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The Ascent Of Money -

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(generated from captions) it must be dry, made of smooth, round grains of quartz, and not have too much shell material.

But there's still no definitive answer.'

So, there you go. We can land a remote-controlled robot on Mars, but we don't know why sand squeaks on Earth. And to be honest, I kind of like that. SAND SQUEAKS Thanks for watching Catalyst, I'm Graham Phillips, see you next time. Closed Captions by CSI

This program is not subtitled

This Program is Good evening, Virginia Haussegger with an ABC News update. Cracks have begun to appear in Iran's power elite, amid more mass protests streets of Tehran. For the fifth elite, amid more mass protests on th running, tens of thousands streets of Tehran. For the fifth day running, tens of thousands of people have turned out to protest against the election victory of president Ahmadinejad. And the protest has spread to celebrity sport - the national soccer team has taken the opposition's cause live into opposition's cause live into homes across the country. They wore armbands at a World Cup qualifier across the country. They wore green armbands at a World Cup qualifier in South Korea. Obama has unveiled the biggest South Korea. US President Barack shake-up of financial regulations

since the Great Depression.

government will now have much since the Great Depression. His powers to step in and prevent a government will now have much greate

repeat of still rattling global markets. More repeat of the financial crisis that' than 100 Romanian migrants have been forced to leave their homes Northern Ireland after attacks by forced to leave their homes in being blamed on right wing anti-immigrant groups. The trouble i and elements of the British being blamed on right wing extremist and elements of the British loyalist community. Australia's thirstiest national treasure has been National Botanic Gardens have national treasure has been saved. Th a water supply that will guarantee National Botanic Gardens have secure

a water supply that will guarantee the survival of its 80,000 it's just down the road. A the survival of its 80,000 plants an from Lake Burley Griffin will pump millions of litres of water to the it's just down the road. A pipeliine

gardens each year. More news in an

'The most basic financial impulse of all is to save for a rainy day. Because, as we've been painfully reminded by the recent months of financial turmoil, the future is so unpredictable, the world really can be a dangerous place.

Not many of us get through life without a little bad luck. Some of us get a lot. It's all about being in the wrong place at the wring time, like New Orleans when Hurricane Katrina hit.' The question is how should we deal with the risks and uncertainties of the future? Should the onus be on the individual to insure against disaster? Should we be able to rely on the voluntary charity

of our fellow human beings when calamity strikes? Or should we be able to count on the state, in other words, the compulsory contributions of our fellow taxpayers to bail us out when the flood comes?

THUNDER CRASHES 'That's a long way of asking a simple question -

are you insured? The British certainly think they are. Today, we pay a larger proportion of our income on insurance than any other people in the world. It's really rather odd, because Britain is one of the safest countries on earth. The struggle to overcome risk has been a constant theme

of the history of money.

From the invention of life insurance by two hard drinking Scots clergymen to the rise and fall of the welfare state, to the explosive growth of hedge funds and their multibillionaire owners. At the core of our struggle with risk is an insoluble conflict - we want to be financially secure, and so we yearn for a predictable world. But the future always seems to come up with new and unpleasant ways to take us by surprise. We want calculable risk, we're stuck with random uncertainty.

When Hurricane Katrina hit New Orleans in the last week of August, 2005,

it caused death and destruction. Yet it's not a natural catastrophe that now threatens the survival of the city. The real lesson about the disaster is about money - how the risk management system we call insurance simply failed when faced with a calamity on this scale.

The hurricane didn't hit New Orleans directly. The main force of the storm passed to the north-east of the city. But just as the residents breathed a sigh of relief, the real catastrophe began.' This industrial canal links Lake Pontchartrain to the Mississippi, and after the hurricane, the huge storm surge raised the water level in the canal so high that it broke the levee, pouring umpteen gallons of the lake over here, into the Ninth Ward of New Orleans. 'Just to the east of the Ninth Ward is St Bernard, a blue-collar community of homeowners, all, on paper at least, covered by private insurance.

Counselor Joey Di Fatta refused advice to leave the city, staying put during the storm. Eventually, he was forced to retreat to the roof of the Town Hall as the water kept rising.' And, as you can see, this is the waterline. That's the waterline? That's where it came up to.

The water came in this building, 14 feet of water in 15 minutes. Wow. From the second floor of this building I could see, coming down Judge Perez, a wall of water. In that wall of water was debris, cars, vehicles, pieces of roofs, and this wall of water, you'd guesstimate, had to be maybe 15 to 20 feet tall. And moving fast. Moving quickly. Just coming down this boulevard, straight, and just taking everything with it as it would come. 'The whole of St Bernard Parish was inundated in just 15 minutes. Only five houses out of 26,000 weren't flooded.

More than 2,000 people were killed in Hurricane Katrina and the subsequent flooding.' Here in St Bernard Parish, 148 people lost their lives, mostly because they became trapped in their houses as the flood waters rose. The painted signs on these abandoned houses say where their dead bodies were found after the flood waters receded, a little bit like medieval London in the time of plague.

'Yet, three years later, it's not flooding or plague that's killing New Orleans. A harsh, financial reality has emerged. People can't live here anymore because they can't insure their homes. One man made it his mission to show the limits of private insurance,

when it comes to a really big crisis. He's former navy pilot Richard F Scruggs, one of those lawyers that only America seems to produce. Dickie Scruggs took $50 million of the asbestos industry, then $248 billion off the tobacco companies for failing to warn smokers of the danger of lung cancer. This kind of work has its rewards. Scruggs share and fees on the tobacco case was $1.4 billion Scruggs' latest target has been America's insurance companies. His clients, hundreds of homeowners whose houses were destroyed by Katrina, argued that the companies were refusing to pay up on genuine claims, a view the insurers disputed.' There was a house there? There was a house here, and a house next to it, where you see the trailer. 'Scruggs had a dog of his own in this fight. His own home on Pascagoula's Beach Boulevard,

here on the Mississippi coast, was so badly damaged by Katrina that it had to be demolished.' This is the- The front door? This is the front door, right here. The edge of the slab, if you will. You were slabbed, good and proper. We were slabbed. If you could fix the system - But I have the means, I'm fortunate enough that I have the means -

To lose a house and build another? To lose a house and build it back. Most people here, don't. If you had the power to change the system so people really were insured, how would you do that? Is there a way of making insurance work again? There is, and it's disclosure of what you're buying, so you know, like a drug,

there's a black-box warning on there - this is what it does, this is what you should watch out for, as opposed to this device the modern insurance policy, which is called or understand. which no-one can interpret the insurance companies 'It seemed as if has been well and truly Scrugged. One of America's biggest insurers brought by Scruggs settled hundreds of cases had been turned down. on behalf of clients whose claims

THUNDER high-stakes battle, But in this bitter, had the last laugh. the insurance companies

After winning the case, and sentenced to five years Scruggs was convicted for attempting to bribe a judge of legal fees. and influence the distribution

companies responded And the big insurance to the weight of post-Katrina claims declaring parts of the Gulf Coast by, in effect, a no home-insurance zone. Today, as Counselor Joey Di Fatta has found out, insuring a house in this part of New Orleans is virtually impossible.'

They can't get a mortgage, either? That is correct. They have make a choice - do I build a house here, or do I relocate to another area a little bit cheaper where insurance may be and I can afford it? it is taking our people away, So that is hurting our community, and pulling them away. the nucleus of this parish, 'Three years after disaster struck, of its pre-Katrina population. St Bernard Parish has only a third

THUNDER life has always been dangerous. Of course, or any big disaster, The real lesson of Katrina, we're protected against risk, is that even when we think sometimes, it turns out we're not. insurance claims Even making quite modest than it's worth. can seem more trouble

why we bother spending so much It leaves you wondering on insurance policies every year. come from?' Where did this strange habit Saving up for the proverbial rainy day is this first principle of insurance. But the trick is knowing what to do with your savings so that, unlike in New Orleans after Katrina, they're there in the kitty when you really need them.

But to do that, you need to be more than usually canny and that gives as a valuable clue insurance has its origins. as to where the history of modern

canny, Scotland. Where else but in bonny, are a pessimistic people. 'They say the Scots

all those hundreds of rainy days. Maybe it's the weather -

of sporting disappointment, Maybe it's the endless years

we picked up or maybe it was the Calvinism at the time of the Reformation. Church of Scotland ministers Certainly, it's two who deserve the credit true insurance fund back in 1744, for inventing the first industry. and fathering a multibillion-pound The Kirkyard of Greyfriars the resurrection men, is best known for the grave robbers, the late 18th century who came here in at Edinburgh University to supply the medical school with corpses for dissection. But Greyfriars' lasting importance here, Robert Wallace, comes from the work of the minister and his friend, Alexander Webster.' that it was Scottish ministers It is somehow appropriate who invented modern insurance. After all, we tend to think of them and thrift, as the embodiment of prudence of impending divine retribution weighed down with an anticipation

for every tiny transgression. Robert Wallace was a hard drinker But in fact, as well as a mathematical prodigy, knocking back magnums of claret who liked nothing better than with his bibulous buddies. were unhappy at the way 'Wallace and Webster of their fellow clergymen the widows and children when the Grim Reaper struck. were treated homeless and penniless. They often found themselves came up with was ingenious - The plan Wallace and Webster in history.' the first true insurance fund calculations that Robert Wallace did, These are some of the voluminous of Scotland, now housed at the National Archives he ran the numbers and you can see how making very careful assumptions over and over again, of widows and orphans about the maximum number that would have to be provided for. was that from now on, The key point, however, that would be paid out ministers wouldn't just pay money in when one of their number died. would be used to create a fund Rather, they would pay premiums that for profitable purposes. and the fund would then be invested henceforth out of the returns The widows and orphans would be paid leaving the premiums to accumulate. on that money,

for the scheme to work 'All that was required of how many widows and orphans was an accurate projection there would likely be in the future, Wallace and Webster made a calculation which with extraordinary precision. the Scottish Ministers' Widows' Fund The creation of was a milestone in financial history, not just for Scottish clergymen, for it provided a model who aspired to provide but for everyone for life's eventualities. was sufficiently widespread By 1815, the principle of insurance of men who lost their lives to be adopted for the widows

fighting against Napoleon. your chances of getting killed At the Battle of Waterloo, if you'd taken out insurance, were up to one in four, but at least that your wife and children you had the consolation of knowing wouldn't be thrown out onto the street. Gives a whole new meaning to the phrase "take cover."

'The Scottish Ministers' Fund grew into the world-famous Scottish Widows'. their financial prudence could join. Even novelists not renowned for in 1826 Walter Scott took out a policy to reassure his creditors in the event of his death. that they'd be paid

being insured By the mid-19th century, as going to church on Sunday. was as much a badge of respectability What no-one anticipated back in 1744

of two Scottish ministers was that the careful calculations insurance industry.' would grow into today's huge 250 years ago, As Robert Wallace understood size matters in insurance, are paying into a fund, because the more people by the law of averages, the easier it becomes, will have to be paid out each year. to predict how much of death can be known in advance, Although no individual's date the likely life expectancy actuaries can calculate with quite astonishing precision. of a large group of individuals about trying to cope with the risks In other words, insurance is all of the future. you're insured in the first place. If, that is,

like Scottish Widows were set up, No matter how many private funds beyond the reach of insurance, there were always going to be people or too feckless who were either too poor to save for that rainy day.' was once a pretty harsh one - The lot of the poor either dependence on private charity or the harsh regime of the workhouse like this typically austere one

here in the heart of Edinburgh. Yet, by the 1880s, people began to feel that life's losers somehow deserved better. The seed was planted to an entirely new approach to risk, a seed that would ultimately sprout into the modern welfare state. This state system of insurance was designed to exploit the ultimate economy of scale, by covering literally every citizen from the cradle to the grave.

'Yet, while we tend to think of the welfare state as a British invention, in fact, the world's first welfare superpower was Japan. Disaster just kept striking Japan in the first half of the 20th century. In 1923 a huge earthquake devastated Tokyo. As in New Orleans, private insurance policies turned out to be worth

little more than the paper they were printed on.

A new idea began to emerge in Japan, that the state should take care of risk. But this was to be state protection allied with imperial ambition. The Japanese set up a welfare state, and they did it to promote warfare. It was the mid-20th century state's insatiable appetite for able-bodied young soldiers and workers, not some kind of bleeding-heart altruism, that inspired the rise of welfare. State health care would ensure a fitter populace and a steady supply of able-bodied recruits to the Emperor's armed forces, and deliver him an empire. The war time slogan, "All people are soldiers,"

was adapted to become, "All people should have insurance." The only problem was that Japan had gone to war with the world's economic colossus, the United States. Japan's warfare state proved to be a massive mistake. Quite apart from the nearly 3 million lives lost in Japan's doomed bid for empire, by 1945, the value of Japan's entire capital stock seemed to have been reduced to zero by American bombers.

Cities built largely out of wood were incinerated. Nearly a third of the urban population lost their homes. Practically the only city to survive intact was Kyoto, the former imperial capital. 1945 may have seen the end of the Japanese warfare state, but it wasn't the end of the Japanese experiment with state-sponsored welfare.' In Japan, as in most combatant countries, the lesson was clear - the world was just too dangerous a place for private-insurance markets to cope with. With the best will in the world, people couldn't be expected to insure themselves against the US Air Force.

The answer, practically everywhere, was the same - for the government to step in, in effect, to nationalise risk. Perhaps the most familiar such system of welfare from the cradle to the grave, also born in the ruins of war, was devised by the British economist, William Beveridge.'

When the Japanese came up with their own comprehensive welfare system in October 1947, their advisory committee on social security recommended what amounted to "beveridgi no nihon ban", Beveridge for the Japanese. And yet, they went even further than Beveridge had intended, as this copy of their report here

in the Library of the Japanese National Parliament makes clear. It called on the government to provide against every cause of poverty - sickness and injury, disability, death, childbirth, large families, old age and unemployment. Whatever the reason, the needy would be guaranteed the minimum standard of living by national assistance. 'From now on, the Japanese would not have to rely on the benevolence of a feudal lord, or the luck of the gods. The welfare state would cover them against all the vagaries and vicissitudes of the modern world. 'If they couldn't afford education, If they couldn't find work, If they were too ill to work, the state would pay.

When they retired, And when they finally died, the state would pay their dependants. So what happened after the war in Japan was merely the extension

of the warfare/welfare state. The slogan now became "All people should have pensions."

The Japanese welfare state seemed to be a miracle of effectiveness. In public health and education, Japan lead the world. By the late 1970s, the Japanese could boast that their country had become the welfare superpower.'

Run like this, the welfare state seemed to make so much sense. Japan had achieved security for all, the elimination of risk, while at the same time growing so rapidly that by 1968, it had the second largest economy in the world. 'One US economist even predicted that Japan's per-capita income would overtake America's by the year 2000. Welfare was working where warfare had failed - to make Japan top nation.' The key turned out to be not a foreign empire but a domestic safety net. And yet there was a catch, a fatal flaw in the design of the post-war welfare state. Just what was it that caused those predictions of Japan's ultimate triumph to fail to come true? 'The welfare state looked to be working smoothly enough in 1970s Japan, but elsewhere, there were signs that all was not well.

In Britain and throughout the Western world, the welfare state, it seemed, had removed the incentives

without which a capitalist economy simply cannot function. The carrot of serious money for those who strive, the stick of hardship for those who are idle. The result was stagflation, low growth and high inflation. What was to be done? One man and his pupils thought they knew the answer. Thanks in large measure to their influence, one of the great economic trends of the past 25 years has been for the welfare state to be dismantled, reintroducing people with a sharp shock to the unpredictable monster they thought they had escaped from - risk. In 1976, a diminutive professor called Milton Friedman, working here at the University of Chicago, won the Nobel Prize in economics.' Milton Friedman won his place in the economic hall of fame by restating this simple equation - MV equals PQ, where M is the money supply, V is the velocity at which it circulates, P is the price level and Q is the quantity of expenditures. Friedman's observation was simple - if the money supply went up, then so did the price level, hence the quantity theory of money.

But you needed much more than a piece of chalk and a blackboard to answer the second crucial question of Milton Friedman's career - what had gone wrong with the welfare state? 'In Chile, he found the perfect laboratory to test his theories.

In September 1973, tanks had rolled through Santiago

to overthrow the government of Chile's Marxist President, Salvador Allende, whose attempt to turn the country into a communist state had ended in total economic chaos and a call by the Chilean parliament for a military coup.'

Up there, on the balcony of the Carera Hotel, opponents of the Allende regime celebrated with champagne as Air Force jets flew overhead to bomb the Moneda Palace.

Here in the palace, Allende prepared to make a desperate last stand, armed with an AK47 presented to him by his Cuban role model, Fidel Castro. Looking out the palace window and seeing the tanks literally rolling in, Allende realised it was all over for his dream of a Marxist Chile. Cornered here in what was left of the presidential quarters, he took the decision to shoot himself. 35 years later, you can still see the bullet holes

in some of the buildings around the square. What happened here in September 1973, in many ways epitomised a world-wide crisis of the welfare state and posed a stark choice between alternative economic systems. With output collapsing and inflation rampant, Chile's system of universal benefits was effectively bankrupt.

For Allende, the only solution was full-blown, Soviet-style takeover of the entire economy. While the generals and their supporters knew they didn't want that, but what did they actually want, given that the status quo was unsustainable? Enter Milton Friedman.

'In March 1975, Friedman flew from Chicago to Chile to answer that question.

In addition to giving lectures and seminars, Friedman came here to the Moneda Palace for a meeting with the new Chilean president, General Augusto Pinochet. Friedman spent three quarters of an hour with Pinochet, urging him to reduce the government deficit that he'd identified as the main cause of Chile's sky-high inflation, then running at an annual rate of 900%. A month after Friedman's visit, the Chilean junta announced that inflation would be stopped at any cost. The regime cut government spending by 27%.

"This problem of inflation is not of recent origin. It arises from trends towards socialism that started 40 years ago and reached their logical and terrible climax in the Allende regime."

For tendering this advice, Friedman found himself denounced for acting as a consultant to a military dictator, responsible for the execution of more than 2,000 real and suspected Communists,

and the torture of nearly 30,000 more.'

Chicago's role in Chile's new regime consisted of more than just a visit by Milton Friedman, however. Since the 1950s, there'd been a steady stream of bright young economists going from this place, the Catholic University in Santiago, to study in Chicago, and they'd come back convinced of the need to balance the budget, tighten the money supply, and liberalise trade. These were the Chicago boys, Friedman's foot soldiers. And yet the most radical of their ideas went beyond what Friedman had recommended to Pinochet. It amounted to a full scale rolling-back of the welfare state. The conservative economic revolution didn't begin in Thatcher's Britain or Reagan's America,

it began right here in Chile. 'The mastermind behind this wholesale dismantling of the welfare state was a young economist called Jose Pinera.' Chile's economy was destroyed. We have had 50 years of protectionism, of state intervention, light socialism, if you want, and then that was exacerbated during the Allende government. We had created a sort of welfare state and that, of course, was going bankrupt in Chile. Between 1979 and 1981, Pinera and his colleagues erected a radically new pension system for Chile, giving every worker the chance to opt out of the old pay-as-you-go state system. Instead of a payroll tax, each worker now could put 10% of his wages aside into an individual, personal retirement account to be managed by private, competing companies. There was also a small premium for disability and life insurance. The idea was to give each worker a sense that the money being put aside was his own property,

his own capital.

(SINGS IN SPANISH) 'Pinera gambled. He gave workers a choice - stick with the old system of pay-as-you-go, or opt for the new personal retirement accounts. It paid off. Convinced by Pinera's arguments, 80% made the switch to a private pension plan.' But was it worth it? Was it worth the huge moral compromise that the Chicago boys and the Harvard men made when they got into bed with a torturing, murderous dictatorship?

Well, the answer to that question very much depends on whether their reforms helped pave a peaceful way back to a sustainable democracy in Chile, and I think they did. 'In 1980, Pinochet conceded a new constitution that prescribed a ten-year transition back to democracy. Ten years later, he stepped down as president. Democracy was restored, and by that time,

the economic miracle was underway that helped ensure its survival. For the pension reforms not only created a new class of property owners, each with his own retirement nest egg, it also gave the Chilean economy a massive shot in the arm.'

These brokers at the Banco de Chile pension contributions are investing Chilean workers' into the stock market, a pretty good job of it. and they've been doing on the personal retirement accounts Average returns has been over 10%,

in the 20 years after 1987, reflecting the fact that by a factor of 18. the Chilean stock market has gone up

to be sure. 'There is a downside to the system, has a full-time, regular job, Since not everyone in the economy in the system. not everyone ends up participating chunk of the population Which leaves a substantial with no pension coverage at all.'

the Communist Party headquarters I'm standing in front of a suburb of Santiago here in La Victoria, of opposition to the Pinochet regime. which was once one of the hotbeds are either unemployed Because most people here or work in the informal sector, they don't or can't pay into the pension system, which means they don't get anything out of it. This is the kind of neighbourhood where Che Guevara is still the local hero, not Jose Pinera. a private pension plan, The poor of Chile may not have and may have to make do in their old age, with a meagre government handout

but even they've benefited

economy.' from Chile's rapidly growing

in the life of every citizen. Growth makes a difference

The poverty rate in Chile to around 13% now, has gone down from around 50% a huge success so this has really been a critical element in this. and the pension reform has been economic performance 'The improvement in Chile's is really very hard to argue with.' since the Chicago Boys' reforms Milton Friedman's visit, In the 15 years before

was a measly 0.17% a year. the growth rate here increased by a factor of nearly 20, In the subsequent 15 years, it the poverty rate here is down to 15%, in the rest of Latin America. compared to 40% And when you look down at Santiago's shiny new financial district, you can see why the Chilean pension reform has been imitated right across the region,

and, indeed, around the world.

'For Britain's Margaret Thatcher, the general from Chile

were heroes and the professor from Chicago by rolling back the welfare state who demonstrated that only economic growth. could governments revive has not been tried Yet one country where this recipe that's come to need it most - is the country


welfare superpower that by the 1970s, So successful was the Japanese was the longest in the world. life expectancy state was too successful.' The problem was that Japan's welfare

at Japan's Ministry of Welfare Today, the programs run here

of active workers rely on an ever smaller number to support an ever rising population of retirees. Back in 1960, there was something like 11 active workers for every one retired person, but by 2025,

that number could sink as low as two.

In other words, there will be one old-age pensioner for every two bureaucrats working here at the ministry. In just 30 years, the cost of social security benefits has risen in relation to Japan's national income by a factor of 4. 'Today, virtually all Japan's health insurance societies are in deficit,

are nearly out of money, too. and the pension funds Japan's once so super welfare state to bankrupt the nation. is threatening it seemed such a brilliant idea Insurance - of those Scottish ministers, in the calculations all-encompassing welfare state. and even more brilliant in Japan's

the best laid schemes But, as we've seen, by an unexpected turn of events. can be thrown into disarray of managing risk So is there any better way in an uncertain world?' expose the limits Disasters like 9/11 and Katrina and the welfare state. of both traditional insurance aren't the only ways But insurance and welfare against future shocks. to buy yourself protection is by being hedged. These days, the smart way of doing it everybody's heard of hedge funds, Now, and where did it come from? but what exactly does hedging mean, 'To most of us, hedge funds are a mystery. But the one thing we do know is that they can make you stupendously rich.

One hugely successful hedge-fund manager paid $60 million for this Cezanne,

and he owns this Degas, too, he paid $80 million for. not to mention a Jasper Johns of dollars to charity. He's also given hundreds of millions

Ken Griffin is the founder of the Citadel Investment Group, one of the world's biggest hedge funds. Last year, he navigated his way

through the credit crunch so successfully that he was able to pay himself more than $1 billion. To most of us, risk is scary, but all of Griffin's vast wealth has come because he's found a way of managing risk with a mixture of mathematical precision and brilliant intuition.' Nothing is constant, nothing is the way it's always been. So what I find is that people who are really good at this have great intuition, they have great instinct. Their gut actually tells them something. The mathematics are important because they demonstrate you understand the problem, but, ultimately, the decision whether or not to take a given risk,

I think, is a human judgment call in every sense of the word. 'The origins of hedging, appropriately enough, are agricultural. For a farmer, nothing is more important than the future price of his crop, after it's been harvested and brought to market.' But that could be higher or much lower than he expects.

A futures contract allows him to protect himself by committing a merchant to buy the crop when it's brought to market at a price agreed when the seeds are being planted. 'The farmer gets a floor below which the price can't sink, the merchant gets a ceiling above which it can't rise.

By signing a futures contract, both the farmer and the merchant have hedged their bets.' Both parties are better off, and, because of that, the world as a whole is much better off. It encourages capital formation, it encourages investment, it encourages people to do what is needed to be done to make the world a better place.

'With the development of a standardised futures contract, agreed rules, and an effective clearing house, the first true futures market was born. And its birthplace was here in the Windy City - Chicago. After the city's futures exchange was established in 1874, hedging commodities became standard practice. The next step was for a conditional kind of future to evolve - the option. Some of this really is the financial equivalent of rocket science, but the underlying principle is simple.' Because they're derived from underlying assets, all futures contracts are known as derivatives. But an even smarter kind of derivative is an option. They buyer of a call option has the right, say, to buy a barrel of oil for $120 in a year's time. Now, if the price of oil rises to $150 a barrel, then the option is in the money, and the smart guy makes a profit of $30. But if that doesn't happen, if the price of oil stays the same or actually declines, he's under no obligation to carry through the deal. All he does is to write off the cost of the option itself. Well, it's by buying and selling complex smart derivatives like options that Ken Griffin has become a billionaire. 'In theory, derivatives offer a new way to hedge against an uncertain future,

than boring old insurance. a much smarter way And much more profitable. derivatives have seemed to take over In the past decade, the world of finance. the notional value By the end of 2007,

reached a staggering $596 trillion. of all derivatives contracts of the American economy.' That's 43 times the size

benefits for people that work here. There are tremendous economic a thousand people $20 billion in the hands of is really a 21st-century phenomena. This never happened 50 years ago. too. Yet there are downsides to hedging, Warren Buffett When billionaire investor weapons of mass destruction," described derivatives as "financial of American insurance giant AIG, he all but prophesied the downfall are there behind me, whose European headquarters not by selling insurance policies, brought low that blew up in its face. but by selling derivatives

'Our basic human urge to protect ourselves against risk has proved frustratingly difficult to satisfy. Insurance companies let us down,

welfare states sink into insolvency,

and derivatives turn out to be a double-edged weapon, too. And so for many families, now takes one very simple form - providing for the future the value of which an investment in a house, until the day the breadwinners is supposed to keep going up need to retire. never mind, If the pension plan falls short, there's always home, sweet home.' As a pension or an insurance policy, very obvious flaw - this strategy has one totally unhedged bet it represents a one-way, the property market. on a single market, of the Ascent of Money, But, as we'll see in the next episode or good old Japanese wood, a bet on bricks and mortar, is anything but as safe as houses.

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Live. This Program is Captioned

Good evening, a Liberal Party

staffer has resigned after a

sexual harass the scandal at

last night's mid-winter ball last night's mid-winter ball at

Parliament House, Tony Scrinis

accused of groping several

women at the event in Canberra,

he's quit his job as he's quit his job as an he's quit his job as an advisor

to the shirns for Women's

Affairs. Opposition supporters

in Tehran vow to come out in Tehran vow to come out in

force tonight. Urged to wear

black as a mark of respect for

those killed in post-election

clashes, Iran's rulers offered

to meet the defeated candidates

Saturday before a partial

recount of the ballot. There

are calls for stricter controls

revelations that on the use of tasers after

revelations that a man who died

lasted weaning may have been

shot at up to 28 times - week

may have been shot at up to 28

times , officers used the taser

on a man in North Queensland.

They said it had been fired

three times. The use of the

weapon is under review. Tim

Winton is the first author to Winton is the first author

win the Miles Franklin Award

four times, he won the

four times, he won the $42,000

prize for his novel Breath. He

took out his first title 25

years ago. Tomorrow - showers

in Brisbane, Sydney and Perth.

More news on Lateline at 10:20.


This is the age of plastic. MAN: Plastics is an integral part that took place in the 20th century. of the enormous developments the stuff just doesn't go away. MAN: It's like nuclear waste - is a fabulous material I think plastic that can do all kinds of things, to bottles. from heart valves to plastic bags WOMAN: It's beautiful, you know? or almost everything in plastic, You can buy everything you can find, and you say, "Oh, this is nice!"

the way we use it. We've gotta be pretty clever about any of this material. We simply can't afford to throw away to be adhesive, to be degradable, You can design plastics to release drugs, to grow cells on. Plastic is being thrown away, there is no "away". and the biggest problem is

And then I take some...and I eat it. is that it's disposable. 'The biggest myth about plastic on earth can degrade plastic, The truth is virtually no organism that's ever been made, and that means every piece been incinerated, still exists.' except for a small amount that's

the North Pacific Central Gyre - We're headed out to as it's called. the Eastern Garbage Patch, 'For the past seven years, hunting for plastic Captain Charles Moore has been in the middle of the Pacific Ocean. from the US mainland His sampling area is 1,000 miles in the centre of a thing

of Western Europe called a gyre.' approximately the size

There are five gyres in the world. North and South Pacific, North and South Atlantic, and the Indian Ocean. are created by weather systems These high-pressure gyres builds up in, like, a mountain, where atmosphere actually of atmosphere and that heavier weight pushes down on the ocean's surface,