the original bankers. But the Italians in the 13th century, really made huge innovations in applying paper totransporting capital.So you had paper backed by assets. But it was paper, much easier to move around. And of course today, we have blips, electronicblips. And they represent transactions and enable you to have infinite flexibility, enable you to, in effect, lend your assets tosomebody else for a price. So money is simply a facilitator. A facilitator of transactions. And so it should be a measure of value.You understand that, you can see how dumb our Federal … I’m being blunt here … our central bank, the Federal Reserve, has been.The idea, and you see it with central banks all over the place, the idea that if you manipulate the value of money, you can somehowgin up prosperity.No. It is very disruptive. Think of it this way: think of it this way, and history proves it, weak money means weak recovery.Unsustainable recovery. But imagine what your life would be like if governments or central banks did to timepieces … clocks, watches… what they do to the dollar and money. Float it. That is, 60 minutes in an hour one day; 48 the next, 96 the next, 22 the next. You’dsoon have to have hedges, derivatives, futures to figure out how many hours you’re working. Just makes life infinitely complicated.So 60 minutes in an hour, standard. You don’t have to worry about it. An hour in China’s the same thing as it is in Bermuda,same thing it’s in the United States. Money should be the same thing. Stable in value. Because if you change the value arbitrarily,eventually people notice it. Just to take the clock thing one step further, lets say the U.S. government gets the bright idea, if weincrease the number of minutes in an hour from 60 to 70, and not tell anyone, think of what it would do to productivity.Why, people would work longer at the same pay. Whoa! Wow, instant increase in productivity. Well, eventually people will figure outwhat’s happening. And you’re going to have disruptions until people figure out what’s the new clock versus the old clock. Or howmany minutes in a China clock versus a U.S. clock.It just becomes complicated and disruptive. So the Federal Reserve doesn’t treat the dollar with any respect. And if the key currencyof the world is in turmoil, as it was in the ’70s, it just makes sustained growth very, very difficult.So watch the dollar. Not against the euro or the pound, that’s like putting a 98-pound weakling versus a 92-pound weakling; the98-pounder may do better, but neither one is going to be lifting weights in the Olympics … just watch the price of gold. It’s nowabout $1150. A few years ago it was $300; $260 an ounce. That tells you all you need to know … the markets don’t trust it yet.And that’s why you don’t get the kind of investment you’d normally have, that’s why you get more currency and commodityspeculation. It is just very disruptive. Keynes was absolutely right. So watch what happens to the U.S. dollar in terms of sustainability.Private Wealth Conference - 11 -Steve Forbes
  • 12. And because of what that does to our own banking system, small businesses in the United States still have an uncertain time ofgetting credit. Some can, if they overcome their uncertainties, but it is still a jagged system. So we’re not getting the kind of vigorousjob creation we’d get. We’ll get job creation this year, above what the experts think. But not on the kind of sustained level we should.Watch the dollar.Another big thing to watch out for in the U.S., of course, is because the U.S. economy still is critical to this world, taxes. One thing,this is true everywhere, that the policy makers have a hard time understanding, some of them, is that taxes just don’t raise revenuefor government, taxes are also a price and a burden.The tax you pay in income, the price you pay for working, tax on capital gains, price you pay for taking risks that work out, tax onprofit, price you pay for success. Very simple. If you lower the price of good things, like productive work, risk-taking success, you’ll getmore of them; raise the price, you’ll get less of them. That’s why tax rebates, useless. Very nice to get a rebate, especially when thecheck clears, but it’s a one-shot. It doesn’t change incentives. It doesn’t change the price or the burden.So in the U.S., we just passed a health care bill, which has numerous new taxes. At the end of this year, our tax cuts of 2003expire, so you’re looking at capital gains levy going up 60, 70 percent. Personal dividend tax in the next couple of years goin’ from15 percent to as high as 45 percent. Those things are capital killers. That will hurt the economy. And I’m not sure the White Housefully grasps it.Another thing to watch out for, longer term, is trade. This is the first administration in decades that hasn’t made free trade acenterpiece of economic policy. Even when past U.S. presidents did protectionist things, it was a tactical move, but they always hadthrust for free trade. Bill Clinton went against his own party to pass the North American Free Trade Agreement.So this administration still hasn’t put its cards on the table on trade. Watch what happens there. The U.S. doesn’t take a forcefullead? Bad things could spin out of control. Thankfully we did not get in a trade war with China. I think we’ll avoid that. We’ll see onThursday, if we don’t call them a currency manipulator.But, watch out for that. And finally, the spending. The binge spending cannot continue. I don’t think it will, but watch on that,because government indebtedness soaks up resources from the private sector. And the U.S., as you know, we’ve got entitlementscoming along; watch what happens there.So even though things are going to get better short-term, we got some major areas we have to address. Need currency stability,need some sensible policies on taxes. And on spending. If we do those things, and we’ve done them before, there’s no reason why wecan’t make a recovery from what we just went through. Recovery should be we get these things right; an aberration, not somethingmarking a whole new era of subpar growth, subpar innovation, subpar job creation. It does not have to be our fate, nor should it be.Thank you very much.(laughter)MAN: Thank you very, very much. And we really appreciate the conversation and the information. What’s your prediction for the Dow inthe next two years?FORBES: What’s the prediction for the Dow in the next two years? Remembering what my grandfather said?(laughter)FORBES: It’s now at 11,000 and while that is wonderfully higher than it was in March of last year, it is still at least almost 20 percentbelow what it was before this crisis hit in 2007. So I think in the next two years, even though you’re going to have huge conflictsbetween our Congress and the White House, unless President Obama does a Bill Clinton and starts to weave and bob on some ofthese things, I think the markets will go up in anticipation of big economic changes in 2012. So I’ll say … 13 … what, we’re at 11,000?At least 13,000; probably 14, 000. We’ll be at where … two years from now, where we were before the crisis hit in 2007. And if I’mwrong I’ll just say I was misquoted. Thank you.(laughter)Private Wealth Conference - 12 -Steve Forbes
  • 13. MAN: I have one other question for you, and again this is, you brought up health care, and the Health Care Act in the U.S. And healthcare is an issue here in Bermuda as well. We are struggling with health care costs here. What’s your feeling with regard to whether theHealth Care Act in the U.S. is actually going to address some of the issues that are structurally wrong in the delivery system there?FORBES: Health care. Got another hour?(laughter)FORBES: But on the issue of health care, no, the bill that was passed is just the beginning of the debate in the United States. It hasbecome a very hot political issue. And I think on health care, almost in any country, but let’s take the U.S., the U.S. does not have realfree markets in health care. It’s a hybrid system. Some of it is free, some of it is with the government. It’s a mixed system.A crazy system. Came out of World War II when you couldn’t pay workers in cash because of wage control, so you paid them inbenefits. And then it became embedded in the tax code, and off we went. But ask, why is there a health care crisis in a country likethe United States? And people will say, well, it’s because people want more health care.People are living longer. Well, as I get older, I don’t think longevity’s a crisis. My heirs might, but I kind of like it. But think of it. In anyother walk of life, if people want more of something, it’s seen as an opportunity for growth. People want more and better wealthmanagement, you will be very happy, John.People want more … pandering … people want more … they go with the best … people want more software, Austin, Texas, SiliconValley, other centers will be happy. People want more automobiles in North America, Detroit would be very happy. Why is thedemand for health care seen as, oh my God, what a disaster? It’s because of the way we pay for it. It’s all third-party. And whenyou have a disconnect between providers and consumers, you don’t get the normal pressures for productivity and improvement ininnovation and delivery in the product itself. So in health care, the debate should be how do we increase the supply of health care.Why are the normal innovations not happening? We have a lot of it, but it’s a fraction of what it could be, especially in the delivery toconsumers. It’s because you don’t pay for it.So therefore, in the U.S., for example, the consumer doesn’t count. If you work for a company and they provide you a perfectly goodhealth plan, but if you don’t like it, too bad. The insurer has to satisfy the employer. Not you, the individual. You don’t count. Whenyou see it, how crazy the system is? If you go, ‘cause we do have a hybrid system, if you go in the U.S. to a doctor, to a hospital or aclinic? And you ask what it costs? They look at you as if either you don’t have insurance or you’re just a plain nutcase. What’s it to youwhat it costs?So the system goes haywire. Now, can you get real productivity? Yes. You look at, for example, Lasik surgery for the eyes, put asidethe debate whether you should have it, and millions have, so you may not have to wear these things.It costs, in real terms, less than it did ten years ago. Why? Because you write the check in the U.S. So everyone knows. The providersknow they have to make it attractive to you. Not some third party; to you. Because if you don’t take to it, they don’t get the business.Same thing with cosmetic surgery; again, none of you need it … pander time. But in the U.S. … in the U.S., John, cosmetic surgerydemand has grown six-fold in the last decade and a half, in the last 15 years. Huge technological advances.Yet you haven’t had that kind of inflation there that you’ve had in the rest of health care. Why? Because the provider knows you’remaking the decision. And so if you want some procedure done, what do you do? You scope it out like you would anything else. Youtalk to, if you have a friend who can keep his or her mouth shut, you might ask their advice. And so the system works. The systemworks, because it’s geared to the individual.So in the U.S., how do we get more that kind of marketplace action? And the way you do it is various things. Like in the U.S., wehave a crazy system on private health insurance. It’s regulated by each state. Which is fine. But it means that it’s illegal if you live inone state, to buy a policy offered in another state. I live in the state of New Jersey. We have crazy regulations. Pennsylvania, aneighboring state, doesn’t. I can buy in Pennsylvania a family policy at half the cost of what it is in New Jersey. But it’s illegal.Private Wealth Conference - 13 -Steve Forbes
  • 14. I can buy a car in Pennsylvania, buy a house, open a bank account. But it’s illegal to buy health insurance.So one of the things proposed out there is get rid of those state barriers so you get a truly national market. And so if I want to buy apolicy offered in Albuquerque, New Mexico, I’m free to do so. That would get real competition. Another crazy thing we do is taxes. Ifyou’re a business, you get a tax deduction when you buy insurance. But if you’re an individual, unless you’re self-employed, you paywith after-tax dollars. So if you go out on the market as an individual, you’re already 40 percent behind the eight ball.So if a business gets it, allow individuals to get it. Tort reform. I don’t have to tell you about our crazy court system. Adds literallyhundreds of billions to the cost, defensive medicine and the like. And a few basic reforms would go a long ways there. Otherthings, John, like allowing small businesses to pool together in the U.S., through trade associations, to buy insurance. Those kindof basic things.And one example of what can be done, it was done in the state of Indiana. A governor there named Mitch Daniels, and may runfor president. But one of the things he did early in his term as governor, was with the state workers. He brought in this thing called“health savings accounts”. Which would mean you’d get the basic catastrophic coverage, but the state would put in money forroutine medical expenses. The unions fiercely resisted it; he got it through anyway. Initially only four percent of the state workerssigned up for it; now over 70 percent have signed up. They love it because they get to control the resources.In our own company, we give our people $2,500 cash during the year for medical expenses before the deductible. So if you finda generic that’s as good as a prescriptive medicine, that’s money in your pocket, not mine, and I don’t care what you do with the$2,500; if you want to go to the dentist and get some gold teeth, go right ahead, I don’t care. It’s up to you. But what it means is, yousuddenly become conscious when it’s your money. And your control of it, what are you getting for it?And if you go through the $2,500, only then does the deductible kick in, and then the catastrophic insurance kicks in. Our costs havegone up less than our peers, because we let people have control of the resources. We find it’s cheaper to have a high deductiblepolicy and give as much as the law allows the deductible to people, even though we’re giving the money away. Seemingly. It saves,because suddenly every worker is working to control costs, not just the employer or bureaucracy or an insurance company. Marketswork. And people say what about those that can’t get insurance, for whatever reason? Do the same thing, as what you do with food.And, you know, imagine if governments try to grow food, we’d all be starving; the Russians and the Chinese tried that. Catastrophicresults. So in the U.S., you know, farmers grow the food, processors process the food, truckers deliver the food, restaurants, grocerystores, supermarkets sell the food. It works. It’s a proportion of budgets, as you know, for 200 years, food costs have been comingdown in real terms vis-à-vis people’s incomes.And if people can’t get food, for whatever reason, you have everything from food stamps in the U.S. to food banks to deal with it.Why can’t you do the same thing in health care? Allow private sector, and if people can’t get it, you have systems in place so peopledon’t fall through the net. And if you can do it in food, I think you can do it ultimately in health care. And unleash, and this is hugelygood, not only because it means we’re going to be healthier and you might have a chance to live longer, but also you look at theliabilities of health care systems around the world? There’s catastrophic liabilities. All assume very little productivity in medicine.You start to get some real productivity and those liabilities in things like our Medicare program or some of these other programs yousee around the world? Fall dramatically. That’s the way you get around it. The only other way of getting around the health care crisis,certainly in the U.S., with Medicare and Medicaid, huge liabilities, is just shoot everyone above the age of 65. And that’s the only wayto deal with it.(laughter)FORBES: But there is a better way.MAN: There was a great article in The Onion, which is a paper that is farcical, but it solved the retirement crisis after 2008, that theydiscovered how you could make your retirement last longer. And it was to die early.(laughter)Private Wealth Conference - 14 -Steve Forbes
  • 15. FORBES: Well … by the way, if any of you live in the United States, I’ll give you a word of caution if you have friends that live in theU.S., this year, and only Washington could do this, we don’t have a death tax. It expired on December 31st. However, it comes back in2011 at a higher level than ever before. So …(laughter)FORBES: … you can see where this is going. If any of you are in the U.S., or have friends, and their heirs suggest taking a trip toHolland? Don’t do it. Why? ‘Cause the Dutch have legalized euthanasia, and it’s absolutely true, they often don’t tell the patient.What they’re about to do.So if you go to Amsterdam, you may end up looking at the tulips from an angle you had not anticipated. So just stay home.(laughter)MAN: A couple of questions from the floor. And this really is a very Bermuda-centric question, but is one that is so important tous, but is dependent upon the U.S. perspective. Do you have an opinion on the U.S. government’s future attitude towards offshorejurisdictions and financial services?FORBES: Yes. And we’re not talking here about fraud and money laundering and things like that, we’re all against that, and effectivemeasures to deal with that. But the idea of having areas where you have tax advantages? I’m all for it. I think that competition isgood. And so I think the war that the EEU’s always waging against not only you guys … Cayman … but Ireland with it’s 12.5 percentcorporate tax rate, they hate it in Brussels, which means it’s good.And the U.S. Treasury’s always getting on the high horse about it, Congress, Levin(?) and others get on the high horse about it,that’s got to be resisted. And, fortunately I think there is support that having areas where you can be able to focus on the task athand instead of trying to get around crazy tax laws, is a good thing. So may the insurance prosper here, and anything else thatprospers. Certainly, I and others, who believe in low taxes, will fight to make sure the U.S. Congress doesn’t treat Bermuda like acolony. It shouldn’t.(applause)MAN: And again Bermuda is unique in that it is very independent, but it’s also very conscious of its nearest neighbor and majortrading partner. And a question came from the audience, what’s your opinion on the election in November?FORBES: We have Congressional elections for the House, our House of Representatives, all members, all seats come up. Andone-third of the U.S. Senate. So on the U.S. Senate side, most of the seats are held by Republicans. So they’ll make gains in theSenate, but they’re not likely to get control of the Senate. The arithmetic just isn’t very difficult. However, I do think in 2012, theRepublicans will get control of the U.S. Senate. On the House side given the way House districts are drawn in the United States, Ithink Republicans will make enormous gains, but they may not get enough to win the House. However, they may gain enough seatswhere they’ll force the ouster of Speaker Nancy Pelosi.Because, among the more moderate Democrats, they’re going to want a change realizing that the course is going to jeopardizetheir own careers. So, you watch for fireworks there. But the Democrats have a majority now of about 80 seats in the House ofRepresentatives. I think the Republicans can realistically look to take at least 30, 35 seats. So it’ll almost be not a hung Parliament,but a hung House. It’ll be very close. But I wouldn’t count on the GOP taking either house, but it’ll be enough where the messagegets through. But it could change, and then in 2012, as you know, you have a census, we have a census, this year. Lines will beredrawn. The GOP, Republicans, do well in November, they’ll control enough state houses where the election lines will be redrawn inways that will help them rather than the other side.But this gets to an arcane subject in the U.S. about drawing those lines. Iowa. Little state of Iowa is the only state in the union,in the United States, that actually tries to draw election lines to bring about competitive elections. Most of the seats in the U.S.House of Representatives are uncompetitive. You know, normally voters choose their representatives? In the U.S., representativeschoose their voters.Private Wealth Conference - 15 -Steve Forbes
  • 16. But thanks to computerization, of drawing lines. And you saw the most corrupt example, it was in California when we hadthe census ten years ago, they drew the lines so that California has 53 representatives. They drew the lines so that everyincumbent, whether Democrat or Republican, would be protected.And so the only change in the first few years of this, the only incumbent who was ousted was one who got involved in a scandalwhen his aide was murdered and he had to admit he’d had an affair with her. He didn’t do the murder, but it just was an uglyscandal. That’s the only incumbent for years that was ousted. Because the lines are drawn, and you can do this, it makes JacksonPollack look like a traditionalist. In terms of the lines and the houses, you can almost pick the houses to people’s residences to tryto make these things as uncompetitive as possible. And that contributes to the rancor in debate. If you know you’re from a safeseat, you’re less likely to be in a mood to compromise or try to work things out if you know there’s no consequence in terms ofyour own seat, by being rigid.So you have to have a mix. Bind up some safe seats. But when all, or 90 percent are uncompetitive, and most of the time the onlyway you get a competitive seat is when an incumbent leaves. Then you have a shot at it. But as long as an incumbent’s there, theadvantages are so great, very, very difficult to oust them. It happens.Saw a little bit of it in ’06 and ’08. I think you’ll see it this year, in 2010, but given the magnitude of shifts of public opinion you saw inthose years, the shifts in the Congress should have been much greater, but weren’t because they do choose their own voters.MAN: Staying on the political vein for one more question, and again, Bermuda-centric, because we have our friends in the Congresswho are favorable to much of the industry here on the island, how do you believe Ways and Means Chairman Charlie Rangel steppingdown from the Ways and Means chairmanship will affect the reinsurance business in Bermuda? It’s always been a strong …FORBES: Sadly for you, Congressman Rangel has some other problems. So he will be stepping down. Among them, turns out he hadfour rent-controlled apartments in New York City. If you’re below a certain income level, you’re supposed to have only one. And hehad four, so he’s not going to be running, I don’t think, for reelection.What’ll it mean? I think fortunately the change in the composition of Ways and Means that’ll take place after the Novemberelections, where you will get more anti-tax Republicans on that committee, even if the chairmanship does not go your way though,there’ll be plenty of resistance to putting on new exactions. And one of the things I think will happen in these November elections isthat one of the issues will be the value-added tax.The White House is already trying to stoke that idea. And it’s a killer politically. I’m surprised they think they can do it. MostAmericans think they’re over-taxed, and the idea of putting on a super sales tax, super consumption tax, whether it’s a VAT orgeneral services tax like Canada has, or anything like that, nationally, is just real political poison. So I think the Republicans are goingto hammer the Democrats. You know, even though you deny you’re going to do it, clearly the signs are you want to do it. And givenall the spending you’ve done, and what you’ve done on entitlements, you’re going to need one.And so don’t vote for the Democrats. That could tip the House. So that is going to be such a focus that I think there’ll be a real taxphobia after the November elections.MAN: In your earlier comments, you had said to watch the price of gold, as one of the indicators that should be looked at. Could gold bethe next bubble?FORBES: The nice thing about gold is, as much as you get in this imperfect world, is it has constant value. So if it goes up in terms ofa currency, it means that currency’s perceived as weak or people will believe it will get weaker. This is the Federal Reserve calling me.(cell phone rings)(laughter)Private Wealth Conference - 16 -Steve Forbes
  • 17. FORBES: Thanks to technology, they follow you everywhere. But you can tell how seriously I take you, that I wouldn’t take BenBernanke’s call. But …(laughter)FORBES: … in terms of gold itself? If it rises in terms of a currency? That it means it’s not so much a gold bubble, as it is a run on acurrency. So the question really should be, will currencies like the dollar, or the euro, remain weak? Will the euro be destroyed?You should always have gold as part of your portfolio, only as an insurance policy. I’m picking the number five percent. So if things gokablooey, at least you know you have something to anchor you. But remember, there are long periods where monetary policy gets itright, gold goes nowhere. You saw it from the early ‘80s, where people thought the end of the world was going to come; gold wentup to eight, $78, $80 an ounce. And then, it didn’t reach those levels for another 20-plus years … 23 years.So it’s an insurance policy, if you want to speculate in it, be very, very careful. Uh, commodities can bite you very, very easily. So, abubble in gold? No, it is a perceived weakness in currencies, and eventually, I think central banks get it together. I know the EuropeanCentral Bank would love to be like the old German Bundisch(?) Bank, or what the Swiss are today, if they thought they could getaway with it.And the Fed eventually will learn; it’s only been in business 97 years, that its primary function is a stable currency. Talk about slowlearners. But they’ll eventually get it.(laughter)MAN: During your talk you spent a great deal of time on innovation and how important innovation is. It’s not necessarily thediscovery of a particular thing; paper or compass, but it’s actually the innovation that goes on behind that. Aside from health care,what’s the next area that you believe is ripe to benefit from innovation in this market?FORBES: Well, if you want to pick areas where you’re going to see huge growth, obviously, high tech will continue. You’ll probablysee a boom in biotechnology. There’s a lot of stuff ferment there. And health care, because it’s personal. And as we start, justbecause of budgetary pressures, to allow more entrepreneurship, that’s going to explode. And another area … this will be good newsfor you, John … is going to be financial services, again.Why? Because once we get growth again, middle classes expand again, demand for financial services, wealth is created, it’s going togrow again. An advantage that you have is that, in this new environment, people are looking anew for financial services. Perfect timeto make the move you’re making. ‘Cause people are saying, okay, what people can I trust? So your emphasis earlier on your advisorsand the like? Couldn’t be timed better.So, financial services will come back. And there will be sensible rules of the road. We have a bill now before our Congress, thatunfortunately will do the opposite of what it’s intended to do, but I think that will be sidetracked, and some sensible things will bedone; and that is sensible capital requirements. Including off balance sheet, Walt Risten(?) was right, he invented post-war modernbanking. And back in the early ‘80s when people came to him with ideas of doing … with large vehicles off balance sheet, you know,this is a way to really leverage your capital, he said don’t kid yourself. He said, “if we’re associated even not legally, any way, withsomething that gets in trouble, it’s going to hit the home bank. So don’t kid yourself.” And that’s exactly what happened.So, in terms of regs, I think you’re going to see sensible capital regulations. I think you’ll see requirements that more of these exoticinstruments must go through clearinghouses. So you see what the volumes are. You can have proper margin requirements, and thelike. Bring them out in the open. And there will be capital ratios, like 11 to one, or 15 to one for investment banks. All sensible things.And one that’ll allow the system to recover. And where you see the kind of outsized profits you saw during the inflationary times?No more than the outsized profits you got in energy in the ‘70s, or energy briefly in the last decade. Again, if the currency is stable,you don’t get these weird things, where certain areas are artificially depressed, and other areas are artificially boosted. It’ll bemore because, yes, there is a genuine demand for the thing. It will be much healthier for everybody. Certainly politically. Thoseare three areas, financial services, high technology, and health care, among others. Huge booms coming.Private Wealth Conference - 17 -Steve Forbes
  • 18. MAN: Well, we live in a pristine place, out here in the middle of the Atlantic. We don’t have smog and we don’t have cars thatare spewing pollutants and, it’s just a lovely place. And the question always comes up, what can business do to preserve theenvironment? We have our issues here, what about the U.S.?FORBES: In terms of the environment, one thing to keep in mind, we tend to sometimes get depressed about the environment, isthat advances above a certain level in the human condition, people demand a higher quality of life. Some of you even tried to picka number that when per capita income in a country goes above, say, five or $6,000, new middle classes will demand cleaner water,cleaner air and the like. You’re starting to even see it in China, where local pressure is growing.You go to certain parts of China, you might as well be smoking a carton of cigarettes each hour. You know, it really is quite jolting.But in the United States, huge progress has been made. Just take something … lead. You know, once upon a time, you mayremember, you had no knock lead in gasoline, which was disaster for public health. Well, that’s been knocked down about 99 percentsince the 1970s. And lakes have been brought back to life again, great lakes. So progress can be made, and that’s where you wantinnovation in technology. And one thing, I think, the government’s got to learn is don’t tell people how to clean the environment; setgoals. And then let people figure out ways to do it, and they will.And it’ll come in unexpected ways. And government can be a facilitator. For example, in the United States, we have three electricitygrids, including the State of Texas. And for a variety of reasons, they’re not quite up to snuff. Well, that’s wasteful electricity, butit also means is thanks to our rules and regs, it’s very difficult to build new lines. So in the U.S., we have, if you like wind power, forexample, don’t mind what happens to the birds or the noise from Texas to North Dakota there’s a great wind tunnel in the UnitedStates, in effect. Boone Pickens and others talk about it.Very nice, but even if you put in wind farms, you don’t have the grid to move the electricity. So removing barriers to that would bevery helpful. Natural gas. We have globs of it in the United States. Offshore and onshore. And one word you’re going to hear moreabout is fracturing.It’s putting chemicals into the ground, it breaks the rock, and releases just globs of natural gas. If this thing moves forward, you’regoing to see natural gas go down to two dollars per thousand cubic foot. The U.S. will become, eventually, a gas exporter. Butthe nice thing about natural gas, it’s clean. And if this thing fulfills its promise, it means that certainly in the U.S., you’ll see theinfrastructure grow for long-haul vehicles. Cars is one thing may not work, but certainly long-haul vehicles, natural gas is a natural.And so if a large country like the United States, you see this happening, it’s going to be a model for countries like China and India.Where their demand for energy is just going to be insatiable.The thing, and we’ve got to move on these things, because the demand for electricity is going to grow faster than the economy.Even though we’ll have products that are more efficient, high tech is a huge consumer of electricity. Google is probably the biggestconsumer of electricity, they have these massive farms for their million and a half servers. Major consumer of electricity. So there’sgoing to be more demand, so we got to figure out to do it in a way where we’re not smoking cartons of cigarettes.And I think that’s ubiquitous. But again, don’t do command top-down, here’s how you do it. Say here’s what we’d like to have done,and let innovators figure out how to do it.MAN: And then the final question. Someone noticed that you had said that you hadn’t been here since you were four. And thequestion is, how can we get you to come back again sooner?(laughter)FORBES: I meant to say the first time I came here was when I was four, on the Queen of Bermuda. And then we’d come backsubsequently, including Pan Am, we were talking about that earlier. And I think I was last here about eight or ten years ago and soI hope it’s not eight or ten before I come back again. And I must say, this trip was wonderful because I got a free room. And so, youknow, that’s …(laughter)Private Wealth Conference - 18 -Steve Forbes
  • 19. FORBES: … pretty good. And these turbulent times … I’ll take it. So, yes. I’m up for it. But, no, you’ve got a lot going here. And there’sno reason why what you’ve done and will do, you shouldn’t do very, very well. And I think the U.S. Congress can be kept at bay;always a fight, but it can be done.KEPHART: Thank you very much.(applause)Private Wealth Conference - 19 -Steve Forbes