sloughgan, the motto is half of a famous latin proverb which everyone knows is let justice be done in the world. except what the american painter did was drop some of it. he did a picture of the chief justice of the stream court and said let justice be done. what was a tragic warning about the consequences of grand historical action is transformed into a belief, this can-do, let's fix things and everything will be finement i think you're right. i have to say i worry about many, about afghanistan, about iraq. i'm not so sure that everything was completely misguided in our response. in other words, i think that it is perfectly clear to me that unless one is prepared to fall

back on a clash of civilizations analysis which i think amounts to a kind of bigotry actually, a kind of essentialism and believe that, in fact, if our society just can't do it in which case the jewish state certainly, but also americans and others are condemning themselves to a pessimistic siege mentality. unless they are prepared to fall back on that i think the basic idea, the democratic faith holsaert in the possibility of political reform has to be kept alive both as a moral manner and a security manner. the irony of 9/11 is the right wing bush administration accepted the denouncing of the left. this was the root cause analysis that in order to get rid of terrorists and in order to do

that get rid of terrorism, and in order to do that you develop a society, and in the 70s, people made a career out of this. along came george bush, and i think with some measure of wisdom which i rarely attribute to him. i think that there -- i think there is some merit to that, and in that sense although i have many criticism of obama in the world, in so far as obama representing a continued faith of possibility of the reform in the muslim world, i think that's a very valuable thing. i don't think that's naive. the orthodox. well, i think that's a complicated manner. i think that there's something new going on there. yes and no, i think that there is a new legitimacy, a new prestige if you will in the any

orthodox extreme. i think there's a prestige to openly bigoted antiarab antimuslim arguments i mean, of a very classical kind. you know, religion has its dark side as well as its light side. >> why now? >> a mixture of fear of their surroundings and a feeling of strength internally about their own, i think, i think, -- again, the orthodox in israel can be as misguided and ugly as they wish. what bothers me is the extent of the political system to permit some of this to seep into places that really matter, that really matter. i mean, i worry more about this -- >> just a second. what's your take own this subject? >> well, i think in some -- we are talking a lot about

issues, and i think this is one of the most important, central subjects for the future of israel because it's not -- it's not a struggle about the border of the israeli. it's a struggle of the jews in the world, and what you have if you see those orthodox voices, and by the way, there are many other voices, you know, even the greatest policies of this generation a week ago and the rabbis shouldn't give them pens to write. there is a -- >> interesting. so they fight back? >> yeah, there is a struggle about what are we as jews here for? what you have here, you know, to go forward who always, you know,

who talk in the name of jewish law, when you know anybody who knows jewish law know that they have other problems and humane ways. the chief rabbi of the state of israel, and he dealt with this issue and said, you know, we should treat our knowledge as equal. there are two issues for me if i want to pin it down. there -- first of all, it's the way in which you talk the language of the weak from a position of strength. this is a horrible thing. some of this -- some of this hatred comes from a point of prosecution and suffering, ect., ect., but adopting the language of the weak from the position of the strength is lethal. what you have here is what i

would call the development of the ugliest part of our tradition. we had seriously other options to deal with. the second issue, and i think this is important for all of our government. the issue is this, what does it mean to be a jewish state? people hear, and you hear in the rhetoric is that this is a jewish state. they are taking our lens, taking our this and that, and i think one of the most important issues is the fighting of it in the nature of the state of the jewish state with the understanding, seriously, that the jewish state would not be justified as a jewish state unless it treats its minorities

with dignity and equality. i'm talking not that your kind of compromising on the jewish nature of the state idealed humane to your fellow citizens. you're compromising on the nature of the jewish state. if you're not, and we have a struggle, the struggle is that we have is about -- is about the future of jew dayism and coming in and us having wounds of state power, having the language of weakness for generations, and the other thing is to stand strong for what this means for us to be a jewish state, and this is an issue that we'll have to deal with seriously. >> now, you mentioned maybe if we want to talk about

lieberman. >> yeah, i want to ask what should americans know, you know, about foreign minister lieberman? we don't know him well here, and david, what should israelis know about sarah palin? >> is she jewish? [laughter] >> you go first. >> should we be afraid of him? weave seen right -- we've seen right wing members -- >> it's very interesting because it may be lieberman is the sound of the future. >> yeah. >> in many ways. look, it starts with the numbers, and i don't want to bother the numbers or get into

it, but the demographically israel is changing rapidly. >> tell us about that. >> now there's 20% of the population is up. a coat between palestine and israel, and it's harder every year, every time it becomes harder to somehow to live peacefully with both. there are pointed out they consistent of 10% and in 2025, they become 20% of the population. there is a -- the russians were -- they will become 8%, of course, and there will not be families

like that, but they share something very important, and it is odd, but it is the legacy of liberals, social democrats. they don't feel at home in this country or in this society. they have their opinion, and they know how to use it political pi. politically. it may be hard to explain. let's talk politics. he made it by a speech where he endorsed two things. in his speech he kaled -- killed at once the basic left and right. we spoke of territories years ago because everybody knows that if the gurs lem is endorse --

jerusalem is endorsed by the leader on the right, everybody knows what it means. a greater israel doesn't exist anymore, but we feel it, so what is that? it's now between jews and libberman that realize that jews in israel -- say something about what is jew in israel, but jews in israel hate or are open to an argument that israelis are a much more danger to them and deserve more hatred than palestinians, so the palestinians are out. they are out. israelis are out. they talk jewish, and so, so, you know, in a way, you know, you know, i told you this

story. i was in the covering the war in bosnia, and everybody said there are no jewish providences. and believe me, the only people who define themselves as israelians are the children of the im-- immigrant workers who want to join the army. you know this about third of the immigrants from the soviet union are not jews according to this, but they hate it enough to become jewish, so they are jews in this respect. they don't accept it, but the

general population is very, very integral to the family land. >> is lieberman someone to be afraid of or another hard right politician who once he's prime minister will be domesticated and call into the pattern? >> this is a tough question, really. what is different that he has no movement, but he has, but he has a group which votes, i believe, by about 80 or 85% for these parties which i don't think is quite israeli politics, not the most ethnic parties that die after two terms, and he managed to survive, and young people are attracted to what -- young people are attracted to what he says and what he says. he's not a right winger in the old sense of it. for example ring he's ready to

-- for example, he's ready to evacuate territories. he's ready to be very, very generous about regarding the quarrel between the palestinians, but other times he provokes palestinians because he understands there is a big big problem. i interviewed a member of lieberman's party, and i decided to go to his home, and i didn't ubs, and i found it out and proud of the color -- >> i just want to say something following nahum. all of these extremes always fluish in the mainstream of the center.

you know, we have members of three parties and our government. we have great people and actually genius, and they belong to three parties. [laughter] well, you ask yourself, you know, the country is in really trouble, its identity. you have the israelis wanting to be a democratic state, not a jewish state. they want to be a jewish state, and then not a democratic state. they are divided about nothing. rather than getting together, and i say, i'm agreeing with them, because there's great people on both sides, many good

people, just get your act together, and before it's going to be too late, and by getting your act together is astounding the nature of the state of the jewish democratic state in a genuine way and not letting the extremes control what we are, and this is what you see is the old rival ris about nothing that can want unit or feel -- unite or feel there is a demographic transformation, and, you know, let's not generalize. they have variations in them, but if we have a mainstream that can say look, we are facing a completely different situation, let's get together to define who we are as a nation, and then, you know, the public education, other issues that are -- so this just is --

>> david, what should israelis know about her? is she good for the jews? >> i'm imagining her and lieberman on their way there. the first thing you should know about is she's attractive and one of the things a book publisher discovered is it's good to offend liberals and they buy the book. she's really good at that, and therefore she is one to follow especially those with high school education degrees, not so much with college education degrees. she was in the media, and she's not cared by the government. she herself, is a big media figure, but so many people have come up to her say you should be president.

you see the seduction process happening. she's thinking about it. she won't be the republican nominee. most think she's not qualified to be president, but the republicans have changed their primary process to stretch it out. it will be hard for someone who is against the establishment to win. they make it like a political process. she will not be the republican nominee. mike pence is more than likely to be than her. she doesn't have the rigor to understand that process. the movement she's the figure head of is here to stay. the tea party achieves norman rockwell ends. they start with a radical method, but they want a basic, wholesome america. if you talk a tea party person, the typical guy you run into is he was in high school working hard when nobody else was

working hard. he majored in accounting, got a job, doesn't love it, bought a house he could afford when their neighbors bought a house they couldn't afford, and then it blows up. he played by the rules his whole life, and see the people who didn't play by the rules in his neighborhood or in wall street getting rewarded while he's getting screwed. that's the essence of the anger. he wants an america where responsibility is respected and rewarded. i completely sympathize with that. my problem with the tea party movement is the radicalism, that there is a disconnect between the policies they live by and support, and the ide yolings they surround themselves with. you can define a conservative by which year they want to go back to. i want to go back to 1965 and that's fine with me.

they want to go back to the articles of the federation or the constitution. in practice, they don't, but they have an ideology in compromise that avoids the issue. the governing choice has nothing to do with the reasons they give themselves that they are there. >> well, what's going to the happen in the near term is you have a bunch in congress, and i met with enough freshmen there, but what you heard is about representative. they are smarter than people thought they were. a lot of them have served in state legislatures and rarely have so many freshmen be professional legislatures. these are not yahoos. they care about government being out of control. they don't care about cutting deficits, but spending. they've been in seminars over the last few weeks and experts from the heritage foundation and

elsewhere say you care about spending, but do you want to cut medicare? no the defense budget? no. well, if you want that, here's everything else you basically have to wipe out the rest of the government, and the answer in those seminars has been, fine, let's do it. so, people who care about foreign aid just real worried, and so that -- they've been assimilated in the short term into the republican party, and it is a let's cult, let's cut. >> president obama gets 40% in israel, and sometimes you see less. certainly the least popular president in a long time. why is that? >> oh, before we get to obama's popularity in israel, there's a question of obama's popularity in the states.

there i just want to say a few things to amplify what david just said. i think the first thing to be recognized is at this point in the history americans are in no position to give lessons to israelis about the quality of their politics. i think that our politics are in an exceedingly volatile moment. i think the hostility to government you just described is not just an ideological position in the sense that i think it is the kind of fever, and i think that hostility to government is a very dangerous feeling. i mean, we had the debate between the federalists and antifederalists a long time ago and the antifederalists are now coming to washington. i think there's also a fundamental symmetry between the republicans and the democrats in the following way. i think we're at democrats, obama at the head of them, generally prefer to ignore or

insult or squish the radicals. the republican leadership has actually decided to hitch a ride. i don't see any real resistance on the part of the republican establishment to the tea party or argument on the merit of the particular things, but there is ways the republican party decided to let its extremes lead in some way, and that has to be noted. that's a very significant development. i don't know exactly how to understand # the politics of our country right now. ..

2008 was an optical illusion in that for reasons that are possible to understand but not reproducible, that not reproducible. i think what concerns me now and then we can get to obama and israel and then of course you have this whole gang of prevoyance about who barack obama really is.

that is a tiresome game because the president should make it clear to the population who he really is. but is he and lady phyllis or realist or coming to the ambassador from a better future, is he trying to take us to a higher level or does he think he was elected to make the best backroom deal and we are all in the middle of this game of trying to read the mind of this man and so this ads another level of confusion and volatility to our politics right now. plus there is of course the economic situation plus we have our own we still got xenophobia. we are not in this by any means there is a profoundly xenophobia string and an american life right now. there is a lot of dread in this country and one of the things is

the israelis worry about america losing its sense of greatness i think that's right. there are many reasons and then i will conclude i think that one of the reasons we are losing our sense of greatness is we are allowing our obsession with our economy however awful to stand in for our entire sense of ourselves, historical and globally. i think that an economic analysis of life, the mind of the analysis of america and america's tradition in the world is never the whole story. when an unexpected strategic opening just opened to the united states in east asia for a simple, when the chinese overreached they are set to overreach, just beating the way they behave. when they overreach of a sudden our whole collection of east asian countries basically

realized there was a basis for the new relationship or alliance with the united states. all of this happened despite the miserable economy. and so there is a way in which the autonomy is not all we need to know and strategic position and national self-esteem which is subject to be is a very powerful force in history, very powerful force. i mean you can correct it hysterically and so on but the sense of ourselves and our place in the world cannot be allowed to be determined only by our analysis of the troubles of our economy. for all these reasons i think america shouldn't sleep that well. hismelt i will let you answer the obama question. is that his full, israel, nobody? why has there been this relationship between him and israel?

>> that is something mentioned in the conversation. i think it's not really about the proposals he actually freezes. it's about the message he doesn't generate and he made a mistake. you have to pay dues to the israelis. that is a very bad pilgrimage. he should have gone to jerusalem and i think should have stuck to the israelis. your concerns are my concerns. the president made the bold proposal but i think he has a good chance of being elected and

it was about the cents with the people and their concern is real. i think you can compromise a great deal, but don't take lightly the future and the concern of people about the future and its security, and if you didn't do that. there was another thing he tends to do. my mother and myself we don't share the same policy but she said to me i don't mind giving them jerusalem but don't tell me that i started. people do not like to be blamed. the left is a position of guilt

and the farther your guilt goes if you are not guilty at all to moderate less. now, that is a big mistake so i think is a genuine trend that is the very basic human aspect of addressing and not playing this kind of overall ego of the conflict. those are two things i think will be -- >> in the middle east you can actually say anything to the israelis if you first make it clear you know what neighborhood they are living in and you say anything to arabs if you first make it clear you really want

them to succeed, you really want them to succeed. >> we have to take into account that the israelis like to american presidents who knew how to help israelis boost but the outcome -- and in many cases we didn't deserve it and for the market process this is the fact. now, cairo speech was a mistake

and interviewed them after the speech to make the reporters and was the only one who didn't belong [inaudible] there is a kind of sometimes speech and interview and i told them the equation between the hardship which the palestinians suffer and obama is not a member state, it is a destructive and it will kill obama and israel. people who get them as another

job if you want and so i don't have the freedom to say what they say that the big disagreement. the fact is it seems then you find a way to heal this kind of feeling. now, i believe the dimension obama is not playing by the political move which means he was developed after the elections he didn't -- he has not done you never approach the

israeli public in a way which can really -- [inaudible] give an interview to each interview no trauma, nothing. so this guy who knew how to swallow and it will remain like this a long and dangerous path because iran is an issue and the palestinians are the issue and -- would like to have 50% of the israelis.

[inaudible] i grew up in the wing of the jewish community in new york where the phrase was at yiddish, the yiddish, at british, which means we are not -- we don't dillinger other we love each other, we are not touchy-feely, and obama is like that. stick with obama as long as he doesn't touch you. he doesn't touch you. he doesn't believe in shakiness, he doesn't want to do the cheesy jester so get over it. >> the second thing i would say in the middle east is most obama policies come down to his confidence. they tend to be extremely confident. he said the new standard. i believe in 80 years the word obama will be the unit of measure for self-confidence. 20 obama's, so all these other

people didn't solve the middle east but i can. and the people around him so that is the second thing. the fair thing to know about him is that every white house i've covered is more centralized than the last and this one goes a little further so the mistake he made with the parallel and -- he doesn't rely on the whole bunch of people. he did himself so he said it, that is the problem of centralization. it is fundamentally not a problem of alana younce, a fellow feeling toward israel. if the leaks show anything it shows the administration is tough on iran and other issues so was not a substantive problem. i think the substantive difference between him and push on the big issues is less than it is appeared. >> we have to get past the question of his personality because i think that there are deep strategic realities that have to be addressed that he represents whether or not he

recognizes them and there are also certain ideas for example to me whether osama bin laden succeeded in drawing the united states into an unprecedented central engagement with the muslim world that was going to have been. after we invaded afghanistan and iraq with the united states having hundreds of thousands it was inevitable that the american president would turn to some sort of not just focused new relationship to this thing called the muslim world and we know it doesn't exist but we will use the phrase. most american jewish supporters of the war in iraq and supporters of israel or under the illusion that when bush attacked iraq and overthrew saddam hussein said this was a beautiful harmonic convergence of the interest of israel and the interest of the united states. in fact, what it meant was the israeli-palestinian conflict

would become more of a liability to the united states in the region than it ever was before and not only in the region, but around the world. so for example, when obama goes to jakarta and the time supports that from the parliamentarians to people on the street when he asks what is the main problem he's told palestine. analytically we can say we know palestine has no impact upon the price of eggs in jakarta. but again, the fact that in jakarta, so i think that the israelis have to understand that america is now at the beginning has begun a long period of the engagement and immersion in the muslim society and states and that this is going to complicate the american israeli friendship and it is strategically inevitable. now, having said that the question is how has obama chosen to make this engagement and i think one way to describe this is his foreign policy is the

first american foreign policy after multiculturalism, and what i mean by that is obama decided that in order to correct the negative image that bush gave the united states was more grand he would offer a more positive and affirmative and accepting form of engagement to the various muslim societies and states. the problem with that, the problem with that and use all this in the cairo speech is that this kind of acceptance is not received in the various arab society as anything but an affirmation of the societies and as they currently exist. so for a simple, when obama goes out of his way to address muslim society in the religious terms, to invoke the koran on all of this is fine at some humane moral level, but in touch with the muslim world needs to hear from the american president is a

secular message played the muslim world does not need the american president to address them on the religious terrain and the second consequence of obama's kind of engagement as a consequence of these strategic realities is that it turns out that engagement usually means 66 he thinks he's accepting society. but he is accepting our regimes. but he is accepting his regime's and you see this in the dissidents of the human rights policy, you see this in with which he and sycophant clinton, anyway, you see this in the warmth and there is a confusion being made as a consequence of this warmer -- obama believes that he is the man from the future. he doesn't like to meet century. he's the man from the 21st century. he stands for new thinking, and

our political questions now are in frenzies of new thinking. everything is different partly because the internet and partly because of gullible as asian but all kind we know. in fact everything is not different and it is for the real strategic question now not just for obama but for the israelis is what are the continuities and the discontinuities? it cannot be everything is new. what obama discovered in the palestinian conflict is that it is incredibly 20th century conflict and it's incredibly stubborn that there are 20th century in certain ways is going to to go into the 21st century. >> we want to take a few questions from the floor before we break for dinner so let's keep our answers and questions tight so we can get as many people in. >> you stated that israel needs

to treat the minority and by assuming you mean the arab minority with a quality and respect and liking that israel doesn't. so to facts, one, the israeli arabs a vote and have representatives some of them participate in flotillas and the like. every time there's a controversy they raise hamas and palestinian state flags. my question to you is this. if israel were to build more roads and schools, but they raise the israeli flags? >> it is a very important question. >> it's important to raise. they took seriously the

treatment of the other minority as a genuine equal partner. there, ministers have been second. the best, nothing. i don't mean formal recall the which is a great thing actually and very admiral. i don't know what other democracies would do given the situation. but this is not enough. we are talking about equal rights housing, all that stuff. we have established 1 cents 48. with a great demographic growth. now you ask me if israel would

grant visas it doesn't do them a favor. would they change? some of them. this is not one [inaudible] i don't remember, it was like 90, i don't remember the number but the era is really don't for the direct elections. now i see the situation as follows. the leadership of the arab israelis are playing a dangerous game because they are not representing themselves anymore discriminant minorities but a minority vendor occupation. it is a dangerous game.

and they dismantled the nature of israel as a kind of nation state. but, you know, this is not capturing the whole arab-israeli sentiment. you know, many arab israelis want to be israeli citizens, and by the way, it will be difficult to expect them raise a flag. it's fine. if we want to crash we are going to create a cultural war to read the have to abide by the rules. they have to be large citizens of the country first of all, and i would say the following, the arab leadership is failing by integrating its new rhetoric and political goal if we actually isolate their community from the rest of israel.

we are saving by not genuinely and raising them as equal citizens etc., and the one of reading the fruit of that and that is what i would say. i would say the following. this is a very delicate fabric, very delicate, and if you push it then you'd see the policies that then create a reaction that can justify more caution. we have seen that in history. we are strong enough to increase them as equal citizens and strong enough not to allow, not to allow their political leadership anything that has to do with actually genuine disloyalty on the genuine basis for israel for what it is coming

and that is what i see. >> i think the question actually raises a larger issue you are addressing that is relevant to american foreign policy in certain places and that is the question of what is the relationship of standard of living to identity? in other words, if identity -- can you take a national grievance, national sense of injury and by means of economic and social development, can you actually raise eight? now, we are trying to do something similar in afghanistan. when you look at what our counter insurgency is a significant piece of it is basically a material analysis of political identity to be to improve the group's life and modernize them, etc., and what worries me is first that identity is not only determined by material factors. in fact it is usually determined not by material factors, and the

most dramatic example of this actually is the zionist one when ugonda was proposed before you will propose that the affluent jews who live in conditions of material prosperity were prepared to take the deal the russian jews who lived miserable lives in the settlement who need of rescue and relief more urgently than any they prefer to wait for arab-israel. for me that is always symbolizing the problem that you cannot use economic development to be answered fully the question of who people think it is and what people want. the question is the smart thing is first not to alienate the symbolic matters to respect their own sense of their own, to recognize the incredibly

difficult position that the birth of the palestinian nationalism after the 67 war, the difficult position of which it plays arabs because the israeli arab identity is a very enflamed thing now because there is israel to one side and palestine to another. right now i think that as was said that the attempt the cultural war should not be provoked. that is the first thing. >> please, with the beard, i can't see. [inaudible] >> i do have a comment. >> i just released as you know that a brookings yvette and you have some of the information and part of it is on actually identity and on ever citizens as well as the jewish citizens of

israel and there are two things that are clear. one is the onset of economics is right, that it doesn't seem to matter how much money you make or your level of education on your identity. that isn't much of a major factor. it does show on one thing. the vast majority of arabs and israel do not want their town to be included in the palestinian state when there is a palestinian state. and the number one answer is economics actually. when you break of the demographics to figure out what explains their attitudes and the differences christians, muslims, that is and variable, but by far, the most important. that explains its vision among them is something completely different. whether or not they have relatives who became refuges in 1948. and in that segment, they've

broken almost half of them have relatives, half of them don't. and if you differentiate those two groups would be astonished to see the differences of attitudes almost every single issue including identity and that leads me to believe it is impossible to address that before you have a solution that incorporates the state of palestine as a refugee issue. it's impossible to address that matter what you do internally. >> i want to get to the issue of the orthodox society and you touched on it very gently the issue of they're adamant and i wonder if there is an unholy alliance going on and i would like the opinion of the panelists to read in the old days you have people like the rabbi, when it was run by him in the 70's when he wanted to integrate the russian jews who came hundreds of thousands

massed converting them and just did it like a bulldozer and no one seems to remember, he just did it. now the chief seems to be hijacked by the ultra-orthodox and the unholy alliance seems to be between the one side, the secular on the other who don't like him for whatever reasons they don't seem to care, lieberman to play off the orthodox to restore the grievances of his russian constituencies and therefore the metal has been decimated of people who actually saw the chief as a way to integrate its release and be alleviate the hostilities of the past and it seems to be exacerbating them and also between israel and the diaspora. i wonder if you agree with that analysis and you see any hope of taking it back from the ultra-orthodox to say the diaspora relationship and further exacerbate internal

tensions. [inaudible] question of conversion between israel and the jewish community, is there a major problem i believe it is the offense or insults or very important groups in the american jewish community by treating their conversion forces as oster year to the terms of the israeli. now regarding israel there is one can look at it as a miracle. more than 300,000 jews subject who immigrated to israel and lost return according and you

don't have many strangers about the marriages and about the jewishness, you know why? because it doesn't matter it matters only [inaudible] so we can go for a week, get married, and that is a lot who are completely 100% to prefer and they go to the same group and the range marriage in a few hours, so to the surprise of everybody, the former soviet union are big enough to swallow this kind of difference so we don't have the scandal. at the same time it is crazy because you have people who are

considered by themselves and by everybody else has you to go to churches on sundays and other secular there is no difference and still it is written in the card as something that is an insult. >> so, i'm going to let everybody pursue the questions individually with the panelists. thank you very much. [applause] >> let me thank you, tom, for doing a wonderful job. i know shakespeare would have been proud of all of you. thank you for extremely rich intellectual diet [inaudible]

in the shakespeare library. thank you very much for the great session. terrific. [applause] [inaudible conversations]

>> well, to the press conference

following the regular quarterly meeting of the shadow financial regulatory committee. we had seven members at the table. let me introduce them to you. on my extreme right is bob, chester, onto my left, charles calomiris of columbia, can scott at stanford, i'm george kaufman of loyola. and we'll follow the same procedures went in the past. we have five statements. will have someone review the statements and after all the statements are read we will open it up to questions from the audience. the first statement, statement number 300, 300 statements. years ago people thought we would never get past 10. and so we are very proud of still being alive. [laughter] >> and king will talk about the principles under the dodd-frank- act.ct is

>> the dodd-frank act is on ity an everyone's agenda in thes y financial community.ments and certainly influenced hours as you will see from the statements today.ct's one of the act, many over assignments or the revelatory committee is to develop procedures for recognizing and allocating losses systemicly important financial institutions. these are called in the shorthand of washington, d.c., sfies. the dodd-frank act to its great credit recognizes investor understanding endgame how a insolvency will be resolved influence as firm's appetite for risk. and if the authorities don't change the understanding of existing rules which means changing the rules to begin with, higher capital requirements, which is the solution everyone is trumpeting around the world really can't by themselves

end credit or perceptions that in most circumstances systemicly important financial institutions are just going to be economically, politically and administrative, to difficult to fail and unwind. that is what occurred in this crisis and what is occurring to a large extent in europe now. the current financial crisis really underscored the particular dangers of the business plan these existing wind up rules have made very prevalent in the world and that is to follow a, have a highly leveraged institutions that funds assets that have relatively long maturity with funds that are much shorter in their duration. so this business conditional on the widespread understanding but if we don't have plans existing and practiced, for

winding up complex institutions, then they probably won't wind them up and instead they will just bail out these firms when they develop significant financial losses. so our statement tries to set forth three principles that we believe as a committee ought to govern insolvency resolution procedures if authorities are going to succeed in rendering this understanding of the bailout reflex if you like, inoperative. our first and overriding principle, resolution procedures must have a number of probsts. one they must be credible. two, they must be rehearsed and practiced so you discover what might go wrong. they need to be predictable outside the regulatory community which means they have to be widely publicized. credibility requires that authorities acknowledge the beginning which the act does not really acknowledge, that

insolvencies will occur from time to time in sifies and the cost of resolving these insolvencies are seldom going to be zero. that would be nice if they although quick action can stem the ultimate cost of a bailout the dodd-frank act introduces some for very good reason three-part series of potentially time-consuming checks and balances. these checks and balances are designed or aimed at strengthening a failing firm's due process rights. our country is always interested in checks and balances and very much a tradition of the united states. but before an institution can be subjected to the act's special resolution procedures, the federal reserve and a specified other federal regulator, fdic for banks, the new bank

insurance office, the new federal insurance office for insurance companies and then there is, the sec for securities firms. so, the, this is the first step. and, then, so that the, this team of regulators must jointly recommend that, to the secretary of the treasury, that the firm be put into an fdic-managed receivership. then for the recommendation to go forward, the treasury secretary, after consulting with the president, must undertake a number of specific determinations about the condition of the institution and the benefits of putting it into this special receivership. if and when there is no time limit on what, when the secretary has to respond, if, the, the secretary decides to support the recommendation of the regulators, the consent of the institution's board must be solicited. and if they refuse, then the

treasury's decision and findings undergo a nominal 24-hour judicial review. until we've seen this thing in action it's hard to be sure how long or how long this process might take in difficult cases. it's clear that the last two steps could be traversed quickly but the agency's, in the first step because of different missions and different clienteles might have some difficulty reaching agreement. it might take a while. of course we understand that while this process was unfolding knowledgeable counterparties may be expected to take action to improve their position in the receivership at the taxpayers expense. it is important to keep this at the same time, the systemicly important parts of the firm operating. that is why we have the problem of putting it into

special resolution procedure. the second broad principle is the cost of keeping these systemic, the important parts going should fall as far as possible on the firm's stockholders and creditors. we want to minimize the cost of taxpayer help. this means that the receiver ought to be required at the outset to impose preliminary haircuts on unsecured creditors and stockholders of failing firms. appropriate haircuts should be inflicted on all uninsured claimants regardless of maturity, appropriately is carefully chosen word but a strategy of favoring short-term debtors in the initial process would end up encouraging short funding strategies that created the trouble in the first place. we want to be very careful about anything that provides that favor. now in resolving the losses at the receivership or bridge institution experiences the priority of creditor claims should be respected.

when the treasury is reviewing regulator's recommendation, a scramble for liquidity could occur among the various creditors and counterparties motivated by uncertainty just how deep the insolvency is and this is clearly a legitimate concern and we believe that scram he will abouts can be mitigated by giving the receiver a limited ex post right to reverse transactions that can be demonstrated have occurred as part of the scramble or by capping individual county party losses in the resolution process at a specified percentage. politics will determine what would be done here. then we also maintain that it's important to recognize that whatever funding or credit support the fed and fdic provide to a receivership, or bridge institution, is a tax expenditure. it commits the government to spending money, spending taxpayer money and the

government supports decisions to levy any kind of ex post assessments to fund these reports are forms of fiscal policy so it is misleading to suggest they're only a province of the fed or the regulatory community. now because sfis are likely to be global institutions with positions in many countries, u.s. strategies have to be coordinated specifically with other countries. our third and final principle specific international coordination of country resolution plans is necessary to limit regulatory arbitrage and cross-country scrambles for the good assets of failing firms. no we see in europe today the absence of cross-country loss-sharing agreements is greatly aggravating the financial stresses that european, that europe is undergoing, thank you. >> thank you, ed. our second peek doctor

speaker is talking about federal reserve lending programs through the recent financial crisis. bob?. >> thank you, george. as many of you are aware the federal reserve has just released a week or so ago detailed information on many of its financial rescue programs. this was not a voluntary release of information but actually a release that was mandated by requirements under the new dodd-frank acts. the information covers trillions of dollars of loans and over 21,000 individual transactions. a very voluminous set of information this is mandated the release of information. the thing about the data it really suggests how

wide-ranging and deep the federal reserve's lindhing programs and financial support actually was. it surprised many people about both the breadth and depth of the programs. and in particular who received the funding. it was quite surprising to see the amount of loans and funds that were channeled not only to the foreign subsidiaries of foreign banks but also to foreign governments in some cases and other entities as well, both foreign and domestic. the fed not only engaged in loan purchase --, in loan programs but also in significant asset purchase programs and loan programs to support asset purchases in an attempt to revive and stimulate the asset-backed commercial paper market and asset-backed markets more generally.

while the committee endorses and actually applauds the release of this information, at the same time, if you go through and look at it very careful form it really is not sufficient to allow to assess the full impact and implications of the programs that were put in place. to address these issues and a lot of the questions that have been raised, the committee really urges that we create a nonpartisan, independent group of financial experts to go in and organize the data and conduct the forensic study similar to what was conducted in the lehman bankruptcy case to see what lessons we could actually learn. there's a lot of questions that have been raised in these data that deserve careful scrutiny. for example, what were the true costs of these lending

programs? who got the subsidies and how big were they and how were they distributed across the various parties to the transactions? what was the market quality of the underlying collateral? and finally, is there better ways to have structured the programs such that the both the interest of the fed and the taxpayer would be protected and perhaps to assure that the taxpayer received a portion of the upside gains in associated with some of these programs? many of the beneficiaries quickly returned to profitability and are now engaged in activities to distribute handsome bonuses to managers, just to mention one issue. the purpose of the study is not to conduct a witch-hunt but rather to determine what kinds of lessonsed learned might better able us to deal with the next financial

crisis because most surely there will be one that occurs at some point down the road if history is any guide. and we think that under the circumstances the lessons learned are important and deserve significant amount of attention. and probably the most important thing that should be assessed is what was the true costs of the subsidies, and the amount of the subsidies? that has gotten lost in the discussion of the various programs with particularly policymaker's emphasis on the fact that the taxpayer didn't lose a dollar. yeah, the taxpayer may not have lost money in connection with the loan programs but there was substantial support given and those, those subsidies, need to be quantified and evaluated. we think that this would be, in society's interests and most importantly we think that the federal reserve should embrace such a study because it will be critical

to insuring not only its political independence and but ability to conduct monetary policy in an unconstricted way in the future. thank you. >> thank you, bob. our third statement is statement of testing the federal reserve's role about stress testing the banks and how we'll stress testing the stress store. -- stressor. >> thanks, george. as george pointed out the fed is familiar with stress tests but usually on the giving end rather than the receiving end of the stress test and you might even say the stress from being tested. stress tests are all about thinking through scenarios that might result in the insolvency of a financial institution. so it's interesting to ask what kind of scenario would result in the insolvency of the federal reserve? and secondly to ask, why would that matter if the fed became insolvent?

so this statement tries to address those two questions. the main reason that the fed is at risk of being insolvent on a market-value basis, is that the fed has a large amount of interest rate risk embedded in its portfolio. that is, its holding of long term assets compared to its short-term liabilities. based on rough knowledge which is what is available of the composition of the fed's balance sheet, prior to the qe2 purchases of medium and longer term instruments, about a 50-basis point parallel increase in interest rates of all maturities would probably result in a market value insolvency of the fed. that is a half percentage point increase.

after qe2, with an increase in the maturity of assets on the fed's balance sheet, it might be about half that amount. so you can see the insolvency of the federal reserve on a market value basis is not a low probability event. interest rates just over the last few weeks have gone up many basis points, so that an increase prospectively of 30 or 40 basis points is definitely in the realm of possibility. now the fed is not required to do its accounting on a market value basis of the its existing portfolio. so the fed doesn't have to, as we understand it, actually call itself insolvent, except if the fed were forced to sell assets, that were below market value in sufficient quantity, and recognize the losses on

those assets, then the fed would show itself to be insolvent. and so that illustrates what we think the main risk is. if the fed wanted to sell its assets in large quantity, remember with qe 289 in place they will have a little bit more than two trillion dollars in assets which is much more, precrisis the fed had less than a trillion in assets. the fed want to sell 500 billion or up to a trillion in assets, that could entail recognizing a huge amount of loss since particularly about a trillion of those assets are mortgage-backed securities which would not be easy to liquidate. so the point of course is, if the economy were to surprise on the upside, if the historically low money multiplier started to grow dramatically making the fed want to contract its balance sheet, and if interest rates were rising as they might very well do in that upside

scenario, the fed might demure from selling its assets and contracting the monetary base precisely because doing so might make it insolvent. we think that this is a risk worth thinking about and doing something about. i want to recognize that the fed has already mentioned that if it wanted to contract, that it has many different options. so let's explore those. the fed of course in separate from contracting its balance sheet and selling treasury securities, the fed could engage as it has proposed in reverse repurchase agreements, perhaps with money market mutual funds. those however have been brought into doubt by various market participants, especially on the kind of scale that might be necessary. the fed could also raise interest rates on excess

reserves to encourage banks to maintain high balances of excess reserves to keep the money multiplier from growing but that would require creating cash flow problems that would exacerbate the potential insolvency of the fed. the fed of course could also just raise reserve requirements. doing so would competitively disadvantage american-based banks and there are significant risks associated with that kind of a discrete change in reserve requirements. so we think there is a significant risk that if interest rates were to rise substantially and the fed wanted to contract, that it might simply not contract and allow inflation to take hold. that is the inflation tail risk associated with fed potential insolvency. what could be done about it? well the fed should move as quickly as possible to restore its traditional

historical maturity structure of shorter term maturity assets. one possibility would be for the fed to swap long-term debt for short-term treasurys with the u.s. treasury possibly. another possibility is to swap its mortgage-backed security portfolio for shorter-term treasurys with fannie mae may or freddie mac. we think this is an important problem and should be dealt with prior to the potential risks of a positive economic surprise and an inflation risk. thank you. >> thank you, charlie. our next speaker is dick herring. on the case for the appropriate types of convertable contingent capital. >> thanks, george and good afternoon, everyone. in the recent crisis we learned that the basel framework is virtually totally inadequate. it became clear that the quality of high-quality

capital, which is basel speak for equity, had declined remarkably and was totally inadequate to absorb losses. we learned that the risk-weighted denominator was not a good indicator of risk and we learned that the minimums, whether you looked at them in terms of tear one or tier one plus tier two were entirely inadequate to safeguard the financial system. indeed in the case of every major failure you had the unhe had filing speckel of the spectacle, primary superivsor are were truly puzzled how it could have happened because in the last reporting period the firm in question had far above the average capital and far, far above the minimal requirement. the result was in the end the market simply ignored regulatory capital and focused on tangible equity. basel iii is all about

trying to restore confidence in the system and a lot of it unfortunately is going down the same well-trodden road to nowhere. they're trying to fix the, some of the more egregious errors in the risk weights but most of basel iii so far is focusing on having more and higher quality capital. and they're going to do it in several different ways. the capital which had once been 4% equity under basel i drasted down to 2% after serious bank lobbying over the years. they're going to raise the minimum what has now become 2% to 4.5%. in addition to that they're going to add a countercyclical, i'm sorry, they're going to add a capital conservation buffer that will be about 2 1/2%. and then there will be a discretionary counter-cyclical buffer, and

this one is very unclear but it could range from zero to 2 1/2% and there is still the possibility of although not for certainty of an add-on for systematically important banks. incidentally dodd-frank requires that in the united states but it is not yet accepted in the world of basel. so in the end we might look forward to a ink withing system -- banking system that has possibly 10 to 12% equity capital to risk-weighted assets for the large systemicly important banks. that of course doesn't materially address the inherent flaws but at least it will abetter capitalized system. the dodd-frank act mandated a study for a new kind of capital, a contingent capital requirement, which is commonly known as a coco. this would not be a substitute for equity but a possible addition to the regulatory tool kit. the committee believes this

would be a very important addition to the regulatory tool kit and could have an important impact on the incentives for risk-taking and could actually motivate managers and shareholders to correct whatever problems a firm is having long before it becomes a disaster and there is little to do but intervene or close it. the idea of cocoes is not a new one. it has been around for at least 10 or 15 years. the ideas for cocoes can be four key parameters. what is unusual the choices we made among those parameters. and we think they're all important. the key parameters are the amount of cocoes a bank should be required to issue. second the trigger under which the cocoes would be converted into equity. the third the amount of that

would be converted when the trigger is reached, is breached. and then finally the price at which cocoes are converted into equities. now of course these parameters should be specified by the regulators and the aim of giving the bank a very, very strong incentives to take whatever corrective action it needs, whether it is raising additional capital or changing its business plan or restructuring before they hit the trigger. and that's, i guess the theme that is really quite different about our vary ant of the proposal. so we have the following recommendations regarding these four parameters. first with regard to the first parameter. the amount of cocoes should be sufficient to cause very significant dilution to shareholders if the conversion is triggered. and we think that 10% of the

quasi-market value of the bank's assets would be about the right amount. now the quasi-market value is an important departure from the traditional practice. the problem in valuing a bank as you all know is that we can't market to market. we don't really know. it's an odd mix of mark-to-market, fair value and book value accounting and so the best you can do really is to infer what the market value of the bank's assets are from stock market estimates which represent the equity value, and contain a measure ofistic -- of risk, incidentally and add to it the face value of liability. we call this our quasi-market value of assets. and what we want to focus on as a trigger is the ratio of the, the amount of equity relative to the quasi-market

value of assets. now we realize that stock market prices are very noisy and that if you simply left it at the closing price on an particular day, you would create all sorts of problems and leave institutions vulnerable to raids by creditor hedge funds. what we'd like to do is to suggest that the quasi-market value of assets and indeed the quasi-market value of equity be subject to a 90-day moving average. so that it would have to be a very stained -- sustained decline something like the flash crash which would disappear. this would be something more likely to reflect true asset values. moreover, we think the trigger should be set high enough so it is really capturing the market's view of the future earnings value of the assets rather than some gamble on a bailout.

this differs markedly from all of the other proposals we're aware of because they're all based in one way or another on the book value of assets and this clearly does not. we believe in, second, that the trigger for conversion should be breaching a fairly high level of, of, market value of equity to the quasi-market value of assets. and we think 10% is just about the right amount because it is roughly equal to the amount of equity that is likely under the new scheme. this trigger has the advantage of giving you a fairly clean equity price but most importantly it comes early enough that the institution has plenty of options for either recapitalizing, selling assets, or restructuring in some other way, even changing the business plan.

and so it should motivate the managers who will fear dilution and shareholders most of all will fear dilution, to take measures before they reach a point at which it is difficult to take corrective measures. then finally, third, although not finally but third, the, the amount converted should be the full amount of the issue. some, proposals say that you should only bring up to the amount. we have a very different idea in mind. we wanted to be so large an event that the dilution itself will be a strong incentive. and, that means that we would like the full amount to be converted if you hit the conversion point. our hope is of course, that the fear of hitting the conversion point will keep you from ever getting there

but if you do you will hit the conversion point and that will mean that you're going to have a lot of disgruntled shareholders who can badly diluted and you will have additional new shareholders. it is almost certain that management will change and you will have, we may even restore market control in an area where it is virtually dormant these days. finally the conversion rate. and our view is the that the conversion rate should be favorable to the bondholders. that it should be at least the face value plus a premium of 5%. the idea it will be easier to sell the bonds and it will increase the dilution effect. it, it is very different than the two issues of cocoes outstanding . .

>> first, you actually would increase liquidity within a bank that is declining. it's a rather subtle increase. but it's equivalent to the injection of liquidity that's equal to the interest and principal payments that no longer have to be paid to the holders who are now shareholders. and the other feature that is potentially quite useful is that

it deals with something that neither the basel committee or dodd-frank was able to engage. that is the fact that the more risk sensitive you make capital requirements, the more likely you are to make them prosiply call. they are going to make the booms boomier, and the busts bustier. the idea of having the percentage that's base the on quasi-market value vast, means it will go up in a boom, which will retart lending. and on the way down, the amount that you have to hold will fall which will to some extent offset the encouragement to new lending on the risk-based capital requirement. the bottom line is how might things have been different in

recent crisis if we had a cocoa requirements in place years before. i think the answer is -- well, it's speculative. i think it's fairly convincing. we've done some data of all of the systemically important u.s. banks. and it turned out that the six banks that required large interventions or shotgun marriages crossed the 10% threshold long before they got into deep problems, months and some case years before. so there was plenty of warning of something to do. and it -- these all happened at a time when they could have been raised new capital. capital markets were not at all closed to them at that time. but, of course, these data don't take account of the incentive effects of having cocoas in place. our guess is that a company like lehman brothers where the employees and managers really owned most of the capital or

both bear stearns and lehman brothers were owned by the managers and stockholders, that in that case, the fear of delusion is very great. and the fear of delusion was such that they didn't raise new capital. but if they are forced -- if they are faced with a cocoa trigger that would dilute them significantly, you can imagine they would have been believed very, very differently at a time when they could have saved the firms. they would basically have -- if they had breached the threshold, they would have basically lost control of the firms, they would have double their capital in equity terms roughly, and that might have bought them time to restructure. on the over hand, if they were boomed to failure, it would have given us a much longer time to

identify their plight. a matter of months rather than hours. it should have put an end to the scammable over the sleepless weekend to arrange the ad hoc bailout for bankruptcy. >> thank you, dick. our final statement 304 is beyond dodd-frank whatever tag team on this. and charlie will start off. >> thanks, george. [laughter] >> well, almost everyone in this room probably got a lot of homework to do from dodd-frank. there were over 100 reports mandated as a result of the act. hundreds of new rules that have to be written, very tight deadlines too on a variety of matters. but we thought the turn about fair play. we came up with some homework for the new congress. it might seem strange given that

we just had this ill luminous education. some of it had to do with fixing things that weren't fixed, and some had to do with modifying things of dodd-frank that would be easy to modify and beneficial to do so. we're doing to work as a tag team. i'm going to go through the first three of those, and then turn it over to chester kemp. maybe even one of the most important financial business of the congress is to try to figure out the mortgage market. the key mistake that drove many of the other mistakes was the government subsidization of ever rising and unbelievably high

leveraging in the mortgage market. for example, no-docks subprime lending really wouldn't have been a problem if there would have been a 20% down payment requirements. think about that. it's precisely the fact that people didn't have to put much money up on the mortgage that attracted very bad credit risk to take advantage of the lending. of course, it used to be back in the 1980s that a 20% or more down payment was standard. and, of course, in many, many countries that's the case. we need to get back there. the way to do it is to phase it in. we are starting with 3% down payment requirement. we need to increase it 2% a year until we get back to 20% would be a reasonable way to phase in and get us back to a sane mortgage market. we think that's absolutely necessary for restoring any kind of sanity to the market.

second issue is we have a new consumer financial protection bureau. of course, we don't really have a head of that pew -- bureau. it's kind of running outside of the normal due process. and it's being run effectively out of the white house. we think that's not appropriate due process. we need to have the right kind of due process with discussion openly through normal channels with opportunities for public debate that only are going to be had through a normal sort of regulatory process. we encourage the new congress to think about having hearings, wide ranging hearings to try to figure out how to improve that process. third area is rating agencies. now as you know, dodd-frank basically created a mandate for getting rid of the regulatory use of ratings. this committee supports that as

the long-run objective, of course. the use of ratings in regulation tends to encourage the debasement of ratings. the problem, of course, is so much existing regulation depends on the use of ratings. so at least as an interim step, it seems to make sense to try to improve the usefulness of ratings and maybe extent the deadline a little bit for eliminating them. but the way, barbara boxer, senator to california, introduced something similar to dodd-frank that was defeated. which is to quantify ratings, to turn them from letter grades into numerical estimates and hold rating agency accountable for those estimates. i will now turn the floor over to chester spat, and then jim scott.

>> thank you, charlie. one the significant portions of the dodd-frank bill was the treatment of derivatives of clearing and the emphasis of the clearing of derivatives. one can think of that in terms of a number of objectives, including ensuring the adequacy of collateral, to make sure that the central counterparty is bullet proof. to try to limit the generation of systemic risk, and to try to enhance price transparency. while at the same time, not retarding innovation in the markets. but i think we also think that in some respects, there maybe less than meets the eye with respect to some aspects of the implementation. of course, keep in mind that at least some of the goals -- maybe many of the goals, reflect the

derivatives fiasco that occurred at aig. many of the exotic instruments that aig used, of course, would not be likely candidates for clearing on an exchange. furthermore, the degree to which changes in clearing practices are going to be achievable by the statutory implementation deadline on september 15th 2001, this is an open question due to quite a number of different concerns. in effect, a new set of rules needs to be developed, a whole new legal and regulatory framework, and the market structure needs to be developed. i think an important example along these lines is going to be -- is going to arise with respect to the nature of price transparency, and the reporting requirements of that. and certainly as a group, we're very sympathetic to price transparency in these markets.

we're also sensitive to the high ly sensitized nature, it's also the importance of introducing significant reporting delays for launched position so as to not under cut the liquidity of the markets for those large position. sort of more broadly, we are concerned that the tight statutory deadline creates the potential for possibly a forecastable train wreck on september -- on next september 15th. a more specific issue that we think wasn't contemplated by dodd-frank is going to be the development of suitable margin requirements with respect to credit default swaps. credit default swaps, of course, provide insurance in effect in the event of the default on the underlying bond instrument. these reflect the potential for basically significant downward jumps due to the nature of an

effective fault insurance. keep in mind, however, that across a whole range of credit default swaps, and across a whole range of bond contracts, defaults are likely to be very correlated. we saw dramatic evidence, of course, during the financial crisis. this in turn makes it difficult to set margins or clot real requirements that are going to be protective enough of the ensurer based upon the number of defaults. of course, keep in mind, this is a difficulty that's not specific to the presence of a central counterparty. it's a difficulty that arises, in fact, ot -- over-the-counter trading as well. indeed, while the collateral of aig is widely recognized. that reflected examplely the fundmental problem.

this was one aspect that underlied the collateral by aig. i think broadly what this issues suggest to us that it would be desirable for congress to be in the front of the problems and permit reasonable delays in implementing reforms to try to force stall the potential for serious disruptions in the marketplace that we could anticipate come next december 15th. i'm going to turn things over next to ken scott. >> thank you, chester. in the process of getting a majority for dodd-frank, it became sort of a 2300 page collection of the favorite sayings of congress to improve financial regulation and achieve

financial reform. it's almost an endless set of possibilities for comment. picking on only one here, something of an anomaly. that is that dodd-frank could offer incentives for whistleblowers. awarding 10 to 30% of all financial recoveries, fines, penalties that are achieved in a successful pursuit of a security violation. so the first person to report that independent knowledge of let's say, you know, accounting fraud or wrongdoing of some variety to the fcc is in line for a very substantial pay off. what's anomalous about this, if you think back to sarbane in

2002, that was concerned with accounting fraud, manipulation, world com, for example, represented a case where earnings were bolsters by capitalizing expenses rather than having to recognize and charge them off to the improvement of world com's financial statement. that was disclosed by an employee in the world com accounting department. and therefore one the things that sarbane tried to do was to improve internal capacity to deal with these kinds of activities within large corporations. so the effort was to improve internal controls over corporate financial records and reporting

as part of that. sarbane oxley encouraged employees to inform legal and compliance officers of suspected fraud or wrongdoing in a variety of ways. one, for example, was to require companies to establish confidential hotline numbers to protect sources, retaliation against whistleblowers is prohibited. it's the internal control of the governance that's the first line of defense against the activity. there are 10,000 companies to which it applied. and now what we find in dodd-frank is the creation of incentives to bypass, to ignore really these internal mechanisms

and go to the fcc which over looking the universe that large may not be able to adequately follow up or have the capacity to determine the merits of what all of the tips that it gets. so it does this by creating incentives to go to the fcc if you are the first person to report, you maybe in the line for a very substantial bounty. the retaliation provisions were strengthened if there is retaliation, you can now get two times your back pay and so on. so in the request for comments in the rule proposal that the fcc issued last month on these whistleblower issues, it requested comments as to whether a whistleblower should be required to make reasonable use of internal compliance procedures before getting in line for a tip in the pay off from the fcc and for very

practical reasons the committee believes that the answer to that request should be in the affirmative. >> we have time for questions from the audience. some microphones that will be circulated. if you state your name and identification and direct your question to a particular person, that ought to speed things up. yes, sir, right over here. >> thank you. i think 20% down payment is a terrific idea. could the commission do this for the consumer protection agency or whatever board, whatever you want to call it? they can't declare anything usive. why not say progressively anything that any loan, any mortgage that requires less than 5, 7, 9% is ipso facto abusive?

>> that is part a legal and political question, isn't it? i think the orientation of elizabeth warren and the board will regard that as predatory lending than to go after it from the stand point that the borrowers have skin in the game is a larger -- large element in the disastrous outcomes that we've had the last couple of years. in terms of issuing a rule, defining abusive as anything -- any loan made with less than a prescribed down payment, i think it would be -- well, the world abusive came into the law without any background in terms of legal usage or interpretation. there are words like unfair,

competitive practices and so on that do have a legal history and definition in a variety of context. the word abusive is up for grabs. what's abusive? so technically, would they have the power to say anything less than 20 is abusive? maybe. but politically, do i think it's likely? i don't. over here. >> will, to follow up on the issue of 20% down payment, i've seen accounts years ago which unfortunately i can't report in the general brass that da mortgages required a lower down payment and yet do not have higher default rates?

is this true and how do you explain it? >> high leverage is not a sufficient condition for high default. if you control credit quality, and you have a rising housing market, that is if the people you are lending too have to have evidence of employment and income that can meet their mortgage payments, va and fha historically have managed to run above market leverage without huge default experience. but what we are saying is high leverage is generally a necessary quality for the kind of housing crisis that we had. that is, where you permit the possibility that relax underwriting standards could lead to large defaults with significant consequences for the financial system. and so we think that when you look at the route of where the idea that leverage was necessary

came from, it came from the idea that by supporting the subsidization of mortgages and driving up leverage, you could make housing more affordable. we think that's a bad idea. you can make housing affordable if you want to with on budget expenditures, down payment assistance, the australians do it that way. a lot of countries have figured out that leverage isn't the best way to run an affordable housing program. if we want to have an affordable housing program, let's have one that doesn't destabilize the financial system. let's have one that's on budget, transparent, and openly debated. that hasn't been what we had. we are not saying that necessarily high leverage defaults in failure. we are saying it creates the risk and is unnecessary for achieving bona fide objectives in affordable housing. >> thank you. hi, i'm andrea, a bank analyst

in new york. i worked with a company that did a great deal of work for fannie and freddie. partly related to the quality of fannie and freddie's underwriting standards. they were considered one could say very high and you needed private mortgage insurance or something like that. actually i was involved with bringing a product to freddie which was a higher loan to value mortgage product. but the -- let's get into the definitions of the erosion of the definition quality where in a collapsing economy with a lot of free trade agreements proliferated during the bush ii administration and on the heels of nafta, on the heels of u.s. compliance with g-20, aside from the erosion of fannie and freddie's criteria in what had been considered a paper

underwriting quality. what perhaps at one point was a paper is now b paper or something like that. they called it a. in order to compete with private label, they eroded the quality. and in cases where they had originated a paper, i had some acquaintance with the independent bank in the new york area which had a lot of no doc loans. but the erosion of the economy had a lot to do with whether or not those borrowers could pay back their loans. this touches on my concern. perhaps you can answer this. the fed has been a conflicted party and has been aligned with international interest. some of which have wanted to see the u.s. economy in concert with the slow growth of the european economies. so where fannie and freddie had

provided quality products, but this whole notion of how we -- i don't mean to be confused. but let's just perhaps touch on something like allowing the fed to do the resolution authority. it's not proven itself to be a nonconflicted party. and i don't think -- and maybe you can speak to the point that fannie and freddie at an earlier point under wrote the responsible mortgages and mortgage securities that those organizations underwrote were performing. you know, the investors receive their cash flows and things like this. let's address these two issues. the deterioration of where fannie and freddie have gotten and how the fed is a conflicted party with being able to handle it's responsibility. >> i would just add -- ed wants

to say something. we have given a lot of statements in -- over the last few years over the slipping standards of fannie and freddie and the problems in their own risk management and i think there's been a lot of literature on it. i don't want to rehash that whole story. the point that we are making today is in addition to winding down fannie and freddie, we need to rethink the whole approach of the government toward affordable housing. we need to think, rethink that approach away from this continuing and rising subjectdyization of high leverage and push in another direction. just to point out at the peak of the crisis, 35% of fannie and freddie's mortgage portfolio had loan to value ratios in excess of 45%. if you just go back to the early 1990s, that's almost unthinkable. so the way that this happened

has a very long story that we could talk about. but that a big part of fannie and freddie's erosion of business wasn't just the decision in 2004 to enter no docs and low docs. it was a push that you could see through the whole period primarily and i would say maybe even most importantedly in the form of increasing leverage. we think that's a crucial safeguard to the mortgage system that we should under take. ed? >> the issue of fed being conflicted is something that we are addressing in the statement about resolution. it's going to be difficult for the fed and any other agency to get together and decide to under take this step of recommending the special resolution authority being invoked. every agency has it's own self-interest, every leader of an agency has a self-interest. and we saw many during this

crisis, many differences across the -- stick with the fdic at some point was very much in disagreement with the treasury and the federal reserve and prior to the crisis only the fdic seemed to recommend the leverage ratio as one of the important measures of the capital condition. the fed was locked in on risk-based capital into the basel system, which was based on risk measures as was said in our discussions by bob that we are really inadequate. >> over here. >> mark, i run a small hedge fund here in washington. three questions. first speculation on whether the

deficit commission is, in fact, going to make any headway in eliminating the mortgage deduction. secondly, how would it interface with people like you who want to raise the down payment. i think that's a great idea. that's a double whammy on house prices. and thirdly, i hear this word prosip -- prosip recall so much. they tacked up the requirements on silver and put out the fire. why wouldn't we be doing that with mortgages? >> can i start? the first point is the deficit commission and what is it's function? and i think the recommendation of the mortgage interest deduction being changed is something that can be undertaken, but was certainly undertaken very small steps. for instance, issues of second

home, interest of deductibility, capping interest deductibility in some amount or some income level, letting it slide a bit. i think total abandonful of it isn't what was ever emerged from a political process at this hull with this in direct with the down payment? what charlie has demonstrated is the system we have used is distorted for demoting home ownership has distorted the financial system. there's no reason to pursue these goals. if that is understood you look at countries like canada and that maintained 20% down payment throughout this period and backed up by saying you want the institution that higher loan devaluation you have to get mortgage insurance and you have to be recruited to our

prudential regulatory authority under quality of wine this loan is sensible. >> i want to respond in one sentence to the first two to questions each. with respect to mortgage deduction -- mortgage interest deduction. is it a distortion to allow deductibility or is it the distortion not to allow deductibility? from the standpoint of the renter/buyer distinction since the owners that than rent their house up the gut the interest as businesses there's an argument that deducting interest for homeowners actually is tax neutral in terms of its incentives. but there are opposing argument that for very expensive homes there really isn't margin between renting and buying and so you don't have to worry about neutrality so you could make reasonable argument that distortions depend on size of the mortgage deduction.

second point do we worry about house price effects from the increase in the minimum downpayment? remember we are facing -- we think -- i think it would it least potentially have a small effect in preventing run ups in home prices. and would like to point out that that is a good thing. in economics houses are a particular kind of investment. they are an investment you are also consuming so we're actually -- as pointed out in the recent article we have an intro the proposition that tells us when prices go up your not that of. there are exceptions to that. small important issues. but there is a social objective. of society is not made better off by making home prices rise. >> the ultimate distortion in the income tax system with respect to home ownership is the fact that the servants of the

house are not taxed. if the services and not tax you don't have the same business justification for allowing the interest to be deducted. >> we should thank you all for coming out. we will see you in 2011. [applause] [inaudible conversations] >> in a few moments white house economic adviser larry summers talking about slow consumer demand remaining address on the u.s. economy for several years.

in an hour, former head of the cia, on the future of terrorist threats. the senate is back in session at 10:00 eastern to continued debate on the bill extending tax cuts and unemployment benefits. >> several live events to tell you about. the white house drug control office releases its report on teen drug use. it surveyed students in eighth, tenth and twelfth grade about attitudes and perceived risks of alyssa drugs on c-span at 10:00 eastern. at the same time on c-spanfree the upcoming referendum that will divide sudan. panelists include representatives from southern sudan and national unity. >> it is hard to get here and it is hard to leave here. but all of us do leave and the

senate always continues. >> here from retiring members in the senate and house on the c-span video library with every c-span program since 1987. 1 67 found our all on line and all free. washington your way. white house and economic adviser lawrence summers said he expects low consumer demand remained a drag on the u.s. economy for several years. cheese the economic policy institute. he is stepping down as director of the national economic council at the end of the year. this is a a little over an hour. >> hello. i am the president of the economic policy institute. thank you for coming to hear larry summers today, director of the president's national economic council.

he will offer his remarks after his two year tenure in the white house. we are very pleased to be able to host this event. imus admit that a number of people have looked at me and thought this was a little odd to have larry summers here. but i want to set the record straight. there are a lot of things larry and i have in common. we are both named larry. and we are both economists and we both have done a lot of work for the labor market. we were both raised in the philadelphia area. third, he has two uncles who were awarded the nobel prize in economics. i have two uncles. okay. i do not want to leave the

impression however that there are not some fundamental differences between us. in my view very moved to boston and adopted the boston red sox as his baseball team. i am still a fan of the fighting bills. i hope this clarifies matters for everybody. on a more serious note on a debt larry is here to offer this speech. he has had a remarkable career. only in his 30s he was chief economic adviser to a democratic presidential candidate, michael dukakis. he was awarded something very important in the field of economics. the clark award which is given every other year to the best economist under age 40. he served in world bank and the treasury and became secretary of the treasury 1999.

he was harvard president and came back to be president obama's director for the in ec and in that role he has had to address the great world wide recession which i imagine we're going to hear a lot more about now. here is larry summers. [applause] >> thank you very much. that was surely the most recent introduction of ever received. i do still support the philadelphia phillies as well as the boston red sox both of which are a tad more satisfying than supporting the alaska national and if i lived in washington would be a phillies fan too.

i am glad to be here this morning. for 25 years your distinctive and important voice has held underscore the central importance of economic policies that support a growing, striving american middle class. it is why what happens to the middle class that our economic policies ultimately have to be judged. success for the middle class means a better life for our citizens and upholding a 250 year tradition of children whose lives of better than their parents and it is central to america's continuation as a role model for the world. a want to say a brief word about what we have done in the past two years to strengthen the american economy and then turn to what i see as the great challenges we face in the years ahead if the american economy will work for all of our people. just as scholars continue to

debate how close we came to nuclear conflict during the cuban missile crisis they will continue to debate just how close the american financial system came to all out collapse in the six months between september of 2008 and april of 2009. what we do know is this -- during that time the stock market fell more sharply than it did six months after black tuesday in 1929. global trade declined more rapidly than in the first year of the great depression. the economy was not invigorating. vicious cycles were pulling down deeper at a rate of 700,000 jobs among at the worst of it. had it not been for president obama's willingness to support a sufficiently aggressive response from delayed stage of the presidential campaign to his first days and months in office i have little doubt that we would be looking at a vastly

different world today. yet while the economy may be of, be patient now faces the long road of not just recovery from previous affliction but beginning to address chronic ailments. the slow process of recovery has caused some to conclude that perhaps we have entered a new and weakened normal state of affairs. estate in which we must lower our sights, lower our aspirations and not be able to pass to the next generation the kinds of dramatic improvements in american economic potential that were passed down to us. president obama rejected this view and so should the rest of us. with the right approach we can

and we will resurrect, rebuild and renew the american economy. we are prepared to do two important things. growth unnecessary, neither is sufficient. to fully recovered from the great recession. put in place a framework that bush worse that our growth, productivity and living standards continue to lead in a rapidly changing world. we must do everything we can to ensure this recovery is as rapid as possible. all of the other goals will be compromised. there will be no prospect for

reducing medium and long-term budget deficits while simultaneously investing in capital. no prospect for competing successfully and remaining examples to the rest of the world. no prospects of restoring growing living standards for the american middle class and above all, no prospect of putting eight million people who should have jobs back to work. what is holding our economy back? when unemployment has been above 9% for 19 straight months, when the job vacancy rate is near record low levels, when eight million houses and cal was shopping, countless square feet of office space and retail sit empty, when capacity in the

nation's factories on railways and highways as low as it has been in any period since the second world war there cannot be any question that the constraint on our economy now and for the next several years will be the lack of demand. i am under no illusion that increased demand alone is sufficient to restore america's the economic health but it is an unquestionably necessary component of a full recovery. unfortunately, the approaches that we became used to, supporting demand in a market economy are not open to us today. short-term interest rates cannot be reduced below their current

level of zero. in the face of excess capacity and excess debt is not clear that even if it were possible, falling interest rates would be terribly potent in convincing consumers and businesses to spend more. we need less traditional approaches. take exports. it is always the case that when we export more successfully we are more prosperous. but when the economy is as demanding as it is now, increases in exports have a more potent effect because with excess capacity, mort exporting does not mean less of anything else. that is why agreements like the one we recently concluded with korea are important as is the breadth of the support it has received. it is also why the president set a goal of doubling our exports

over the next 5 years. enforcing trade agreement, relaxing export control, stand up directly and diplomatically for the interests of american producers and most important, in assisting on vote rebalancing of global economy. promoting exports, will not be enough. in the decade prior to the downturn, the american household and business sectors, adding them together. close to 2% of gdp more than

earned or net borrowers. in the developments of recent years, it has changed dramatically. 6% short of private sector in comes. the private sector has swung in its deficit of 7-1/2% with 2% deficit to about little less than 6% surplus. that means less demand is one way that we are suffering the aftermath of the worst recession in 50 years. it is right for government to counteract private-sector delivered in. even with all of fiscal

measures, of the last several years, total borrowing in the american economy has failed to grow for the last few years. that is the worst two year period since the second world war when total bar wing in the american economy was increased. even with deficits, the deficits have fallen short, that means extra debt. it is less than the amount of reduced borrowing. it is the leveraging the private sector. that is why the recent tax agreement to congressional leaders is so important. it adds more fiscal support than

most observers thought politically possible. an extension of unemployment benefits, refundable tax credits, and estimates of job creation of a the next year or two are revised up at 1.5 million or more. these measures not only support jobs but also our medium-term goal of deficit reduction. by timing allowances, business expense, revenue collections after 2013, exo lorraine recovery, the additional effect of these measures is the most potent form of deficit reduction. one% increments in twenty-third team or any year afterward, reduces the deficit by $40 billion.

to be sure this legislation is a compromise. the president strongly opposed continuation of high income tax cuts and especially the estate tax relief, only 6400 of the country's least 80 families. these concessions were the price exacted by the congressional minority with fiscal support that will provide significant impetus to the economy. but the clear. compromises that were necessary with a weak economy in 2010 should be inconceivable as recovery accelerates in 2012. it opens up between private savings and private investment. tax compromise will help but it is not enough. at a time when real interest

rates even over 30 years are less than 2%, when unemployment is nearly 20%, at a time when building material costs are substantially depressed by lack of demand. what better time to invest in renewing and upgrading their nation's infrastructure, working a backlog of deferred maintenance, and investments. and to rebuild america should be at the top of washington's priority list. these measures taken together. this will accelerate recovery. increasing demand will mean more

workers with jobs, more employers in a position to provide training, more capital investments in capacity in the future. more revenue for local governments to make the investments that are crucial for them. without increased demand we are not in a position to pursue our longer-term -- in a demand constrained economy like the one we have today and will have for several years, and as point ated out with the paradox of risk, efforts to save more lead to less total savings. more educated workers with demand constrained, opportunities with lesser educated neighbors.

with demand constraints increases in productivity, we deflate pressures and result in more unemployment rather than more out comes. that is what we have to drive recovery and remove the demand constraint on the economy. at the same time it is essential that we recognize monetary policy for increases in demand, never made a society prosperous, fair or strong. we need to renew the american economy for is century that will be very different from its predecessor. a key lesson that management strategists fulfilled for businesses is this. don't succeed by producing exactly the same thing that other people are producing in the same way but at lower costs.

we succeed by establishing your own uniqueness and excellence. think of the distant this of product like google search engines, the ipad or harley-davidson. think of the distinctive way southwest or new core or walmart have delivered their products and services. this led the global economy by building on unique strengths and continue to lead in the next century. there's no going back to the past. productivity and mass production to the point that even china is seeing manufacturing employment declined by ten million jobs. we have moved to the knowledge

and service economy. i tried to follow the red sox. hi learned how they had done on friday. it was delivered in the early afternoon on friday to jakarta. it is a different and smaller world. what does it mean to adapt to this. just as the american worse prospered, even as the southern part of the united states caught

up. even as we do strength in generation after world war ii. as europe and japan's economies were rebuilt and converge towards our own. we will need to find a way to prosper and benefits as the emerging markets of the world take their place on the global stage. what should our approach be? some suggest that we have no alternative but to compete with the world on price even if it means striving to win races to the bottom. they would have workers sacrifice wages, benefits and the bargaining rights to hold on to their jobs. they would cut taxes on businesses even as their profits rise in order to lure them to stay in the united states. they would shred social safety in the name of self-reliance.

such social darwinism with bad morality and bad economics in the nineteenth century, and it is no better in the 21. the flatness of the world not withstanding, by far the largest part of the activity americans engage in and the goods they buy remain quite local. and retail services, recreation and education, hair cuts in insurance policies, hotels and houses and i could go on. where we compete with other countries, are restraints is collective. few of us can hope to succeed as individuals in a global economy where any particular task or skill can be purchased at very low prices in much of asia and beyond.

rather our strength must come from establishing uniqueness, establishing that which is difficult to replicate. that which comes from more collective action. any idea or machine or individual capacity can be transplanted. far harder to transplant, imitate or emulate our great institutions, the national laboratories and national parks and national highway system. great universities in great cities and great technology clusters. a diverse culture and a tremendous aspect. competition is concerned, the lesson for us as a nation is the same as the lesson for business. far better to compete by innovating, leading and building on strengths than by standing

still and reducing prices. let me highlight what i see in this regard as three essential priorities for the years ahead. president clinton used to say that in a world where ideas can move capital and move a nation's distinctive strength lay in its people. our biggest failing as a nation over the last 50 years has been with respect to education. we were once the envy of the world. we now struggle to get into the top half. the duke of wellington famously observed the battle of waterloo had been won on the playing fields and i suggest the battle for america's future will be won

or lost in his public schools. for too long we have been caught in a sterile debate from those with more accountability and those who see the need for more resources. no one who has seen the conditions in our urban schools can deny the need for more resources and no one who believe in incentives can deny the need for more accountability. race to the top american nation has sought to reform elementary and secondary education both by providing resources and increasing accountability. these kinds of efforts will need to be greatly magnified in the future. even as we strengthen elementary and secondary education we must also expand higher education opportunities. the u. s used to lead the world. a share of young people who

became college graduates. is no longer in the top-10. worse yet, over the last generation, in coming's in this land of equal opportunity, in college attendance have actually widened. as a consequence of both issues of affordability and i would submit issues of subtle discrimination, take this one example, i suggest to you that the least of first-class rooms in america are in the s.a.t. prep schools that help some but not all students raised their admissions test scores. that is why the administration has made major investments to expand education opportunities. since taking office, the administration has funded an unprecedented doubling of the powell grant program which will help eight million low-income

students. to attend college. at the same time as winning enactment tax credit. ipod on this for just a second because in less tumultuous times are would suggest to you that the largest increase in federal support with college attendance by students from low and middle income tax brackets would be recognized as a signal in defining achievement. as a reflection of the magnitude of the issues we have grappled with over the last several years this is not perceived the attention it deserves. education is closely linked with the second major priority for the years ahead. innovation, the other central

pillar of economic growth. we have had for in very long time in the united states a distinctive ecology. the reason why we are the leading economy in the world. on the one hand, we have recognized, venerated and acted on the observation that it is individual leaders, the edisons, fords, gates, zuckerburgs, who with a uniquely anti bureaucratic temperament and who would not dream of filing a a rent application, and drive an enormous amount of the economy's progress. we have maintained a culture where it is still true today

that with all of our financial systems failing and they are many, we are the only country in the world where you can raise your first 1 hundred million dollars before you buy your first tied if you have a sufficiently good idea. that is a great strength of our country. but at the same time as maintaining a culture that supports the entrepreneur, that salutes the rebel, that allows people to establish themselves as major figures in business without bothering to complete a college degree. at the same time as we have that support for the individual, we also recognize fundamental innovation and progress will not happen without the public sector

playing its essential role. there would be no internet without dark but, no car industry without highways, pharmaceutical revolution without the nih. maintaining and increasing our american capacity for innovation and thus requires both fundamental support for entrepreneurialism innovation and for the key foundations of science and technology. that is why we have to make it easier to pass a new idea or innovation. make it easier for on for norplant and small-businesses to raise capital. make it easier for the most promising minds and the most promising entrepreneurs to come to this country from around the world. but we must also take the steps

that will not happen without public action to invest in energy efficiency and renewable energy technologies of the future. we are able to maintain what is distinctive about the united states. simultaneous capacity for strong public actions and for great entrepreneurs to emerge in the years ahead we will be in a stronger position to -- third and final thing we must do is renew the fundamental public compact between the present and the future. perhaps the most important

illusion that permeates much of our economy is the idea that budget deficits as a way of financing government are somehow an alternative to tax increases. it is not so. deficits are a means of postponing and magnifying ultimately necessary tax increases worse than reductions. they are a tax on our future. unless used to finance productive investments. i am not one who's ease financial collapse on the imminent horizon. i believe at this point the risks of deflation or stagnation

in the united states exceed the risks of uncontrolled growth or high inflation. but unless we change course, we are at risk of a profound demoralization with respect to government. on one level this means the decay of essential public functions and a loss of our national self-confidence and at a deeper level, we risk a vicious cycle in which an inadequately resources government performs badly leading to further demand that it be cut back, exacerbating performance problems, deepening the backlash and creating a vicious cycle. that is why recovery is our

first priority, it is essential that we establish long run charity between revenue and expenditures. this is a more complex matter. than is often supposed. one of the more important and less well-known ideas that came out of the economics profession over the last generation or so is a phenomenon which in certain areas, rapid productivity growth is possible. in other areas it is much more difficult. it all is has and always will take eight teachers to teach 96

students for 1-hour in classes of 12. productivity improvement simply is not possible in the way that it is in other activities. similar phenomenon applies to almost anything that involve direct human interaction. conversing care as another example. more than an's corollary is the observation that there's a tendency for those activities where it is most pronounced to my great to or located in the public sector. taking one example, every five years, the share of gdp devoted to government spending on health

care goes up by one percentage point. as we contemplate our long run fiscal future we must contemplate this reality rather than suppose there's some static pattern of revenues and expenditures that can be maintained indefinitely. that is why the work of the bowls simpson commission is so important. that is why president obama committed himself to healthcare cost reduction. in the context of the recently enacted health-care legislation. if there ever was an area where president kennedy's doctrine that man's problems were made by man and therefore they can be solved by man, if ever there was an area where that applies it is

the budget deficit. the united states improved structural deficit by four percentage points between 1993 and 2,000. being called on to make fiscal adjustments in the range of 10% of gdp. once our temporary fiscal support expires we need an improvement in net 2% to 3% range of gdp to begin the process of putting our debt on a declining path relative to our income. president obama has taken several steps in this direction. a multi-year freeze in spending outside national security, serious effort to root out outdated spending in every area particularly defense and particularly defense. particularly welcome feature of

the recent commission report is its bipartisan recognition of the idea that tax expenditures are just like expenditures and need to be held to the same standard of efficiency, fairness, and tough tests on government intrusion into the economy. they say that market's climb walls of worry. so it is with our nation. america's history in the uncertain sense has been one of self denying prophecy. a history of alarm and concern but alarm and concern averted by a decisive actions to ensure our

prosperity. one cia director warned of our largest competitor. that industrial growth rates of 8% to 9% per year for decade was dangerously narrow the gap between our two countries. that was allen dulles, 1959 referring to the soviet union. when the soviet union collapsed, the harvard business review of 1990 proclaimed in every issue, every issue in one way or another that the cold war was over and germany and japan had won. now we hear the same thing with respect to china. predictions of america's decline are as old as the republic. but they perform crucial

function, driving the kind of renewal that each generation -- that is required of each generation of americans. i submit to you that as long as we are worrying about the future, the future will be better. we have our challenges but we also have the most flexible dynamic entrepreneurial society the world has ever seen. if we can make the right choices our best days as competitors and prosperous citizens still lie ahead. thank you very much.

>> our procedure will take some questions from the audience. we gave out cards earlier that are being collected. we will take a look at a few of those and after a few of those questions we will go to the press. so let me start with one of the questions. in your speech you pointed to the need for greater education. as you know a typical house graduate is earning today what he or she did ten years ago and that was the case, stagnant wages were the case even before the recession. what does it tell you about the additional need for policy, wage growth several worker can benefit from the advance? >> if our college graduate or

high-school graduate find themselves embedded in an individualistic competition with workers from around the world or if they develop skills for bridge and twhich and the demand is going to fall their wages are not going to rise. a necessary strategy for increasing wages is that we developed areas of unique strength that are lethat are le international competition.

areas described in my speech where the market is inherently local, that also means maintaining the capacity for innovation so that our production is producing things that are not in what the business strategist calls come monetized businesses where that competition is going to be most brutal. it also, i might just say, goes to the quality of education as well as the quantity of education. we have seen an enormous emphasis on measuring achievement, raising standards, increasing accountability on school systems, on teachers, on students in the k-12 level. i would predict that over the

next two decades we will see a similar kind of focus on accountability and improved performance come to higher education and if carefully managed, that will be a very good thing. >> another question. given all the developments in the last several years in your experience as an economist what has happened that might lead you to think economics itself needs some accountability? >> i don't see how the events of the last decade can fail to have an important impact on economic thinking that a number of different levels.

to take just three examples, in the standard introductory economics textbook discussion about business cycles and the like, financial in mediation is essentially not mentioned. there's a discussion of the interest rate and the way it affects the money market and the interest rate as in fact investment incentives and the issues around financial remediation are not mentioned. obviously after what we have been through, financial remediation will need to be much more prominent as an issue in mainstream economic thinking. second, mainstream economic thinking is still dominated and this is what you learn in your economics course by the

production of widgets which has a writing marginal cost curve. in the knowledge economy, the canonical good is going to be a good with a high fixed cost to produce and then has the very low marginal cost. think about publishing a a book. think about a program, think of a program of software. think about a pharmaceutical project. think about what happened to the ratio design cost to production cost in automobiles. if you think about such a market-custom low marginal cost if you have standard competition pushing prices back to module cost firms won't be able to stay in business. so in a set of ways that i don't have time to talk about, economical form of an industry

is going to be different going forward. third, when i went to graduate school which was some time ago but not exactly ancient history one of the things you learned about was that a striking fact of american economic life was stability of income distribution. that was a quite reasonable reading of the data from the end of the second world war to the late 1970s when i was in graduate school. it is a manifestly wrong use of data over the last two decades. what is especially salient in the data over the last two decades is there are significant

movements and skill differentials understood quite well in terms of relative demand for college-educated and high-school educated labor and the light. the striking phenomenon in the data is the practical quality. what happened in the top 1% relative to the bottom 99%, what happens in the top 0.1% relative to the rest of the top 1% and what happens to the top 0.01%. economists are only beginning to understand what the forces driving that car and that will have to be a central and increasing part of economics going forward. the only question these events should force very substantial reformulation in economics. at the same time, i would

caution the fact that there is a lot to which economics has to adapt, does not mean everyone who has said mainstream economics is wrong has been right or that every critique that has been offered has validity. i think we need to be rather careful about throwing out the baby with the bath water even as we recognize that any responsible synthesizer of what economics knows or things work needs to study will substantially revise their views over -- driven by the experience particularly of the last decade. >> in your talk you mentioned substantial delivered in process underway that will be going on

for many years. several deficit commissions recommended deficit reduction starting in fiscal year 2012 which means starting october of 2011 when the unemployment rate might still be 9% or so. is that too senses that a deficit reduction plan without a strong the leveraging trend? >> the commissions also short for short measures to increase to also called for short measures to increase demand. i think the right time to cut wasteful spending is now. then you can make a separate decision about other kinds of

investments with revenues you save doorways that can be used to improve tax and transfer system to maximized spending so i salute the objective of reducing wasteful spending as soon as possible even as as i tried to make clear in my remarks i respect that the economy will be demand constrained for several years to come. wooley bought operating on the demand side can you increase demand and that the path of fiscal policy and structural deficit is a very important determinant of demand. >> why don't we have people stand up and asked who they are. [inaudible question]

>> there has been a certain amount of economic forecasts generated in the last several weeks revising their forecasts and to my knowledge all the forecasts have been upwards by amounts that run in the 1% range perhaps slightly lower and perhaps slightly higher. one nuance some of a commentary has missed is many of the forecast revisions speak about 2011 relative to 2010. if you think about 2011 gdp the average of 2011 is similar to july 2011. if you increase the growth rate by 4% over the course of 2011 the average level of gdp would

only be increased by 2%. when people speak of the increment of 2011 over 2010, those often underestimate what the growth rate is going to be going forward but i would say clearly positive and 1% range. the other thing the bill has done is truncated the possible forecasts. forecasters who have been revising their forecasts, it will be extended. if the process had broken down or had there not been a tax bill in this session, the middle class tax cuts would not have been extended and in that case we would have seen forecast revisions but you would