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ln our time, we've witnessed
the zenith of global finance.

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ln 2006, the world's total economic
output was worth around $47 trillion -

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that's 47 followed by 1 2 zeroes.

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The total value of stock
and bond markets

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was roughly $1 1 9 trillion -
more than twice the size.

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And the amount outstanding
of the strange new financial life form

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known as derivatives
was $47 3 trillion - ten times larger.

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By the summer of 2007, it seemed as if
the Earth had turned into Planet Finance.

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As never before,
the world was interconnected,

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but not just by cabIes,
container ships and jet pIanes.

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By 24/7 deaIing rooms
and internationaI investment banks.

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ln this series, we've seen how
the markets for credit, bonds, stocks,

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insurance and real estate all evolved
in Europe and North America.

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Well, now it's time to tell the story

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of how those financial innovations
conquered the world.

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This is the story
of financial globalisation.

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Globalisation is something
we take for granted today.

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And yet for all the advantages
of an interconnected world,

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perfectIy exempIified by Hong Kong's
astonishing humming container port,

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there's a downside to gIobaIisation,
and that is its vuInerabiIity -

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its vuInerabiIity to financiaI shocks,
because finance isn't an exact science,

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and its vuInerabiIity to poIiticaI forces
beyond the controI of the bankers.

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The ascent of money
has seldom been smooth.

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Time and again, it's been punctuated
by big and painful crises.

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Just ten years ago,
it seemed that these crises

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were more likely to blow up
in emerging markets, like Asia.

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Yet today, it's the West that's caught up
in a full-blown credit crunch,

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while Asia seems
scarcely to have noticed.

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lndeed, a new phenomenon
has come to define the world economy.

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American borrowers have come
to rely on Chinese savers -

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a symbiotic relationship between China
and America that l call ''Chimerica''.

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But can we be sure
that Chimerica will save

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this era of financial globalisation?

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The chiIIing reaIity
is that a hundred years ago,

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another age of financiaI gIobaIisation
ended not with a whimper, but with a bang.

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And there's no reason why that
shouIdn't happen again in our time.

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lt used to be said
that ''emerging markets''

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were places where
they have emergencies.

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lnvesting in faraway places
can make you rich,

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but when things go wrong, it's often
been a fast track to financial ruin.

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That's why many of today's apparently
unstoppable emerging markets

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are really re-emerging markets.

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These days, of course, the uItimate
re-emerging market is China.

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To taIk to some peopIe,

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there's simpIy no Iimit to the amount
of money to be made here.

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And it's certainIy true
that over the past 20 years,

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the mainIand has foIIowed the exampIe
set here in Hong Kong, and boomed.

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And yet this isn't the first time that
foreign investors have piIed into China,

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aiming to make megabucks from
the worId's most popuIous nation.

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And the Iast time,

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those foreign investors
Iost aImost as many shirts

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as the IocaI taiIors here
can stitch together in a week.

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The key problem with overseas
investment, then as now,

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is that it's hard for an investor
in London or New York

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to see what a foreign government
or company is up to

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when they're an ocean or more apart.

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lf the foreign borrower
decides to default on its debts,

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what's an investor to do?

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The answer before 1 91 4
was brutally simple but effective.

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Get your government
to send in the navy.

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By guaranteeing European
political control,

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gunboat diplomacy provided
reassurance for British investors

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even at the remotest extremities
of the world economy.

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The Royal Navy provided the firepower

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that underwrote the first age
of globalisation...

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..and its pioneers,

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like William Jardine...
and James Matheson.

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Jardine and Matheson
were buccaneering Scots

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who'd set up a trading company in the
southern Chinese port of Canton in 1 832.

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Not to put too fine a point on it,

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their most profitable line
of business was drug dealing.

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They shipped opium produced
under British Government control in lndia

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to China's population of addicts -

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a trade that China's Emperor
had banned.

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On March 1 0th, 1 839,
an imperial official named Lin Zexu

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arrived in Canton under orders from
the Emperor to stamp out the trade.

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He besieged the British
opium warehouses,

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blocking any further imports.

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20,000 chests of opium
valued at £2 million

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were confiscated
and literally thrown in the sea.

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Faced with catastrophic losses,
Jardine hurried to London

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to lobby the British Government
to send a gunboat.

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WeII, Jardine got his wish granted.

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On August 23rd, 1840, British gunships
Ianded here on Hong Kong IsIand.

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The Qing Empire
was about to feeI the fuII force

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of history's
most successfuI narco-state.

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As Jardine had predicted,

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the Royal Navy made short work
of the Chinese defences.

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With south-western China
under British control,

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the opium trade was given free rein.

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Drug addiction exploded.

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Large tracts of the country
slid into rebellion and anarchy.

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But for Jardine Matheson, with their head
office now established in Hong Kong,

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the glory days of Victorian
globalisation had arrived.

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By1 900, the firm had diversified into
more respectable lines of business.

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lt had its own breweries,
its own cotton mills,

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its own insurance company,

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and its own railways, like the one
they built from Kowloon to Canton.

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Back in 1913, an investor in London
had an extraordinary range

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of foreign opportunities,

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and nothing iIIustrates that better than
the Iedgers of N M RothschiId & Sons.

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Just a singIe page from 1913

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Iists no fewer than 20
different foreign securities,

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incIuding bonds issues by ChiIe,
Egypt, Germany, Hungary, ItaIy,

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not forgetting 1 1 different
raiIway companies,

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incIuding four from Argentina,
two from Canada and, down here,

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the good oId KowIoon to Canton
raiIway Iine.

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For the first time in history,
the world economy was truly united

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by a combination of low trade
and high finance.

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Yet this first era
of financial globalisation

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was to be brought to a violent halt by
the world's first truly global conflict.

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On June 28th, 1 91 4,
the heir to the Austrian throne,

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the Archduke Franz Ferdinand,

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was assassinated
in the Bosnian capital, Sarajevo.

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lnitially, financial markets
shrugged off the news

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as just another bout of Balkan bloodshed.

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ln reality, the assassination

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had sparked off a chain reaction
in the world's financial markets.

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As investors belatedly grasped the
likelihood of a full-scale European war,

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liquidity - the ability to borrow
money or sell assets -

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was sucked out of the world economy as if
the bottom had dropped out of a bath.

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The resulting disruption
to international finance

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shattered globalisation.

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It's absoIuteIy fascinating to foIIow
the outbreak of the First WorId War

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through the financiaI pages
of the London Times.

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It wasn't untiI JuIy 22nd, 191 4,
that anybody appreciated

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that the assassination of the
Archduke Franz Ferdinand in Sarajevo,

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three weeks before, might have
some financiaI repercussions.

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Just ten days Iater,
on August 1st, 191 4,

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the Times had to report the cIosure
of the Stock Exchange,

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and cIosed it remained
untiI January 4th, 1915.

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Why were investors so seemingIy
obIivious to Armageddon

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just days before
the outbreak of worId war?

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WeII, the answer is that a combination
of financiaI innovation

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and gIobaI integration had made
the worId seem reassuringIy safe.

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The lights in financial markets
were flashing green, not red,

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until the very eve of destruction.

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There may be a lesson
here for our time, too.

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Financial globalisation mark one
took a generation to engineer.

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But it was blown apart
in a matter of days.

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And it would take more than a generation
to repair the damage done

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by the guns of August 1 91 4.

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The First World War had put an end
to the first age of globalisation.

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Until the late 1 960s,
international finance slumbered.

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Some even considered it dead.

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ln 1 944,
the soon-to-be-victorious Allies

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gathered to devise a new financial
architecture for the world.

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Trade wouId be free,

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but capitaI movements wouId be
subject to tight reguIation.

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When money did fIow
across nationaI borders,

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it wouId go from government
to government.

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This new financial order
was to have two guardian sisters,

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established here in Washington DC -

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the lnternational Monetary Fund

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and the lnternational Bank for
Reconstruction and Development,

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later known as the World Bank.

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By the 1 97 0s, however, vast sums
of money were being accumulated

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by the oil exporters of the Middle East.

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With Western bankers desperate
to reinvest the money as loans,

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the guardian sisters relaxed their grip.

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Financial globalisation was reborn.

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The region where the bankers
chose to lend the petrodollars

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seemed to promise the best returns.

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Not for the first time
in financial history,

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it also posed the biggest risks.

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ln seven years, Latin America
quadrupled its borrowings from foreigners

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to more than $31 5 billion.

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Then, in 1 982,

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Mexico declared that it would
no longer be able to service its debt.

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Soon, the entire continent teetered
on the verge of bankruptcy.

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But the days had gone when investors
could confidently expect their governments

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to send a gunboat to get their money back
when foreign borrowers misbehaved.

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Now responsibility for such debt crises
fell on the lMF and the World Bank.

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They didn't have gunboats.

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But in return for new loans,

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they could insist that
Latin American governments

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adopt painful ''structural
adjustment programmes'' -

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impose fiscal discipline.

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To American economists, these
programmes all made perfect sense.

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But not everyone agreed.

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To the increasingly vocal
critics of global finance,

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the two guardian sisters
of the post-war order

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were being transformed
into economic hit men.

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00:14:09,200 --> 00:14:13,716
They were holding a financial gun to
the heads of Third World governments...

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00:14:15,520 --> 00:14:20,958
..propping up dictators and furthering
the interests of Yankee imperialism.

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00:14:25,240 --> 00:14:30,394
And woe betide those
who resisted the hit men.

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00:14:30,480 --> 00:14:34,837
Conspiracy theories flourished
in the anti-globalisation movement.

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00:14:34,920 --> 00:14:38,390
According to one popular theory,
two Latin American leaders -

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Jaime Roldos of Ecuador
and Omar Torrijos of Panama -

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00:14:42,320 --> 00:14:46,996
were actually assassinated for resisting
the demands of American imperialism.

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00:14:48,080 --> 00:14:52,835
And yet there's something about
this story of a WorId Bank-IMF pIot

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00:14:52,920 --> 00:14:56,071
against Third WorId Ieaders
that doesn't quite add up.

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00:14:56,160 --> 00:14:59,516
After aII, it's not as if the
United States had Ient that much money

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00:14:59,600 --> 00:15:01,192
to Ecuador and Panama.

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00:15:01,280 --> 00:15:06,877
In the 1970s, they accounted for just
0.4% of totaI US grants and Ioans.

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00:15:06,960 --> 00:15:10,270
Nor were they particuIarIy big
customers for the United States.

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00:15:10,360 --> 00:15:13,989
Again, Iess than 0.4%
of totaI US exports.

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00:15:14,080 --> 00:15:18,551
Now, those just don't strike me
as figures worth kiIIing for.

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00:15:19,480 --> 00:15:20,879
To say the least,

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00:15:20,960 --> 00:15:25,750
the idea of lMF-sponsored
assassinations is a stretch.

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00:15:25,840 --> 00:15:29,469
Nevertheless, this new phase
in the story of globalisation

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00:15:29,560 --> 00:15:34,998
did see the emergence of a new and
more plausible kind of economic hit man,

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00:15:35,080 --> 00:15:40,393
armed with a financially
lethal weapon - the hedge fund.

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00:15:43,440 --> 00:15:47,228
The men who ran the hedge funds
were far more intimidating

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00:15:47,320 --> 00:15:52,189
precisely because they didn't even need
to threaten violence to get their way.

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00:15:52,280 --> 00:15:56,478
And their distinctive contribution
to globalisation was to speed it up.

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00:15:56,560 --> 00:16:00,473
Whereas the World Bank lends money
to countries for periods of years,

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00:16:00,560 --> 00:16:04,519
hedge funds are more likely
to put their money in for just weeks,

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00:16:04,600 --> 00:16:06,033
or even days.

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00:16:07,920 --> 00:16:11,515
The grandmaster of
the new economic hit men

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00:16:11,600 --> 00:16:13,591
was George Soros.

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00:16:16,160 --> 00:16:22,076
A Hungarian Jew by birth, but educated
in London and based in New York,

213
00:16:22,160 --> 00:16:26,438
Soros brought to global finance
a brand-new theory of economic behaviour

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00:16:26,520 --> 00:16:29,159
that underlined
the fallibility of human nature

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00:16:29,240 --> 00:16:31,390
and the instability of financial markets.

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00:16:31,480 --> 00:16:36,031
Your actions wiII have
unintended consequences,

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00:16:36,120 --> 00:16:41,240
so the outcome wiII not correspond
to your expectations.

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00:16:41,320 --> 00:16:47,236
And that is the way
human affairs generaIIy work.

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00:16:51,080 --> 00:16:53,913
According to Soros's
Theory of Reflexivity,

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00:16:54,000 --> 00:16:57,390
financial markets can't
possibly be perfectly efficient,

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00:16:57,480 --> 00:16:59,550
much less rational,

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00:16:59,640 --> 00:17:00,993
for the simpIe reason

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00:17:01,080 --> 00:17:04,629
that prices are just the refIection
of the ignorance and the biases,

224
00:17:04,720 --> 00:17:07,712
mostIy compIeteIy irrationaI,
of miIIions of investors.

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00:17:07,800 --> 00:17:11,713
In Soros's eyes, markets are bound
to go through cycIes of boom and bust,

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00:17:11,800 --> 00:17:13,518
as sureIy as the human temperament

227
00:17:13,600 --> 00:17:17,479
is prone to bouts of euphoria
and despondency.

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00:17:22,120 --> 00:17:27,069
Soros's Quantum Fund had made
millions from short selling,

229
00:17:27,160 --> 00:17:30,357
a type of dealing which
borrows stocks or currencies

230
00:17:30,440 --> 00:17:32,670
and sells them for future delivery

231
00:17:32,760 --> 00:17:36,070
on the calculation that
they'll go down in value.

232
00:17:37,680 --> 00:17:41,639
His biggest coups came from
being right about losers, not winners.

233
00:17:41,720 --> 00:17:46,635
And the greatest of these was among
the most momentous speculative hits

234
00:17:46,720 --> 00:17:48,711
in all financial history.

235
00:17:52,120 --> 00:17:58,036
On September 1 6th, 1 992,
with the British pound in big trouble,

236
00:17:58,120 --> 00:18:04,468
l watched as Soros put out
a contract on the Bank of England.

237
00:18:04,560 --> 00:18:08,109
I became convinced that specuIators
Iike Soros were bound to win

238
00:18:08,200 --> 00:18:11,476
if it came to a straight showdown
with the British Government.

239
00:18:11,560 --> 00:18:13,596
It was a matter of simpIe arithmetic -

240
00:18:13,680 --> 00:18:18,913
a triIIion doIIars of currency traded
every day on foreign exchange markets

241
00:18:19,000 --> 00:18:24,438
against the meagre hard currency
reserves of the UK Treasury.

242
00:18:26,440 --> 00:18:30,433
At that time, the British pound
was tightly linked to the German mark

243
00:18:30,520 --> 00:18:36,038
through the ERM -
the European Exchange Rate Mechanism.

244
00:18:36,120 --> 00:18:37,678
As German interest rates rose

245
00:18:37,760 --> 00:18:41,594
in the wake of that country's
hugely expensive reunification,

246
00:18:41,680 --> 00:18:43,477
Britain's rates had to rise too,

247
00:18:43,560 --> 00:18:45,516
hurting home-owners and businesses.

248
00:18:45,600 --> 00:18:49,673
Soros calculated that the British
Chancellor, Norman Lamont,

249
00:18:49,760 --> 00:18:53,435
would be forced to withdraw from
the ERM and devalue the pound.

250
00:18:56,040 --> 00:18:58,679
lt was the biggest bet of Soros's life.

251
00:18:58,760 --> 00:19:04,949
So sure was he that the pound
would drop that he bet $1 0 billion -

252
00:19:05,040 --> 00:19:08,430
more than the entire
capital of his fund.

253
00:19:08,520 --> 00:19:12,638
The risk-reward
was disproportionate.

254
00:19:12,720 --> 00:19:18,989
And therefore it seemed
Iike a good specuIation,

255
00:19:19,080 --> 00:19:23,596
or investment, if you Iike,
shorting the pound.

256
00:19:24,760 --> 00:19:28,719
l was equally convinced that sterling
would have to be be devalued,

257
00:19:28,800 --> 00:19:30,950
though all l had to bet
was my credibility.

258
00:19:31,040 --> 00:19:36,592
That evening, I headed to the opera
to see Verdi's The Force Of Destiny.

259
00:19:36,680 --> 00:19:38,716
It proved exceedingIy appropriate.

260
00:19:47,280 --> 00:19:50,875
At the intervaI, they announced
that ChanceIIor Norman Lamont

261
00:19:50,960 --> 00:19:53,758
had appeared in there,
in the Treasury courtyard,

262
00:19:53,840 --> 00:19:56,593
to say that Britain
was withdrawing from the ERM.

263
00:19:56,680 --> 00:19:57,874
How we aII cheered.

264
00:19:57,960 --> 00:20:02,636
Today has been an extremeIy
difficuIt and turbuIent day.

265
00:20:02,720 --> 00:20:06,429
Massive specuIative fIows
have continued to disrupt

266
00:20:06,520 --> 00:20:09,353
the functioning of
the Exchange Rate Mechanism.

267
00:20:12,200 --> 00:20:15,556
Soros made a billion dollars that day,

268
00:20:15,640 --> 00:20:20,270
and that was only 40%
of his fund's annual profits.

269
00:20:20,360 --> 00:20:24,911
(NiaII) Do you feeI...
or did you feeI a sense of triumph

270
00:20:25,000 --> 00:20:28,470
when your prophecy came true
and the bet paid off hugeIy?

271
00:20:28,560 --> 00:20:33,076
Of course. It was Iike when
you're betting and you win,

272
00:20:33,160 --> 00:20:37,119
naturaIIy, you have that
satisfaction and aIso the profit.

273
00:20:41,160 --> 00:20:43,276
COWS MOO

274
00:20:47,120 --> 00:20:50,476
Soros owed his success
to a kind of gut instinct

275
00:20:50,560 --> 00:20:52,994
about the way the ''electronic herd''
would move.

276
00:20:53,080 --> 00:20:55,310
But even his instincts
are sometimes wrong.

277
00:20:55,400 --> 00:21:00,030
So what if instinct couId somehow
be repIaced by mathematics?

278
00:21:00,120 --> 00:21:02,714
What if you couId write
an aIgebraic formuIa

279
00:21:02,800 --> 00:21:05,155
that guaranteed doubIe-digit returns?

280
00:21:05,240 --> 00:21:07,913
WeII, on the other side
of the financiaI gaIaxy,

281
00:21:08,000 --> 00:21:10,719
such a formuIa had just been devised.

282
00:21:17,280 --> 00:21:22,115
As the new era of globalisation
increased trade and growth,

283
00:21:22,200 --> 00:21:27,399
it also increased the world economy's
vulnerability to financial shocks

284
00:21:27,480 --> 00:21:30,472
that could spread rapidly
to the four corners of the Earth.

285
00:21:32,440 --> 00:21:37,639
But what if we inhabited another
completely different kind of planet?

286
00:21:37,720 --> 00:21:41,349
A planet without all the complicating
frictions caused by subjective,

287
00:21:41,440 --> 00:21:44,159
sometimes irrational human beings.

288
00:21:44,240 --> 00:21:48,756
One where the inhabitants instantly
absorbed all new information

289
00:21:48,840 --> 00:21:51,434
and used it to maximise profits,

290
00:21:51,520 --> 00:21:54,398
where amid the turbulence
of everyday life

291
00:21:54,480 --> 00:21:56,948
all was calm and predictable.

292
00:21:59,560 --> 00:22:03,758
ln such a perfectly observed,
efficiently interconnected world,

293
00:22:03,840 --> 00:22:07,799
an unpredicted catastrophic stock market
crash would be about as common

294
00:22:07,880 --> 00:22:11,589
as an adult shorter than
one-and-a-half feet in our own world.

295
00:22:11,680 --> 00:22:16,708
lt would happen only once
in four million years of trading.

296
00:22:16,800 --> 00:22:19,030
This was the planet imagined

297
00:22:19,120 --> 00:22:24,035
by some of the most brilliant
financial economists of modern times.

298
00:22:24,120 --> 00:22:29,148
And this is what
their planet looked like.

299
00:22:32,600 --> 00:22:38,436
ln 1 993, two mathematical geniuses
came to Greenwich, Connecticut,

300
00:22:38,520 --> 00:22:40,875
with a big idea.

301
00:22:40,960 --> 00:22:43,793
Stanford University's Myron Scholes

302
00:22:43,880 --> 00:22:48,112
had invented a revolutionary new theory
of pricing things called ''options''.

303
00:22:48,200 --> 00:22:52,716
He and Harvard's Robert Merton
were the original ''quants'' -

304
00:22:52,800 --> 00:22:56,713
a new breed of speculators
using quantitative mathematics

305
00:22:56,800 --> 00:22:59,030
to make money.

306
00:22:59,120 --> 00:23:05,593
From this nondescript office they plotted
a global financial revolution.

307
00:23:05,680 --> 00:23:09,832
Merton and SchoIes's idea was
based on the simpIe option contract.

308
00:23:09,920 --> 00:23:13,959
Take the case of a stock
that's worth $100 today.

309
00:23:14,040 --> 00:23:18,955
Now, suppose I think that stock's
going to be worth 200 in a year's time.

310
00:23:19,040 --> 00:23:24,353
WouIdn't it be nice to have the option to
buy it at today's price in a year's time?

311
00:23:24,440 --> 00:23:28,069
If I'm right, I make
a tidy profit of $100.

312
00:23:28,160 --> 00:23:31,232
But if I'm wrong, weII, who cares?
It was onIy an option.

313
00:23:31,320 --> 00:23:34,790
The onIy cost to me
is the price of the option itseIf.

314
00:23:34,880 --> 00:23:37,633
The big question is,
what shouId that price be?

315
00:23:37,720 --> 00:23:40,632
$5? $1 0?

316
00:23:40,720 --> 00:23:44,349
The answer
was to be found in a magic formula.

317
00:23:44,440 --> 00:23:48,479
''Quants'' sometimes refer
to this formula as a ''black box''.

318
00:23:48,560 --> 00:23:52,235
Well, let's look inside the box.

319
00:23:52,320 --> 00:23:58,190
The challenge Merton and Scholes
faced was how to price an option

320
00:23:58,280 --> 00:24:01,511
to buy a particular stock
on a particular date in the future,

321
00:24:01,600 --> 00:24:05,912
taking into account the unpredictable
movement of the price of the stock

322
00:24:06,000 --> 00:24:07,399
in the intervening period.

323
00:24:09,480 --> 00:24:15,032
Work that option price out accurately,
rather than just relying on guesswork,

324
00:24:15,120 --> 00:24:19,238
and you truly deserve
the title ''rocket scientist''.

325
00:24:19,320 --> 00:24:22,198
With wonderful mathematical wizardry,

326
00:24:22,280 --> 00:24:26,353
the quants reduced the price
of the option to this formula.

327
00:24:29,000 --> 00:24:33,676
FeeIing a IittIe bit baffIed? Finding
the aIgebra rather tricky to foIIow?

328
00:24:33,760 --> 00:24:35,671
WeII, that was just fine by the quants.

329
00:24:35,760 --> 00:24:38,149
In order to make money
from this kind of thing,

330
00:24:38,240 --> 00:24:43,075
they needed markets to be fuII of peopIe
who had no idea how to price options.

331
00:24:43,280 --> 00:24:46,556
ln its first two years,
Merton and Scholes's company,

332
00:24:46,640 --> 00:24:52,158
Long Term Capital Management,
made megabucks by selling options

333
00:24:52,240 --> 00:24:55,516
that were never exercised because
the buyers had guessed wrong

334
00:24:55,600 --> 00:24:58,068
and Long Term had got it right.

335
00:24:58,160 --> 00:25:02,472
They also made a killing by buying up
all kinds of different securities

336
00:25:02,560 --> 00:25:05,552
that the rocket scientists
thought were mispriced.

337
00:25:07,120 --> 00:25:12,148
Greenwich's luxury car dealers
had never had it so good.

338
00:25:12,240 --> 00:25:17,075
Admittedly, to generate these
huge returns, Long Term had to borrow.

339
00:25:17,160 --> 00:25:18,639
This additional ''leverage'',

340
00:25:18,720 --> 00:25:22,599
or gearing, allowed them to bet
more than just their own money.

341
00:25:22,680 --> 00:25:28,869
By August 1 997, the fund's capital
was just under $7 billion,

342
00:25:28,960 --> 00:25:33,590
but the assets funded by borrowing
amounted to 1 26 billion.

343
00:25:36,080 --> 00:25:40,039
You might have thought that a coupIe
of academics Iike Merton and SchoIes

344
00:25:40,120 --> 00:25:43,317
wouId have been scared siIIy
by this enormous piIe of debt.

345
00:25:43,400 --> 00:25:47,234
But not a bit of it. According to
their magicaI mathematicaI formuIa,

346
00:25:47,320 --> 00:25:50,630
there wasn't the sIightest risk
in being so highIy geared.

347
00:25:50,720 --> 00:25:53,917
Apart from anything eIse,
Long Term was pursuing muItipIe,

348
00:25:54,000 --> 00:25:58,278
supposedIy uncorreIated trading
strategies, around a hundred in aII,

349
00:25:58,360 --> 00:26:02,194
with over 7,600 different positions.

350
00:26:02,280 --> 00:26:05,431
One of these might go wrong,
or possibIy even two.

351
00:26:05,520 --> 00:26:10,036
But sureIy aII the bets they'd pIaced
couIdn't possibIy go wrong simuItaneousIy.

352
00:26:12,080 --> 00:26:15,277
Long Term was trading
in markets all over the world.

353
00:26:15,360 --> 00:26:18,238
But the firm's biggest business

354
00:26:18,320 --> 00:26:21,790
was selling options on American
and European stock markets...

355
00:26:25,520 --> 00:26:27,112
..options that would be cashed in

356
00:26:27,200 --> 00:26:31,239
if there were big future stock price
movements, up or down.

357
00:26:32,840 --> 00:26:35,877
At the time, the high prices
these options were fetching

358
00:26:35,960 --> 00:26:39,111
implied that the markets
would become particularly volatile.

359
00:26:43,320 --> 00:26:46,949
But Long Term
thought this was wrong.

360
00:26:48,560 --> 00:26:53,839
According to their calculations,
market volatility would actually decline,

361
00:26:53,920 --> 00:26:58,118
and that meant the chances of investors
exercising their options would be low too.

362
00:26:58,200 --> 00:27:02,955
So Long Term piled the options
high and sold them cheap.

363
00:27:05,880 --> 00:27:08,075
Sounds risky?

364
00:27:08,160 --> 00:27:14,429
They estimated their risk of going bust
at one in ten to the power of 24.

365
00:27:14,520 --> 00:27:17,796
ln other words, virtually zero.

366
00:27:19,880 --> 00:27:24,192
lt was as if they really were
on another planet,

367
00:27:24,280 --> 00:27:27,989
far from the mundane
ups and downs of terrestrial markets.

368
00:27:28,080 --> 00:27:30,674
ln October 1 997,

369
00:27:30,760 --> 00:27:34,548
as if to prove that Long Term
really was the ultimate Brains Trust,

370
00:27:34,640 --> 00:27:38,599
Merton and Scholes were awarded
the Nobel Prize in economics.

371
00:27:38,680 --> 00:27:41,558
APPLAUSE

372
00:27:47,640 --> 00:27:51,269
It seemed as if inteIIect
had triumphed over intuition,

373
00:27:51,360 --> 00:27:54,432
as if rocket science
had taken over from risk-taking.

374
00:27:54,520 --> 00:27:56,795
Equipped with
their magicaI bIack box,

375
00:27:56,880 --> 00:28:00,077
the partners in LTCM
seemed poised to make money

376
00:28:00,160 --> 00:28:03,232
far beyond the wiIdest imaginings
of even George Soros.

377
00:28:03,320 --> 00:28:05,993
And then, in the summer of 1998,

378
00:28:06,080 --> 00:28:08,514
when every seIf-respecting
hedge fund manager

379
00:28:08,600 --> 00:28:10,670
shouId have been pIaying with his yacht,

380
00:28:10,760 --> 00:28:13,957
something happened that
threatened to bIow the Iid right off

381
00:28:14,040 --> 00:28:15,871
the NobeI Prize-winners' bIack box.

382
00:28:15,960 --> 00:28:18,918
ReaIity started to misbehave.

383
00:28:22,680 --> 00:28:27,390
ln evolution, big extinctions
tend to be caused by outside shocks,

384
00:28:27,480 --> 00:28:30,233
like an asteroid hitting the Earth.

385
00:28:31,480 --> 00:28:34,870
On Monday August 1 7th, 1 998,

386
00:28:34,960 --> 00:28:38,794
a giant asteroid smashed
into Planet Finance.

387
00:28:38,880 --> 00:28:44,318
And - surprise, surprise - it struck
on the other side of the world

388
00:28:44,400 --> 00:28:47,472
in an especially flaky emerging market.

389
00:28:51,680 --> 00:28:55,639
Weakened by political upheaval,
declining oil revenues

390
00:28:55,720 --> 00:29:00,714
and a botched privatisation, the ailing
Russian financial system collapsed.

391
00:29:00,800 --> 00:29:04,952
A desperate Russian government
was driven to default on its debts,

392
00:29:05,040 --> 00:29:09,556
fuelling the fires of volatility
throughout the world's financial system.

393
00:29:09,640 --> 00:29:11,153
Stock markets plunged.

394
00:29:13,320 --> 00:29:16,357
Remember all those low-cost
options Long Term had sold

395
00:29:16,440 --> 00:29:19,989
based on their prediction
of low stock market volatility?

396
00:29:20,080 --> 00:29:24,073
The ones they thought
no-one would ever exercise?

397
00:29:24,160 --> 00:29:25,639
Well, now they did.

398
00:29:25,720 --> 00:29:29,633
The quants had predicted
that Long Term was highly unlikely

399
00:29:29,720 --> 00:29:34,430
to lose more than $35 million
in a single day.

400
00:29:34,520 --> 00:29:39,036
On Friday August 21 st,
it lost $550 million -

401
00:29:39,120 --> 00:29:42,556
1 5% of its entire capital.

402
00:29:42,640 --> 00:29:47,760
Now that, according to the Long Term
risk models, was next to impossible.

403
00:29:47,840 --> 00:29:50,070
The traders in Greenwich stared

404
00:29:50,160 --> 00:29:53,072
slack-jawed and glassy-eyed
at their screens.

405
00:29:53,160 --> 00:29:55,549
lt couldn't be happening.

406
00:29:55,640 --> 00:29:57,073
But it was.

407
00:30:02,640 --> 00:30:06,679
By the end of the month,
Long Term was down 45%.

408
00:30:10,680 --> 00:30:14,832
The only chance of survival was to find
a financial white knight to rescue them.

409
00:30:16,520 --> 00:30:20,957
And the most powerfuI knight in town
was none other than George Soros.

410
00:30:21,040 --> 00:30:22,996
It was the uItimate humiIiation -

411
00:30:23,080 --> 00:30:26,629
the quants from PIanet Finance
begging for a baiI-out

412
00:30:26,720 --> 00:30:31,794
from the prophet of irrationaI,
unquantifiabIe refIexivity.

413
00:30:31,880 --> 00:30:33,996
(NiaII) That must have been
a very tense meeting.

414
00:30:34,080 --> 00:30:36,878
Do you remember the atmosphere
in the room, or am I...?

415
00:30:36,960 --> 00:30:42,990
I remember he came for breakfast
and it wasn't at aII tense, because...

416
00:30:43,080 --> 00:30:45,878
Of course, he was tense

417
00:30:45,960 --> 00:30:48,713
but I wasn't because
I wasn't putting in the money.

418
00:30:48,800 --> 00:30:51,678
There was to be no
white knight for Long Term.

419
00:30:54,160 --> 00:30:59,359
I feIt that it was too dangerous
and that I didn't have enough capitaI

420
00:30:59,440 --> 00:31:04,116
and, in fact, it reaIIy required
the coordinated actions

421
00:31:04,200 --> 00:31:07,556
of aII the banks to baiI out LTCM.

422
00:31:11,560 --> 00:31:15,439
And that's precisely what happened.

423
00:31:15,520 --> 00:31:20,355
Fearful that Long Term's failure could
trigger a general financial meltdown,

424
00:31:20,440 --> 00:31:24,513
the New York Federal Reserve hastily
brokered a multi-billion-dollar bail-out

425
00:31:24,600 --> 00:31:26,079
by 1 4 Wall Street banks.

426
00:31:26,160 --> 00:31:28,469
What on earth had happened?

427
00:31:28,560 --> 00:31:34,430
Why was Soros so right and
the giant brains at Long Term so wrong?

428
00:31:38,240 --> 00:31:42,597
For one thing, this wasn't
a coolly logical Planet Finance.

429
00:31:42,680 --> 00:31:47,629
lt was still dear old Planet Earth,
inhabited by emotional human beings

430
00:31:47,720 --> 00:31:49,517
with a stampede mentality.

431
00:31:51,200 --> 00:31:55,751
There was, however, another
reason why Long Term failed.

432
00:31:55,840 --> 00:32:00,550
Their risk models were working
with just five years' worth of data.

433
00:32:00,640 --> 00:32:02,710
lf they'd gone back even 1 1 years,

434
00:32:02,800 --> 00:32:07,032
they'd have captured
the 1 987 stock market crash.

435
00:32:07,120 --> 00:32:10,510
And if they'd gone back 80 years,

436
00:32:10,600 --> 00:32:13,433
they'd have captured
the last great Russian default

437
00:32:13,520 --> 00:32:15,750
after the 1 91 7 revolution.

438
00:32:15,840 --> 00:32:18,479
To put it bIuntIy,
the NobeI Prize-winners

439
00:32:18,560 --> 00:32:21,677
had known pIenty of mathematics,
but not enough history.

440
00:32:21,760 --> 00:32:25,958
They'd perfectIy grasped
the beautifuI theory of PIanet Finance,

441
00:32:26,040 --> 00:32:28,759
but not the messy reaIity
of PIanet Earth.

442
00:32:28,840 --> 00:32:31,957
And that, quite simpIy, is why
Long Term CapitaI Management

443
00:32:32,040 --> 00:32:35,749
turned out to be Short Term
CapitaI Mismanagement.

444
00:32:35,840 --> 00:32:41,392
The big question is whether such a crisis
couId repIay itseIf today, ten years on,

445
00:32:41,480 --> 00:32:43,994
onIy this time invoIving
so many hedge funds,

446
00:32:44,080 --> 00:32:47,755
and on such a Iarge scaIe,
that it simpIy couIdn't be baiIed out?

447
00:32:47,840 --> 00:32:49,592
WeII, the answer to that question

448
00:32:49,680 --> 00:32:54,629
Iies not on another pIanet,
but on the other side of this one.

449
00:33:09,760 --> 00:33:13,673
To some, financial history is just
so much water under the bridge -

450
00:33:13,760 --> 00:33:16,797
ancient history,
like the history of lmperial China.

451
00:33:16,880 --> 00:33:22,318
Some young traders don't even
remember the 1997 / 98 Asian crisis.

452
00:33:22,400 --> 00:33:25,153
In fact, if they came into
the markets after 2000,

453
00:33:25,240 --> 00:33:27,231
they had seven bumper years.

454
00:33:27,320 --> 00:33:29,515
Stock markets worIdwide boomed.

455
00:33:29,600 --> 00:33:32,512
So too did bond markets.
So did commodity markets.

456
00:33:32,600 --> 00:33:37,151
So did derivatives markets. In fact,
every kind of asset market boomed.

457
00:33:37,240 --> 00:33:40,596
And so too did the markets
for those products that are in demand

458
00:33:40,680 --> 00:33:46,152
when the bonuses are big, Iike
vintage Bordeaux and Iuxury yachts.

459
00:33:54,440 --> 00:33:58,035
But these boom years
were also mystery years.

460
00:33:58,120 --> 00:34:02,750
For markets soared at a time
of rising short-term interest rates,

461
00:34:02,840 --> 00:34:06,879
glaring trade imbalances
and escalating political risk.

462
00:34:06,960 --> 00:34:12,557
The key to this seeming paradox
lay here in China.

463
00:34:20,520 --> 00:34:24,035
Chongqing, on the banks
of the mighty River Yangtze,

464
00:34:24,120 --> 00:34:26,918
is deep in the heart
of the Middle Kingdom,

465
00:34:27,000 --> 00:34:31,118
over a thousand miles from the coastal
enterprise zones most Westerners visit.

466
00:34:35,760 --> 00:34:39,275
Yet this is the fastest-growing city
on the planet.

467
00:34:47,200 --> 00:34:50,158
I've traveIIed aII over the worId
making this series,

468
00:34:50,240 --> 00:34:53,073
and I must say, I have never
seen anything Iike this.

469
00:34:53,160 --> 00:34:56,755
WeIcome to Chongqing,
the fastest growing city in the worId.

470
00:34:56,840 --> 00:34:59,957
It's construction heaven.
If you Iook over through the fog,

471
00:35:00,040 --> 00:35:04,511
you can just about make out one of
the 30 bridges they're currentIy buiIding,

472
00:35:04,600 --> 00:35:07,398
and down there,
one of the ten Iight raiIways.

473
00:35:11,080 --> 00:35:15,551
AII around me, there used to be
prime farmIand, untiI six months ago,

474
00:35:15,640 --> 00:35:19,713
when they started constructing
IiteraIIy miIIions of square metres

475
00:35:19,800 --> 00:35:21,153
of new office space.

476
00:35:21,240 --> 00:35:25,631
The aim is to turn Chongqing into
the financiaI capitaI of western China.

477
00:35:25,720 --> 00:35:29,554
WeII, if they keep this up, it'II soon be
the financiaI capitaI of the worId.

478
00:35:29,640 --> 00:35:37,399
Thanks to growth like this, there are now
345,000 dollar millionaires in China

479
00:35:37,480 --> 00:35:39,516
and over 1 00 billionaires.

480
00:35:41,280 --> 00:35:45,068
Not only has China
left the colonial era far behind,

481
00:35:45,160 --> 00:35:47,833
the fastest-growing economy
in the world has also managed

482
00:35:47,920 --> 00:35:49,876
to avoid the kind of crisis

483
00:35:49,960 --> 00:35:53,350
that has periodically blown up
in the other emerging markets.

484
00:35:55,240 --> 00:35:59,074
One reason for China's
crisis-free ascent has been the fact

485
00:35:59,160 --> 00:36:02,709
that most Chinese investment
hasn't been financed by foreigners,

486
00:36:02,800 --> 00:36:04,358
but out of China's own savings.

487
00:36:04,440 --> 00:36:06,237
There has been foreign investment,

488
00:36:06,320 --> 00:36:08,709
but most of it has been
direct investment

489
00:36:08,800 --> 00:36:10,677
in the form of things Iike factories

490
00:36:10,760 --> 00:36:13,877
which you can't easiIy Iiquidate
and send home in a crisis.

491
00:36:13,960 --> 00:36:17,316
Indeed, so enormous have China's
savings become in recent years

492
00:36:17,400 --> 00:36:21,439
that they have enabIed gIobaIisation
to do the most aImighty U-turn.

493
00:36:21,520 --> 00:36:24,671
PreviousIy, it was the rich
EngIish-speakers who Ient money

494
00:36:24,760 --> 00:36:26,876
to the poor Asian periphery.

495
00:36:26,960 --> 00:36:30,396
But now it's the Chinese who are
Iending money to rich Americans.

496
00:36:30,480 --> 00:36:35,190
WeIcome to the strange new hybrid
country of China and America.

497
00:36:35,280 --> 00:36:37,032
I caII it ''Chimerica''.

498
00:36:48,840 --> 00:36:53,072
This extraordinary place
is the South Western Stock Exchange.

499
00:36:53,160 --> 00:36:56,436
lt's where hundreds of Chongqing's
residents come to have lunch,

500
00:36:56,520 --> 00:36:59,512
play ping pong and invest -

501
00:36:59,600 --> 00:37:02,558
or is it gamble? -
their savings on the stock market.

502
00:37:02,640 --> 00:37:05,757
This is what defines
the Chinese economy today.

503
00:37:05,840 --> 00:37:08,400
lncreasingly, it's what defines
the world economy.

504
00:37:08,480 --> 00:37:13,110
Chinese investors trying to work out
what to do with their abundant savings.

505
00:37:13,200 --> 00:37:15,953
After years of instability,

506
00:37:16,040 --> 00:37:19,510
Chinese households save
an unusually high proportion

507
00:37:19,600 --> 00:37:21,192
of their rapidly rising incomes,

508
00:37:21,280 --> 00:37:25,831
in marked contrast to Americans,
who these days save none at all.

509
00:37:29,960 --> 00:37:35,273
So plentiful are Chinese savings
that for the first time in centuries,

510
00:37:35,360 --> 00:37:39,319
the direction of capital flow
is not from West to East,

511
00:37:39,400 --> 00:37:42,312
but from East to West.

512
00:37:42,400 --> 00:37:44,834
And it is a mighty flow.

513
00:37:50,640 --> 00:37:55,919
ln 2007, the United States
needed to borrow around $800 billion

514
00:37:56,000 --> 00:37:57,353
from the rest of the world.

515
00:37:57,440 --> 00:38:01,433
That's more than $4 billion
every working day.

516
00:38:01,520 --> 00:38:05,115
China, by contrast,
ran a current account surplus

517
00:38:05,200 --> 00:38:08,192
equivalent to more than
a quarter of the US deficit.

518
00:38:08,280 --> 00:38:11,192
And a remarkably large
proportion of that surplus

519
00:38:11,280 --> 00:38:14,716
has ended up being lent
to the United States.

520
00:38:17,160 --> 00:38:20,516
ln effect, the People's Republic of China

521
00:38:20,600 --> 00:38:24,195
has become banker
to the United States of America.

522
00:38:28,720 --> 00:38:31,393
lt may seem a little bizarre.

523
00:38:31,480 --> 00:38:35,837
The average American has an income
of around $44,000 a year,

524
00:38:35,920 --> 00:38:39,913
whereas the average Chinese, despite
this country's 100-pIus biIIionaires

525
00:38:40,000 --> 00:38:43,879
and aII the ostentatious signs of
new money here in centraI Chongqing,

526
00:38:43,960 --> 00:38:45,837
is on around $2,000.

527
00:38:45,920 --> 00:38:49,754
So why wouId the Iatter
want to Iend money to the former

528
00:38:49,840 --> 00:38:52,115
who's roughIy 22 times richer?

529
00:38:52,200 --> 00:38:55,078
WeII, here's how it works.

530
00:39:01,360 --> 00:39:03,828
Until recently,
from China's point of view,

531
00:39:03,920 --> 00:39:06,957
the best way of employing
its vast population

532
00:39:07,040 --> 00:39:12,956
was through exporting manufactures
to the insatiably spendthrift US consumer.

533
00:39:13,040 --> 00:39:15,998
To ensure that those exports
were irresistibly cheap,

534
00:39:16,080 --> 00:39:19,914
China had to stop its currency
strengthening against the dollar

535
00:39:20,000 --> 00:39:24,152
by buying literally billions
of dollars on world markets.

536
00:39:27,040 --> 00:39:32,592
And, until recently, this seemed
to be to America's benefit too.

537
00:39:34,480 --> 00:39:37,278
Here in America, the best way
to keep the good times roIIing

538
00:39:37,360 --> 00:39:42,912
in recent years has been to import cheap
Chinese goods by the container-Ioad

539
00:39:43,000 --> 00:39:46,037
and seII them in out-of-town
superstores, Iike this one.

540
00:39:46,120 --> 00:39:48,918
For companies Iike WaI-Mart,
outsourcing to China

541
00:39:49,000 --> 00:39:52,959
has been a way of reaping vast profits
from cheap Chinese Iabour.

542
00:39:53,040 --> 00:39:54,712
In 2006 aIone,

543
00:39:54,800 --> 00:39:59,396
WaI-Mart out-sourced no Iess than
$9 biIIion-worth of goods from China.

544
00:39:59,480 --> 00:40:00,833
But at the same time,

545
00:40:00,920 --> 00:40:04,469
by seIIing biIIions of doIIars of bonds
to the PeopIe's Bank of China,

546
00:40:04,560 --> 00:40:08,155
the United States has been abIe
to enjoy much Iower interest rates

547
00:40:08,240 --> 00:40:10,356
than wouId otherwise
have been the case.

548
00:40:10,440 --> 00:40:14,319
It's what they caII at business schooI
a win-win situation.

549
00:40:17,560 --> 00:40:21,075
This is the wonderful
dual country of ''Chimerica'',

550
00:40:21,160 --> 00:40:24,709
accounting for 33%
of the world's economic output

551
00:40:24,800 --> 00:40:29,237
and more than half of all global
growth in the past eight years.

552
00:40:33,920 --> 00:40:38,311
Chimerica seemed like
a marriage made in heaven.

553
00:40:38,400 --> 00:40:43,235
The East Chimericans did the saving.
The West Chimericans did the spending.

554
00:40:43,320 --> 00:40:45,880
But there was a catch.

555
00:40:48,920 --> 00:40:52,310
The more China was willing
to lend to the United States,

556
00:40:52,400 --> 00:40:55,312
the more Americans
were willing to borrow.

557
00:40:55,400 --> 00:40:56,879
Chimerica, in other words,

558
00:40:56,960 --> 00:41:01,476
was the underlying cause
of the flood of new bank loans,

559
00:41:01,560 --> 00:41:06,793
bond issues and derivative contracts
that swept Planet Finance after 2000.

560
00:41:10,560 --> 00:41:15,156
That, in turn, was the underlying
reason why the US mortgage market

561
00:41:15,240 --> 00:41:17,595
was so awash with cash in 2006

562
00:41:17,680 --> 00:41:21,593
that sub-prime mortgages were
being sold to people with no income,

563
00:41:21,680 --> 00:41:24,877
no job and no assets - Ninjas.

564
00:41:30,360 --> 00:41:35,593
It wasn't as if the sub-prime mortgage
crisis of 2007 was hard to predict.

565
00:41:35,680 --> 00:41:39,355
Months before it bIew up,
I was in Tennessee and in Michigan,

566
00:41:39,440 --> 00:41:42,352
seeing for myseIf
how many poorer househoIds

567
00:41:42,440 --> 00:41:45,352
were heading for mortgage defauIt
and forecIosure.

568
00:41:45,440 --> 00:41:47,317
What was much harder to predict

569
00:41:47,400 --> 00:41:52,554
was how a smaII tremor in America's
very own home-grown emerging market

570
00:41:52,640 --> 00:41:55,632
wouId cause a financiaI earthquake
aII around the worId.

571
00:41:59,800 --> 00:42:03,634
Not many people foresaw that
defaults on sub-prime mortgages

572
00:42:03,720 --> 00:42:06,439
would send such a shockwave
around the world

573
00:42:06,520 --> 00:42:10,672
that a British bank would suffer
the first run since 1 866

574
00:42:10,760 --> 00:42:12,591
and end up being nationalised,

575
00:42:12,680 --> 00:42:15,592
or that one of the greatest names
in American investment banking,

576
00:42:15,680 --> 00:42:18,558
Lehman Brothers, would go bust.

577
00:42:19,880 --> 00:42:22,155
And not many people saw

578
00:42:22,240 --> 00:42:26,233
that as other banks started to write down
hundreds of billions of losses,

579
00:42:26,320 --> 00:42:29,073
inter-bank lending
would simply seize up,

580
00:42:29,160 --> 00:42:34,075
driving the US Treasury
to propose a $7 00 billion bail-out

581
00:42:34,160 --> 00:42:36,037
for the financial system as a whole.

582
00:42:43,560 --> 00:42:45,152
CertainIy, by June 2008.

583
00:42:45,240 --> 00:42:48,676
an American recession
seemed more or Iess inevitabIe.

584
00:42:48,760 --> 00:42:50,398
But the end of the worId?

585
00:42:50,480 --> 00:42:52,550
Looking around
the streets of Hong Kong,

586
00:42:52,640 --> 00:42:54,915
I don't see much sign
of a recession here.

587
00:42:55,000 --> 00:42:57,878
Can it be that
the Chinese haIf of Chimerica

588
00:42:57,960 --> 00:43:02,192
has successfuIIy decoupIed itseIf
from the American haIf?

589
00:43:04,240 --> 00:43:09,712
The idea that China can somehow walk
away unscathed from the American crisis

590
00:43:09,800 --> 00:43:12,678
is certainly seductive.

591
00:43:12,760 --> 00:43:15,593
Despite declining exports
to the recession-hit West,

592
00:43:15,680 --> 00:43:18,990
and a stock market crash,
booming domestic demand

593
00:43:19,080 --> 00:43:23,358
seems set to keep China's economy
growing at at least 8% a year.

594
00:43:25,000 --> 00:43:27,912
But remember, we've been here before.

595
00:43:28,000 --> 00:43:29,877
A hundred years ago,

596
00:43:29,960 --> 00:43:32,520
in the first age of globalisation,

597
00:43:32,600 --> 00:43:36,149
many investors thought there was
similarly symbiotic relationship

598
00:43:36,240 --> 00:43:38,390
between the world's
financial centre, Britain,

599
00:43:38,480 --> 00:43:41,552
and Europe's most dynamic
industrial economy.

600
00:43:41,640 --> 00:43:44,518
That economy was Germany's,

601
00:43:44,600 --> 00:43:48,752
and the breakdown of that
relationship ended in war.

602
00:43:53,880 --> 00:43:55,916
As before 1 91 4,

603
00:43:56,000 --> 00:44:01,916
there's a fine line that separates
symbiosis from rivalry and conflict.

604
00:44:02,000 --> 00:44:05,549
According to one estimate,
China's gross domestic product

605
00:44:05,640 --> 00:44:09,428
could exceed that of
the United States as early as 2027.

606
00:44:09,520 --> 00:44:13,149
By that time
some critics of free trade argue

607
00:44:13,240 --> 00:44:17,836
that virtually nothing may remain
of American manufacturing industry.

608
00:44:17,920 --> 00:44:21,356
And the worse things get
in the United States,

609
00:44:21,440 --> 00:44:23,431
the louder such complaints will grow.

610
00:44:27,760 --> 00:44:31,514
On a day Iike today, when the
Hong Kong stock market is down sharpIy,

611
00:44:31,600 --> 00:44:34,273
it's tempting to ask whether
anything couId trigger

612
00:44:34,360 --> 00:44:38,831
a comparabIe breakdown in gIobaIisation
Iike the one that happened in 191 4?

613
00:44:38,920 --> 00:44:41,195
The obvious answer
is some kind of confIict

614
00:44:41,280 --> 00:44:46,070
between the United States and China,
whether over trade, Taiwan, Tibet,

615
00:44:46,160 --> 00:44:49,311
or some other unforeseeabIe
bone of contention.

616
00:44:49,400 --> 00:44:52,949
What starts with competition
for Olympic medals

617
00:44:53,040 --> 00:44:55,634
could end in a battle over dollars

618
00:44:55,720 --> 00:45:01,590
if the Chinese one day decide to cut off
their credit line to the American empire.

619
00:45:01,680 --> 00:45:05,036
Maybe, as its name suggests,

620
00:45:05,120 --> 00:45:09,272
Chimerica is nothing more
than a chimera -

621
00:45:09,360 --> 00:45:12,796
the mythical beast of ancient legend
that was part lion, part goat,

622
00:45:12,880 --> 00:45:14,916
part dragon.

623
00:45:19,640 --> 00:45:23,155
A Chinese-American conflict
may sound implausible,

624
00:45:23,240 --> 00:45:25,549
but one of the key points of this series

625
00:45:25,640 --> 00:45:29,952
is that the really big crises
come just seldom enough

626
00:45:30,040 --> 00:45:31,553
to be beyond the living memory

627
00:45:31,640 --> 00:45:35,394
of the people who run today's
companies, banks and funds.

628
00:45:37,600 --> 00:45:40,910
Just because all the swans
you've ever seen are white

629
00:45:41,000 --> 00:45:43,560
doesn't mean there are no black swans.

630
00:45:54,120 --> 00:46:00,195
Today's financial world is the result
of four millennia of economic evolution.

631
00:46:05,480 --> 00:46:08,517
Yet despite the unprecedented
complexity and diversity

632
00:46:08,600 --> 00:46:10,397
of the modern financial system,

633
00:46:10,480 --> 00:46:14,473
Planet Finance remains
as vulnerable as ever

634
00:46:14,560 --> 00:46:18,075
to the age-old problem
of booms and busts,

635
00:46:18,160 --> 00:46:22,472
irrational exuberance
and manic depression.

636
00:46:22,560 --> 00:46:28,317
Maybe all this complexity has actually
increased our vulnerability to crisis.

637
00:46:28,400 --> 00:46:31,870
For 4,000 years, from ancient
Mesopotamia to modern China,

638
00:46:31,960 --> 00:46:36,750
the ascent of money has been one of
the key factors in human progress,

639
00:46:36,840 --> 00:46:41,072
an extraordinary story of innovation,
intermediation and integration

640
00:46:41,160 --> 00:46:42,957
that had done as much as anything

641
00:46:43,040 --> 00:46:46,953
to heIp peopIe escape from the drudgery
of subsistence agricuIture.

642
00:46:47,040 --> 00:46:49,838
And yet PIanet Finance
can never quite escape

643
00:46:49,920 --> 00:46:52,309
from the gravitationaI force
of PIanet Earth,

644
00:46:52,400 --> 00:46:56,154
because the quants can never take
fuII account of the human factor -

645
00:46:56,240 --> 00:46:59,835
our tendency to underestimate
the probabiIity of bIack swans,

646
00:46:59,920 --> 00:47:03,390
our propensity to veer from
euphoria to despondency,

647
00:47:03,480 --> 00:47:06,472
our chronic inabiIity
to Iearn from history.

648
00:47:06,560 --> 00:47:09,279
And that's why the course
of financiaI history -

649
00:47:09,360 --> 00:47:13,831
Iike that most human of emotions,
Iove - never runs smooth, and never wiII,

650
00:47:13,920 --> 00:47:20,393
not even here, on the magicaI and quite
possibIy mythicaI country of Chimerica.