1 00:00:01,760 --> 00:00:03,273 THUNDER RUMBLES 2 00:00:05,160 --> 00:00:07,754 The most basic financial impulse of all 3 00:00:07,840 --> 00:00:11,389 is to save for a rainy day. 4 00:00:11,480 --> 00:00:16,031 Because, as we've been painfully reminded by the recent months of financial turmoil, 5 00:00:16,120 --> 00:00:18,475 the future is so unpredictable. 6 00:00:18,560 --> 00:00:21,552 The world really can be a dangerous place. 7 00:00:23,600 --> 00:00:27,070 Not many of us get through life without a little bad luck. 8 00:00:27,160 --> 00:00:29,958 Some of us get a lot. 9 00:00:30,040 --> 00:00:33,874 lt's all about being in the wrong place at the wrong time, 10 00:00:33,960 --> 00:00:37,999 like New Orleans when Hurricane Katrina hit. 11 00:00:40,520 --> 00:00:45,469 The question is, how shouId we deaI with the risks and uncertainties of the future? 12 00:00:45,560 --> 00:00:49,838 ShouId the onus be on the individuaI to insure against disaster? 13 00:00:49,920 --> 00:00:54,072 ShouId we be abIe to reIy on the voIuntary charity of our feIIow human beings 14 00:00:54,160 --> 00:00:55,832 when caIamity strikes? 15 00:00:55,920 --> 00:00:58,514 Or shouId we be abIe to count on the state - 16 00:00:58,600 --> 00:01:02,229 in other words, the compuIsory contributions of our feIIow taxpayers - 17 00:01:02,320 --> 00:01:04,880 to baiI us out when the fIood comes? 18 00:01:04,960 --> 00:01:06,313 THUNDER RUMBLES 19 00:01:09,360 --> 00:01:12,079 That's a long way of asking a simple question - 20 00:01:12,160 --> 00:01:14,390 are you insured? 21 00:01:17,640 --> 00:01:20,154 The British certainly think they are. 22 00:01:20,240 --> 00:01:21,912 GULLS CRY 23 00:01:22,000 --> 00:01:25,390 Today, we pay a larger proportion of our income on insurance 24 00:01:25,480 --> 00:01:27,357 than any other people in the world. 25 00:01:28,400 --> 00:01:32,313 lt's rather odd, because Britain is one of the safest countries on Earth. 26 00:01:35,000 --> 00:01:39,278 The struggle to overcome risk has been a constant theme of the history of money, 27 00:01:39,360 --> 00:01:44,036 from the invention of life insurance by two hard-drinking Scots clergymen, 28 00:01:44,120 --> 00:01:47,874 to the rise and fall of the welfare state, 29 00:01:47,960 --> 00:01:52,715 to the explosive growth of hedge funds and their multi-billionaire owners. 30 00:01:56,600 --> 00:02:00,752 At the core of our struggle with risk is an insoluble conflict - 31 00:02:00,840 --> 00:02:06,437 we want to be financially secure, and so we yearn for a predictable world. 32 00:02:06,520 --> 00:02:10,399 But the future always seems to come up with new and unpleasant ways 33 00:02:10,480 --> 00:02:11,959 to take us by surprise. 34 00:02:14,280 --> 00:02:17,317 We want calculable risk. 35 00:02:17,400 --> 00:02:19,709 We're stuck with random uncertainty. 36 00:02:47,520 --> 00:02:52,753 When Hurricane Katrina hit New Orleans in the last week of August 2005, 37 00:02:52,840 --> 00:02:54,796 it caused death and destruction. 38 00:03:00,200 --> 00:03:04,352 Yet it's not a natural catastrophe that now threatens the survival of the city. 39 00:03:06,800 --> 00:03:10,395 The real lesson of the disaster is about money. 40 00:03:10,480 --> 00:03:14,234 How the risk management system we call insurance 41 00:03:14,320 --> 00:03:17,596 simply failed when faced with a calamity on this scale. 42 00:03:21,600 --> 00:03:24,831 The hurricane didn't hit New Orleans directly. 43 00:03:24,920 --> 00:03:28,435 The main force of the storm passed to the north-east of the city. 44 00:03:28,520 --> 00:03:31,910 But just as the residents breathed a sigh of relief, 45 00:03:32,000 --> 00:03:34,514 the real catastrophe began. 46 00:03:34,600 --> 00:03:39,037 This IndustriaI CanaI Iinks Lake Pontchartrain to the Mississippi. 47 00:03:39,120 --> 00:03:42,032 After the hurricane, the huge storm surge 48 00:03:42,120 --> 00:03:44,759 raised the water IeveI in the canaI so high 49 00:03:44,840 --> 00:03:46,478 that it broke the Ievee, 50 00:03:46,560 --> 00:03:52,032 pouring umpteen gaIIons of the Iake over here, into the Ninth Ward of New OrIeans. 51 00:03:54,880 --> 00:03:57,440 Just to the east of the Ninth Ward is St Bernard, 52 00:03:57,520 --> 00:04:00,592 a blue-collar community of homeowners 53 00:04:00,680 --> 00:04:05,117 all, on paper at least, covered by private insurance. 54 00:04:12,600 --> 00:04:16,354 Councillor Joey DiFatta refused advice to leave the city, 55 00:04:16,440 --> 00:04:18,396 staying put during the storm. 56 00:04:19,680 --> 00:04:22,956 Eventually, he was forced to retreat to the roof of the town hall 57 00:04:23,040 --> 00:04:24,871 as the waters kept rising. 58 00:04:24,960 --> 00:04:27,918 ..And as you can see, 59 00:04:28,000 --> 00:04:30,434 - this is the water Iine. - That's the water Iine. 60 00:04:30,520 --> 00:04:32,272 (Joey DiFatta) Where it came up to. 61 00:04:32,360 --> 00:04:35,909 The water came in this buiIding in, er... 62 00:04:36,000 --> 00:04:39,595 - 1 4 feet of water in 15 minutes. - Wow. 63 00:04:41,840 --> 00:04:44,400 From the second fIoor of this buiIding, 64 00:04:44,480 --> 00:04:48,189 I couId see, coming down Judge Perez, a waII of water. 65 00:04:48,280 --> 00:04:52,512 In that waII of water was debris - cars, vehicIes, pieces of roofs. 66 00:04:52,600 --> 00:04:55,831 And this waII of water, you know, you guestimate, 67 00:04:55,920 --> 00:04:58,639 had to be maybe 15 to 20 feet taII. 68 00:04:58,720 --> 00:05:00,631 - And moving fast. - Moving quickIy. 69 00:05:00,720 --> 00:05:04,838 Just coming down this bouIevard street, and taking everything with it as it came. 70 00:05:09,200 --> 00:05:13,432 The whole of St Bernard Parish was inundated in just 1 5 minutes. 71 00:05:15,920 --> 00:05:20,357 Only five houses out of 26,000 weren't flooded. 72 00:05:23,520 --> 00:05:26,398 More than 2,000 peopIe were kiIIed in Hurricane Katrina 73 00:05:26,480 --> 00:05:27,959 and the subsequent fIooding. 74 00:05:28,040 --> 00:05:32,511 Here in St Bernard Parish, 1 48 peopIe Iost their Iives, 75 00:05:32,600 --> 00:05:35,319 mostIy because they became trapped in their houses 76 00:05:35,400 --> 00:05:36,992 as the fIood waters rose. 77 00:05:37,080 --> 00:05:39,389 The painted signs on these abandoned houses 78 00:05:39,480 --> 00:05:42,870 say whether dead bodies were found after the fIood waters receded. 79 00:05:42,960 --> 00:05:46,919 A IittIe bit Iike medievaI London in the time of pIague. 80 00:05:52,160 --> 00:05:54,071 Yet three years later, 81 00:05:54,160 --> 00:05:57,436 it's not flooding or plague that's killing New Orleans. 82 00:05:57,520 --> 00:06:00,956 A harsh financial reality has emerged. 83 00:06:01,040 --> 00:06:03,600 People can't live here any more 84 00:06:03,680 --> 00:06:05,989 because they can't insure their homes. 85 00:06:07,400 --> 00:06:09,675 One man made it his mission 86 00:06:09,760 --> 00:06:12,069 to show the limits of private insurance 87 00:06:12,160 --> 00:06:14,355 when it comes to a really big crisis. 88 00:06:22,680 --> 00:06:26,070 He's former navy pilot Richard F Scruggs, 89 00:06:26,160 --> 00:06:30,039 one of those lawyers that only America seems to produce. 90 00:06:31,440 --> 00:06:36,389 Dickie Scruggs took $50 million off the asbestos industry, 91 00:06:36,480 --> 00:06:41,031 then $248 billion off tobacco companies 92 00:06:41,120 --> 00:06:44,396 for failing to warn smokers of the danger of lung cancer. 93 00:06:44,480 --> 00:06:47,517 This kind of work has its rewards. 94 00:06:48,720 --> 00:06:53,271 Scruggs's share in fees on the tobacco case was $1.4 billion. 95 00:06:57,120 --> 00:07:02,274 Scruggs's latest target has been America's insurance companies. 96 00:07:02,360 --> 00:07:06,797 His clients, hundreds of homeowners whose houses were destroyed by Katrina, 97 00:07:06,880 --> 00:07:11,908 argued that the companies were refusing to pay up on genuine claims - 98 00:07:12,000 --> 00:07:14,230 a view the insurers disputed. 99 00:07:14,320 --> 00:07:16,436 There was a house there? 100 00:07:16,520 --> 00:07:19,114 There was a house here, a house next to it, 101 00:07:19,200 --> 00:07:21,350 where you see the traiIer. 102 00:07:21,440 --> 00:07:25,115 Scruggs had a dog of his own in this fight. 103 00:07:25,200 --> 00:07:29,876 His own home on Pascagoula's Beach Boulevard, here on the Mississippi coast, 104 00:07:29,960 --> 00:07:32,793 was so badly damaged by Katrina 105 00:07:32,880 --> 00:07:34,552 that it had to be demolished. 106 00:07:35,720 --> 00:07:37,438 - This is the... - The front door? 107 00:07:37,520 --> 00:07:39,351 This is the front door, right here. 108 00:07:41,240 --> 00:07:43,595 The edge of the sIab, if you wiII. 109 00:07:43,680 --> 00:07:46,148 - You were sIabbed. - We were sIabbed. 110 00:07:46,240 --> 00:07:48,231 If you couId fix the system... 111 00:07:48,320 --> 00:07:51,710 But I'm fortunate enough that I have the means to... 112 00:07:51,800 --> 00:07:55,156 - To Iose a house and buiId it. - Most peopIe here don't. 113 00:07:55,240 --> 00:08:00,997 If you had the power to change the system so that peopIe really were insured, 114 00:08:01,080 --> 00:08:02,399 how wouId you do that? 115 00:08:02,480 --> 00:08:05,278 Is there a way of making insurance work again? 116 00:08:05,360 --> 00:08:11,071 There is, and it's discIosure of what...what you're buying. 117 00:08:11,160 --> 00:08:14,072 Er, so that, you know... 118 00:08:14,160 --> 00:08:16,754 Iike...Iike a drug. 119 00:08:16,840 --> 00:08:19,354 There's a bIack box warning on there. 120 00:08:19,440 --> 00:08:22,716 ''This is what it does, this is what you shouId watch out for.'' 121 00:08:22,800 --> 00:08:28,352 As opposed to this device, which is caIIed a modern insurance poIicy, 122 00:08:28,440 --> 00:08:31,876 which no-one can interpret or understand. 123 00:08:35,000 --> 00:08:39,152 lt seemed as if the insurance companies had been well and truly ''Scrugged''. 124 00:08:39,240 --> 00:08:44,189 One of America's biggest insurers settled hundreds of cases brought by Scruggs 125 00:08:44,280 --> 00:08:48,398 on behalf of clients whose claims had been turned down. 126 00:08:48,480 --> 00:08:50,357 THUNDER RUMBLES 127 00:08:50,440 --> 00:08:53,000 But in this bitter, high-stakes battle, 128 00:08:53,080 --> 00:08:55,389 the insurance companies had the last laugh. 129 00:08:56,480 --> 00:09:01,235 After winning the case, Scruggs was convicted and sentenced to five years 130 00:09:01,320 --> 00:09:06,519 for attempting to bribe a judge and influence the distribution of legal fees. 131 00:09:09,960 --> 00:09:14,511 And the big insurance companies responded to the weight of post-Katrina claims 132 00:09:14,600 --> 00:09:20,152 by, in effect, declaring parts of the Gulf Coast a no-home-insurance zone. 133 00:09:22,200 --> 00:09:25,636 Today, as Councillor Joey DiFatta has found out, 134 00:09:25,720 --> 00:09:29,554 insuring a house in this part of New Orleans is virtually impossible. 135 00:09:31,200 --> 00:09:34,078 - They can't get a mortgage either? - (Joey DiFatta) That is correct. 136 00:09:34,160 --> 00:09:36,754 They have to make a choice. Do I buiId a house here? 137 00:09:36,840 --> 00:09:40,469 Or do I reIocate to an area where insurance may be a IittIe cheaper 138 00:09:40,560 --> 00:09:41,959 and I can afford it? 139 00:09:42,040 --> 00:09:45,157 That is hurting our community, it's taking our peopIe away, 140 00:09:45,240 --> 00:09:48,073 the nucIeus of this parish, and puIIing them away. 141 00:09:48,160 --> 00:09:50,628 SHIP HORN 142 00:09:50,720 --> 00:09:52,790 Three years after disaster struck, 143 00:09:52,880 --> 00:09:57,715 St Bernard Parish has only a third of its pre-Katrina population. 144 00:10:01,880 --> 00:10:03,996 THUNDER RUMBLES 145 00:10:04,080 --> 00:10:06,913 Of course, life has always been dangerous. 146 00:10:07,000 --> 00:10:11,118 The real lesson of Katrina, or any big disaster, 147 00:10:11,200 --> 00:10:14,317 is that even when we think we're protected against risk, 148 00:10:14,400 --> 00:10:17,039 sometimes it turns out we're not. 149 00:10:18,080 --> 00:10:20,878 Even making quite modest insurance claims 150 00:10:20,960 --> 00:10:24,111 can seem more trouble than it's worth. 151 00:10:24,200 --> 00:10:26,430 lt leaves you wondering why we bother 152 00:10:26,520 --> 00:10:29,671 spending so much on insurance policies every year. 153 00:10:29,760 --> 00:10:33,116 Where did this strange habit come from? 154 00:10:34,520 --> 00:10:38,832 Saving up for the proverbiaI rainy day is the first principIe of insurance, 155 00:10:38,920 --> 00:10:41,878 but the trick is knowing what to do with your savings 156 00:10:41,960 --> 00:10:44,428 so that, unIike in New OrIeans after Katrina, 157 00:10:44,520 --> 00:10:46,909 they're in the kitty when you reaIIy need them. 158 00:10:47,000 --> 00:10:50,231 But to do that, you need to be more than usuaIIy canny, 159 00:10:50,320 --> 00:10:52,117 and that gives us a vaIuabIe cIue 160 00:10:52,200 --> 00:10:55,556 as to where the history of modern insurance has its origins. 161 00:10:55,640 --> 00:10:59,269 Where eIse but in bonny, canny ScotIand? 162 00:11:00,000 --> 00:11:01,752 BELL TOLLS 163 00:11:08,400 --> 00:11:12,075 They say the Scots are a pessimistic people. 164 00:11:12,160 --> 00:11:16,312 Maybe it's the weather - all those hundreds of rainy days. 165 00:11:16,400 --> 00:11:19,710 Maybe it's the endless years of sporting disappointment. 166 00:11:19,800 --> 00:11:24,590 Or maybe it was the Calvinism we picked up at the time of the Reformation. 167 00:11:26,320 --> 00:11:29,232 Certainly, it's two Church of Scotland ministers 168 00:11:29,320 --> 00:11:33,552 who deserve the credit for inventing the first true insurance fund, 169 00:11:33,640 --> 00:11:35,756 back in 1 7 44, 170 00:11:35,840 --> 00:11:39,674 and fathering a multi-billion-pound industry. 171 00:11:46,720 --> 00:11:50,872 The Kirkyard of Greyfriars is best known for the grave-robbers, 172 00:11:50,960 --> 00:11:54,555 the Resurrection Men, who came here in the late 1 8th century 173 00:11:54,640 --> 00:11:57,518 to supply the Medical School at Edinburgh University 174 00:11:57,600 --> 00:11:59,750 with corpses for dissection. 175 00:12:01,600 --> 00:12:04,034 But Greyfriars' lasting importance 176 00:12:04,120 --> 00:12:07,510 comes from the work of the minister here, Robert Wallace, 177 00:12:07,600 --> 00:12:10,672 and his friend, Alexander Webster. 178 00:12:13,000 --> 00:12:16,276 It's somehow appropriate that it was Scottish ministers 179 00:12:16,360 --> 00:12:18,112 who invented modern insurance. 180 00:12:18,200 --> 00:12:23,320 After aII, we tend to think of them as the embodiment of prudence and thrift, 181 00:12:23,400 --> 00:12:27,598 weighed down with an anticipation of impending divine retribution 182 00:12:27,680 --> 00:12:29,591 for every tiny transgression. 183 00:12:29,680 --> 00:12:33,639 But, in fact, Robert WaIIace was a hard drinker, 184 00:12:33,720 --> 00:12:35,756 as weII as a mathematicaI prodigy, 185 00:12:35,840 --> 00:12:38,957 who Iiked nothing better than knocking back magnums of cIaret 186 00:12:39,040 --> 00:12:40,393 with his bibuIous buddies. 187 00:12:42,960 --> 00:12:44,916 Wallace and Webster were unhappy 188 00:12:45,000 --> 00:12:48,470 at the way the widows and children of their fellow clergymen 189 00:12:48,560 --> 00:12:51,279 were treated when the Grim Reaper struck. 190 00:12:52,720 --> 00:12:55,473 They often found themselves homeless and penniless. 191 00:12:59,080 --> 00:13:02,959 The plan Wallace and Webster came up with was ingenious - 192 00:13:03,040 --> 00:13:06,112 the first true insurance fund in history. 193 00:13:10,440 --> 00:13:14,035 These are some of the voIuminous caIcuIations that Robert WaIIace did, 194 00:13:14,120 --> 00:13:16,680 now housed at the NationaI Archives Of ScotIand. 195 00:13:16,760 --> 00:13:19,877 You can see how he ran the numbers over and over again, 196 00:13:19,960 --> 00:13:22,952 making very carefuI assumptions about the maximum number 197 00:13:23,040 --> 00:13:26,112 of widows and orphans that wouId have to be provided for. 198 00:13:26,200 --> 00:13:30,591 The key point was that, from now on, ministers wouIdn't just pay money in 199 00:13:30,680 --> 00:13:33,433 that wouId be paid out when one of their number died. 200 00:13:33,520 --> 00:13:37,593 Rather, they wouId pay premiums that wouId be used to create a fund, 201 00:13:37,680 --> 00:13:40,877 and the fund wouId then be invested for profitabIe purposes. 202 00:13:40,960 --> 00:13:45,670 The widows and orphans, henceforth, wouId be paid out of the returns on that money, 203 00:13:45,760 --> 00:13:48,228 Ieaving the premiums to accumuIate. 204 00:13:53,280 --> 00:13:55,669 All that was required for the scheme to work 205 00:13:55,760 --> 00:13:59,036 was an accurate projection of how many widows and orphans 206 00:13:59,120 --> 00:14:01,156 there would likely be in the future. 207 00:14:01,240 --> 00:14:06,473 A calculation which Wallace and Webster made with extraordinary precision. 208 00:14:11,000 --> 00:14:13,798 The creation of the Scottish Ministers' Widows' Fund 209 00:14:13,880 --> 00:14:16,758 was a milestone in financial history, 210 00:14:16,840 --> 00:14:20,719 for it provided a model not just for Scottish clergymen, 211 00:14:20,800 --> 00:14:25,749 but for everyone who aspired to provide for life's eventualities. 212 00:14:29,240 --> 00:14:33,518 By 1815, the principIe of insurance was sufficientIy widespread 213 00:14:33,600 --> 00:14:36,797 to be adopted for the widows of men who Iost their Iives 214 00:14:36,880 --> 00:14:38,711 fighting against NapoIeon. 215 00:14:38,800 --> 00:14:43,476 At the BattIe of WaterIoo, your chances of getting kiIIed were up to one in four, 216 00:14:43,560 --> 00:14:45,790 but at Ieast if you'd taken out insurance, 217 00:14:45,880 --> 00:14:48,838 you had the consoIation of knowing your wife and chiIdren 218 00:14:48,920 --> 00:14:50,876 wouIdn't be thrown out onto the street. 219 00:14:50,960 --> 00:14:53,918 Gives a whoIe new meaning to the phrase ''take cover''. 220 00:15:03,800 --> 00:15:08,351 The Scottish ministers' fund grew into the world-famous Scottish Widows. 221 00:15:09,480 --> 00:15:13,234 Even novelists, not renowned for their financial prudence, 222 00:15:13,320 --> 00:15:14,548 could join. 223 00:15:14,640 --> 00:15:17,950 Walter Scott took out a policy in 1 826, 224 00:15:18,040 --> 00:15:22,192 to reassure his creditors they'd be paid in the event of his death. 225 00:15:23,480 --> 00:15:28,315 By the mid-1 9th century, being insured was as much a badge of respectability 226 00:15:28,400 --> 00:15:30,391 as going to church on Sunday. 227 00:15:31,760 --> 00:15:33,671 BELL TOLLS 228 00:15:40,320 --> 00:15:43,676 What no-one anticipated back in 1 7 44 229 00:15:43,760 --> 00:15:47,594 was that the careful calculations of two Scottish ministers 230 00:15:47,680 --> 00:15:51,468 would grow into today's huge insurance industry. 231 00:15:55,800 --> 00:15:59,156 As Robert WaIIace understood 250 years ago, 232 00:15:59,240 --> 00:16:01,800 size matters in insurance, 233 00:16:01,880 --> 00:16:04,678 because the more peopIe are paying into a fund 234 00:16:04,760 --> 00:16:07,194 the easier it becomes, by the Iaw of averages, 235 00:16:07,280 --> 00:16:10,192 to predict how much wiII have to be paid out each year. 236 00:16:10,280 --> 00:16:13,511 AIthough no individuaI's date of death can be known in advance, 237 00:16:13,600 --> 00:16:18,799 actuaries can caIcuIate the IikeIy Iife expectancy of a Iarge group of individuaIs 238 00:16:18,880 --> 00:16:20,871 with quite astonishing precision. 239 00:16:26,920 --> 00:16:29,753 ln other words, insurance is all about 240 00:16:29,840 --> 00:16:33,037 trying to cope with the risks of the future. 241 00:16:33,120 --> 00:16:37,989 lf, that is, you're insured in the first place. 242 00:16:39,440 --> 00:16:43,115 No matter how many private funds like Scottish Widows were set up, 243 00:16:43,200 --> 00:16:47,034 there were always going to be people beyond the reach of insurance, 244 00:16:47,120 --> 00:16:52,478 who were either too poor or too feckless to save for that rainy day. 245 00:16:53,720 --> 00:16:56,439 The Iot of the poor was once a pretty harsh one - 246 00:16:56,520 --> 00:16:59,080 either dependence on private charity, 247 00:16:59,160 --> 00:17:01,196 or the harsh regime of the workhouse, 248 00:17:01,280 --> 00:17:04,556 Iike this typicaIIy austere one here in the heart of Edinburgh. 249 00:17:04,640 --> 00:17:06,551 Yet by the 1880s, 250 00:17:06,640 --> 00:17:10,428 peopIe began to feeI that Iife's Iosers somehow deserved better. 251 00:17:10,520 --> 00:17:14,069 The seed was pIanted of an entireIy new approach to risk, 252 00:17:14,160 --> 00:17:17,994 a seed that wouId uItimateIy sprout into the modern weIfare state. 253 00:17:18,080 --> 00:17:23,279 The state system of insurance was designed to expIoit the uItimate economy of scaIe, 254 00:17:23,360 --> 00:17:28,036 by covering IiteraIIy every citizen from the cradIe to the grave. 255 00:17:34,000 --> 00:17:37,709 Yet while we tend to think of the welfare state as a British invention, 256 00:17:37,800 --> 00:17:41,270 in fact, the world's first welfare superpower 257 00:17:41,360 --> 00:17:42,713 was Japan. 258 00:18:01,000 --> 00:18:06,120 Disaster just kept striking Japan in the first half of the 20th century. 259 00:18:07,800 --> 00:18:11,713 ln 1 923, a huge earthquake devastated Tokyo. 260 00:18:13,480 --> 00:18:15,436 As in New Orleans, 261 00:18:15,520 --> 00:18:18,830 private insurance policies turned out to be worth little more 262 00:18:18,920 --> 00:18:21,354 than the paper they were printed on. 263 00:18:21,440 --> 00:18:27,276 A new idea began to emerge in Japan - that the state should take care of risk. 264 00:18:31,560 --> 00:18:36,873 But this was to be state protection allied with imperial ambition. 265 00:18:38,680 --> 00:18:40,671 The Japanese set up a welfare state. 266 00:18:43,320 --> 00:18:46,357 And they did it to promote warfare. 267 00:18:50,920 --> 00:18:54,435 lt was the mid-20th-century state's insatiable appetite 268 00:18:54,520 --> 00:18:57,193 for able-bodied young soldiers and workers, 269 00:18:57,280 --> 00:18:59,999 not some kind of bleeding-heart altruism, 270 00:19:00,080 --> 00:19:02,992 that inspired the rise of welfare. 271 00:19:06,760 --> 00:19:09,672 State healthcare would ensure a fitter populace 272 00:19:09,760 --> 00:19:15,153 and a steady supply of able-bodied recruits to the Emperor's armed forces, 273 00:19:15,240 --> 00:19:17,595 and deliver him an empire. 274 00:19:20,600 --> 00:19:22,750 ENGINE REVS 275 00:19:28,680 --> 00:19:31,831 The wartime slogan ''All people are soldiers'' 276 00:19:31,920 --> 00:19:35,799 was adapted to become ''All people should have insurance''. 277 00:19:42,640 --> 00:19:45,871 The only problem was that Japan had gone to war 278 00:19:45,960 --> 00:19:48,235 with the world's economic colossus - 279 00:19:48,320 --> 00:19:49,878 the United States. 280 00:19:54,840 --> 00:19:59,038 Japan's warfare state proved to be a massive mistake. 281 00:19:59,120 --> 00:20:02,396 Quite apart from the nearly three million lives lost 282 00:20:02,480 --> 00:20:04,835 in Japan's doomed bid for empire, 283 00:20:04,920 --> 00:20:09,516 by 1 945, the value of Japan's entire capital stock 284 00:20:09,600 --> 00:20:11,556 seemed to have been reduced to zero 285 00:20:11,640 --> 00:20:13,278 by American bombers. 286 00:20:15,120 --> 00:20:18,954 Cities built largely out of wood were incinerated. 287 00:20:19,040 --> 00:20:22,589 Nearly a third of the urban population lost their homes. 288 00:20:35,880 --> 00:20:38,758 Practically the only city to survive intact 289 00:20:38,840 --> 00:20:42,116 was Kyoto, the former imperial capital. 290 00:20:44,760 --> 00:20:49,834 1 945 may have seen the end of the Japanese warfare state, 291 00:20:49,920 --> 00:20:54,471 but it wasn't the end of the Japanese experiment with state-sponsored welfare. 292 00:20:56,080 --> 00:20:59,675 In Japan, as in most competent countries, the Iesson was cIear - 293 00:20:59,760 --> 00:21:01,876 the worId was just too dangerous a pIace 294 00:21:01,960 --> 00:21:04,599 for private insurance markets to cope with. 295 00:21:04,680 --> 00:21:06,238 With the best wiII in the worId, 296 00:21:06,320 --> 00:21:10,359 peopIe couIdn't be expected to insure themseIves against the US Air Force. 297 00:21:10,440 --> 00:21:13,159 The answer, practicaIIy everywhere, was the same - 298 00:21:13,240 --> 00:21:15,151 for government to step in. 299 00:21:15,240 --> 00:21:17,674 In effect, to nationaIise risk. 300 00:21:21,840 --> 00:21:26,516 Perhaps the most familiar sub-system of welfare from the cradle to the grave, 301 00:21:26,600 --> 00:21:28,830 also born in the ruins of war, 302 00:21:28,920 --> 00:21:32,549 was devised by the British economist, William Beverage. 303 00:21:34,600 --> 00:21:38,673 When the Japanese came up with their own comprehensive weIfare system 304 00:21:38,760 --> 00:21:40,716 in October 1947, 305 00:21:40,800 --> 00:21:44,156 their advisory committee in sociaI security recommended 306 00:21:44,240 --> 00:21:46,913 what amounted to ''Bebariji no Nihon-ban'', 307 00:21:47,000 --> 00:21:49,150 ''Beverage for the Japanese''. 308 00:21:49,240 --> 00:21:52,471 And yet, they went even further than Beverage had intended, 309 00:21:52,560 --> 00:21:54,551 as this copy of their report, 310 00:21:54,640 --> 00:21:58,553 here in the Iibrary of the Japanese NationaI ParIiament, makes cIear. 311 00:21:58,640 --> 00:22:02,952 It caIIed on the government to provide against every cause of poverty. 312 00:22:03,040 --> 00:22:06,350 Sickness and injury, disabiIity, death, 313 00:22:06,440 --> 00:22:10,592 chiIdbirth, Iarge famiIies, oId age and unempIoyment. 314 00:22:10,680 --> 00:22:14,878 Whatever the reason, the needy wouId be guaranteed the minimum standard of Iiving 315 00:22:14,960 --> 00:22:17,394 by nationaI assistance. 316 00:22:17,480 --> 00:22:19,869 MONKS PERFORM INCANTATIONS 317 00:22:23,040 --> 00:22:27,795 The Japanese wouId no Ionger have to reIy on the benevoIence of a feudaI Iord 318 00:22:27,880 --> 00:22:30,075 or the Iuck of the gods - 319 00:22:30,160 --> 00:22:31,957 the weIfare state wouId cover them 320 00:22:32,040 --> 00:22:35,430 against aII the vagaries and vicissitudes of the modern worId. 321 00:22:39,520 --> 00:22:41,670 lf they couldn't afford education, 322 00:22:41,760 --> 00:22:44,035 the state would pay. 323 00:22:44,120 --> 00:22:46,429 lf they couldn't find work, 324 00:22:46,520 --> 00:22:48,431 the state would pay. 325 00:22:48,520 --> 00:22:52,479 lf they were too ill to work, the state would pay. 326 00:22:52,560 --> 00:22:55,950 When they retired, the state would pay. 327 00:22:56,040 --> 00:23:00,272 And when they finally died, the state would pay their dependents. 328 00:23:07,280 --> 00:23:09,794 So what happened after the war in Japan 329 00:23:09,880 --> 00:23:13,270 was merely the extension of the warfare welfare state. 330 00:23:13,360 --> 00:23:16,670 The slogan now became ''All people should have pensions''. 331 00:23:20,920 --> 00:23:25,550 The Japanese welfare state seemed to be a miracle of effectiveness. 332 00:23:25,640 --> 00:23:28,712 ln public health and education, Japan led the world. 333 00:23:32,080 --> 00:23:33,752 By the late 1 97 0s, 334 00:23:33,840 --> 00:23:37,150 the Japanese could boast that their country had become 335 00:23:37,240 --> 00:23:39,310 the welfare superpower. 336 00:23:43,760 --> 00:23:47,514 Run Iike this, the weIfare state seemed to make so much sense. 337 00:23:47,600 --> 00:23:50,319 Japan had achieved security for aII, 338 00:23:50,400 --> 00:23:51,992 the eIimination of risk, 339 00:23:52,080 --> 00:23:55,868 whiIe at the same time growing so rapidIy that by 1968 340 00:23:55,960 --> 00:23:59,032 it had the second-Iargest economy in the worId. 341 00:24:01,920 --> 00:24:05,469 One US economist even predicted that Japan's per-capita income 342 00:24:05,560 --> 00:24:08,552 would overtake America's by the year 2000. 343 00:24:13,680 --> 00:24:16,911 WeIfare was working where warfare had faiIed - 344 00:24:17,000 --> 00:24:19,309 to make Japan top nation. 345 00:24:19,400 --> 00:24:22,073 The key turned out to be not a foreign empire, 346 00:24:22,160 --> 00:24:24,310 but a domestic safety net. 347 00:24:24,400 --> 00:24:26,152 And yet, there was a catch, 348 00:24:26,240 --> 00:24:29,949 a fataI fIaw in the design of the post-war weIfare state. 349 00:24:30,040 --> 00:24:34,318 Just what was it that caused those predictions of Japan's uItimate triumph 350 00:24:34,400 --> 00:24:36,197 to faiI to come true? 351 00:24:38,680 --> 00:24:43,276 The welfare state looked to be working smoothly enough in 1 97 0s Japan. 352 00:24:44,320 --> 00:24:47,676 But elsewhere, there were signs that all was not well. 353 00:24:51,160 --> 00:24:53,754 ln Britain and throughout the western world, 354 00:24:53,840 --> 00:24:57,310 the welfare state, it seemed, had removed the incentives 355 00:24:57,400 --> 00:25:00,870 without which a capitalist economy simply cannot function - 356 00:25:00,960 --> 00:25:05,192 the carrot of serious money for those who strive, 357 00:25:05,280 --> 00:25:09,478 the stick of hardship for those who are idle. 358 00:25:12,880 --> 00:25:15,440 The result was stagflation - 359 00:25:15,520 --> 00:25:18,114 low growth and high inflation. 360 00:25:19,200 --> 00:25:21,031 What was to be done? 361 00:25:22,960 --> 00:25:26,589 One man and his pupils thought they knew the answer. 362 00:25:27,880 --> 00:25:30,474 Thanks in large measure to their influence, 363 00:25:30,560 --> 00:25:34,075 one of the great economic trends of the past 25 years 364 00:25:34,160 --> 00:25:37,197 has been for the welfare state to be dismantled - 365 00:25:37,280 --> 00:25:40,113 reintroducing people with a sharp shock 366 00:25:40,200 --> 00:25:43,875 to the unpredictable monster they thought they had escaped from... 367 00:25:45,040 --> 00:25:46,393 Risk. 368 00:25:59,160 --> 00:26:03,472 ln 1 97 6, a diminutive professor called Milton Friedman, 369 00:26:03,560 --> 00:26:06,393 working here at the University of Chicago, 370 00:26:06,480 --> 00:26:08,755 won the Nobel Prize in Economics. 371 00:26:10,520 --> 00:26:13,432 MiIton Friedman won his pIace in the economic haII of fame 372 00:26:13,520 --> 00:26:15,795 by restating this simpIe equation. 373 00:26:15,880 --> 00:26:19,316 MV = PQ, 374 00:26:19,400 --> 00:26:21,391 where M is the money suppIy, 375 00:26:21,480 --> 00:26:23,994 V is the veIocity at which it circuIates, 376 00:26:24,080 --> 00:26:25,638 P is the price IeveI 377 00:26:25,720 --> 00:26:28,234 and Q is the quantity of expenditures. 378 00:26:28,320 --> 00:26:30,436 Friedman's observation was simpIe - 379 00:26:30,520 --> 00:26:34,229 if the money suppIy went up, then so did the price IeveI. 380 00:26:34,320 --> 00:26:36,436 Hence, the Quantity Theory of Money. 381 00:26:36,520 --> 00:26:40,115 But you needed much more than a piece of chaIk and a bIackboard 382 00:26:40,200 --> 00:26:44,193 to answer the second cruciaI question of MiIton Friedman's career - 383 00:26:44,280 --> 00:26:47,033 what had gone wrong with the weIfare state? 384 00:26:49,680 --> 00:26:54,435 ln Chile, he found the perfect laboratory to test his theories. 385 00:26:59,320 --> 00:27:03,632 ln September 1 97 3, tanks had rolled through Santiago 386 00:27:03,720 --> 00:27:05,392 to overthrow the government 387 00:27:05,480 --> 00:27:08,711 of Chile's Marxist president, Salvador Allende, 388 00:27:08,800 --> 00:27:12,076 whose attempt to turn the country into a communist state 389 00:27:12,160 --> 00:27:14,549 had ended in total economic chaos 390 00:27:14,640 --> 00:27:17,712 and a call by the Chilean Parliament for a military coup. 391 00:27:31,040 --> 00:27:33,554 Up there on the baIcony of the Carrera HoteI, 392 00:27:33,640 --> 00:27:37,110 opponents of the AIIende regime ceIebrated with champagne 393 00:27:37,200 --> 00:27:40,670 as air force jets fIew overhead to bomb the Moneda PaIace. 394 00:27:40,760 --> 00:27:42,910 WHISTLING, EXPLOSION 395 00:27:52,000 --> 00:27:56,073 Here in the paIace, AIIende prepared to make a desperate Iast stand, 396 00:27:56,160 --> 00:28:02,030 armed with an AK-47 presented to him by his Cuban roIe modeI, FideI Castro. 397 00:28:13,400 --> 00:28:18,076 Looking out the paIace window and seeing the tanks IiteraIIy roIIing in, 398 00:28:18,160 --> 00:28:22,199 AIIende reaIised that it was aII over for his dream of a Marxist ChiIe. 399 00:28:22,280 --> 00:28:26,114 Cornered here in what was Ieft of the presidentiaI quarters, 400 00:28:26,200 --> 00:28:28,873 he took the decision to shoot himseIf. 401 00:28:36,080 --> 00:28:38,310 MILITARY BAND PLAYS 402 00:28:39,400 --> 00:28:42,233 35 years later, you can still see the bullet holes 403 00:28:42,320 --> 00:28:44,788 in some of the buildings around the square. 404 00:28:48,560 --> 00:28:51,791 What happened here in September 1973 405 00:28:51,880 --> 00:28:55,589 in many ways epitomised a worIdwide crisis of the weIfare state, 406 00:28:55,680 --> 00:28:59,798 and posed a stark choice between aIternative economic systems. 407 00:28:59,880 --> 00:29:02,633 With output coIIapsing and infIation rampant, 408 00:29:02,720 --> 00:29:06,554 ChiIe's system of universaI benefits was effectiveIy bankrupt. 409 00:29:06,640 --> 00:29:08,596 For AIIende, the onIy soIution 410 00:29:08,680 --> 00:29:12,355 was fuII-bIown, Soviet-styIe takeover of the entire economy. 411 00:29:12,440 --> 00:29:15,591 The generaIs and their supporters knew they didn't want that, 412 00:29:15,680 --> 00:29:17,671 but what did they actuaIIy want, 413 00:29:17,760 --> 00:29:20,320 given that the status quo was unsustainabIe? 414 00:29:20,400 --> 00:29:21,879 Enter MiIton Friedman. 415 00:29:27,320 --> 00:29:29,550 ln March 1 97 5, 416 00:29:29,640 --> 00:29:33,428 Friedman flew from Chicago to Chile to answer that question. 417 00:29:33,520 --> 00:29:35,158 SOLDIER SHOUTS ORDERS 418 00:29:41,120 --> 00:29:43,714 ln addition to giving lectures and seminars, 419 00:29:43,800 --> 00:29:46,394 Friedman came here, to the Moneda Palace, 420 00:29:46,480 --> 00:29:51,235 for a meeting with the new Chilean president, General Augusto Pinochet. 421 00:29:55,240 --> 00:29:58,198 Friedman spent three-quarters of an hour with Pinochet, 422 00:29:58,280 --> 00:30:01,670 urging him to reduce the government deficit that he'd identified 423 00:30:01,760 --> 00:30:05,196 as the main cause of Chile's sky-high inflation - 424 00:30:05,280 --> 00:30:08,352 then running at an annual rate of 900%. 425 00:30:10,920 --> 00:30:12,876 A month after Friedman's visit, 426 00:30:12,960 --> 00:30:17,511 the Chilean junta announced that inflation would be stopped at any cost. 427 00:30:18,720 --> 00:30:21,917 The regime cut government spending by 27%. 428 00:30:28,160 --> 00:30:32,039 ''This problem of inflation is not of recent origin. 429 00:30:32,120 --> 00:30:37,399 ''lt arises from trends towards socialism that started 40 years ago, 430 00:30:37,480 --> 00:30:42,952 ''and reached their logical and terrible climax in the Allende regime. '' 431 00:30:50,320 --> 00:30:53,915 For tendering this advice, Friedman found himself denounced 432 00:30:54,000 --> 00:30:57,072 for acting as a consultant to a military dictator 433 00:30:57,160 --> 00:31:02,473 responsible for the executions of more than 2,000 real and suspected communists, 434 00:31:02,560 --> 00:31:05,438 and the torture of nearly 30,000 more. 435 00:31:21,120 --> 00:31:23,680 Chicago's roIe in ChiIe's new regime 436 00:31:23,760 --> 00:31:26,911 consisted of more than just a visit by MiIton Friedman, however. 437 00:31:27,000 --> 00:31:31,437 Since the 1950s, there'd been a steady stream of bright, young economists 438 00:31:31,520 --> 00:31:34,830 going from this pIace, the CathoIic University in Santiago, 439 00:31:34,920 --> 00:31:36,148 to study in Chicago, 440 00:31:36,240 --> 00:31:39,676 and they'd come back convinced of the need to baIance the budget, 441 00:31:39,760 --> 00:31:42,320 tighten the money suppIy, and IiberaIise trade. 442 00:31:42,400 --> 00:31:45,949 These were the Chicago Boys, Friedman's foot soIdiers. 443 00:31:46,040 --> 00:31:48,838 And yet the most radicaI of their ideas 444 00:31:48,920 --> 00:31:51,912 went beyond what Friedman had recommended to Pinochet. 445 00:31:52,000 --> 00:31:56,278 It amounted to a fuII-scaIe roIIing back of the weIfare state. 446 00:31:56,360 --> 00:32:00,433 The conservative economic revoIution didn't begin in Thatcher's Britain, 447 00:32:00,520 --> 00:32:02,238 or Reagan's America. 448 00:32:02,320 --> 00:32:04,311 It began right here in ChiIe. 449 00:32:08,440 --> 00:32:12,991 The mastermind behind this wholesale dismantling of the welfare state 450 00:32:13,080 --> 00:32:16,436 was a young economist called Jose Pinera. 451 00:32:18,480 --> 00:32:24,316 ChiIe's economy was destroyed. We have had 50 years of protectionism, 452 00:32:24,400 --> 00:32:27,790 state intervention - Iike sociaIism, if you want - 453 00:32:27,880 --> 00:32:32,317 and that was exacerbated during the AIIende government. 454 00:32:32,400 --> 00:32:34,960 We had created a sort of weIfare state, 455 00:32:35,040 --> 00:32:38,430 and that, of course, was going bankrupt in ChiIe. 456 00:32:41,400 --> 00:32:43,914 Between 1979 and 1981 , 457 00:32:44,000 --> 00:32:48,312 Pinera and his coIIeagues erected a radicaIIy new pension system for ChiIe, 458 00:32:48,400 --> 00:32:53,269 giving every worker the chance to opt out of the oId pay-as-you-go state system. 459 00:32:53,360 --> 00:32:55,032 Instead of a payroII tax, 460 00:32:55,120 --> 00:32:58,749 each worker now couId put 10% of his wages aside 461 00:32:58,840 --> 00:33:01,400 into an individuaI personaI retirement account, 462 00:33:01,480 --> 00:33:04,836 to be managed by private competing companies. 463 00:33:04,920 --> 00:33:07,718 There was aIso a smaII premium for disabiIity and Iife insurance. 464 00:33:07,800 --> 00:33:10,712 The idea was to give each worker a sense 465 00:33:10,800 --> 00:33:13,917 that the money being put aside was his own property, 466 00:33:14,000 --> 00:33:15,228 his own capitaI. 467 00:33:15,320 --> 00:33:17,834 GUITAR PLAYING, MAN SINGING 468 00:33:24,640 --> 00:33:28,189 Pinera gambled. He gave workers a choice - 469 00:33:28,280 --> 00:33:30,748 stick with the old system of pay as you go, 470 00:33:30,840 --> 00:33:35,356 or opt for the new personal retirement accounts. 471 00:33:35,440 --> 00:33:37,351 lt paid off. 472 00:33:37,440 --> 00:33:39,317 Convinced by Pinera's argument, 473 00:33:39,400 --> 00:33:42,756 80% made the switch to a private pension plan. 474 00:33:47,520 --> 00:33:51,672 But was it worth it? Was it worth the huge moraI compromise 475 00:33:51,760 --> 00:33:54,957 that the Chicago Boys and the Harvard man made 476 00:33:55,040 --> 00:33:58,953 when they got into bed with a torturing, murderous dictatorship? 477 00:33:59,040 --> 00:34:03,670 The answer to that question very much depends on whether you think their reform 478 00:34:03,760 --> 00:34:08,276 has heIped pave a peacefuI way back to a sustainabIe democracy in ChiIe. 479 00:34:08,360 --> 00:34:10,351 And I think they did. 480 00:34:17,480 --> 00:34:21,439 ln 1 980, Pinochet conceded a new constitution 481 00:34:21,520 --> 00:34:25,274 that prescribed a ten-year transition back to democracy. 482 00:34:25,360 --> 00:34:28,318 Ten years later, he stepped down as president. 483 00:34:29,880 --> 00:34:32,030 Democracy was restored, 484 00:34:32,120 --> 00:34:34,873 and by that time, the economic miracle was under way 485 00:34:34,960 --> 00:34:37,190 that helped to ensure its survival. 486 00:34:41,800 --> 00:34:45,918 For the pension reform not only created a new class of property owners, 487 00:34:46,000 --> 00:34:48,514 each with his own retirement nest egg, 488 00:34:48,600 --> 00:34:52,798 it also gave the Chilean economy a massive shot in the arm. 489 00:34:57,320 --> 00:34:59,231 These brokers at the Banco de ChiIe 490 00:34:59,320 --> 00:35:03,552 are investing ChiIean workers' pension contributions into the stock market. 491 00:35:03,640 --> 00:35:06,313 And they've been doing a pretty good job of it. 492 00:35:06,400 --> 00:35:10,757 Average returns on the personaI retirement accounts has been over 10%, 493 00:35:10,840 --> 00:35:14,355 refIecting the fact that in the 20 years after 1987, 494 00:35:14,440 --> 00:35:18,638 the ChiIean stock market has gone up by a factor of 18. 495 00:35:25,360 --> 00:35:28,272 There is a downside to the system, to be sure. 496 00:35:32,600 --> 00:35:35,751 Since not everyone in the economy has a regular full-time job, 497 00:35:35,840 --> 00:35:38,752 not everyone ends up participating in the system. 498 00:35:41,520 --> 00:35:44,159 Which leaves a substantial chunk of the population 499 00:35:44,240 --> 00:35:46,071 with no pension coverage at all. 500 00:35:50,520 --> 00:35:54,115 I'm standing in front of the Communist Party headquarters 501 00:35:54,200 --> 00:35:56,714 here in La Victoria, a suburb of Santiago, 502 00:35:56,800 --> 00:36:00,395 which was once one of the hotbeds of opposition to the Pinochet regime. 503 00:36:00,480 --> 00:36:03,552 Because most peopIe here are either unempIoyed 504 00:36:03,640 --> 00:36:05,596 or work in the informaI sector, 505 00:36:05,680 --> 00:36:08,478 they don't, or can't, pay into the pension system 506 00:36:08,560 --> 00:36:10,869 which means they don't get anything out of it. 507 00:36:10,960 --> 00:36:14,714 This is the kind of neighbourhood where Che Guevara is stiII the IocaI hero, 508 00:36:14,800 --> 00:36:17,109 not Jose Pinera. 509 00:36:20,640 --> 00:36:23,552 The poor of Chile may not have a private pension plan, 510 00:36:23,640 --> 00:36:28,555 and may have to make do with a meagre government handout in their old age... 511 00:36:30,000 --> 00:36:33,390 ..but even they've benefited from Chile's rapidly growing economy. 512 00:36:36,920 --> 00:36:41,118 (Jose Pinera) Growth makes a difference in the Iife of every citizen. 513 00:36:41,200 --> 00:36:44,272 The poverty rate in ChiIe has gone down from about 50% 514 00:36:44,360 --> 00:36:46,271 to 13%. 515 00:36:46,360 --> 00:36:48,590 So this has been reaIIy a huge success 516 00:36:48,680 --> 00:36:51,831 and the pension reform has been a criticaI eIement in this. 517 00:36:53,360 --> 00:36:55,920 The improvement in ChiIe's economic performance 518 00:36:56,000 --> 00:36:59,231 since the Chicago Boys' reforms is reaIIy very hard to argue with. 519 00:36:59,320 --> 00:37:02,392 In the 15 years before MiIton Friedman's visit, 520 00:37:02,480 --> 00:37:06,314 the growth rate here was a measIy 0. 1 7% a year. 521 00:37:06,400 --> 00:37:08,197 In the subsequent 15 years, 522 00:37:08,280 --> 00:37:10,191 it increased by a factor of nearIy 20. 523 00:37:10,280 --> 00:37:12,874 The poverty rate here's down to 15%, 524 00:37:12,960 --> 00:37:15,713 compared to 40% in the rest of Latin America. 525 00:37:15,800 --> 00:37:19,429 And when you Iook down at Santiago's shiny new financiaI district, 526 00:37:19,520 --> 00:37:21,909 you can see why the ChiIean pension reform 527 00:37:22,000 --> 00:37:25,788 has been imitated right across the region and, indeed, around the worId. 528 00:37:28,760 --> 00:37:31,752 For Britain's Margaret Thatcher, the general from Chile 529 00:37:31,840 --> 00:37:34,752 and the professor from Chicago were heroes, 530 00:37:34,840 --> 00:37:38,628 who demonstrated that only by rolling back the welfare state 531 00:37:38,720 --> 00:37:41,757 could governments revive economic growth. 532 00:37:44,200 --> 00:37:47,670 Yet one country where this recipe has not been tried 533 00:37:47,760 --> 00:37:50,320 is the country that's come to need it most. 534 00:37:53,280 --> 00:37:54,554 Japan. 535 00:37:58,680 --> 00:38:02,070 So successful was the Japanese welfare superpower 536 00:38:02,160 --> 00:38:06,756 that by the 1 97 0s, life expectancy was the longest in the world. 537 00:38:11,760 --> 00:38:13,079 The problem was 538 00:38:13,160 --> 00:38:16,709 that Japan's welfare state was too successful. 539 00:38:23,240 --> 00:38:26,676 Today, the programmes run here at Japan's Ministry of WeIfare 540 00:38:26,760 --> 00:38:29,911 reIy on an ever-smaIIer number of active workers 541 00:38:30,000 --> 00:38:33,436 to support an ever-rising popuIation of retirees. 542 00:38:33,520 --> 00:38:37,274 Back in 1960, there were something Iike 1 1 active workers 543 00:38:37,360 --> 00:38:39,476 for every one retired person. 544 00:38:39,560 --> 00:38:41,073 But by 2025, 545 00:38:41,160 --> 00:38:43,515 that number couId sink as Iow as two. 546 00:38:43,600 --> 00:38:46,398 In other words, there'II be one oId-age pensioner 547 00:38:46,480 --> 00:38:49,677 for every two bureaucrats working here at the Ministry. 548 00:38:49,760 --> 00:38:53,639 In just 30 years, the cost of sociaI security benefits 549 00:38:53,720 --> 00:38:56,837 has risen in reIation to Japan's nationaI income 550 00:38:56,920 --> 00:38:58,399 by a factor of four. 551 00:39:01,520 --> 00:39:04,557 Today, virtually all Japan's health insurance societies 552 00:39:04,640 --> 00:39:05,993 are in deficit. 553 00:39:06,080 --> 00:39:08,913 And the pension funds are nearly out of money too. 554 00:39:10,360 --> 00:39:13,033 Japan's once so-super welfare state 555 00:39:13,120 --> 00:39:15,873 is threatening to bankrupt the nation. 556 00:39:22,920 --> 00:39:25,832 lnsurance. lt seemed such a brilliant idea 557 00:39:25,920 --> 00:39:28,878 in the calculations of those Scottish ministers, 558 00:39:28,960 --> 00:39:32,839 and even more brilliant in Japan's all-encompassing welfare state. 559 00:39:32,920 --> 00:39:37,789 But as we've seen, the best-laid schemes can be thrown into disarray 560 00:39:37,880 --> 00:39:40,474 by an unexpected turn of events. 561 00:39:40,560 --> 00:39:45,270 So is there any better way of managing risk in an uncertain world? 562 00:39:46,440 --> 00:39:49,034 Disasters Iike 9/1 1 and Katrina 563 00:39:49,120 --> 00:39:51,634 expose the Iimits of both traditionaI insurance 564 00:39:51,720 --> 00:39:53,233 and the weIfare state. 565 00:39:53,320 --> 00:39:55,788 But insurance and weIfare aren't the onIy ways 566 00:39:55,880 --> 00:39:58,678 to buy yourseIf protection against future shocks. 567 00:39:58,760 --> 00:40:02,639 These days, the smart way of doing it is by being hedged. 568 00:40:02,720 --> 00:40:04,790 Now, everybody's heard of hedge funds, 569 00:40:04,880 --> 00:40:08,270 but what exactIy does ''hedging'' mean and where did it come from? 570 00:40:13,600 --> 00:40:16,910 To most of us, hedge funds are a mystery. 571 00:40:17,000 --> 00:40:19,116 But the one thing we do know 572 00:40:19,200 --> 00:40:22,636 is that they can make you stupendously rich. 573 00:40:22,720 --> 00:40:28,590 One hugely successful hedge fund manager paid $60 million for this Cezanne. 574 00:40:28,680 --> 00:40:30,352 And he owns this Degas too. 575 00:40:31,400 --> 00:40:35,473 Not to mention a Jasper Johns he paid $80 million for. 576 00:40:35,560 --> 00:40:38,597 He's also given hundreds of millions of dollars to charity. 577 00:40:48,720 --> 00:40:52,349 Ken Griffin is the founder of the Citadel lnvestment Group, 578 00:40:52,440 --> 00:40:55,477 one of the world's biggest hedge funds. 579 00:40:55,560 --> 00:40:59,519 Last year, he navigated his way through the credit crunch so successfully 580 00:40:59,600 --> 00:41:02,398 he was able to pay himself more than a billion dollars. 581 00:41:04,800 --> 00:41:08,349 To most of us, risk is scary, 582 00:41:08,440 --> 00:41:13,389 but all of Griffin's vast wealth has come because he's found a way of managing risk, 583 00:41:13,480 --> 00:41:17,632 with a mixture of mathematical precision and brilliant intuition. 584 00:41:19,960 --> 00:41:24,795 (Ken Griffin) Nothing is constant. Nothing is the way it's aIways been. 585 00:41:24,880 --> 00:41:28,589 So what I find is that peopIe who are reaIIy good at this 586 00:41:28,680 --> 00:41:31,478 have great intuition, great instinct. 587 00:41:31,560 --> 00:41:33,357 Their gut actuaIIy teIIs them something. 588 00:41:33,440 --> 00:41:34,998 The mathematics are important 589 00:41:35,080 --> 00:41:37,878 because they demonstrate you understand the probIem. 590 00:41:37,960 --> 00:41:41,953 But uItimateIy, the decision about whether or not to take a given risk 591 00:41:42,040 --> 00:41:46,795 I think is reaIIy a human judgement caII in every sense of the word. 592 00:41:54,800 --> 00:41:58,190 The origins of hedging, appropriateIy enough, are agricuIturaI. 593 00:41:58,280 --> 00:42:02,319 For a farmer, nothing is more important than the future price of his crop 594 00:42:02,400 --> 00:42:04,914 after it's been harvested and brought to market. 595 00:42:05,000 --> 00:42:08,959 But that can be higher, or much Iower, than he expects. 596 00:42:09,040 --> 00:42:11,759 A futures contract aIIows him to protect himseIf 597 00:42:11,840 --> 00:42:15,196 by committing a merchant to buy the crop when it's brought to market 598 00:42:15,280 --> 00:42:18,113 at a price agreed when the seeds are being pIanted. 599 00:42:19,520 --> 00:42:22,956 The farmer gets a floor below which the price can't sink. 600 00:42:23,040 --> 00:42:26,874 The merchant gets a ceiling above which it can't rise. 601 00:42:26,960 --> 00:42:28,871 By signing a futures contract, 602 00:42:28,960 --> 00:42:32,635 both the farmer and the merchant have hedged their bets. 603 00:42:32,720 --> 00:42:35,188 (Ken Griffin) Both parties are better off, 604 00:42:35,280 --> 00:42:38,989 and because of that, the worId as a whoIe is much better off. 605 00:42:39,080 --> 00:42:41,355 It encourages capitaI formation, 606 00:42:41,440 --> 00:42:43,237 it encourages investment, 607 00:42:43,320 --> 00:42:46,790 it encourages peopIe to do what is needed to be done 608 00:42:46,880 --> 00:42:48,552 to make the worId a better pIace. 609 00:42:51,400 --> 00:42:54,392 With the development of a standardised futures contract, 610 00:42:54,480 --> 00:42:57,790 agreed rules, and an effective clearing house, 611 00:42:57,880 --> 00:43:01,077 the first true futures market was born. 612 00:43:04,040 --> 00:43:07,396 And its birthplace was here in the Windy City. 613 00:43:07,480 --> 00:43:08,879 Chicago. 614 00:43:12,240 --> 00:43:16,791 After the city's futures exchange was established in 1 87 4, 615 00:43:16,880 --> 00:43:20,270 hedging commodities became standard practice. 616 00:43:22,680 --> 00:43:27,549 The next step was for a conditional kind of future to evolve. 617 00:43:27,640 --> 00:43:28,789 The option. 618 00:43:30,280 --> 00:43:34,319 Some of this really is the financial equivalent of rocket science, 619 00:43:34,400 --> 00:43:37,631 but the underlying principle is simple. 620 00:43:37,720 --> 00:43:40,553 Because they're derived from underIying assets, 621 00:43:40,640 --> 00:43:43,234 aII futures contracts are known as ''derivatives''. 622 00:43:43,320 --> 00:43:46,790 But an even smarter kind of derivative is an ''option''. 623 00:43:46,880 --> 00:43:48,950 The buyer of a caII option 624 00:43:49,040 --> 00:43:54,478 has the right, say, to buy a barreI of oiI for $120 625 00:43:54,560 --> 00:43:56,118 in a year's time. 626 00:43:56,200 --> 00:44:00,113 Now, if the price of oiI rises to $150 a barreI, 627 00:44:00,200 --> 00:44:02,031 then the option is in the money 628 00:44:02,120 --> 00:44:05,078 and the smart guy makes a profit of $30. 629 00:44:05,160 --> 00:44:08,675 But if that doesn't happen, if the price of oiI stays the same, 630 00:44:08,760 --> 00:44:10,034 or actuaIIy decIines, 631 00:44:10,120 --> 00:44:12,680 he's under no obIigation to carry through the deaI. 632 00:44:12,760 --> 00:44:16,389 AII he does is to write off the cost of the option itseIf. 633 00:44:16,480 --> 00:44:20,996 WeII, it's by buying and seIIing compIex smart derivatives Iike options 634 00:44:21,080 --> 00:44:23,594 that Ken Griffin has become a biIIionaire. 635 00:44:23,680 --> 00:44:25,238 TRADERS SHOUTING 636 00:44:26,960 --> 00:44:31,750 ln theory, derivatives offer a new way to hedge against an uncertain future. 637 00:44:31,840 --> 00:44:35,116 A much smarter way than boring old insurance. 638 00:44:35,200 --> 00:44:37,714 And much more profitable. 639 00:44:40,360 --> 00:44:46,071 ln the past decade, derivatives have seemed to take over the world of finance. 640 00:44:46,160 --> 00:44:50,472 By the end of 2007, the notional value of all derivatives contracts 641 00:44:50,560 --> 00:44:54,553 reached a staggering $596 trillion. 642 00:44:55,240 --> 00:44:58,437 That's 43 times the size of the American economy. 643 00:45:04,000 --> 00:45:08,232 There are tremendous economic benefits for peopIe that work here. 644 00:45:08,320 --> 00:45:10,880 $20 biIIion in the hands of 1 ,000 peopIe 645 00:45:10,960 --> 00:45:13,838 is reaIIy a 21st century phenomenon. 646 00:45:13,920 --> 00:45:16,036 This never happened 50 years ago. 647 00:45:20,840 --> 00:45:23,638 Yet there are downsides to hedging too. 648 00:45:23,720 --> 00:45:25,870 When biIIionaire investor Warren Buffet 649 00:45:25,960 --> 00:45:29,509 described derivatives as ''financiaI weapons of mass destruction'', 650 00:45:29,600 --> 00:45:34,720 he aII but prophesised the downfaII of American insurance giant AIG. 651 00:45:34,800 --> 00:45:37,394 Their European headquarters are there behind me. 652 00:45:37,480 --> 00:45:40,358 Brought Iow not by seIIing insurance poIicies, 653 00:45:40,440 --> 00:45:43,352 but by seIIing derivatives that bIew up in its face. 654 00:45:56,560 --> 00:46:00,348 Our basic human urge to protect ourselves against risk 655 00:46:00,440 --> 00:46:03,432 has proved frustratingly difficult to satisfy. 656 00:46:05,960 --> 00:46:08,394 lnsurance companies let us down. 657 00:46:10,920 --> 00:46:14,071 Welfare states sink into insolvency. 658 00:46:15,520 --> 00:46:18,956 And derivatives turn out to be a double-edged weapon too. 659 00:46:22,720 --> 00:46:23,994 GUNSHOT 660 00:46:26,400 --> 00:46:28,391 And so for many families, 661 00:46:28,480 --> 00:46:32,439 providing for the future now takes one very simple form - 662 00:46:32,520 --> 00:46:35,193 an investment in a house, 663 00:46:35,280 --> 00:46:37,999 the value of which is supposed to keep going up 664 00:46:38,080 --> 00:46:40,992 until the day the breadwinners need to retire. 665 00:46:44,080 --> 00:46:47,356 lf the pension plan falls short, never mind. 666 00:46:47,440 --> 00:46:49,795 There's always home, sweet home. 667 00:46:52,800 --> 00:46:55,189 As a pension or an insurance poIicy, 668 00:46:55,280 --> 00:46:57,999 this strategy has one very obvious fIaw - 669 00:46:58,080 --> 00:47:01,516 it represents a one-way, totaIIy unhedged bet 670 00:47:01,600 --> 00:47:04,239 on a singIe market, the property market. 671 00:47:04,320 --> 00:47:07,790 But as we'II see in the next episode of The Ascent Of Money, 672 00:47:07,880 --> 00:47:09,791 a bet on bricks and mortar, 673 00:47:09,880 --> 00:47:12,075 or good oId Japanese wood, 674 00:47:12,160 --> 00:47:14,390 is anything but as safe as houses.