>> what rules or policies can we put in place like dilution of stock, firing of management, mandatory restructuring of the creditors in the event of an insolvent institution, which will show people ahead of time that they will pay a price unlike the experience of t.a.r.p. last fall.

secondly is the matter of detection. to credibly detect about an institution becomes insolvent you have to be able to measure what's on its balance sheet. in particular regulators have to be able to measure it. so that complex and opaque instruments particularly the complex derivatives that were at the core of this last crisis have to be simplified. and in particular i think derivatives market reforms as bob pointed out in the regulatory gaps slide are vital because until you can measure what assets really trade at -- we're not talking about fictitious mark-to-model of rocket scientists. we're talking about actual transactions -- until you can measure that, you can't measure the value of assets till -- and you can't measure capital. and if you don't know what capital you have, you don't know if you're solvent or insolvent. so you got to be able to detect an insolvencies when it arises.

finally with regard to resolution. many proposals focus on the question of one isolated institution in trouble. but i think we've seen in this experience we had a whole constellation, a large entity in trouble which one could cascade into one another and amplify the durableance. -- disturbance. some say how can we credibly resolve a institution and how can a treasury secretary come up on deck in the morning with these newfound resolution powers that are in the house bill and actually close an institution? well, i would argue that individual who is responsible to society, not to allow spillovers to the real economy has to be able to come on deck, has to be able to assess the intertwined -- the spider web of

interconnections between the firms. and that individual has to also -- and this is a dimension perhaps bob would like to discuss because it's mentioned in his book. we do have to have an international regime. the big firms are international firms. and if you're going to do burden-sharing and restructuring in order to restructure or close a firm, you've got to be able to share the burden around the world 'cause there are creditors in different legal jurisdictions, switzerland, london and what have you. so what i'm concerned about in current legislation is that without adequate derivatives reform and i do not believe what's on the table is adequate, things will be opaque. things will be complex. and officials will be deterred. they will be induced into continued forbearance much like we saw with bank of america and citicorp in the spring of 2009 rather than to take forceful restructuring. we won't be able to detect the

time at which we would want to do this. and we won't be able to handle things internationally. i think a portion of what must be mandated by whatever regulatory authority is that international agreements akin to the kind of agreements that you have from the world trade organization for free trade -- there's the old saying. if there's a will there's a way. big multinational corporations want free trade agreements. and that encroaches upon the sovereignty of the various nations in the name of free trade. we can encroach upon the sovereignty of many nations to create a harmonized bankruptcy regime so that no country has to endure induced forbearance and too big films being bailed out over and over again. >> we'll start with the international and then we'll go to discretion -- there's so many thomas in there. -- topics in there. >> let me talk a little about his three deterrence monitoring

and resolution and about the bureaucracy issue versus a functional issue. so i agree that one of the keys is deterrence and i think the most important deterrence is to have higher capital requirements and differently designed capital requirements. i think there's a consensus that we should have higher capital requirements. but people don't realize how badly designed the capital requirements are. we had one international agreement. and people spent 20 years in basil and they came up with basil 1. basil 1 said the capital requirements for a bank if you have normal loans, standard loans is 8%. but if you have mortgage loans, it's only 4%. and if you have mortgage-backed securities that are rated aa, it's 2%. so we had a system of capital that didn't recognize differences between subprime

mortgages and good mortgages. so it's probably true that the international agreement basil 1 is an important factor in causing the crisis because it skewed the incentives. now we're on something called basel ii. that committees every large bank can set its own capital requirements and it sets them by doing their own risk analysis for these risk models and then it goes through a elaborate set of formulas. well, i've come to be, i would say, basically opposed to those risk models. if you've ever seen them, you can't understand them. if you don't have a ph.d. from mit in math, you've got no chance. i doubt whether there's a director in any bank that understands these risk models. but we know one thing about them, they were wrong. all these geniuses were wrong because they made assumptions like once every 100 years housing prices will go down in the u.s. well, if you make that

assumption and you put it through a lot of formulas, looks pretty good for mortgages. the question is, is the assumption reasonable? and i don't think it is. and the basic idea of all these risk models -- and i critique this in chapter 4 of my book is that there's a normal distribution curve. the reality is that in many financial markets it's not a normal distribution curve. so the whole idea of modeling is having capital requirements based on that just seems to me a big mistake. now, in terms of monitoring i agree with what rob says about valuations. i think it's unfortunate that we do have a system of fair value accounting. i would say there's been a huge political backlash. i didn't see anybody complaining when people were margin up their assets but when they starred margin them down, then i saw a lot of complaining.

now, there are some legitimate questions about truly illiquid assets and i think fasb has been responsive and setting up certain exceptions but there's a move in congress which was expressed in part on the house bill to actually overthrow fasb and the sec and let that go to some banking council. and i think that would be a terrible thing 'cause we have two very different groups. we have investors who want to see and regulators who should want to see on a regular basis what's the valuation? that doesn't mean just because you market differently that you have to say, okay, for banking purposes you're insolvent. that's a different question. but if we start intentionally giving everyone so many exceptions that we can't tell what these things are valued at, i think we made a terrible mistake.

now, just to go to bureaucratics, i think some bureaucratics and organizational issues are important and others are not. i think if you took accounting standards out of the sec and fasb and took them -- and put them to the banking agencies, you've clearly had a system that was much more geared to protecting bank solvency than explaining to investors and i think that would be bad. that's a well-known tension. however, i'm a little cynical about, you know, the process that led us to the homeland security department and senator dodd had this proposal. take all four banking agencies and merge them into one. well, those four banking agencies actually do joint rulemaking. so all the rules are pretty much the same. and there's a little difference in implementation. but it would take a huge amount of political effort to consolidate those four agencies. and my concern is that would divert us from the sort of goals

that rob are talking about. people would spend a huge amount of time arguing about that. and that's what really worries me. so i think we should be careful not to spend the limited political capital that we have on bureaucratics unless they're really important to achieve the functional goals. and i don't think actually it matters whether we have two, three or four banking agencies. we have four now and if we had three or two or seven, i'm not sure it would make that big of a difference. so i guess -- i hope that we're not going to get diverted in that way. >> one thing that i think from -- where there's a place of agreement on the organizational chart i noticed in the book is that you are supportive of the idea of creating a consumer financial protection agency although i think in the book you only limit it to mortgages. and i don't know, rob, what your thoughts are on that. i think your mic might not be working perfectly. i wanted to just generally ask

you about the notion of these bank regulators whose primary purpose is to think about the solvency of these institutions and protecting the depositors in those institutions whether they're likely to be successful in doing the consumer protection functions and whether there's a benefit in taking those financial -- those responsibilities and bringing them together. and then i want to ask a little bit also about systemic risk but let's do the consumer issues first. >> well, in my book and i hope you can hear me is the -- i sort of take the middle ground position. unfortunately, the original proposal for the consumer protection agency was so broad, it included every financial instrument in the world pretty much. and i was very concerned that it would have a lot of overlapping jurisdiction, a lot of conflict. i mean, for instance, it covered deposits. it covers all savings programs.

well, why do we need, you know, the banking agencies are going into the banks and presumably they are looking at deposits and they ought to look at them in connection with assets. and so i just couldn't understand why we want to be that broad. i think on the other hand, there are certain areas -- mortgages is a good example where we've seen that the agencies haven't done a very good job. and where we've thrown a lot to the states. we put in the state licensing of mortgage brokers. and i guess i'm very concerned about not having a strong federal agency in mortgage orn nation. -- origination. i would say it's not mortgage origination. i would say payday loans and lots of things we have mainly nonbank lenders. anything where we have nonbank lenders mainly that should be in the consumer agency. and in products where we really feel the banking agencies aren't doing a good job.

i think probably the most controversial area is credit cards because we've now made all credit card banks national banks. we believe and i think rightly so there should be one national regime and we shouldn't have lots of states interfering. and if we're going to have -- we got to have one group set it. now, as you know in the house bill in the end the compromise was that the consumer protection agency sets rules for credit cards but they're not allowed to example, i think, 8,000 of the 8200 banks. so i'm not sure this is a sensible compromise because i like to see people who set the rules actually have a responsibility for enforcing them. so i think that it was unfortunate that it started so broad. somebody should have -- and so what's happened is it's gotten pared back. i noticed, for instance, auto financing was taken out, which was a mistake because that's a nonbank lender where we really don't have people involved from the federal banking agencies. so if we -- we need a set of

principles. and my principles are let's concentrate on the nonbank lenders. let's concentrate on lending facilities which go to low-incomed people. and let's try to minimize overlap between the banking agencies and this agency. >> i'm going to take this up about 10,000 feet. which is we have a society that particularly since the time of ronald reagan tends to think that the government is the problem rather than the solution. prior to that, it was called the keynesian era. many people thought the government was the solution and the market was a problem. we're in a problem where there's a tension where nobody believes particularly after watching the bailouts that the government is the solution. but nobody is very romantic about unfettered free markets anymore either. and in this pragmatic void that

we must now address, i do think we have to affirm that there is a social purpose in financial regulation. otherwise, we will be just chafing at kind of -- at an unconscious higher altitude. we will be chafing about whether things are -- i mean, i agree with you that too much overlap and double scrutiny and so forth is just costliness. on the other hand, people will argue that any interference or intrusion or rules is costly and unnecessary. and i think we have to move beyond that as a society. that the scale and scope of the crisis we just experienced and the frequency of the crisis that you showed in your charts suggest that financial markets more than any other where the vicissitudes of -- how we say the volatility and the vicissitudes of shifting

expectations and so forth make for a domain where regulation is warranted. and with that philosophical agreement as a society, then the particulars become much less contentious. >> i make clear that what i'm talking about is when there are two agencies, both of which have jurisdiction over the same financial product, that's what my concern is. i agree that in almost all of these areas there should be someone with federal regulatory policy power and i'm very concerned that if we leave mortgage brokers to every state through licensing, we'll get some states that will do a good job and many states that won't. >> some people are concerned with regard to credit cards. if the bank regulators are in charge that they're actually regulating for the banks rather than for the consumers. and so what i'll call the elizabeth warren agenda, being somewhat broader with the

consumer financial protection -- >> i think credit cards -- and i've talked to elizabeth who i very much respect and i think maybe these are all national banks now. maybe what we need to do is set up a separate division of the comptroller that's more consumer-oriented. and let them be the ones who do this because since they're all national banks and many -- or the other possibility is to say credit cards have to be organized as a separate bank and then have one agency with jurisdiction. if you have credit cards as a function within a national bank and there's already the comptroller regulating them and that's where you get into complications. >> i think in some ways what this conversation has suggested is that there is a tension between whether multiple agencies regulating the same entity for different purposes inevitably creates confusion and difficulty for the institution.

on the other hand, there's a question of institutional culture. and whether or not a given institution which is set up, for example, to think about safety and soundness is going to be institution by institution good at systemic risk. or that it's set up to think about the prudent financial management is going to be good about thinking of consumer protection and i think that sort of functional set of questions -- how do you balance between those functional set of questions without creating a kind of bureaucratic nightmare of regulation for the institutions is what's part of the dialog and there's lots of possible ways you could end up resolving that here. i want to talk about systemic risk and the discussion again has been about the boxes, whether or not the fed should be the systemic risk regulator while it is also a prudential regulator of some of the largest institutions. is that benefittial or is that in contrast? how do you think of systemic risk and the role of the federal

government and whether it belongs separately or together with this same function? >> sure. first of all, i do think that the federal reserve, as i mentioned people do not have a lot of faith in experts. and the federal reserve which is the place where i started my career but has always had what you might call a very strong reputation has had that reputation tarnished in this episode and they have to re-earn the confidence of our society. and i think that's an unforgotten -- we say byproduct of this crisis whereby the fed was asked to do essentially a back door bailout. the fed's traditional role has been focused more on monetary policy and here they became the fiscal agent of the united states.u$ç in a way that was what you might call revealing that their structure, which is not a purely

democratic structure could be seen to use taxpayers' money to favor financial institutions. when you talk to people at the fed or at the treasury and others, they say -- and perhaps rightfully, what did you want us to do? sit there and watch while the real economy melted down? you want to us teach a few lessons to speculators and traders and watch the economy crash? and the answer obviously is no. but there are ways to handle systemic risk and there are ways. handling things as the federal reserve system did in the aig bailout where the american taxpayer used -- was -- money was used through the conduit of aig to fortify financial institutions, some of which are foreign and not under the literal protective umbrella of the united states to manage

systemic stability was a tremendous abuse of american taxpayers. because in the aig bailout, had they bankrupted aig and marked down all the exposures to those counter-parties and then the american people would put up exactly the same amount of money in recapitalizing all of those firms, the american people would have owned stock in this recovery, and they would have owned a piece of these firms that are all doing very well again. i think the thing that disturbs me most about what people in the regulatory world are saying, and particularly at the fed if if they say to you what did you want us to do, sit and watch the ship go down? they are making the case that the real economy is affected by the spillovers from the financial system. and that's what systemic risks essence is. if they're willing to make the case, they have to make the case

for strong prior restraint on those financial institutions restricting their activities just like you make the case for restricting polluters from the side effects -- what they call the spillover from the event. when i look at it i feel the fed is defensive and the treasury is defensive about what did happen and we need to open up what happened at aig and not like eliot spitzer said in their op-ed at the end of the year. we need to open it up and examine it and make sure the legislation we're trying to pass and the regulatory reforms we're doing actually cure the disease that was revealed by the aig episode. >> let me comment on a few points. first of all, on the aig, i absolutely agree there was $62 billion handed out covertly essentially and $40 billion went

to non-u.s. institutions. and all of these people actually made a mistake. they had chosen the wrong counter-party. these are the most sophisticated financial institutions in the world. and they all got 100 cents on a dollar. and if we don't make them take any penalty for making a bad judgment about counter-party risk, then we don't have anything in risk management. it's all -- it's all for naught. the second thing -- and i actually calculate this in chapter 7 of the book is how much exposure did the fed have? and it turns out the number unbelievably was $7 trillion. remember, congress only appropriated $700 billion but then what treasury would do is they would give $100 million to a program and then the fed would lend out a trillion. and the fed -- the treasury would sort of act as first loss. well, this is why the fed's reputation has suffered because

it's allowed itself to be levered up by the treasury and get into these programs. and so i think that the political pressure that's on the fed now is really very understandable. but the fed ought to get back to its role as a monetary authority. and if it doesn't get back to it, we're going to have more people like ron paul writing books called "abolish the fed." and that's not a good thing for the fed. to talk just for a brief moment about systemic risk, the real problem is not who was going to do it but what do we mean by systemic risk. it's easy for everyone to say now we're going to be focusing on systemic risk? well, what exactly are we going to do? we know the nature of most bubbles are after the fact we're very brilliant about it. but during the process we're not so brilliant. and, you know, some people -- look, in 2004, bob schiller at

yale who wrote the forward to my book, he said the housing market was out of control. he showed you all the numbers. but you know something, people didn't listen and many people made money between 2004 and 2006. so i guess i tried to say well, what are the things that have historically led to financial crisis? and if you go through all of the history, there are four things that to me are ones that we should focus on if we're going to look at systemic risk that's likely to become a financial crisis. the first is a real estate boom especially a bubble that's financed by money from outside of a country. that is characteristically leads to a financial crisis. sooner other later it was not just the u.s. we saw that in ireland and spain. second of all, high leverage. the sec made a terrible decision in 2004 to let the 5 billion

investment banks go from a 15 to 1 leverage to a 30 to 1 leverage and we really paid for that. the third thing is, when we have a new product and we have lots of good new products that it becomes very huge very quickly without regulation. that's essentially credit default swaps. and i think those -- those are three of the things that do it. and the fourth is a mismatch between assets and liabilities. if we have long assets and short liabilities, there's a mismatch. that's what happened in the s & l crisis. and that's what happened in a lot of these mortgage-backed securities. the issuer of these securities had 15-year mortgages, 30-year mortgages and many of them issued 60-day commercial paper that had to be rolled over and rolled over so that's what makes you very vulnerable to a liquidity crisis. so i'd like to see a lot more discussion about whether these are the right four factors or we

have more factors and less discussion about what the bureaucratics are going to be. what agency is going to look at this. >> once again with regard to systemic risk, we're not in a situation where you're resolving one failed financial institution. as you were in the throes in the period around bear stearns or up to the lehman episode, if you walked into the cfo's office of any of the nine or ten big money center institutions, investment banks, and banks at that time, and you asked them are you solvent, and first of all, with the complexity on the balance sheet they may not have known. probably didn't. but secondly, if you asked them are you solvent and they give you an honest answer, they say it depends on the eight other guys. and we had a situation which i think calls for something akin to a bank holiday. when you close them all, you

measure them all, you recapitalize them in parallel. and instead what we had was a process after bear stearns where the politically strong can get to the back of the bus. and then you do bear stearns and then you wipe out a couple of others and you recapitalize others. and the politically strong at the back of the bus after you've resolved the other 7 can look at you and say, yeah, of course we're solvent. and what ended up happening is there was a horrible microeconomic violence where the politically strong get to the back of the bus and their management stock options and their stockholders are preserved because you've sacrificed the people at the front of the bus. now, what's the problem with that system? the problem with that system is once you identify that you're in a crisis, the politically strong have tremendous incentive to delay resolution. so the depth and the duration of

the mounting of the crisis and the spillovers and consequences goes on and on before you've sequentially resolved everybody because the politically strong can resist being resolved. and we need in this ethic of governance of the financial system the ability to bring everybody in in parallel, look at them all. this is not unlike what the reconstruction finance did in the '30s or what franklin did. we need to reassert that society is in in charge of the financial markets and they're a means to an end rather than the nominal political entity. >> on housing finance you spend the first probably 25% of the book on the mortgage markets and the securitization process on the gses, fannie mae and freddie mac and the role they played in

the crisis because in many ways they are the ones who started the unraveling. we haven't gotten to much of that in that discussion so far. here at the center we have convened a mortgage finance working group and we're spending a lot of time talking about what comes next in the financial system as we try to disentangle the federal role which is 90% of the housing finance system. we could talk a lot about the diagnoses how that went. and you won't we won't have any more lending unless we figure out the securitization process. you talk about the mismatch between short term and long term. 30-rate fixed is a core concept. it's relatively unique. there's only a few other systems cover bonds, the danish model have produced longer-term finance. and the ability to know what

your obligation is going to be over time makes housing more available to other people. do you think a more -- as you recommend the gses are somewhat unwound and much of that market resumes -- is managed largely by the private sector that we'll be able to attain a 30-year fixed rate and is that a necessary component for american homeownership? >> i think one thing that's helpful to do is look at canada. canada has pretty good home mortgage market and they didn't have our problems. and there are two things that are characteristic. one is people actually made down payment it is. -- payments. they had 10 or 20% down payments. and when you go to canada and you tell them about all the things they happen in the u.s. they shake their heads because even now fha has a 3.5% down payment and you can reimburse yourself -- yeah, it's financeable. it's good to have down payments.

and if people really can't afford a down payment of 5% or 10%, you know, we want people to own houses but maybe we're going too far. the second thing is they don't give in canada a tax deduction for all mortgage interest. and i'm in favor of tax ace for your primary residence up to a certain point. but we give a tax deduction for everything. you get a vacation home mortgage we give it to you. a home equity loan. and we say what happens to the personal savings rate in the u.s.? well, home equity loans made it negative because people took so much money out. so i think we have gone overboard in encouraging homeownership. and i think we really need to sort of realize that we're sort of implicitly subsidizing that in a very substantial way. and while homeownership is a good thing, we've gone too far. now, that does lead me to the

view that to me there are lots of people and lots of critiques of fannie and freddie. to me the most difficult problem is that there is a implicit subsidy of the housing market in fannie and freddie. and it's very hard to calculate and very hard to find. people have lots of debates. but some of that subsidy -- a lot of that subsidy is going to the middle class and perhaps in some jurisdictions up to $700,000 mortgages. well, my view is as a government we need to be subsidizing the low-incomed housing and that's most efficiently done by subsidizing them directly. and then as the middle class and higher housing -- i'm okay with letting the private market operate. and if the result of that is that in the middle class and upper class markets you can only have 15-year mortgages and not 30, my view is, well, that's what the market tolerates.

that's okay. because we shouldn't be using government resources to subsidize $500,000 mortgages and $700,000 mortgages. and that's -- that's just the strong view. and then in terms of people who really do need the government subsidy, i'd like to see it done as directly as possible and as efficiently as possible. and my concern is when you mix all these things together, where you're trying to do the low-incomed and the high incomed and you have an impolicid subsidy and we -- implicit subsidy, then we don't know what's happening. >> what i think is tricky right now is that people do experience a subsidy and taking away the subsidy when the housing market is very fragile is a timing problem. >> i agree with that. this is probably not the time to

do it this year. >> so i think we need concrete plans about what we want in the longer term but not to be implemented in a shocking or unanticipated or abrupt manner. and i think what you might say the goal of housing is a a social goal, even a noneconomic goal and using housing subsidies as a means to an end is worth arguing and worth discussing. i tend to concur with your perspective that upper middle class and upper class subsidies probably wouldn't be one of my social goals. but let me also add here i think one of the most profound statements that you made and the challenge in your opening in the book is that the securitization markets that have collapsed and cut off the flow of credit much

more than the banks. and we come as a society out of the experience of the '30s where the roosevelt administration had a very successful experience fortifying the banks. but the market structure at the onset of this crisis, the banks were the 22% and what we did is we lurched in and supported the banks. and we supported the 22% in a big way and, you know, their portfolios are comingled but how to put a safety net structure around the incentives of the securitization markets to keep credit flowing. and in no place is that bigger than the housing market. >> and i agree that it's the irony or anomaly or unfairness that the other -- that banks became a much smaller part of the market and that's the one we bailed out. and in many cases it was other

institutions and other sectors that actually were more important to credit. the question is, we had a trucking company come in and say they wanted money from t.a.r.p. and they said, hey, listen if the two biggest trucking companies go down, that will be very bad. so we're too big to fail. and when you think about it, it's not as crazy an argument as you think. because the banks are only 22%. what is it that's so special about the banks? my view is there's a payment processing function of the banks that is special but that's probably limited to 5 or 6 banks. if we were bailing out the banks because we thought they were critical to loan generation, why did no administration, neither the bush administration nor the obama administration, require the banks to lend more? you would think that would have been the logical result. partly the answer is complicated in terms of where they were in terms of loss reserves but partly because as we've argued,

loan securitization is what drives loan volume. so you're right to say now in the current market structure we have it's even more anomalous that all we did is bail out the banks. >> also not surprising that when banks were allowed to comingle traditional banking activities with securities activities and their securities portfolios got devastated, that they pulled in their horns on traditional bank lending. so one may have exacerbated the other. >> let me just put a pin in another topic that's related to this that we'd probably invite you to be part of other discussions on. we talked about the whole securitization process and housing markets in terms of single family. but, in fact, also probably one of the lessons of the crisis is that we have given an inadequate policy focus on financing affordable housing for those individuals for whom hypothetical is not the appropriate result. >> and we would be in much better shape if it wasn't an all or nothing.

if we had some subsidies for rental housing. >> that's right. and there's both a subsidy issue and then also an access to credit where over the last few years the housing gses -- we talk about them in terms of single family but they were -- became almost exclusively the source of access to credit, to finance multifamily system. and we need to put access for capital for rental housing to be one of the high priority goals of that system. be something that we'll all be talking a lot more. so with that i would like to now turn to the audience and see if they would like to get into the conversation. my colleague with the microphone will come around. i will ask you to identify yourself and you're welcomed to make a brief comment but very brief, please, focus on a question and let us know who you would like them to chat with. why don't we start over here and then we'll go to barry.

>> yes, hi. is this on? >> yes. >> my name is steve brant. and my question is for -- excuse me, i'm a little nervous here. mr. johnson, you talked about the social purpose of financial regulation. there's a great 30,000-foot comment. in a world that should have both carrot and stick, i'm thinking of the social purpose of our economic system itself 'cause if the regulators are going to be socially motivated, how about the culture of what they are regulating being looked at? i mean, jim wallace just has a new book out. and he's calling for a national dialog literally on what kind of economics do we have? why do we have economics? you know, management people like dr. deming said the purpose of

business is to serve people and make money as a result. not to make money whether you're hurting people or helping people. so can you talk about the idea of getting at the culture of not just the regulators but the culture of the organizations being regulated and get them to look at maybe it's literally anti-american to make money by hurting people? >> i guess i would go two places. the first of which is kind of humorous. joseph stiglitz was holding a panel last year and they were talking about the problems of values. and he said, rob, how do you get these speculators like back on track? and i said well, they have to discover belief in the afterlife. they have to believe that somebody is going to measure them and there's something that matters. and that they can't escape detection or they can't buy their way in. [laughter] >> i think the -- that's the biggest -- that's the highest altitude --

>> that's the best regulator we've got. >> i'd say that you're really talking about a system and a purpose for a life and for a society. and at some level not adam smith 'cause if you read "the wealth of nations" he doesn't talk like this but some of the modern free market fundamentalism has tried to act as if -- excuse me, if you are in the marketplace you are therefore virtuous. and i think that's just -- that's an oversimplification of people like jim wallace have to challenge now and probably no better place. he's a theologian so probably no better place than religious and moral teachings from his work and places like union theological seminary. i know gary dorian has written a book called "soul and society."

i think examining the social gospel movement of the early 20th century and their sense of social purpose can help us what you might call -- have the conversation on values. how you pit that against what you might call the hubris of money and particularly large, large kind of money that others make. i think we're going to have to talk about sociopathology and bring some psychologists to the table too. >> we spent the time of the origins of the progressive movement and at the earlier part of this century. and very earliest part of the last century and there was also a similar discussion about what the purpose of many of our social institutions were and a look empirically at beginning to apply information and evidence to understand what role they played in changing people's lives. and i think there's much in that progressive tradition that can help them form again as we think about some of these questions.

all right. now christine we had in the front row barry, dana. >> hi, i'm barry with consumer federation of america. first, thank you both for your cogent and thoughtful comments. i'm really, really impressed. i'm going to take us down quite a far ways from the last comment. >> that would be hard not to. >> the idea that's sort of coming up very quickly with a bullet, if you will, in this arena and let's restored glass-steagall and the role it might or might not have played. >> i've looked at this pretty closely and i know there are people who have this -- what i have come to see a nostalgic view of banking. i'm afraid i have to come out with a conclusion that it does not make a lot of sense to reinstate glass -steagall. the main thing it allowed banks to get involved with securities

underwriting and there were 25 banks that were put into receivership in 2008 and none of them were significant players in securities underwriting and you look at a bank like citigroup and it was involved in securities underwriting but if the securities underwriting was a problem then we should have seen in their portfolios the dregs of the underwritings that they couldn't sell. instead, what we see is the aaa mortgage-backed securities that they kept and then they went out and bought more. so unfortunately it's a much more fundamental problem that is that they always could buy aaa securities and they bought ones which were poor bets, just poorly done and i guess they believed their own models. the second thing is, what we've learned over the last two years is that the most fragile institution, financial institution is a large financial

institution is not a bank because banks have two big advantages in terms of stability. they have access to the fed's borrowing window and first of all, more importantly they have stable retail deposits. and when you look at lehman and you look at bear stearns, what you saw was the only short-term financing they have are very sophisticated lenders, institutional investors lending them short term and those guys pull the plug very soon. so ironically if we were to tell city group now you can't do securities underwriting, we put that in a separate entity, that would be the entity that would be the one most likely to go under. and if it's big, unfortunately, until we get a new area of too big to fail, we'd probably bail it out. glass-steagall never applied outside of the united states. and in a global market now, you just know that would only take a new york second before people would figure out how to do this and france and germany and all

these other places. so my solution is twofold. one is let's not approve mergers allowing people to get bigger. and we surely have done a lot of that. and second of all, if we thing there's certain activities the banks are really very risky, we ought to have very high capital requirements for those activities. and then people can decide whether to do them or not. but unfortunately i think the day has passed when we can bring back glass-steagall. >> glass-steagall nostalgia or essential? >> compartmentization is was essential. when i worked for the senate banking committee i used to go through the hearings from those each years. glass-steagall wasn't great public policy. it was designed to cut jp morgan and company in half when they were in the the behemoth and that was industrial combat where other banks were looking to break jp morgan apart.

but more substantively i think there are two reasons to decompartmentalize. one is when there are conflicts of interest across departments. proprietary compartmentization and decompartmentalizing to not rely on these vague notions of chinese walls that's worthy of consideration. and the second is that which you have under the safety net by deposit insurance protection, access to the discount window, fdic guaranteed bonds shouldn't be used to subsidize some activities on the asset side like proprietary trading or derivatives market-making so i would think what we need to do in this architectural exercise is consider what's outside of the safety net, what kind of things can be subsidized and it's a very tricky problemw/p(p%

'cause if you just say throw the risky stuff outside of the safety net, when your safety net doesn't protect the real economy anymore. but this notion -- and i know paul volcker is saying i'm nostalgic in glass-steagall but i am interested in compartmentalization and turning the large ones, like you mentioned the four or five like you mentioned back into public utilities where they're serving the economy and serving society. >> all right. dana and we'll do one more in the back and then we'll need to have to close this down. >> >> thanks to both of you and a question to both of you and thanks to the center for holding this important forum. my apologies not to be at the 30,000-foot mark and i guess without getting into the weeds either but somewhere in the middle ground stipulating that

you're both -- that we agree that there's very serious flaws to the current american financial regulatory system, that they need to be addressed and the suffering as a result of these flaws. but also that the senate is battle-weary, that be dealing with healthcare. that its agenda is full of high priorities. that this set of issues is very complex. and that the forces on behalf of the status quo are strong, how do you make the argument -- what do you say to the senate that the time is now to address this, to address this in a serious way and in a comprehensive way. what do you say? >> next november people are going to relieve you of your job if you don't exercise your responsibility.

[laughter] >> there isn't anybody in the united states that don't think we need financial reform. now, the question there are ways. in other words, could we have cosmetic financial reform pretending to address the job and i think that's a very high likelihood fortunately because of those counterveiling powers you mentioned. but almost everybody -- when you talk to a senator -- i'm not talking in a public forum but when you talk to them privately, they know that something's rotten in this process and they know there's real major repairs. so i don't think you have to convince them that we need it. you have to help them see how we're have pressures rather than with lobbying with campaign money to get immediate reforms.x >> and i just want to add, i

think senator dodd's decision not to run is actually helpful to this process. before i think he was extremely sensitive to how everything he did played in terms of the public image or this. that's actually not particularly helpful to the legislative process. i think this is sort of like his swan song. he has a chance now to make it happen and i think he wants to make it happen. and he doesn't have to worry that, you know, somebody in connecticut is going to second-guess and, you know, sharp shoot him on every issue. so i think that's a very positive development, which should happen. and if i had to predict, i think exactly what rob -- this summer it will pass or maybe in september. >> all right. we had one last question. i can't -- yes, two rows back behind the last questioner right there.

>> just a question to go to what you opened with, talking about structured finance and the need to restart it. what do both of you suggest as the strategy to get structured finance to come in and play something similar to the role that was playing two years ago? >> well, i'll give you -- there are three points that need to happen. one is everybody needs to have skin in the game. and that's in the house bill. we can't have originators of loans selling loans to the secondary market with no risk of loss. because they don't have the right incentives to do the due diligence. second of all, we had this terribly complex structure on our balance sheet. and you see this in the investor committee. -- community. people don't want to buy this because you had second, third,

fourth tier cdo squared or cdo to the cube and we need much better disclosure. the sec can do much better on that. the third thing is, you know, a lot of investors depend on credit rating agencies. and basically we have a forum-shopping problem. as long as we have bond issuers choosing the credit rating agencies, investors don't have confidence in that. there have been a lot of proposals for more disclosure, et cetera, but mine is very simple. let the sec appoint an independent person for a day to represent investors and pick the credit rating agency and then let the market work. but as long as we have the bond issuer picking the credit rating agency and those structured finance -- those deals are worth 4 or $500,000 each for the credit rating agencies i don't think investors really are going to have confidence. and in the end that's the key. investors don't want to buy this stuff because they can't understand it and they don't

have confidence in the credit rating agency so you got to do all those three things. it's not saturate answer. -- simple answer. >> well, we covered an enormous range of theology and very detailed policy across a wide range of issues today. obviously, there are many layers more to go. let me encourage you to pick up the book, to go to the new institute for new economic thinking at the roosevelt institute and, of course, to the center for american progress at www.americanprogress.org. and also finally ask you all to join me in thinking our panel. [applause] [inaudible conversations] >> robert pozen is chairman of

mfs investment management and a lecturer at harvard business school and he served on the committee on improving financial reporting from 2007 to 2008. and was on president bush's commission to strengthen social security from 2001 to 2002. for more information visit bobposen.com. >> we're here tonight with steven levine, author of "putin's labyrinth." you talk about a culture of death. do you want to talk about that? >> sure. the best line -- the best way to understand what's going on in russia and what's been going on for the last several years is to look through the lens of murder. and what i argue is that under

putin, under vladimir putin that there is a culture -- a structure in which murder and death occurs with impunity. and it goes on with the indifference of the russian people. and i call that the culture of death. >> why does that occur? why don't the russian people know or care? >> they do know. but it's been going on for centuries. they've learned -- i track it back to ivan the terrible. and people are so accustomed to hardship in their lives, to death, to famine, to all kinds of -- all kinds of terrible hardships that we never encounter. so if there is something that happens -- something to someone very close to them to your relative, to your mother, to your aunt to your daughter you care. if it's a murder of someone next

door, of the village next door, maybe you could care but you don't care and you go on with your life. >> now, you profile six lives and deaths of six different russians in the book. do you want to talk about one? >> sure. what about paul. i think that's a good one. he's a good one because he's an aberration. paul was the editor-in-chief of forbes. the forbes russia edition. grew up in new york. his background is russian aristocrat. totally romantic about russia. he went -- he went back there thinking that he was going to live the life that his uncles, that his grandfather described as he was growing up. and what he found was the chaos of russia under yeltsin so that when putin became president, he cheered. he was a huge fan of putin and he described him that way.

in his articles in forbes. then when he was murdered, this was very dramatic. how could this guy who was such a fan of putin's be murdered? and putin himself in the other murders that i describe -- putin totally indifferent about these deaths. and even in the -- in his interview about the death of anna, another subject who i -- whose murder i describe, he was derisive about her. but with paul, he actually went to new york when he was in new york after his death -- he visited with the widow, and he expressed his sympathy. and what did this tell me and what it tells one is that the culture of death is bigger than putin. it's even bigger than pu