i think there are a lot of good stories and hear about how we were able to get legislation through, almost in all cases on a bipartisanasis, and

it is my credit -- it is my great pleasure to introduce johan van overtveldt who is the author of the "bernanke's test" which is very timely of course, as this talk about the one person apart from our president will probably has the most influence over the u.s. economy. he is also author of the chicago school which is a wonderful book explaining how things work in hyde park and watched the chicago school of economics is really all about. we have known each other for years and am proud to say i have read both of his book's pretty carefully and i reviewed this one favorably for the to do not too long ago. he is a special guy coming he is a ph.d. in economics who then became a journalist who then

became a businessman and he went into work for a couple of very large companies in belgium or he is from and went back into journalism review's editor of trends magazine which is dutch language but their equivalent of business week and very timely and important magazine. then he got the entrepreneurial bug and started his own think tank, we would all love to do that and he managed to by giving corporations to give him the money without obligating him to support their point of view or to work on their behalf so he's an independent thinker and he's got a good business going with princeton's outlook sessions every september and october, his think tank provides look ahead: what is going to happen the following year. he has five researchers like himself who study the economy, the world and look at many different indicators to try to give a hint for what is coming. i personally would like to know what's coming, i have no idea

myself so i will turn it over to johan and loli's first, does everybody think the economy in the u.s. has turned around and moving back up? maybe we could move our hands. does everybody think that? of view here does anybody think we may be in for another big fall before we go up again? more. okay. weld, johan, what do you think? >> summer in between. [laughter] >> fess not a good answer. >> well, it's the beginning of an answer. i honestly think the worst is over but i don't think you'll see a rebound of the u.s. economy in terms of 4% annual growth before 1910 -- into 2010 and so everything that has been happening there is so much support pump into the economy, first of all, by the federal reserve and by now also was sent

the fiscal authority is that it is hard to imagine that the economy would go on crumbling and i think a lot of the recent data show that, indeed, the crumbling of the economy as more or less adopt the process of being stalked, but i don't thank you will see a really strong rebound before mid next year. >> i should have said if anyone wants to ask a question feel free, don't wait until the end, march up to the microphone and we will take it from their. having read the book, johan has a free-market philosophy in general. he is not anti regulation like some folks with that label would assume, but he is a real fan of ben bernanke and not of alan greenspan is also been explain when he doesn't like about greenspan end what he does like about bernanke. >> what i like about bernanke it is the man has been a very courageous i think, he has been

doing things that would have been unimaginable a few years ago but given the fact as an academic his main focus was the great depression and he knew that he couldn't wait too long to do some pretty drastic things given what we saw in the financial and the banking sector. he said the -- he studied bearcat carefully what happened in the 30's and you can say that the great depression became her the great depression because the monetary authority is, the federal reserve didn't do anything or at least certainly not enough to stop at the banking crisis did firmly degenerating and i think the big thing he did and who was probably one of the first world wide realizations that he had to step in and do whatever was necessary to stop a banking crisis. personal he used interest a

policy to do this and suddenly he didn't hesitate to use the balance sheet of the federal reserve was something like $850 billion from today and already for a few months and is more than $2 trillion, and when i say that the fed stepped in to keep the economy from going down further than exactly what they did with that kind of policy. >> does that amount to running the printing presses and is as something will result in tremendous inflation? so much money floating around. >> the fed has been doing the necessary things to keep the money stock from going down. which is not, of course, they have been run in the printing press but it was due to the banking crisis and the huge

losses in the banking sector and a lot of money destruction so they stepped in to compensate that which is a little bit more subtle i think then just saying they kept on pumping up money. did did all the necessary things to present the money-supply from going down too much. >> in now, when i read the book i was unsure how to feel about the fact this very important person is an expert on the great depression. should we be glad that the person running our economy is focused on the depression? it doesn't sound -- >> probably one of the good things of the bush administration have put in their given his background given a good timing, go ahead iraq paul krugman says there haven't been enough money pumped into the economy and our other economists are starting to warn that the deficit has grown so much that it is getting very dangerous so

how are you feeling? it sounds like you think enough has gone into the economy. >> yes i think the big issue for me is what will the federal reserve start doing one of the financial processes, the credit creation through the bank's start coming back to normal because basically what the fed did was that ben, the financial sector was a gross for months to. we came to a point where there would have been a lot of credit destruction quote for banks would have been obliged to call back loans from private people, companies and that would have been the turkish all over so what the fed did was a buy from the banks is outstanding credits, put them on their balance sheets to us to present that there would be recalled. of course, of the counterpart of

that buying by the fed of the credit given by the banks is, of course, that the reserves of the banks have been increasing and at the moment american banks have close to a thousand billion dollars in reserves on which they are sitting in which they aren't using very slowly and very reluctantly. >> i have a feeling some of the people in this room know that because of anybody tried to get a loan it's a lot harder now, isn't a good thing is hard to get a loan? >> the point i want to make is in the fact the situation is as it is. if we go back to normal in these banks are starting to use these reserves as a basis on which they create credit for the private-sector work, companies and private persons then the fed will have to get out quickly and i heard just this morning, and flew in from belgium yesterday

so i was up barry early this morning, and i put on the television ad for 30:00 a.m. and then ben bernake was on c-span or he talked about the budget in congress earlier this week. he made the point fairly clearly that the fed has kept a lot of these credits that have taken over from the private banks on short maturities. so that are renewable every 30, 45, 60 days, which means that if the private process of credit creation restarting and the fed can very quickly wind down its own positions. as a second element, a few months ago congress gave the federal reserve in the authority to pay interest on reserves that the banks are holding with the federal reserve. now, and at one point in time the federal reserve would start to see that credit creation by

the banks on the basis of these reserves starts again very quickly, they can offer in interest rates on those reserves which could mean that the banks won't use of these reserves as a basis for credit creation. so they basically have to tools to present when a lot of people fear these days, an inflationary binge that would -- if a the fed -- let me put it this way -- if the fed does react to slow it will have inflation, not the slightest doubt about that. but i have all the confidence that the fed has the knowledge and and technical ability to make his move in a timely way. >> my guess is if the fed started to take money away they will get a lot of heat, and politicians will not like the idea can access the big problem because certainly the fed will have to move in the direction before the unemployment rate

stops increasing, before the and implement rate stops increasing. so you're all americans, i think, you can easily imagine how the political roles or the political authorities will react when the unemployment rate goes up from 9.4 to 10.2 or something and at that point in time the fed would start increasing interest rates and that would be a lot of ugly comments but that is the way it will have to go. >> yes server. >> are the banks refusing to lend in depressing the economy in order to beef up recruitment for the war? >> for the war? >> to force iraq know, no. >> the question goes to think it a bad economy gets people to join the military as an alternative to finding private work. >> is that the intention? why they are doing it?

>> no, i think really i don't want to be the big the center of the banks, but they have arrived in a situation where there's a lot of uncertainty and where you can have in terms of a run on the banks not luckily people like you in the room taking your money away from the banks, but all the intra bank funding can change you're quickly and so it is normal maine banks are very cautious at the moment and that they want to keep a war chest not in the sense that you use the word but they want a lot of reserves on their hands when such an attack would come. now, as confidence comes back again, as the economy comes back again, that kind of scary feeling that is today a lot present in banking will go way

and at the moment when the banks will start lending. but i really don't think that they are doing this for the reason you point to appear now. >> why do banks lend to banks? >> because banks have to fund their activities ended you will always in the financial markets always have banks that have too much funding and other banks due to circumstances that can be very different that have a shortage of a temporary shortage of funding, and that is when banks are lending to each other. and that is the kind of process by the way that froze down completely last year september and october. >> and that is why the credit crunch hit were banks will lend to each other. >> at that point in time all banks mistrusted the other banks and so nobody give any credit to nobody anymore. also in between banks. >> what is the risk that the credit markets are going to push

interest rates up a short circuit the recovery? >> could everyone here the question? and i'm sorry, i will repeated retreat the moment the private credit creation starts working again, it is the market's keep on believing that we won't see major increases in long-term interest rates because then of the markets believe that the actual situation that we have will not generate into

inflation. if the markets are to believe that, for example, due to political pressure the fed and will not able to do what it has to do in a timely way, then, of course, inflationary expectations will start to go up and certainly in the bond market to the demand to put your money on a longer-term basis will go together with higher interest rates, no doubt about it. so it is crucially dependent on the credibility of bernanke and the fed the taken under the present situation without creating inflation giveback that reminds me of something in your book where you are talking about, the imperial personal rule of greenspan really had that affects and i think most economists seem to believe he walked on water for a time and now it is fashionable to bash greenspan and in your book your hard on him so what do we know now that we didn't know when he

was the fed chairman and everybody was hanging on every word? >> well, i think -- let me first say that something with respect to the criticism of the greenspan that i don't agree with and then come to the point where i am, indeed, also very critical of greenspan. i don't share the opinion that the fed has been a really that much to lose in its policy in the first years of the 21st century. a lot of people, paul krugman and others are arguing today that they were what we saw happening in recent years. i think that is too easy as a critique because in 2001 and there was a huge deflationary scare. really people come imf, economists, mr. krugman himself,

were very outspoken and at that time that the japanese disease and a deflationary and no growth, recession, was a real. now, if you say that it is a lot of other things but one of the things that you imply immediately that you need a very expansionary monetary policies to fight deflationary, that's exactly what the fed did it and that is why you didn't get deflationary. so saying now that it didn't need to do that because there was no deflationary and that is putting things upside-down, so i don't agree with that critique of the fed, but what i think mr. greenspan certainly in the last five or six years was a dictatorship and the federal open market came together. mr. greenspan gave his expos i of what he thought was necessary and then he asked whether there any questions.

i mean, bernanke, the federal market community, it comes together and it is a sixth point out. bernanke a space as the last person which is very different which gives everybody the opportunity on the committee to express his views, and expressed news without not having to be afraid to be bashed by the chairman who is said that time a kind of an untouchable person. >> can you tell us so little about bernanke background, i was surprised reading the book he grew up in south carolina, rural south carolina. >> and he seemed to have been a very good student which is not i think that remarkable given the remainder of his career.

he went to mit, harvard, got his ph.d. from mit, and then quite quickly moved over to princeton and practically all his research has been related to the great depression. and more specifically the mechanisms through which the line into a crisis, the banking crisis crossed the depression and unemployment the contraction of the economy by 30 percent by the way which is still something quite different than what we see today and i think it was a surprise for everyone that he was asked to join the federal reserve in 2003. >> wireless that is a prize? >> because as far as i could discover, he was never in the picture for other jobs and becoming a member of the federal

reserve reserve board in washington is usually not the job you get in a onetime move. >> but maybe there were intelligent people in the bush administration and saucer and things coming. >> i don't know about that. and what is a stranger paring bernanke and henry paulson or paul senate in geithner? >> on a personal basis as far as i could discover and mr. geithner are certainly much more to of a kind and then mr. paulson and mr. bernanke. >> can you explain that? >> well, let's say that i can't -- but i have a kind of look at life that is marked parallel and a look at economics and financial methods that are more comparable. i think it must have been quite difficult situation for

mr. bernanke when the financial crisis turned and maybe you can go back in your memory, it took quite a while for paulson and the bush administration to realize that this was really bad. this is not just a minor crisis that would go away in three months' time and i think there have been very interesting articles amongst "the new york times" about what bernanke had to do to convince paulson and other people in the bush administration that this was serious and is needed urgent personal reaction to prevent from getting into something really bad. >> there was a lot of resistance to government intervention in general which now we have seen pretty much told. practically anything goes of the moment is what it seems so what was the source of that resistance? was at the chicago school or people were thinking the market would take care of its place? >> even, first of all, the complacency you get

automatically when you have years and years of economic growth, that you have seen the.com crash printing itself and all of the. attitude in the administration that when the subprime crisis in july and august 2007 that it would be gone before the end of the year. >> and i think maybe they're all so because ben bernake is not free from line, he, first of all, about that in the first months, the by the end of the year everything shows what really was convinced this wouldn't go away just like fats. >> why do they call him helicopter ben? >> well, because he has been doing what he told he would do, there is a famous speech of panama in november 2002 where he

explains in detail what he has been doing in the last year. out at that point in time and people found it so outrageous that a central banker would start talking about the buying prepositions from private banks, that people start to nickname him helicopter ben. >> well, is referring to helicopter flying over in dropping money, was in the milton friedman? >> something related to cannes and has been used by friedman to but the original quote is from john maynard keynes who said that this is necessary to have to drop money from a helicopter and then people pick it up and start buying things in deflationary will go way. basically milton friedman agree with that point of view. >> i like the idea of. and that somebody happens, a lesson we all got side, but isn't that what we're doing, the

way we are printing money? >> yes, and i come back to the first point i make this morning. there is a lot of money destruction also given the situation in the financial sector and banking sector and the fed is compensating at the moment, largely compensating that money destruction. now, if the money creation and credit creation in the private sector starts reviving, i repeat myself but i think it is free essential to understand that, then the fed has to go back from has to step out of the game. and so at the moment i think honestly we in europe because we can talk about the european central bank and have been very stupid in that respect i think, you can learn a lot from mr. bernanke, we must be very thankful that we have a guy who understands this mechanism and acts accordingly. there are risks involved but not doing that then you get the great depression.

sure as hell. >> now, why does the german chancellor think bernanke has too much power and what was she thinking when she talked about that sort of off the cuff? kim and she doesn't have the have to think. so this time around a their. she has an election in september -- that is it. as you was to blame and the economic situation in germany and europe in general on the central banks and that is it, it is no more than that. >> is that it. criticism of the or strictly politics? >> strictly politics. so is germany better than us or worse than us? >> germany is worse than the united states today and there is something that people always forget certainly in europe to adjust to take the broad data and europe whole economy is in to% private and 50 percent public or less in germany a

little bit less, my own country is exactly 50/50 bredesen and the u.s. to certain private sector more or less not talking about the smaller data. so if your economy goes down 6% like it has been going down into quarters in europe and in the united states, that means something different for the private sector in europe purses and the united states because essentially it can take the point of view that your government doesn't move. it will not throw people out now given the recession so essentially timor-leste remains the same year ago. if in europe have of that economy stays and zero the government sector and the rest

of the sector of the economy is the private sector you have a -- 12 there. >> what you are saying is the real doubles because half of the economy can given the fact that the overall contraction is more or less the same, the contraction in the private sector in europe is much more pronounced in the united states. >> by how much? >> well, the private sector contraction in the u.s. must be in the eight or 9% and in europe is 12%. >> how hard is that make it for everybody to come out of the mess we're in right now? two slow it down. >> i think everybody is waiting again. if you look outside the u.s. because what has been happening essentially up to a few years ago that it was the american consumer who is pulling the world economy and then don't want to personalize this to the people here but in the divisions

in which there is of the world economy and a new and external deficit of the american economy was a clear manifestation of them. of for example to look at what germany is doing they refuse to really have an expansion of the budgetary policy and that they refuse to do that and at the same time they're taking a lot of measures to increase competitiveness, they have just recently cut the taxes on electricity where the major exporting corporations which means a lot because this is still quite industrial country. if you take away all the taxation of the electricity price that these companies pay, you are increasing the competitiveness, visavie belgium or france or other european

vñrt importing again and then be ready when the competitive export start, but that is -- i see a lot of things also in france going in that direction. >> yes, sir. >> you have been talking about the u.s. and europe and reading a lot about stimulus activity of the chinese government undertaken, do you think they will have a more important role coming out of this historic lee? >> i think for me it is quite obvious that china will become more important, economically,

financially, but in one sense i have to say that there is also a huge problem, of course. the environment, the social problems, income inequality. i know that in the united states income inequality is also an issue the income inequality in china is much worse than it is here or in europe. i fear a little bit, i have talked recently to people at the imf will follow up china closely that of a lot of the stimulus problem is window dressing and that the maine publicity avid. in an attempt to push up confidence but that is really the hard practice that shows that it is not that impressive in terms of what really happens

and has put extra into the economy. >> and what is the reason to try to make it out more than it is? >> basically the same reasoning as the germans, a free ride on american expansion. >> everybody is waiting for us to buy and i think i like that idea but not doing much. in the book is a bit of a stretch. i will wait for this question. >> you spoke about china. how about india? >> well, i think it is less in the picture to a certain extent, but i think they have a very good industrial policy because if you look at where economic activity develops in india it is much less in basic sectors of the economy in coming chinese

economy still very much oriented toward the of that kind of basic industrial activity or as, for example, in india you have a lot of development in software and information technology, medical equipment. india has become after the united states the second producer of medical equipment so i think there are developing their economy more clever and less dependent on the competitive situation because what is a problem for china is that countries like bangladesh, vietnam, even pakistan and become competitive because the wage costs their competitors visavie china because labor costs are much lower than they are china. india is less dependent on the kind of cost competitiveness and

much more clever industrial policy and i don't think china, of course, the advantage or the power of its huge currency reserves which india has some reserves but not nearly as much as china which is china some power but don't overdo that either because they start using these reserves that will run the risk of shooting their own foot. they're basically dollars at the moment that start moving too much and the dollar goes down, they throw down the value of their own reserves so i really don't think that china will make a sudden move out of the dollar. that would be totally self-defeating. >> what is going to happen to the dollar and how low will it

go if it is going to? >> i'm not sure it will go down much more than it actually has. because if you look of the world economy basically there is one competitor and at this point in time and maybe the chinese will be of competitor but today wilmont. now, coming from europe and not so sure that people realize and what kind of situation with respect to the currency because we have one currency the 16 countries so which is the bernanke of the banking in europe has to close 16 secretaries of the treasury and a obviously were unnecessarily the voice of it mr. steinbeck of

germany is worth more than a voice of the minister of finance of my own small humble country. so the guys at the ec meat are in an impossible situation and i am blame them for reacting much too late in the financial crisis but i can't understand the institutional and run into in which they have to work and is horrendously difficult because can you imagine what would happen if they started doing what the federal reserve has been doing and i refer again in taking over the credit positions from private banks. what is it to do? the italian bank, a german bank, belgian banks, dutch banks, irish banks? it is immediately a gigantic purely political question where as. the united states bernanke calls

to pull senate in the geithner now and they work out a deal in do something and mr. bernanke takes over credit for american banks and that is that. out the situation in europe is a very complicated, it is no coincidence that each time there is really a pressing financial crisis and everybody runs to the dollar bear go. >> your local community bank of the bottom but yasser. >> before the turn of the millennium, i understand that there were $2.50 for every dollar of its gdp. that would mean that the economy was bankrupt, the dollar meaningless, now you explain with those figures that the economy runs and is still going?

>> well, of course, the u.s. economy is a huge economy, the biggest in the world and you have the reserve currency. at lot of people are almost fighting to have dollars and their central banks so as long as the rest of the world believes that the people of parade this money, the federal reserve keep their heads, there is trust in the dollar and you can have that kind of relationship between amounts of dollars moving around in your economy and not getting into a bankruptcy situation. when the trust falls to the ground i will have a problem and you have a run on the dollar which will diminish the value enormously at that point in time.

like for example in the '50s and '60s. >> geithner has said and when he was a member of the new york fed didn't have any real power to do certain things that would have favored the financial crisis. and lately elias' spencer has been saying that the fed does have a lot of power but it did not have the political will to exercise it and now there have been all these reports about the fierce lobbying effort that the banks and financial institutions are exerting on our politicians to try to make sure that we don't have more regulation so i wondered if you have a perspective on this and your where is bernanke coming from on all this because i haven't really heard him be outspoken about it? >> there is a lot to say on that question. first of all, i think bernanke has always been very careful

with respect to speaking on issues that were not really only monetary because there is a huge tradition in the united states and independence of the federal reserve, but congress and will not away tomorrow. with respect to the first part that is one of the reasons why bernanke rather reluctantly space about things that are not closely related to a purely monetary issues. with respect to your first question i think in that is one of the things you can blame bernanke of four, it wasn't a nonsense to say that they didn't have the machinery or have the power to do what was necessary with example lehman brothers. and there was just a situation of panic, there is a situation of aig happen in the same day and everybody would be

overwhelmed with demands involved, so i think the excuse, we don't have the powers or don't have the authority for this kind of thing or that having, a really weak argument and that is certainly one of the things for which you can blame mr. bernanke of being maybe it certainly those days of 2008 a little bit on the ec side. >> it does seem like we have come along way and we now all owner general motors among other companies, the amount of government intervention is unbelievable considering when you wrote this book on free markets in the chicago philosophy of hands of government so have we now set a precedent or from now on and this is the way the markets are going to work and government owning businesses? >> you certainly have treated a precedent that is for sure, and there is a big difference in my way of looking at things between

letting lehman brothers were bank of america or citigroup going bankrupt or general motors because of the summit of fact of a huge bank going down the drain in an uncontrolled way can be enormous. you get in the 30's. what is the difference between what they are doing now with general motors, which at the end of the day will mean there will be huge job cuts? i don't know exactly but and there were 14 plants close in the united states. you probably would have more less the same results after two years in the bankruptcy situation here now. >> is in bankruptcy, of course. >> chapter 11, pure bankruptcy situation where you would immediately have parts of the business taken over and now you're trying to do it in a controlled way.

there's an argument for that but their arguments against it also can and it's interesting to hear about individual dealerships being preserved as a result of congressional intervention or the local politician calls up general motors and says you can't close to the dealership, that's important so shebly is still in business or a least. we will see a lot of changes. before we had a chance to come up here i was asking johan about real estate and residential real estate and he said spain, if you want to get a good deal on a condo the coast of spain so i would ask you, where is the biggest discount in residential real-estate around the world of these major countries? >> as far as i have looked at and purely as a research interests not as a buyer, spain is in the real estate problem or they are huge, the real-estate prices in the united states is quite modest compared to what is happening there.

for example, the city of valencia and the south, apartments on the coastline that went for something like 300,003 years ago and you have 100,000 euros now, but yes. >> it sounds nuys. >> i don't know how the expense of the following tickets to spain are. but a remarkable thing is that none of the spanish bankers are in problems and it is certainly a remarkable because you'd expect such huge real-estate prices to translate itself almost automatically in a huge banking crisis which is totally not the case and essentially as far as i looked there were two things that happened in the last seven or eight years in spain. first of all, you