better led. the, hopefully, with a government that is moving in the right direction to govern properly, to end corruption. as i said, that's nothing we can guarantee. only they can do that themselves, but it's in their own self-interest, i think, as they look around the world that they respond to the needs of their people a lot more effectively than they have. ..

and the reduction -- for the reduction of 70,000 forces that would be left after 33,000 removed. that reduction, that removal, approximately 70,000 troops would take place between 2012 to 2014 when the turnover responsibility for the security of the whole country would take place but that doesn't mean all of the 70,000 troops would be removed by any stretch of the imagination and also government determine the pace of removal during that period. those were issues which need to be resolved through negotiations. important for a number of reasons that they occur.

we tell the afghan people you have an army respect. perhaps the only group. the only international entity that is respected. the taliban tested most of the afghan people. the afghan army has public support and an enemy that is hated should be able if the country is well equipped enough to provide security to take advantage of that. >> so afghan military presence would be our fold against pakistan, and if we make good on that, is it an empty threat? that would end the relationship knowing security in afghanistan is dependent and the forces -- it becomes an active support for

those networks as opposed to something they denied but let happen but becomes more a matter of policy for them, how messy does that look? is the u.s. ready to follow through on that threat? >> two issues. what do we do about the economy? how do we address the cross border threat militarily affecting part of your questions? we began to use drones successfully against some haqqani leaders. appropriately if this report is accurate i have to say that it is not allowed to confirm things that are classified. but assuming reports are accurate it seems to me over do -- it can have a real effect. secondly we have under international law the right to respond to attacks by artillery.

this is what the secretary of state said, fairly soon we will see a more direct response for effective response or strong response to those attacks across the border against us. her words yesterday are pretty clear that the international effort to squeeze the network--the haqqani network on both sides of the border, quote, will be more apparent in the days ahead. the fact we have a high level, quite extraordinary visit by our officials to pakistan yesterday is the indicator of a clear statement of hope to the pakistani that they will see that it is not acceptable for them to be the safe haven for

the attacks on us. secondly it is a statement to them that we have the international right to respond to attacks from their country across the border and we intend to do so and they shouldn't be surprised. >> i will open it up to questions. just a reminder, wait for the microphone. introduce yourself, name and affiliation. we have close to half an hour. standing in the far back? >> thank you very much. i am from voice of america. we have a nine hours broadcast to the region between pakistan and afghanistan. my question is given the tension and distrust between islamabad and kabul what is the united states. washington is expecting in clear

terms to 2014? >> you are asking what is the u.s. -- >> expecting the role of islamabad when it withdraws troops from afghanistan? >> what will be the role of islamabad? >> what washington is expecting of islamabad given the tension and distrust? >> after u.s. troops are withdrawn. >> the same thing we expect now. that their country will not be used as a safe haven for attacks across the border that they will not interfere with the efforts at reintegration of the taliban, discussions with the afghan taliban to end their tax, taliban attacks on troops and

government inside afghanistan and hopefully play a constructive role in those discussions. they obviously have an interest. that is not at issue. pakistan has an interest in what goes on in afghanistan because it is across their border and has an effect on them and their view is their view, has an impact in terms of their security on india. they will play a role in any peace discussion but a role we won't accept is a role they have so far played of obstructing those discussions. that can take place for them and one of the forms it has taken is not permitting taliban living in pakistan but who are afghanis to go back to afghanistan to

participate in those discussions. the want to control discussions, negotiations and they won't be able to do that. the effective influence and can they control them. surely they cannot be acceptable that they frustrate their taking place and so i don't see 2014 being a point of change between our expectations of what we expect from islamabad. things will change in 2014 in terms of the level of control, security control in afghanistan and our becoming much less of a force securitywise. it won't be the end of our presence. that will be negotiated in terms of long-term relationship. from the number of troops we have now, far reduced to the

70,000 level at the end of next year. >> in the front row. >> thank you. kate phillips from the international rescue committee. i want to tackle and asked about the subject keeping you on the senate floor into the wee hours last night which is the current budget situation. military leaders have increasingly spoken out in support of civilian agencies because they recognize the value of preventative action. far less expensive to major around the world in civilian terms instead of military terms. we find ourselves as a result of budget control under a security cap where international affairs budget is pitted against the department of defense as we have decreasing resources to work with. i am curious what your thoughts are how we get the mix right between investments in international affairs through civilian agencies and our

military in times of decrease in resources. >> i have two thought. to recognize the importance of those efforts you referred to, they can't be short changed or given short shrift. secretary gates was spectacular in that area recognizing the importance of those activities outside the defense department in the international arena. this will all be determined by one word, revenue. that is the battle. i know being fought right now in that committee is whether or not the republicans are going to be able to move away from the rigid ideological driven position which is the tea party position which is so far dominating the republican party in this era.

not being any additional revenue and add to the additional revenue across the board cuts take place including areas of major concern and the defense area. that is the battleground. what will determine the level of support for the areas you made your concern and rightly so will be more than anything else not the relationship between funding -- defense these of the the economic support of the state department and other programs but whether or not republicans will come to see that you cannot do serious deficit reduction without additional revenue. you cannot do it. the only way you can do it is by decimating programs across the board in a mindless, irrational

way where the trigger is pulled, automatic across the country -- across the board cuts being implemented without any prioritization. one other thought is that -- i will leave it at that. my answers have been too long. i look at my staff back there. >> mr. schokoff. >> thank you for that powerful and comprehensive statement. there is one element of the relationship of pakistan which you alluded to but i would like a little more and that is pakistan's attitude toward the united states and feeling we abandoned them in the 90s. that is not the first time they

have felt abandoned by the united states. it happened two or three times. we are right in their reliance on haqqani as a regular forces and use them in kashmir and so on. now we are telling them they are your enemy, they will go after you and that is absolutely correct but we are saying go after them now. it seems to me that is the background for this relationship. how do we convince the pakistani that this time we are not going to leave them? >> we won't leave the area? >> we are not going to abandon pakistan again. >> first of all, we have made some serious mistakes relative to pakistan. one had to do with some planes which we sold to them.

had their money and didn't deliver the planes. i don't know -- i don't claim to have been particularly courageous. i have to look at my own votes in that area. whether i met the test of courage isn't the point. it wasn't just mishandled. it was terribly wrong for us to be selling them something and not deliver while hanging onto their money. that has been corrected but 15 years, we know how many years and how that unfold. also, we are not leaving the area. your question contains both questions about are we leaving afghanistan? abandoning pakistan? we won't do either. the choice is if pakistan gives

us that choice, losing an ally, if we continue to speak the truth about the relationship of pakistan and their isi to the events across the border, if we continue to speak the truth, it is the truth that we could lose an ally, we have to protect their troops. of the price of that is making a relationship with pakistan much more difficult, the chairman armed services committee, i don't love that choice. it should be the choice -- that is the choice. their words, you could lose an ally if you point out the relationship between isi -- we will choose our troops. we have got to choose our troops and they should expect us to do anything else. we will continue to try where we can where the interests our mutual to work with the pakistani is. we are not leaving the area. i don't know if they want us to

or not. if they want this in afghanistan or out of afghanistan. they are ambivalent on this subject. whether they want us in or out, we will reduce our presence and transfer that, security responsibility to the afghan army but we are not leaving afghanistan any more than we are going to abandon our efforts to have peaceful relationship with pakistan. >> in the middle right here. >> thank you. retired state department. are we going to really be able to compel pakistan to change its behavior? i think it can be argued however wrong headed the pakistani behavior is, many pakistani believe backing the haqqani is giving them a strategic presence

in afghanistan, instrument for long-term ability to play a role. however wrong headed it this is it is a strongly held belief among certain pakistani is. and set against that, the threat of losing the united states as an ally will only strengthen the belief that it is important to do that. that is a very powerful thing, however wrong -- we can send drowns against the haqqani. are we going to send troops in? how will we make them change the to and? the more we squeeze them the more they believe they have to have that strategic presence. >> how do you manage that

balance? how do you push the change in behavior? >> you can't force them to do anything. there has been too much u.s. arrogance over d. ages about our trying to dominate or beside -- they will act in their self-interest. we have to persuade them hopefully what their self-interest is. hopefully they will see part of their self-interest is having a normalized relationships with the united states. hopefully they will see that is in their self-interest and we have to be clear and honest that we are going to act from our self-interest as well. we are going to protect our troops. under international law we can do that. i believe we should do that. it is a matter of policy. protecting our troops means any idea that somehow or other because artillery is being fired across the border is not going to be responded to is wrong.

it will be responded to. we are not going to simply have our forces there, have artillery coming into pakistan and not respond. it can be done a number of ways. i don't think people are talking about sending troops into pakistan. the use of roads has been effective and also other color artillery capability we have which is going to be used against that particular threat. i believe with where you started is you can't force pakistan -- the idea that we can do that and some of the rhetoric which implies we can do that does play into the hands of those who are extremists. some of our rhetoric is a dominating rhetoric not just of pakistan but other parts of the world. that is why when the question of libya is raised it is so

important that we act with international community at our back and with us to avoid that use of rhetoric of domination which is too often characterized as which is used by the terrorist against us. america wants to take over afghanistan. we clearly don't want to do that but that is the rhetoric. it has got to be their self-interest. we appeal to and has got to be our self-interest which we must pursue as well and not act as though we somehow or other holier than thou. we will act that self-interest and our self-interest is also people in this world -- the values that is part of our self-interest, our values which move this world in the right direction has got to be at the

core of our interest and the values that we pursue not just because we believe in them but because they have a tremendous powerful affect around world. >> many things you said about pakistan remind me of what was said about saudi arabia's support for these groups. that behavior didn't change until 2004 when these attacks started targeting the saudi royal family and then they got serious about it. when you speak of pakistan they certainly had many attacks but do they need an attack that truly friends of them? that shows that we have to take this seriously? >> attack from terrorists? brought tens of thousands of people. the prime minister to terrorism. >> truly threaten their power. what breaks through that

mentality? >> what breakthrough is for them to see what the terror can turn on the man has. a different form of terror. even though at the moment it is blocked, they think peace from the haqqanis in terms of threat to them is not necessarily lasting. the value of the relationship with the united states is a real value for them. >> how about in the fourth row? >> i am from the japanese dignitary. my question is about an issue -- going to japan for a meeting

with tokyo, what do you expect from the meeting on this issue? >> what location? >> military location? a marine location? >> stemmeda. >> okinawa. senator web and i recently went to okinawa on this issue and japan on the question of our bases in okinawa. it is a major problem that has been festering for longtime and that is not just the presence of american troops on okinawa because i think they're welcome. but there's an overpresence creating a real problem because

it is too heavy a presence. not militarily. it is not dominating anybody but physically it has taken over huge chunks of the island that are populated. the of collins like us but we need to find a -- the okinawans like this but we needed a place. up north is unreal. it is far too costly. it won't happen. we ought to be honest that it won't happen instead of pretending it is going to do. we need a specific have to relocate our marines from that facility where they currently are. there are suggestions that senator web and senator mccain and i, all three of us have made to the pentagon. i would hope secretary panetta

will tell the japanese we are very close allies and whatever we are going to do we will do together. this will not be a unilateral shift by the united states of a plan that has been agreed to. it is too expensive. we ought to be honest with one another. for some reason this is difficult politically and i am not sure i understand why either in washington or the japanese. i don't know why it is difficult to say we have to plan. we agreed on a plan. it is not working. let's change the plan. there is a sensitivity. who goes first? this is an ally. it is not like a negotiation with the former soviet union. this is an ally facing a common problem where it is not such a problem. not like people are trying to get rid of the marines but solve the location problem of the

marines. we should deal with it frankly together, not unilaterally and be honest about the impossibility and impractical ability that the word of our current plan. >> the gentleman in front. >> the arms controller. based on your lawn experience in six presidents now, what do you say is a possibility or how do you see a possibility of persuading the pakistani to come along our way? dealing with the soviet union in arms control leaders the we knew we could force them to do anything. we found certain pressure points

we could apply. what pressure points do we have to apply against pakistan to persuade them to come our way? >> if they see the relationship between us and them as a plus either economically or militarily, that relationship cannot be normal if their land is used as a base of attack against us and the afghan coalition. number 2, obviously there is a significant amount of economic and military support we provide which is in jeopardy because of this threat against our troops and already that economic and military support is on hold and different forms of it. a complex issue but in general that kind of financial support

is on hold because you can't have a relationship where we are supporting a country that is actively as well as passively helping to kill our troops. our troops there being killed by folks that have a safe haven in pakistan. and that government won't even speak out against that much less take them on. that makes it difficult if not impossible for us to continue the economic and military financial support in a normal way. that has been put on hold by the administration properly. of the -- ultimately it will be in their own self-interest as to whether or not they can distinguish between the terrorists who attacked them who they obviously go after and the

a terrorists who attacked their neighbors. if they think they can be given a safe -- they can be safe from threat from that kind of terrorist i think they are wrong in terms of history but they have to make that judgment. >> time for two more questions. maybe just one more. the gentleman in the second row. before i let you speak, a reminder that today's event has been on the record and when you're finished i have one announcement. >> mike cosby, recent retiree -- >> we miss you. >> this must be a sign of the times. not a single question on iraq. it is becoming more clear the ultimate numbers that will remain next year will be diminished from the numbers some had anticipated. anything you can tell us about our that negotiation is going? there was a lot in the news about it the last couple days

but it is sort of questionable. any best guess when the defense authorization bill will be on the floor? >> the first question is easier than the second question. amazing to say a question about iraq is an easy question to handle than the defense authorization bill. that is the situation in the u.s. senate. in terms of iraq the discussions continue. we should make it clear that there's a finite point where we have got to simply say this is not going to work. we will pull our forces out including the trainers we are willing to keep their --there providing we can keep them from being covered by iraqi -- being prosecuted under iraqi law.

we won't let our troops be put in that position. and so that is the sticking point apparently. but i don't think it is a good idea for us to be competing with iraq tarasco's for troops. we have been in the position where relics as though we made certain statements which suggest we are hoping they are going to be making this request and we are hoping certain elements of their political world will join in the government to request. will some of the shia groups joined in the request for our troops politically difficult or would do so. this ought to be in their interests and our interests. we should be pleading with them to ask it. i don't like to be in that position. i am willing to respond to a request providing we are not in combat. providing we are there for

training purposes. we ought to give a clear deadline and say we have to plan if the deadline doesn't need to remove those troops. i am glad we are pulling out almost all of our troops is not all. for my republican friends who criticize president obama for setting a deadline in afghanistan, for the reasons i mentioned, this deadline in iraq was a president bush deadline. to end on a partisan note. not just democratic presidents to set deadlines. the second question on the defense authorization bill. the sticking point is there is language in that bill relative to handling of detainee's as to whether their detention will be by the military or civilian authorities. it is not a question whether it will be tried or whether federal

courts will be available for the trial of terrorists. last night we defeated an effort almost totally a partisan effort to denied prosecutors' use of federal courts for terrorists. we defeated that effort. two republicans joined. all but one or two democrats. to say we ought to be able to use federal courts as well as tribunals to try terrorists. that issue was resolved last night but the issue holding up the defense authorization bill is not a matter of whether federal courts will be available for the trial of terrorists. the issue holding of the authorization bill is who will detain and whether or not terrorists must be detained by the military or whether or not civilians continue as they have

in the past to detained terrorists and interrogate terrorists. we worked out a compromise which i won't go into because of time limits which i felt was a fair compromise because language in the administration doesn't like says narrow category of terrorists, al qaeda and people affiliated with al qaeda must go through the military detention system. they don't like that. we wrote in a waiver so they can waive that. the administration is apparently not satisfied with that waiver and i believe it is mischaracterized. reporter in the room who will not be embarrassed by my recognizing him wrote a story today or last night where the administration has inaccurately characterized our bipartisan language in our bill which contained the waiver for the

president to avoid what he doesn't like and that is bold up because the majority leader indicated the white house, going to get the language out of the bill before he calls up. that is the dilemma we are in. in that high note about roadblocks in the u.s. senate. we ought to have a question to end on a positive note. >> save a course in afghanistan and iraq which is a stark choice for the pakistani and a template for removing the dictators. thanks very much to senator levin. [applause] before i let you go a brief announcement. an upcoming event on wednesday the 26, conversation with general james amos of the u.s. marine corps. more information on that and other events in the back of today's program.

thank you for coming. [inaudible conversations] [inaudible conversations] [inaudible conversations]

[inaudible conversations] [inaudible conversations] >> senate armed service committee chaired carl levin making news at this event from the hill in a story written by john bennett. the u.s. should threaten to cut ties with pakistan over terrorism. pakistan should be warned the u.s. will cut ties with islamabad if it continues to support and extremist group linked by a tech to islamic groups. lawmakers -- senator levin said there is evidence of support between pakistan's intelligence agency and the haqqani network echo in a comment by admiral

mike mullen. you can read the rest of that story on the hill this morning written by john dennis. [inaudible conversations] >> as we leave this event looking get the u.s. capitol the house will gavel in for a brief pro forma session. legislative work on the calendar today for the house. the senate finished their work early this morning. finally gaveling out just before 2:30 in the morning. they had been working on h r 2112, three appropriations bills into one. they were able to dispose of 2 does an amendment. senators rejected democratic moves to bring parts of president obama's jobs bill to the floor. the vote to the measure failed to receive 60 votes. now for a weeklong district work period. the senate will be back october 31st at 3:00 p.m. eastern. you can always watch live coverage on the senate right here on c-span2.

make sure you join us later tonight for from the road to the white house where we featured texas congressman ron paul. he is scheduled to speak in iowa city at a youth hole event. we have that at 9:00 p.m. eastern on our companion network, c-span. this weekend six republican presidential candidates travel to des moines for the iowa freedom forum. watch live coverage of herman cain, newt gingrich and rick santorum and governor rick perry, ron paul, michele bachman starting at 7:00 p.m. eastern saturday on road to the white house. >> because i am a businessman of which incidentally i am very proud and formally connected with a large company, the opposition -- i have attempted to pick jimmy as an opponent of liberalism. i was a liberal before many of

those men heard the word and i fought for the reforms that the roosevelt and woodrow wilson before another roosevelt distorted the word liberal. >> he was a member of the democratic party and switched. is the wind will be won the nomination for president and although he lost the nomination he left his mark and political history speaking out for civil rights and becoming for an ambassador for his former opponent franklin roosevelt. wendell willkie is one of the men featured in the new weekly series the contenders live from indiana tonight at 8:00 p.m. eastern. >> every weekend on american history tv people and events that document the americans will. only one has the sitting u.s. senator been killed in action. the 150th anniversary of the battle of ball bluff.

historian suzanne at your role on the history of that and the death of colonel and senator edward baker. on american artifacts little tokyo near downtown los angeles has been a center of japanese culture since the 1900s. japanese-american national monument shows us around. lectures in history, bowling green professor scott martin on the history of opiates in america. look for the complete weekend schedule at c-span.org/history or for our schedule in your in box. click the c-span alert button. the under secretary of treasury for international affairs said yesterday europe's financial crisis poses the most serious risk to the global recovery but expressed confidence that european leaders were fully engaged in resolving the debt. they practice for the g 20 meeting. the group of 20 was established in 1999 to bring together advanced and emerging economies

to discuss key issues in the global economy. this is just under two hours. >> i would like to call order in this hearing of the banking subcommittee on security and international finance. this hearing is more timely than when we initially planned it. the g 20 and global economic financial risks. we are fortunate to have on the first panel lael brainard, undersecretary of international affairs. as we move this hearing back from 2:00 to 3:00 i will be brief in opening comments and take advantage of the witness's time for questions. obviously the timing is particularly important. the g 20 finance ministers met this past weekend and issued a new communique and we have the european union summit this

weekend which the eyes of the world will be on. the g 20 will meet in france november 3rd and fourth. the most obvious challenge facing the g 20 is the european economic and financial crisis. it is not the sole responsibility of the g 20 to fix its problems. obviously this is not the only item on the g 20 agenda. if the g 20 is to prove itself useful in the long run and demonstrate its ability to get in front of the next economic or financial crisis the next few weeks will be extraordinarily important. the world economy now faces a variety of crises we still have in america. an economy that while technically in recovery a huge

number of americans have not felt that yet. a further shock to the system coming about from a non structured default by grease or any other country or contagion spreading across europe, the financial markets will have a dramatic effect on the economy and an effect that if not appropriately monitored and dealt with could rival the challenges of 2008. the challenge is we don't have the same tools available to is that we had in 2008 on terms of monetary policy and fiscal stimulus as well as a growing concern and some level among the american public that some of the actions in 2008 disproportionately help

financial institutions over many of our fellow citizens. .. secretary brainard i think you said it where -- well and directly. i was reading through your testimony and right here, you say europe's financial crisis poses the most serious risk today to the global recovery. that is what this hearing is about. we want to hear about that and what you see on the horizon. if i might just offer a couple

of thoughts about what i see, because i would like your reaction to that at some point. you know, on one hand, think there is consensus about the need for action, obviously. you have countries like greece and portugal and that are really struggling and trying to figure out how they that are positioned themselves. on the other hand, you have political realities. how far can other leaders move to deal with the crisis that they are facing? every day is a day of concern. every week is a week of concern and as we continue to move down this pathway, if there isn't some hints of resolution or some pathway then it appears to me that whatever sense of security the financial markets have in the potential for resolution, the underpinning for that really gets hit. they begin to be more and more

concerned and then it gets tougher and tougher to fashion a solution. so, again today, this could not be more timely. we apologize for putting everybody off, but that's the way it was sans. my life is more dictated today by what mitch mcconnell and harry reid are doing then what my wife is doing and that is a terrible thing to admit in an open hearing, but it's true. some of this this is just unavoidable, so we appreciate your patience. with that i am very anxious to hear from you secretary, your thoughts on this and this is -- weakening gauged in a dialogue about what we see and what we need to be thinking about in the weeks and months ahead. thank you are good. >> thank you senator johanns. with both of us being relatively new here it is particularly painful for us as former governors and we used to make the agenda.

[laughter] the kind of constraints. with no further it to do that do, secretary brainard. >> thank you secretary warner and ranking member johanns. as you said, this hearing is very timely. today americans are focused on securing good jobs, providing for their families, building opportunities for their children. that is why it is so important for us to strengthen america's recovery which still remains to vulnerable to disruption beyond our shores. europe's financial crisis poses the most serious risk today to the global recovery. while the direct exposure of our financial system to the vulnerable countries in europe is moderate we have very substantial trade and investment ties with europe and european stability matters greatly for consumer and investor confidence. last week at the g20 meetings in paris on an ongoing basis the europeans are discussing their efforts to deliver a comprehensive plan to address their crisis by the summit in

early november. this plan must have for parts. first europe needs a powerful firewall to ensure that government can borrow at sustainable interest rates while they bring down debts and strength and growth. second european authorities are taking steps to ensure their banks have sufficient liquidity and stronger capital to maintain the full confidence of depositors and creditors and as needed access to capital backstab. third, europe is working to craft sustainable -- as it implements tough structural reforms. finally european leaders need to tackle the government's challenge to get at the root causes of the crisis and ensure that every member state is pursuing economic and financial policies that support growth and stability. for our part here in the u.s., pro-growth polity sees in the near term and meaningful deficit reduction in the medium-term provide the best insurance policy to protect the u.s. recovery from further risks and

beyond our shores to promote near-term growth and job creation. the president has put forward a series of proposals that would put veterans teachers and construction workers back on the job and put more money in the pockets of every american worker. president obama is also proposed a framework to put our medium-term public finances on a stronger and more sustainable footing, placing the nation's jet -- debt-to-gdp ratio on a declining path by the middle of the decade. with overall demand in the advanced economies likely to remain weak, it is essential for emerging economic powers in the g20 such as china to move more rapidly to a pro-growth strategy that is led by their domestic consumption by allowing their exchange rates to adjust. at the g20 meeting the economies including china committed to do just that comic celery three balancing demand toward more domestic consumption and to move towards market oriented exchange rate. we made this our top priority

with china and we have seen progress with the depreciation of over 10% real term bilaterally since june 2010 and with exports to china growing twice as fast as other markets but the exchange rate remained substantially undervalued and we need to see it appreciate faster. there are two other priorities i will touch on briefly in the g20 and in the financial stability board. first we have been working very hard to level up the playing field across major and emerging financial centers in the wake of the most global synchronized financial crisis the world has seen. we are working temple mount the most globally convergent financial protection and the world has attempted and we are trying to do so in lockstep as we implement the reforms here underdog frank. the g20 endorse new global capital standards in november of 2010. it will endorse a new international standard for resolution regimes. so that large cross-border firms can be resolved without the risk

of severe disruption are taxpayer exposure to losses and it is very important that we move forward in sync with their g20 partners on the reforms to derivatives markets that were enacted under the dodd-frank act and that are extremely important for ensuring that there is much greater transparency about where the risks in the system live and efforts to mitigate them. finally, sustained and strong american leadership through the international financial institution is vital to achieving our goals in the g20 and at home. we were instrumental in 2009 in and strengthening the imf which help to strengthen the global economy and our continued leadership is vital in the imf to provide us with outside influence at the imf response to challenges such as the european crisis which that is greatly to american jobs and growth. we look forward to continuing to working closely with you on these important challenges and with that i will conclude.

>> thank you secretary brainard. we work very well together and since there are two of us rather than putting tom on the flora have got a couple of questions and if you want to break in at any we will go back. this is in a more informal path. the first question is, here we are a little year plus after dodd-frank a few years after the 2000 a crisis. one of the things we saw in 2008, i am not sure we would have predicted not only did counterparty exposure with aig, because we didn't have accurate real-time ability to figure out counterparty exposure and overall -- this is not directly your area but with fsoc in place at this point the financial stability oversight council, we

have seen a lot of published reports about u.s. bank exposure to greece, but do you have a level of confidence at the regular -- regulator level, the fsoc level we have enough knowledge not only for exposure but if you could talk about money market exposure counterparty exposure. obviously direct and indirect exposure. we have a freezing of the credit markets, a percentage of our financial exposure to europe were to decrease at all goes out the window but do we have enough current real-time knowledge in terms of our financial institutions exposure to both greece and some of the other countries that are talked about it being a path path of passive contagion? >> well i think as you indicated, some of the reforms underdog frank and some of the conforming reforms in the international system under the fsb will help over time although these are in the process of being implemented as we speak.

the fsoc has spent time on the risks from europe and it does provide a forum as was intended for sharing of information among the supervisors and the regulator so that they have common assessments of risk. there is, as you said, they direct exposures particularly to the most vulnerable periphery countries that are relatively modest at this juncture. there is also. >> not just as positive or a institutions. >> direct exposures from depository institutions. in terms of the information we have on some of the other entities in the system there is much greater information, much more detailed information available in money market funds and that information is publicly available and that would be critical development from the crisis. insurance is still a work in progress but i think we are going to see that moving along

at a rapid pace as well and of course the reforms that are in the early stages on derivatives will provide extremely important transparency into what was previously very opaque set of markets between central clearing, between the information, being reported on a real-time basis to trade, depositories those reforms as they move forward will make a material difference in terms of our regulators and supervisors ability into the system. >> again, just hope we recognize that we are doing as much as possible that we can at this moment in time in terms of the counterparty exposure of some of our institutions. let me ask one other and senator johanns please jump in. we had chairman bernanke and to do a small briefing around some of these issues as well and one of the things that i think obviously europe is wrestling

with, we focused on greece, and we are looking at what the europeans directly have done in terms of the europeans stabilization fund and potential ways to lever that up but my understanding, in the next, if we were to see contagion while greece central default on greece would be challenging, if this were spread to italy which has got a rollover a trillion euros in debt over the next year and spain, 500 billion euros and in debt over the next year to roll over. when you look at the size of the europeans stabilization fund, even if you then layer on top of that the imf dollars, our reserves, those reserves are not enough to take on the kind of challenges and the firewall you

mentioned, point number one, the europeans in terms of this firewall but do they have enough capital at this point under the current framework to provide that firewall? >> well i think it is very important as you say to emphasize that in order for europe's financial stability to return, what they categorically need to do was take the risk of cascading defaults and bank runs off the table. in order to do that they need a firewall of sufficient force and size to overwhelm the markets and i think that is something that we saw in our own financial crisis that was critically important to helping to restore a orderly functioning to our financial markets and it is something european leaders are talking about as they are moving forward on this comprehensive

plan. they have quite substantial resources in the european financial stability fund, but they will need -- >> 440 billion euro? >> euro? >> they have 440 billion euro under the structure approved by the national parliaments in the euro area and that funding is going to be critically important for doing those things that we talked about earlier, which is to ensure that large sovereigns with sound policies such as spain and italy can fund at affordable rates so that they can implement those critical reforms that will allow them to grow and bring their debt down. they also need to have adequate bank capital backstop so as they move forward with their plans to set strong capital buffers in the banking system, that where needed they have public capital backstop's. in order to do that the eff will maybe leverage that.

there friday of ways of doing that. it is achievable. these goals are achievable with a capital that they have but that of course is one of the key issues that will be part of their comprehensive plan. >> again i want to turn to senator johanns. you did say you think within that europeans stabilization fund, it is adequate? looking at a trillion dollar rollover in italy and a half trillion dollar rollover just in spain alone not counting the of other nations? >> the funding available in the european financial stability fund can be leveraged up to adequately address the needs that we were talking about to ensure that italy and spain under large performing sovereigns have adequate funding to backstop the banking system and of course to continue to fund the program countries as they perform. but again, it is vitally important that they leverage

up -- >> they haven't figured out how to leverage it up yet. >> what is on the table now, precisely what is the form of that leverage and that leverage needs to be credible in the markets and it needs to give them that overwhelming force that takes the threat of defaults and bank runs off the table. >> there is so much to talk about and ask about, but let me if i might, start with some of the thoughts expressed in dodd-frank and i think the dilemma that we are heading toward. we have put in place with dodd-frank, an enormously complex piece of legislation. i didn't support it. now the rules are coming out and it is just a massive amount of injection of the system's new

rules, new requirements for the financial system. at a banking hearing some months ago, a concern was expressed actually by senator johnson and others actually, and the whole issue was how is this going to be harmonized internationally and deputy secretary wolin said we are working and i'm quoting, we are working closely with rg 20 partners to make sure that we get a regimen that works worldwide, so we don't have new opportunities for arbitrage. i think translated what we are all concerned about is you wind up with this u.s. system and then our capital flees because why deal with this if you can find less resistance in singapore or a.g. 20 country? soon after that, i am reading an article and i probably will

butcher his last name but michael vernier of the european union said this. we don't support the same approach. he said that is not what we are going to do. and, really kind of put down what we had done in the united states. so, what assurance can you give me that the g20 with all of these other problems that they have and bear our economy threatening problems for that part of the world, that in the midst of that, they are sitting there trying to figure out how to put the volcker rule in place and how to put this rule in place etc. and following the leadership of the united states. >> senator let me just say first of all, i could not share more fully your concern and your determination to make sure that

as we move to put in place new mechanisms to ensure the vibrancy and the resilience of our system, that we move in lockstep to ensure that other financial centers around the world both established financial centers and those that are coming on line, move in sync with us so that we don't inadvertently undermine the safety and soundness of our system by providing regulatory arbitrage opportunities or a equally importantly, create a competitive disadvantage for our financial institutions. i believe we have done more on that than has ever been true in the past, and we are having quite a lot of forward momentum among the other members of the financial stability board, and in the g20. michelle barnier, the commissioner, who has responsibility for these issues and the commission meets very

regularly with secretary geithner and they both have repeatedly stated their commitment to ensure that as we move to put in place new capital liquidity leverage standards, the europeans do the same. as we move to put in place requirements for standardization, central clearing, trade repositories on derivatives, they move to do the same. i think we have had successes in terms of getting general adoption of the principles across all the g20 and ssp membership. i work very hard with my counterparts to make sure that not only are they adopting these principles but they are implementing them and our staff of international financial authorities go through in fairly great detail with the cf ct and we are trying to be as granular as we possibly can to make sure

that as our implementation proceeds, beyers does as well. obviously we each have different national legal regulatory environments and so there are going to necessarily be moments where for instance on dodd-frank we move forward with their legal framework or quickly than the europeans did, but we have similar implementation deadlines and we are all working extremely hard, because they are similarly, they are as committed as we are and i think they see the same risks to their system, which are more evident today perhaps the never before of not moving forward on those key requisites for a sound financial system. >> it appears and like i said, we could spend hours on this debating this, but here is my impression. my impression in having worked with the european union for many, many years, part as governor, more intensely as

secretary of agriculture, is that this is a very unusual governing system. it is something we are we are not used to. you have got this umbrella organization out there and it is not really a central government but it kind of tries to act like a central government. you have got all of these other countries that are member countries of the european union. they are forever proclaiming their sovereignty, because it is important that they reclaim their sovereignty to their citizens and their country, and you know when you talk about principles being adapted, it is not very reassuring to be honest with you. all that tells me is that we are having a lot of meetings. i think you are working hard, but i'll bet when we look back 12 months from now or 24 months from now, or 36 months from now we are going to see little activity by the member countries to embrace anything near what we

did with dodd-frank, putting our financial structure at a serious disadvantage. now i hope you can call me in 12 months and 24 and 36 and save boy you are really wrong about that and i'm here to call you would tell you you are but i don't think i will be wrong about that unfortunately. but i find might move on to what i think what probably is occupying our attention right now and that is the financial crisis. here is another impression that i would like your reaction to. we have a handful of countries that really are struggling. greece would leave that. we could probably talk about portugal, ireland. i hope their ambassadors don't call me and yell at me but i think quite honestly, they are really trying to figure out how to deal with what is a crisis

or -- there were huge protests in greece yesterday for example. they are really resisting the efforts. you have got a second group of countries, spain, italy, that somebody said to me and it probably describes it well, too big to fail, too big to bail out, large economies. if somehow the problems with the other countries can't be walled off, they kind of get tangled up and their cost of borrowing goes up, etc.. you have serious under capitalization of the banks. you have stress test that nobody has regarded very seriously. i think they made an attempt but quite honestly our financial community isn't relying on their stress tests, and then in the midst of all of this you have got the european system, and you

have got people, citizens. it would be like you know, for germany to embrace the idea of bailing out greece, it would be like nebraska with a balanced budget amendment in an obligation that we can't borrow any more than $100,000 a we have no debt, bailing out another state that spend wildly and borrowed money. well you can only come to understand how the germans are looking at this and going, are you kidding me? and then you begin to realize, how do you move those dynamics with this system to the kind of resolution that is necessary, because we are not we are not talking about a few dollars. and if the market doesn't have confidence that this is a again a firewall and i think guaranteeing 10 or 20 or 30% of the dead isn't going to be

sufficient, and you can calm the markets down, then i think this thing really has some serious serious potential. now, i have what a lot out there but i would love to have your reaction. where am i wrong in this? what have i misread about this? >> i think the risks you point to our real. i would say though on the other side, that europe has the resources. it has the capacity and we have heard from european leaders that they have the will. the things that need to be put in place i think are fairly clear, and of course as you said, i think there is mixed public support but if you look at the vote for instance in germany on the eff, the overwhelming majority in favor

of supporting the july 21 reforms which extended the efff and enabled it to do the critically important functions of providing precautionary financing and backstopping the banks. so, you are exactly right that europe will need to muster the political will that everything we have heard is that european leaders are determined to do so, and they have the capacity. they have the ability to leverage up the eff to a magnitude that really is commensurate with the size of the challenges they have the ability to take the risk of contagion to italy and spain off the table entirely. and we will see over the next days and weeks how they are going to confront those challenges. as you indicate though, over a slightly longer period of time and they are talking very clearly about this, they will need to move forward on putting

in place mechanisms that give them the fiscal capacity that really matches their monetary union and that is the piece that will take a little longer, but they are going to need to have much more fiscal unity and much more centralized fiscal governance over time. and i think that's something that member states are clear-eyed about in the face of this crisis. >> if i might, just one more. does that require a treaty change? the last step that you just described? it does, doesn't it? >> it depends very much senator on how they decide to move forward on creating a more unified fiscal structure. some of the ideas that are being discussed would require treaty changes. others might not. they have already put forward some very important governance reforms in terms of surveillance and penalties for not meeting

fiscal targets for instance. so, some of these issues have -- we have already got a sense of where they are moving. on the broader sense of where their fiscal governance is likely to be in several years time, think they are still working on that but they are committed to it from everything we hear. >> i only raise that because changing their treaty is akin to amending our constitution. i mean, this is no easy task. a complicated problem i guess what this all comes down to, very complicated problem. >> i would first of all agreed with senator johanns about the complexity of this. to carry on your analogy, a balanced budget state as well as aaa bond rating. i can't believe i'm saying it but it is kind of like the fact

that you know nebraska's government was well run but nebraska completely finance california's budget. you have a little bit of that problem but i think we are looking at it in germany, and that one way or the other, germans are going to have some level of responsibility whether directly or indirectly through their banks exposure. i think one of the things we had a spirited debate about dodd-frank, i think it is imperfect, but their reaction i heard more from our european colleagues was thank goodness at least america went first and again echoing what senator johanns said, because we have advanced capital standards move further and we have had more transparent stress test for example and the fact that we are intertwined, whether we like it or not, we didn't try to have

these coordinated standards. slipping to the lowest common denominator is not going to help anyone. i believe and i share senator johanns's concern on how we do this on an organized aces, i actually think you know you may see what we have seen in the u.k., they may be taking even more structured approach than what we took and when you hear some of the leaders and france and germany in terms of transaction tax that would go way beyond dodd-frank in terms of financial constraints, and while we may disagree about lack of merits around dodd-frank i think we would both agree we need to have not this arbitrage and consistently moving forward. at the end of the day i think we and the e.u. will mesh.

probably the japanese and others but as we get to this g20 framework how do we make sure that even if all the -- are explored in a coordinated fashion that there is not the kind of outlier and enormously interconnected system that does in effect become the equivalent of a tax haven but with a low standard financial center that doesn't agree to international standards? what are we doing to grapple with that? >> well senator warner as you said, think we derive tremendous advantage from moving first and pulling the world to our high standards, and what we have seen in the g20 and the fsb is that we have succeeded in having all the members of the g20 and the fsb sign up for tougher standards on capital liquidity and leverage at banks, sign up for resolutions, higher

prudential standards, greater intensity of supervision around systemically important financial institutions and sign up for a host of very sound changes that will make our derivatives markets less opaque, more transparent, less risky. in terms of getting emerging financial centers to come on board, that is why we thought it was so important to be working through the financial stability board and the g20 where the major financial centers and the emerging financial centers sit together, and so we have a variety of standard setting bodies, the basel committee, the fsb where we have the emerging markets, emerging financial centers represented and taken on the same obligations, the same principles in the same commands in the same basel iii standard uniform across all members of the fsb. we are intensely engaged with singapore on our derivatives

reforms and we have received repeated assurances from the singapore monetary authorities in the supervisory authorities that they will move in lockstep as europe and the u.s. come together on their derivatives regimes. so i think that the concerns you raise are very real. we are working we are working very hard on them. we have to stay extremely engaged at a level of detail on implementation, which we will continue to do but i think we have a real chance of having a system that has far fewer major areas that present regulatory arbitrage risk and disadvantaged are financial institutions. >> we will obviously want to monitor that and we need to have -- we need to establish what those metrics ought to be and i know you have got to leave in a couple of minutes.

want to ask one more question to make sure my colleague gets another crack. we have seen the news that while there was some anticipation, the e.u. might resolve some of these issues this weekendweekend, they are already talking about now a second summit. they may not get there. at a lot of pressure on -- how do we make sure that this crisis doesn't just -- or is there anything we can do other than continue to urge you to move forward in your administration and to make sure this doesn't just drag itself out? at some point we in this country right or wrong, staunch some of that was dramatic actions in late 2008. what is -- recognize you don't want to make news on this but what is your best guesstimate we will see definitive action within this next 30-day period

with this summit coming and probably a second summit within the next 30 days or is this going to be an overhang that will take months and months to work through? >> let me just say that the european leaders are very intensively engaged on this. i think it is a good sign that they are meeting in intensively on this. president obama has been on the phone with european leaders, and has spent a lot of time asking them about the comprehensive plan as they are developing it. he is very very committed to ensuring that the u.s. economic recovery is as robust as it can be and insulated as it can be from shocks emanating from abroad recognizing that europe has headwinds -- headwinds from europe have slowed our recovery somewhat. i think that you know, the set

of issues on the table are the right set of issues. european leaders are focused on the firewall, that bank recapitalization planned and ensuring greece is sustainable and that longer terms that set of governance reforms and again i think that they have that capacity. they have stated repeatedly that they have the will. they have the resources and i think they know from discussions that we have had among finance ministers and central bank governors at the g20 last weekend that this is an issue that the world cares a great deal about, that the emerging markets that are part of the g20 also see european financial stability as central to their own economic growth, that this is the most important priority for the g20 meeting. we see every indication the europeans are working very hard to come up with their plan and to have a plan that succeeds on

the four dimensions that they are talking about. >> well i understand your answer and i appreciate your comments and appreciate you appearing. i hope recognizing we are inextricably tied, that there won't be continual ratcheting back of expectations which seems to be the news of today. the europeans have decided a second summit as opposed to putting out at least the first two steps of the plan in terms of the firewall and the bank capitalization and we do hope that the g20 will continue to show that these international organizations can be successful. but, dragging this out is not clearly europe's interest or clearly in the united states's interest.

again we appreciate your time. secretary brainard. we will move on to the second panel. >> appreciate the opportunity. >> thank you. [inaudible conversations] [inaudible conversations] >> if we could go ahead and book the second panel. and as they get settled by me go ahead and start to make some introductions, recognizing we will probably have another round of votes at some point. in our second panel, we are going to continue this question of the g20, the european crisis,

and currency issues in terms of making the point that all of our economies are enormously intertwined. so, we have three very distinguished panelists. dr. uri dadesh serves as a senior associate and wrecked or for the international economics probe i'm at the carnegie endowment for international peace. his work focuses on trends in the global economy and the increased weight of developing, increase weight of the pattern of financial flows, trade and migration and associated economic policy and governance questions. a french citizen, dadesh has served as the world bank's director for international trade. before that is director of economic policy. he directed the banks world economy group leading preparations of bank reports on the international economy over 11 years. before that he was president and ceo of the economic group economist intelligence unit and

business international. thank you or for joining us. dr. john makin is a resident scholar at the american enterprise institute. mr. makin, and by saying that correctly? mr. makin is a former consultant to the u.s. traitor department of congressional budget office and the imf. he specializes in international finance and financial markets including stocks, bonds and currencies. dr. makin is also researches the u.s. economy including monetary policy and tax and budget issues as well as the japanese economy and the european economy so we will be interested hear your comments on some of the e.u. actions. is a principle of -- and author of numerous books and articles on the financial monetary and fiscal policy. mr. makin right aei's monthly economic outlook and dr. fred bergsten has been the director and widely quoted think-tank

economist at the peterson institute for international economics since 1981. he has been ranked as a profession -- i hate these points where the type is getting smaller and my eyes are getting worse here. he has been ranked as somebody who can move the markets. dr. bergsten was the assistant secretary for secretary for international affairs at the u.s. treasury under the carter administration. vessel function as undersecretary for monetary affairs representing the u.s. on the g5 deputies and in preparing the g7 summits during the 1980 to 81, during 1969 to 71 dr. bob works in corrugated u.s. foreign economic policies in the white house as an assistant for international economic affairs to dr. kissinger and the national security council. dr. bergsten is a well published dollar and served in several distinguished institutions on foreign policies and competitive matters throughout his career.

i want to thank all of you for being here today and again timeliness of this hearing couldn't be more important and with that we will get to mr. dadesh and start your testimony. thank you nick is the thank you very much mr. chairman, mr. ranking member, and for inviting me here today. on the euro crisis, i think it has been from the discussions that have preceded that everyone understands that the sovereign default in europe are possibly leading to a collapse of the eurozone. it would have major repercussions in the united states and could lead to a layman like eventit then, but in my view, -- what i think however is not sufficiently understood is that the eurozone may not be able to handle this crisis on its own.

and this is because of two dimensions. one is the politics, and the other is the even more important thing, the economics. the politics, because europe remains a half built structure, the commission is not the federal government, and the european central bank is not the federal reserve bank, so therefore the example of nebraska bailing out another state i think is extremely appropriate in terms of understanding the dynamics of the current situation but that we take it one step further which is i don't think there is any question about -- if we ask other states considering themselves part of one country, americans.

we are far from that situation in europe. .. >> they're just a much bigger part of the financing. and as you have already recognized, policy is largely out of bullets. it's also important to realize that the european financial

stability fund is, there is an hadn't of smoke and -- there is an element of smoke and mirrors this it because the guarantees come in part from countries that are themselves in trouble and each the countries that were thought not to be in trouble, like france, now are confronting a cost which has doubled the credit of france vis-a-vis germany has doubled in the course of the last several months. it's in excess of 100 basis points. that is an indication that the market is now calling into question the capacity. and, actually, referring to the guarantees themselves in the, in the most recent moody's decision to put france on credit watch, referring to the guarantees at the current levels, not at the levels that are contemplated for the next stage as being one of

the reasons that they downgrade, that they are considering the downgrade, the downgrade of france. so that is why in my written testimony i have proposed that there's an emergency and as a precautionary measure the imf's resources should be expanded by a trillion dollars. i, i'm audacious enough to say with the u.s. making a contribution to that, to that expansion. audacious because i know that the previous expansion has not yet been agreed. but, you know, this is the situation that i, that i see. i see it as an insurance against a very bad event. and i don't think -- while i think the emerging markets want to contribute, i don't think the emerging markets will put all of

that amount by themselves, and even if they wanted to, it would not -- the united states would not necessarily want to see its interests diluted in the imf to that extent. thank you. >> um, just one point. the current imf balance sheet's about 300 billion, suspect it? >> i think the available forward capacity of the imf, of new commitments according to the manager is $400 billion. i think the total balance sheet is somewhere in the region of 850 billion. so $400 billion is the forward catty, yeah. >> thank you, sir. >> thank you, chairman warner and ranking member johanns for the opportunity to testify. i am going to focus my comments as well on the european situation. it's, i think, appropriate to

remember that the g20 was first established in 1999 after the asian debt crisis which was tied to excessive rigidity exchange rates in the region and attempts to avoid those adjustments. my contention today is that the european crisis will not be contained until some of the problems that are inherent in an unstable and nonviable currency regime are addressed. and i think if i go a little bit in detail as to how we got here, how did we get to a situation where last april we were all thinking we're out of the woods, people were starting to invest again, the u.s. economy was looking good to a situation where we're looking at a weekend where, once again, europe is delaying needed adjustments with good reason, because they face some very formidable problems. europe's current problems i would term internal systemic-driven. that is, they have a flawed

currency system. how did they get here? when the european monetary system was set up, the assertion was made that you became a member, greek debt was the same as german debt. so if you were a bank and german debt was commanding an interest rate of 20 or 30 basis points above greek -- greek debt was above german debt, you lent to the greek government. you then could use that claim on the government to borrow there the european central bank, and the process began. in effect, the european monetary system initiated an active increase in the credit ratings of the weaker southern european economies whose labor costs suggest they were in no position to continue to compete with germany. and is -- and so over time the european debt crisis was built on a premise, that is that sovereign governments don't default.

the u.s. debt crisis or the systemic financial crisis was built on the premise, the fallacious premise that house prices never go down. those problems come back to haunt you. why is it so difficult to address this crisis? first of all, there are really four ways to address it. one, the one that's being contemplated now is to engineer massive transfers from northern europe to southern europe. and as others who have testified have suggested, really, we're down to germany. because even the french have their problems. the efsf with its 440 billion euros is a bit of smoke and mirrors as uri has suggested. just the journal today, i think, when we were discussing that earlier when you take away the funds that are already committed, you're down to 275 billion. and then when you look at the commitments from italy and spain which arer spectively going to be recipients, they really don't have any fund.

so the idea you can leverage that up by saying you'll somehow guarantee the first 10 or 20% of the liabilities of the countries involved, i think, is perhaps wishful thinking. the second way to deal with the problem aside there massive transfers, the resources aren't there to make the massive transfers. what else could you do? well, last year the idea was to say to the greeks, we'll give you money if you blow your brains out, that is, if you'll make massive cuts in spending, massive increases in taxes and render the economy or push the economy into a tailspin that means the debt to gdp ratio will be higher this year than last year. that's where we are with greece. that's conceivably where we could be headed with some of the other cubs. a third -- countries. a third alternative is to force wages and prices of the southern european prices to go down so rapidly that they are going on table to compete with germany. that's not going to happen. greece, italy, spain aren't going to turn into germany, and

so that's just not a realistic alternative. the fourth alternative is to allow currency adjustments within the currency union that would address some of the stresses that are there. i think that's probably where we're going to end up, although we're certainly going to exhaust a lot of pain and suffering before we get there. i don't see a way to make greece a viable member of the european currency union, neither do its citizens. the parallels with the argentine debt crisis are there. you request through a long -- you go through a long period of promise, we'll do this, we'll do that, the government's left in a difficult position, or they're really not prepared to undertake the adjustments that are required of them. so i think it's probably not wise, i would respectfully disagree with my fellow panelists, to put more resources into shoring up what probably is not a viable system. and why would it be a viable

system? to say, to impose a single central bank on an area as diverse as europe which has 17 treasuryies, thal gory breaks down, is just not a workable system. and the sooner we recognize that, the better. thank you. >> two out of three so far. this panel's not going to lack for some questions. [laughter] dr. bergsten. >> mr. chairman, i'll try to give you basis for a few more. i want to make a few points that will not repeat, but rather complement what the earlier panel discussed and my colleagues here. i think the most important role for the g20 summit this cannes is to inject renewed impetus for world economic growth. we're not going to so the european crisis, whatever financial engineering is done, unless they can get more growth going. yet the strong countries in

europe led by germany, but holland, austria, the sand nave yas, they should rather be at least stopping their tightening of policy, rather expanding. moreover, the european central bank should cut interest rates substantially. they're the only major central bank which is considerably away from the zero bound. unless europe gets growth, none of the financing is going to work, and it needs to be emphasized. unless the u.s -- you this congress and the administration -- can get together and provide some new stimulus to the u.s. economy, the world is going to continue to wallow as well. the good news is that half the world economy is still booming. the emerging markets in this developing countries -- and developing countries who now make up half the world economy are expanding by an average of 6%. moreover, they have policy space

to do even better. they have low budget deficit and debt ray shows. they still have fairly high interest rates. we should now ask the emerging markets who are the leaders of global growth to do more. they can do it, they can certainly expand further. they've been worried about inflation, but now with the rich country slowing down and commodity prices having leveled off, that is no longer of deep concern. they have been the beneficiaries of global growth strategies led by us and europe for 30, 40 years. it's time for them now to take the lead that their economic capacity and achievements provide. so i would say this cannes summit needs to replicate at least to a degree what the london g20 summit, the london g20 summit did in april 2009. namely, take parallel and to some extent coordinated actions to get the world out of the last economic crisis. we've got to do it again this time led by the emerging

markets, but with europe and the u.s. chiming in as well. it's critical how that emerging market growth impetus takes place. it's got to be done by expanding domestic demand, letting their big trade surpluses decline so as to impart growth to the world, not take it away from the rest of the world which higher trade surpluses would do. and that means letting their currencies go up much more and much more rapidly. on the european crisis, just make four quick points in addition to faster growth. i think they do need to lever the european financial stability facility up to something like two to four trillion euros. i disagree with john macon, i don't believe it's a failed experiment. it is a halfway house, and it's going to have to complete the fiscal union, but i think the way to do it is to complete the discall union, not abolish the monetary union. i'm going to disagree with an

analytical point made by secretary johanns. nebraska and other surplus u.s. states do to a degree bail out other u.s. states not by direct loans, but through the federal budget. because when you transfer your surplus to washington and it transfers that to deficit mississippi, there is some degree of bailout. likewise, when you import citizens from states who have had high unemployment and rising, you help bail out those losing states. the europeans don't have those two types of mobility. that's why they need fiscal group onto complement their monetary -- union to complement particularly if europeans do not get their act together quickly, plan b would have to center on the international monetary fund. because if europeans can't put together an adequate safety net, only the imf can provide it. the trillion dollars may

actually need to be a little bigger. that money would have to be borrowed from the big surplus emerging markets; china, korea, brazil, india, etc., etc., oil exporters. they could provide the money, they should do so, they need to pay back. finally, what should the u.s. contribute to all this? i've suggested our government needs to get its act together to get growth on track. we, obviously, need to move to tangible, credible means bringing our budget deficit down over time without interrupting growth in the short run. and i think we ought to take on a new commitment which is a commitment to eliminate our trade deficit. because that is a way to create something like three to four million u.s. jobs over a five-year period or so. we've been running huge trade deficits for 30 years, we've been facilitating the export-led growth of these emerging markets. they've piled up huge reserves as a result. i think we are perfectly justified, and it is not

protectionist, and it is not beggar thy neighbor to eliminate our big external deficit. we're the world's largest debtor country. they all tell us not to keep building it up. the g20 has agreed that every summit on balancing the economy. and, by the way, it would create something like three to four million u.s. jobs. if we're serious to getting back to full employment, i would throw that into the hopper at cannes as a u.s. commitment to implement agreed g20 strategy, but then we have got to do something about it like the budget deficit, like getting growth going through domestic demand here. >> you department disappoint. be -- you didn't disappoint. you know, let's -- there's so many different places to go with this.

what, i'd like to ask, um, dr. macon and mr. dadush to respond to at least one part of the provocative part that dr. bergsten just said was, you know, what do you think any -- is there any realistic chance that through the g20 mechanism we could really see, you know, a challenge or a coordinated action where the emerging nations would take on these kind of growth policies? since even -- since it seems to me that there has been a, for the most part, an enormous lack of coordination amongst the more industrialized nations on issues like currency. and then when we try to, perhaps, deal with china on a one-off, maybe not the most

effective tool, i will grant. but let's just start with dr. bergsten's, you know, first prescription. what do you think any chances of that could happen? either one of you. >> [inaudible] let me just say, i'll focus on europe. if i'm china or india, why would i want to finance this european experiment that has been struggling since 2009? why would i want to invest in a system that's just not going to work? i mean, fred says let's have, let's have fiscal union. we're not going to get fiscal union in europe. and we have a monetary union that is not viable. are the chinese going to invest 500 billion euros in trying to turn greece into germany? it's just not going to happen. so while the chinese certainly

this view of their aggressive geopolitical ambitions will want to appear to be stepping in the here where the u.s. is unable to do so, i'd be surprised if they were willing to commit many resources. if you look, first of all -- >> could i just ask one thing here? >> yeah, yeah. >> i mean, i can -- >> i mean, it would be nice, but -- >> i understand the point that the direct assistance, and i want to come back to your question -- >> right. >> are -- but the kind of more macro agreement that there could be, you know, coordinated growth policies across emerging nations, letting their currencies appreciate, i mean, is that even realistic? >> well, what have we been doing since 2008? >> no, but from the emerging -- >> remember, in 2008 after the lehman crisis when the fed cut rates aggressively and we engineered a large fiscal stimulus in the u.s., china engineered the largest stimulus in the world.

they engineered a stimulus that was worth 14% of gdp over two years. they got their economy going. they have, of course, the fortunate situation that they have lots of resources and lots of things that need building. so they made a huge contribution to global growth in 2009 and 2010, although it had its downside in the sense that they were, you know, china is such a new force and the contribution was so great that they were pushing up commodity prices and energy prices and so on. i'm not quite as sanguine as fred is about where china's headed now, but i think if i were the chinese, i'd say, look, we did a lot, we did a lot, it was not in our own interests, the spillover effect was very positive. so i would think what's realistic now at cannes or elsewhere is to see if the chinese are prepared to back off a little bit on tamping down the growth rate because they're seeing higher domestic inflation

which some estimates are put as high as 10%. so they're involved in a kind of a conflict situation. this is a very tough situation. so i wouldn't -- let me put it this way -- >> is your prescription this terms of china or your expectation this terms of china for other emerging nations as well? whether you take your indias or south koreas or others? >> i think china's so big the south koreans are, certainly, you know, they're in very good fiscal shape and on a position to do what the chinese could do. my bottom line is this, i wouldn't bet on a lot of help. if i were a realist, i wouldn't bet on a lot of help from the emerging markets for the european experiment, nor for the american conundrum as well. >> mr. dadushsome. >> yes, first of all, i agree with john makin that the emerging markets played an absolutely instrumental role in 2009 in particular in supporting

global economic activity at a very difficult moment. and with china playing a disproportionate role. but i think we need to recognize that that was a very particular situation. and as the emerging markets kind of accelerated extremely rapidly beginning in the second, third quarter of 2009, they within about a year, year and a half were running into what's called a supply constraint. basically, inflation was building up. there's also a real concern in asset price bubbles, there was, in a number of them. so they were reaching their natural limit. and, now, again, fred bergsten makes a good point that in a

scenario where global economic activity, you know, deteriorates in another significant way i think emerging markets could provide a cushion, if you see what i mean. because they do have room. and it will take a while. it's not evident right now, but it might take six months, nine months for the inflationary pressures that are built up over the last couple of years to abate in the emerging markets, and then they can accelerate their growth again because they have that capacity. but i think it's safe to say that their contribution in this kind of scenario will be relatively modest. and as i put in if my written -- in my written commentary, i think we should always remember that american gdp is, to take one example -- i could take other examples from advanced countries -- is composed, is

composed of domestic demand and not exports. the problem is domestic demand is about 34 times bigger than exports, okay? so, you know, even this best of circumstances -- in the best of circumstances just simple arithmetic tells you that the real key to american growth, particularly american growth because it's a large relatively closed economy, the key to american growth is the internal dynamics in the united states. and the trade balance will help a little bit at the margin. um, and by the way, i'm also, i also would stress the fact that there's virtually no conceivable increase in demand from china that would have a significant impact on, on american economic activity. i mean, very simply, just a result of the fact that china

is -- [inaudible] the size of the united states and the united states is a relatively closed economy. so it's about domestic reforms, domestic structural reforms, it's about domestic fiscal reforms. that is the essence of what will drive american growth in the long term. finally, if i may, i also want to disagree with john makin about sort of not helping europe. and not because i'm a french citizen. but because should europe not be able to get its act together, and i fear that it might not or it could not to a sufficient degree, and that lead to a collapse of the euro zone of this half-built, failed experiment as john would describe it, if that were to

lead to a collapse of the euro zone, then i assure you we would have a crisis of absolutely global ro portions that, again, as i said at the very beginning would be of much longer duration than the lehman episode. >> could i come back on that somewhat? >> go ahead. >> well, just three points, quickly. on this argument about the fiscal union in europe, the europeans are not going to give up. they're not going to let the euro collapse. that's been their fundamental goal in life for over 50 years. they are not going to let it collapse. the history of european integration is that when they face crises, and they've faced many before, out of that and all the uncertainty and all the cacophony of the different voices comes forward progress toward a greater union. so i think we better understand that and support their move toward fiscal union because that is the positive outcome for us as well as them over time. on the debate about the emerging

markets' growth, i absolutely agree with my colleagues. china plays a decisive role there the big crisis in '08-'09. i applaud what they did. i draw the opposite ip for instance. they did it last time, they can do it this time. and the supply side constraints have declined sharply as chodty prices have leveled off. they have huge further infrastructure needs and demands, they have those programs out there, they've got plenty of financing to do them. the the issue is when. from their tonightpoint as well as the world's, now is the time to do it. some of the other emerging markets have already reversed policy. indonesia just last week began to cut interest rates. brazil -- earlier this week. brazil has begun to cut interest rates. the time is quickly occurring where other emerging markets are already moving in the direction i suggest, and be i believe china which is by far the

biggest, but others as well, can do it. i think the g20 can push that process. i'll reiterate what i said at the outset. these emerging markets taken together are half the world economy. they're growing three times as fast as the rich countries. that means their share is rising a couple percentage points every year. a decade from now they'll be two-thirds of the world economy. they can be drivers if we can get them to do even a fraction of what china did last time around. finally, i want to take up john's point or, rather, uri's point that the external side is not very important for the u.s. because we're a closed economy. well, we're looking at 2% growth. maybe. it's perfectly feasible for us to strengthen our external position by one-half to one percentage point of gdp per year for the next four or five years. and that would take our growth up by a significant increment

and create a big amount of jobs. we are a relatively closed economy in the sense that uri mentioned, but at the margin we can do a very large benefit for our economy by growing our external sector. it's absolutely right, exports to china alone are not going to do that, but if we can get the kind of pick up in world growth that i talked about at the outset with all the emerging markets -- more than half the world economy -- plus at least a little more in europe, there's no reason why we cannot expand our international contribution to gdp growth in a major way. we are missing a very major bet in not emphasizing that as part of our current jobs strategiment strategiment -- strategy. >> as i look at these issues, um, the debt of the european union, its countries, countries

in the united states, slow economic growth, just a whole host of things going on, i wonder what the potential is that, um, that inflation kind of rears its head again. how does that fit into the equation here, or does it fit? and that's kind of a -- maybe that's not questioned when, actually, we probably worried more about deflation in the last few years. we have historically low interest rates and etc., etc. but it just occurs to me that the pressures out there are enormous to roll over debt. you've got a situation where countries will be, um, struggling to finance that debt. what is the potential that inflation becomes more serious problem as we look two years and five years down the road? and i would like everybody's thought on that.

um -- >> can i -- okay. >> go -- i'm going to work my way across the panel, so everybody's going to get a shot at that. >> well, right now inflationary pressures are quite muted. you are seeing some pickup in headline inflation in europe, for example, but a lot of that is a reflection of some, you know, the delayed reflection of commodity prices to a large degree. um, the, there is so much unused capacity and so much risk aversion, in other words, tendency by people to mass cash and banks to mass cash if they possibly can, that even with the expansion of the central bank's balance sheets that we have seen, um, the actual expansion

of credit remains relatively constrained. and that's a general phenomenon in the advanced countries. it's rather different in the developing countries. in the developing countries, you are seeing, have seen a very significant acceleration of inflation. um, i think if you look some years forward, a lot depends on what you assume is the capacity of central banks as the economy recovers to withdraw the massive amount of liquidity that they've injected into the system over the last few years, and central bankers will tell you we know how to do that. the problem i have and the risk that i see is i know they know how to do that, that they have the instruments to withdraw the liquidity with selling bonds and changing reserve requirements, etc., etc., but the big question is will they be able to do it elegantly?

will they be able to do it in a way that you avoid a very rapid rise in interest rates as has happened many times in the past against a background of a lot of overextended investment and lending that is maybe triggered over a period of years by the abundance of liquidity. >> dr. makin? >> i'm not concerned about inflation right at this point. i would add, however, that if, if a trillion dollars of additional resources were made available to try to shore up a fixed exchange rate regime in europe, that the possibility of inflationary risks rise. in the great depression in united states, and usually after financial be crises there is a greater risk of deflation than inflation. and secondly, as we looked in

the great depression the requisite way out initiated in 1933 by the u.s. devaluation of the dollar v. -- versus gold is exchange rate adjustment. and our friends in europe would like to maintain a single currency. i understand that. and i understand the firmness of their commitment to that. but i think the risks of following that path do include some inflationary potential. >> dr. bergsten? >> i agree with my colleagues. but, again, you have to make two key distincts. you made one, which is timing. over a two-year horizon i certainly would not worry about inflation. over a five-year hidessen i certainly would -- horizon i certainly would, particularly if we do not get our act together here in terms of policy in a credible way. the other distinction, of

course, is between countries. uri made that. i don't see inflation risks certainly over the near term in the u.s. or europe or japan given the slowness of growth, high unused capacity levels. the develops countries, emerging markets have had that risk. i do think they are now recognizing the need to pivot their own policies. i mentioned brazil and indonesia already. because of the slowdown in world growth. nevertheless, they're closer to capacity margins. supply constraints there are potentially greater, so i would not expect them to do nearly as much as china did in '08-'09, but i still think they can change the sign of their policy. if they do it and the germans do it and we do it, that could have a huge effect on resolving all the problem we're talking about. >> um, i'll just ask one more question, and it's maybe one of the most complicateed things to try to figure out. but it's no secret if you look

at the polling, published polling numbers in germany and france, um, leadership there is really struggling. um, people are looking at what is being asked and required and kind of recoiling. and you have -- >> is it lower than the united states congress? >> well, i'm not sure i can add any thoughts on that, but it's, it's a difficult situation. and the political issues here are significant. what happens if you get a year and a half out there, and all of a sudden in response to actions that have been taken you have governmental change, campaigns that have been run on an anti-this or anti-that approach, and all of a sudden you've got a whole different set of circumstances from a leadership situation? try to factor that in for me and

give me your best thought on that. >> certainly, that's a theoretical risk, and i've worried for a long time you'd get populist politics in europe that would go in that direction. but i must say there's virtually no evidence to support it. the germans bitch and moan -- pardon my german -- but they vote strongly on every occasion in favor of the pro-european policies, the pro-european parties including those that have mounted the bailouts. the fundamental fact is germany is a huge beneficiary from the euro and the european union. i mean, we know the underlying old ticks going back to the wars -- politics going back to the wars and the conflagration in europe, and the germans do not forget that. but in pure economic terms the euro, for the reasons makin described, the euro is nirvana for the germans. they are the world's largest surplus country, but their currency stays weak.

that is the, that is the dream of health met schmidt and the other german leaders i used to work with when i was in government. their currency would go up, and they would complain about the weak dollar, but they were complaining about the strong deutsche mark, now they've overcome that. germany is such a massive beneficiary that the business community knows it, the labor unions know it, and so the one party that's opposed to european bailouts, the free democrats, got thrown out of the last election in berlin. and you're getting 80, 90% votes in the popular vote for the parties that are in favor of continuing the policy m the op -- the policy. the opposition this germany is even stronger in favor of it than chancellor merkle's party. so i, it's a risk that we these to keep our eyes on. it could happen, but i would say watch what the germans do, not

what they say. >> dr. makin. >> i always know when i'm with fred i'm getting demoted from dr. makin. >> just shows you what good friends we are. [laughter] >> again, looking at germany, germany has been a great bicep fishery of the monetary union, but, but now that the financial complications of the currency area have begun to jeopardize the stability of the financial system and you have a failure of a major financial institution two weeks ago in belgium, german economic activity is slowing rapidly partly, i would argue, because things are slowing in china, but also partly because the european citizens pick up the paper every day, and they look at the headlines in greece, and they look at what's going on, and they know that something's not working. so i understand -- and i think if we listen to german leadership carefully over the past several weeks, i'm sure

that they're contemplating their options. a, the german finance minister said a greek default may be necessary. that's tantamount to suggesting that greece leave the currency union. the german public was never asked, was never permitted to vote on germany joining the currency union. the german elites are powerful, and they manage the system very well up to a point. and i think we may be approaching that point. we may see some of the, you know, some of the pressure, some of the political pressure which is, obviously, in greece which is on the receiving end of the adjustment, but the political pressure is rising in germany and could continue to rise. since they're being asked to athe bills, that would be a destabilizing factor that could be preempted, again, by being more realistic about what's a viable currency regime for europe. >> yeah. i tend to agree with fred that,

um, the european project goes very deep in germany, very, very, very deep. and that of all, of all the parties, the least likely to desert the euro is germany not just because they are the beneficiaries. i mean, i could make a very machiavellian argument that germany's actually benefiting in some way from the crisis because of low, its low interest rates and because of the low euro. the, but more fundamentally this -- if germany which is, actually, benefiting and not under direct pressure at the moment with it to say, no, i'm fed up, i'm leaving, that really would be the end of the european project.

>> yeah. >> i mean, that would be -- okay. it's very different if greece says i cannot take the pain anymore. there are and finally, i don't want to -- i'm not ready to predict how things will develop in the european periphery. let me just point to the fact that domestic demand, consumption plus investment plus government spending, in ireland is down 20% compared to 2007. i mean, the magnitude of that number should strike one, all right? and greece were already down about 15% in 2007. what we are witnessing in the periphery countries is the equivalent of a great depression, it's just not called a great depression because it happens to occur in some small countries that are sort of a little pit outside the news. -- a little bit outside the news. but for all intents and purposes, it is a great

depression. and spain is now up 24, 25%. so i think it's remarkable the degree to which this structure has held together. under enormous economic pressures. um, but if we go, if as i believe because i believe it's a structural crisis more than a fiscal crisis, competitiveness crisis, it's a growth crisis that is affecting the european prir free, if we are now talking another five years of adjustment, it's very difficult to say whether the policy can actually say together in these countries. and that's one of the arguments why the combination of the commitment to the european project and the incredible stress under which the system is being put is one of the arguments, i think, to say that europe should be helped in a situation like that. finish. >> just two quick ?pses back to dr -- quick sentences back to

dr. makin. he says the germans pay the bills right, but that's a gross payment. net they are still huge winners from the euro zone, and you could view those payments as kind of an insurance premium to keep their very big winnings rolling at the tables. um, he also suggested that greek default would equate to exit from the euro. and i disagree. greece may default. they have to default, certainly will have to restructure substantially its external debt. but i think both the economics and the politics suggest they will do it inside the euro, not outside. and they'll come out better for doing it that way. >> i've got one last question, but do you want -- because i just -- >> yeah. >> could you respond to that? one of the things in your initial points you paint a, i think, appropriate challenge, and i clearly think the idea of

currency union without fiscal union has presented a half-built house. i 100% agree. but i think the implications of yours is if you're going to break up the currency union, you're going to have some really short-term, huge disruption, right? and -- >> yeah. >> question. >> so are we going to -- >> [inaudible] >> yeah. look, we're not in a good situation here, right? and so getting out of it's going to be difficult. it just seems to me that addressing a reality which is that greece can't coexist in a currency union with germany without massive transfers in their direction and without infecting the rest of the system is probably going to be a positive thing. i mean, i don't see how it's worse than going from weekend to weekend where we keep saying, oh, well, you know, we were going to settle it this weekend, but we're going to do it next weekend. remember, the 440 billion euros was agreed to in july and was

finally largely agreed to over the past several weeks, and it's not enough. so how much is enough? again, getting, getting a resolution to this problem -- containing the fallout -- it's not going to shock many people in the financial markets if greece either defaults or leaves the union. >> this is, listen, i know everybody has been very generous with their time, and i just want to say i really, it's been a it is a mating panel. fascinating panel. and provocative. i just, i hear at least one major, one major consensus point was that whether this leads to currency breakup or continuing the european alignment, that the current resources available to ring, fence or staunch, i think i'm hearing everybody would at least concur on that.

there may be different paths, but -- >> well, if we're going to insist on shoring up the currency system. >> right. agreed, agreed. here's a, and if we each could, you know, please, no more than two or three sentences if possible, but give me your best projection this terms of what, if anything, will happen out of the e.u. activities this coming weekend, and what should we realistically expect coming out of cannes in a few weeks? >> either way, any way you all want to do it. mike, you want to -- >> i'll just venture to say what comes out of the e.u. this weekend is further be steps toward the ultimate objectives that we're all talking about here. they can't do it all in one leap, too many players, too many different actors. but they'll take some steps forward on a path that will eventually lead to the

outcomes -- at least i think that i was talking about -- namely, highly leveraged e finishing sf that will provide a ring fence around spain and italy and further institutional reforms that eventually will lead to fiscal union. but in the meanwhile, there will be so much ca cough think and so much uncertainly generated by the trailing the market pressures that the crisis atmosphere will continue. but i think they'll move forward. at the g20 there'll be more pressure on the europeans to complete that progress. um, i think there may be some steps along the growth path. probably not as much as i would like to see, but i think there may be some steps. the finance ministers last weekend actually did reach a fair degree of consensus on the direction that's needed including a stronger europe, certainly in the u.s., and encouraging the emerging

markets. the imf stuff, i think, is not as clear. and that'll depend a lot on how much unserbty the -- uncertainty the europeans leave. if they leave a lot, i would not be surprised to see some movement toward what i call plan d and at least putting in train an imf resource expansion effort that would enable it to plug the gaps. which incidentally, i think, ought to be pursued anyway because in the kind of uncertain world we're facing for several years, who knows where the imf will be needed, and i'd shore it up in any event, though a european failure to act on its own would clearly galvanize it. >> this weekend we've already heard what we're going to hear. again, the problem, the alternatives are so unattractive, it's very difficult to step up to the plate. what the freshman. will do is they'll -- what the french will do is put out a number that's over a trillion dollars that somehow is going to

be a shock and awe number, but really nothing much will get done. if eventually they do come up with more money and try to shore up the system, six months from now we'll be back with more problems and looking for more resources. that's why i think it's a bad idea to go down this road. >> g20, although i was going to say you could just read the last g20 statement that came out in april, but at that time they said the global recovery was broadening, so they'll have to say it's narrowing and we've got problems, and we hope everybody gets everything straightened out. what else can they do? >> yeah. my, my projection is, first of all, that the crisis will continue to fester for at least another year or two. the second is with regard to the next two months over the g20 i think you will see bank

recapitalization decision in many significant bank recapitalization decision. you will see a structure for the forgiveness of greek debts that will be fleshed out. um, i think you will see a larger and better articulated efsf, and i believe that with all that you will also see some much significantly greater engagement on the part of the international monetary fund. i believe you will see that. i don't know where exactly how that money be found or will articulate and how much it will involve the united states, but i believe that that's going to be part of the game going forward. with all that, the crisis will continue to caseally rear its

ugly -- to occasionally rear its ugly head over the course of the next several years because as i said at the beginning, this is a crisis of economic structure, a crisis of competitiveness, a crisis of growth. it is not just a fiscal crisis. >> thank you very much. >> thank you all. hearing is adjourned. [inaudible conversations] [inaudible conversations] [inaudible conversations] [inaudible conversations]

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coming up next, a discussion on economic indicators released by the census bureau. then republican presidential candidate mitt romney and a recent appearance at a town hall meeting in iowa. and a little bit later, a congressional hearing looking at the cleanup of brownfield. be sure to join us later tonight for more from the road to the white house. we'll feature texas congressman ron paul. he is scheduled to speak in iowa city, iowa, and we'll have that live for you starting at 9 p.m. eastern right here on c-span2. this weekend six republican presidential candidates traveled to des moines for the iowa faith and freedom coalition candidates' forum. watch our live coverage of herman cain, newt gingrich and rick season tore rum as well as governor rick perry and representatives ron paul and michele bachmann starting at 7 p.m. eastern saturday on c-span's road to the white house. well, the u.s. senate finished their work for the week early this morning, finally

gaveling out just before 2:30 a.m. eastern. it rolls three appropriations bills into one and they were able to dispose of about two dozen amendments. also last night the senate rejected parts of president obama's jobs bill to the floor. a vote failed to win the required 60 votes. also rejected, a bill by senate minority leader mitch mcconnell calling for a 3% withholding tax. out now for a weeklong district period, the senate will be back on october 31st, they'll be this at 3 p.m. eastern, and, of course, you can watch live coverage on c-span2. right now a discussion on the economic indicators provided by the census bureau from today's "washington journal. "this is just under an hour.

>> host: let me introduce you to our two guests at the table. william bostic jr. is joined at the table by ken simonson who has two roles. he is the chief economist at the associated general contractors of america and also vice president of the national association for business economics. gentlemen, thanks so much for being here. when i was doing research, i found out something interesting. started by president wilson? >> guest: that's right. in world war i the president got together different groups of businesses, but contractors were especially important in order to build facilities for the u.s. to gear up for the war. >> host: we're not going to talk about history so much, but the current economic state. one might wonder why the census bureau is involved in measuring the economy. how do you do it, and why do you do it? >> guest: well, the census bureau has been involved for quite some time. it's well known for conducting a population census, so your

viewers will really get an appreciation and fully understand the critical role that the census bureau plays. we conduct an economic census and be a census of governments in years ending in 2 and 7, and that is the foundation for, actually, the business statistics for the u.s. statistical system because it also serves as, um, the frame for our business samples and, also, that we're talking about it's the source for gdp which is benchmarked every five years from the quarterly program. and that process is actually done by the bureau of economic analysis. so it's the source data, and it's the foundation for all of our programs. and we conduct over 100 surveys, monthly, quarterly and annually. and in that group are the principle economic indicators. so -- >> host: and we have on screen the major economic indicators that you and the congress look

at. they include new residential construction, advance monthly sales for retail and food services, u.s. international trade in goods and services and durable goods, manufacturing services, shipments and orders. and we're going to be looking at some of those numbers right now, and have you interpret them for us and what they mean about our economy. want to start with housing because the real estate sector has been looked at as really a key to the economic recovery in this country. this statistic here looks at single-family and multifamily housing starts from january 1996 to september 2011. and you can see how this trend kept going up and up and up and then into 2008 the big decline. what, what are we seeing this these numbers here -- in these numbers here? >> guest: so you're seeing the residential construction report, it's a joint release by the census bureau and the department of housing and urban development. so this particular chart you see where it shows a dramatic

decrease from 2006, and that was the peak of the housing boom. so the decline started, actually, two years before the recession. so the peak point was in january of 2006 where housing starts were at a level of 1800, and now it's down to 425 in september of 2011 which is the most recent data. ..

happened is so many foreclosed properties in the market so now there are empty houses especially in certain regions of the country that there is a glut on the market of available properties. how does this statistics serve as an indicator for the state of our economy right now? >> guest: it's a very important indicator. it's issued in tandem with an account of building permits issued for new houses and multifamily units, and together those indicate whether the housing industry has begun to start up activity with of the single-family house that precipitous drop use all, 75% decline from 1.8 million start down to 425,000. the multifamily actually kept going a little longer, and so that did help out some aspects of the construction industry and also of the many industries that

depend on housing, building materials, lumber, concrete, and in the case of some of the high rise multi family, things like elevators, roofing material. it also is an indicator for industries that depend on home occupancy, such as furniture, furnishings, carpeting, and in the case of single-family lots of landscaping, lawn and garden material and equipment. and so many people are looking at the housing starts figure to get a sign of when things have turned around. certainly there is still a huge overhang of houses on the market, houses in the foreclosure process and houses that owners would like to sell but they've been discouraged because it takes so long and the price is still low. nevertheless, home building can offer a little separately from existing home sales, because someone who's ready to buy a

home may want a different location or different configuration from what they see on the market. >> host: to the view was we are going to open phone lines for the discussion about the state of the economy. many of you call regularly because you are involved in some of the sectors of the economy the we are looking at today, home and housing construction, retail and the like. if you would like to ask questions about that or share your own experience we welcome your participation. we will put the numbers on the screen you can also send a tweet or an e-mail. we will give you all of those ways to interact. we have to go through the numbers quickly because the time evaporates. but the two states, on one side of the claim you've pointed out on the building permits, california and florida particularly hard hit coming and contrasted them with north dakota and wyoming. what are the stories behind these four states and why they've held different parts of the story? >> guest: california and florida have experienced a boom and bust prior to the recent recession. so, and florida there was a boom with a condominium sales coming

and that had to do with the opening of disney world. and in california, we are showing that bust is exactly very similar to the trend from the recent recession. north dakota and wyoming are two states that have feared better doing the best time from 2007, 2010. then when they were in the boom period. so, north dakota is 14% higher during the 2007-2010 period, and 9% higher for wyoming, so they are just doing better in regard to the most other states. >> host: in your business to you understand why or just the what? >> guest: well, we actually try to investigate to get some aspects of the numbers. in this particular case, it seemed like their employment opportunities are happening in north dakota and wyoming. the oil production activity, so

that is what seems to be driving the new homes. >> host: a general question -- i guess we should have started here -- almost every one of these statistics shows a big decline in the 2008 during the recession, but -- what we are looking at is beginning to take. so my question really is are things beginning to change? are there some signs of growth over all in the economy by these measurements? >> guest: they're definitely are some signs of growth. you mentioned the vice president of the national association for business economics. that professional association is for anybody who uses economic information in their work, whether its data such as the census and bureau statistics data, people who have to do for testing for their company or for the economy as a whole, people who are analyzing policy, like here on capitol hill, not just titled economists or people with an economics degree, but the the cut. at our annual meeting last month in dallas, i say there was a lot

of pessimism because the statistics that were coming out is another source during the summer looked like the economy was really slowing down. in the last six weeks, that has turned much more positive and housing statistics are one of the things that have definitely gotten better. both the single family a little bit better, multi-family is starting to move way up. >> host: this is a related slide to the inventory of housing units under construction from january, 96-september, 2011. what more do we need to know about this? >> guest: the construction inventory is at the lowest point since the bureau began collecting this data, which was 1968. and also, at the end of 2008, what happened was the single-family under construction actually fell below the old unit family under construction for the first time since 75. >> host: you'd not seen that before. what does that mean, that number? that the two single-family fell

below? >> guest: well, it just i think shows how few people were willing to buy a new home at that time, and the home builder's really did a good job of managing their inventories. so the actually continues to cut the number of homes that they were starting coming and we have a fairly reasonable ratio of homes offered for sale, homes under construction now. that's one of the statistics that the census doesn't highlight, but business analysts who are looking at the health of housing, home building companies or others who want to know how long before the israeli pickup. that's one of the things that they can glean from the census statistics. from my own employer, the associated general contractors of america, we don't -- our members don't build a single family, but there's certainly a lot of follow one construction. if you get a lot of single-family home construction, you're going to have additional schools, playgrounds, fire and

police and other public structures. you'll probably get the more retail going in and around those single-family. so this is a tremendously important statistic in many ways to get >> host: one more chart and then we will get to calls. this is on the median sales prices of new single-family homes and it shows what we've been seeing in the newspapers. prices are declining. across the united states, and particularly in the west region and southern region of the united states. >> guest: those regions represent 75% of all single-family sales since 1996. what you hear is price decline in the newspapers actually work for existing home sales. and those numbers are put out by the national association of realtors. >> host: but this suggests that with the prices on the resale it's affecting the prices of new housing. >> guest: that's correct. >> host: so, mr. simonson, a viewer of ours asked this

question about housing prices. can you explain, is expensive housing inherently good or bad or inexpensive housing good or bad? >> guest: no, neither one is inherently good or bad. i tell you you have to interpret this statistic was a lot of caution, because the media measures the price that's right in the middle in terms of counting the number of houses sold above that price, the number below that price. and it can certainly moved move widely depending on any one time he have a lot of home buyers picking up starter homes or moving up to more expensive houses. so this 1i think it is a kind of loose indicator of the state of the economy. i think it's more interesting to look at the total volume of the home production in terms of what it means for economic activity. >> host: this viewer named maverick is a question about the policy for the 8,000-dollar credit for home buyers coming

and can you see a direct uptick in how they would do to the stimulus. >> guest: i saw in another related statistics enzus produced on the first of each month the pope a series called value of construction put in place, or construction spending, and they are attempting to measure the amount of material and labor that went into projects of all types in the most recent month, and we did see an upturn after this really sharp drop in single-family home construction spending. it began in april of 2009 right when that first-time home buyer tax credit took effect. as soon as it expired and a cheerleader the number plunged again. so clearly home builders were thinking they are going to get a boost, but they were disappointed at the end of that cycle, and so they've cut back again. just in the last few months that spending figure has turned up both personal family, and as i mentioned, a huge jump weekly for the multi family, more than

50% on the start we are going to see the spending numbers reflect that very soon. >> host: this viewer, c-span junkie, tweets it proves to be depreciating in value. so the next call come from new jersey. this is tilly. you are on the air. go ahead, please. >> caller: my concern is with infrastructure, i'm all for the new construction, and -- >> host: your question about it? >> caller: yes, my concern is people losing their homes, the husband is a contractor, he does paving. but we are unable to keep our home now because we are in foreclosure why build more houses and destroying more american dreams. i voted for president obama, democrat.

the congress won't let him do what he was supposed to do. >> host: okay. why build more houses wonder so many existing in the marketplace? >> guest: i think mr. bostic's figures on the starts and north dakota give one example of that. they're never was a big excess of housing and north dakota, and now people are moving their to work on the oil shale formation, exploit the land that has already been there and turn it into energy and build transmission lines to deliver the railroads and pipelines. the ag sector has done very well. the census population figures show that north dakota actually had a population increase in the last decade, which had not been true the decade before when they did 2011 figures i think they will show that configuring. so we do need new housing in some areas. in areas like new jersey or here in d.c. we see some infield housing, where you have a lot that were never developed or maybe they had a commercial use,

but now people want to live in that neighborhood and you're getting home building happening there, too. >> host: take a couple more calls and then move to another major economic indicator, that's retail sales. let's listen to a call from orman oklahoma. mike, go ahead, please. >> caller: yes, i was wanting to make the point that all of this construction when builders are building either their homes or the retail spaces they are paying taxes on materials. and in some places they are also paying taxes on labor. this is a boom for the states and localities in that if you put $100,000 worth of material into a single house, that's sales taxes on $100,000. that's the equivalent of what, five, six, seven families earning 50,000 a year?

i just wanted to make that point. >> host: mr. simonson? >> guest: construction contributes to the economy in many ways, and certainly the taxes that the contractors pay on their materials and contribute on labor and the taxes that the workers and the owners pay on their earnings is one way. but in addition of course once the property is completed and occupied, you start to get property taxes. but in fact the decline in home building and in the home prices really have been one of the major reasons that the state and the local economy government economies are in such bad shape. and the associated general contractors does see some pickup happening in categories that private construction, but because of the drag on the receipts, particularly the property tax receipts, we are still waved down on local government spending on things

like schools and public facilities. >> host: let's dive into this statistic mr. bostic. monthly sales to the street surface. what does it cover? >> guest: it covers all kind of retail businesses. talking about department stores, talking about a grocery stores, gasoline stations, online retail shopping. those are just examples. >> host: or automobile -- >> guest: automobile car dealers also. >> host: we are seeking the trending and even though there was a big dip in the 2008, 2009, is of higher than when the recession started. >> guest: certainly. it has almost doubled in the last five years. but there was one uptick and that is in 2001 when you had a 0% financing with new cars, you had a little uptick there. but, again, as you've indicated like most other sectors, it's, you know, it's declined going into the recession.

looking at the data it does look like it has risen above the pre-recessionary levels. >> host: even with the people unemployed with the retail sales going up. so mr. simonson, let me ask about that. the last caller asked about policy implementation. we've had cash for clunkers, cash incentives to buy appliances. we've also had a rollback in our taxes, our which taxes to help stimulate purchases. can you see a cause and effect with people buying more of the policy in washington? >> guest: yes. certainly the cash for clunkers program, which gave people a large brick on the price of new cars if they were trading in an old car that definitely affected the automobile sales for the month or so that that was in effect. and so i think this illustrates

one way that policy advocates and forecasters alike can make sense of the census information, and one reason it is so important is that they funded for the frankly and sexy economic statistics. i don't think any member of congress will ever get elected by saying i helped put money into the retail sales survey or the economic census deutsch to come out next year. but it's tremendously important in order to get the policies right for us to have timely and accurately census data. savitt is just one example of how the census figures help us analyze what really happened when we had a policy in place. similarly going back to the housing. you mentioned the holmdel you tax credit. we tend to see that affected the census figures but only if they are measured properly, to recapture what happened, and the information gets to us in time to use it.

>> host: this number here, retail trade and food service and sale is hard dollars, not units. because of that, if you were asked have the sales doubled or have the costs doubled? >> guest: the data suggests seasonality causes or whether it could be holidays, etc.. but it's not adjusted for inflation. was to the answer is we don't know that, right? it could be prices are going up -- do you have a comment on that as well? >> guest: seasonal adjustment is one of those things that wi-fi always makes my audiences the glaze over, and yet it's really important. it's one of the ways the census is seen by the economic and the statistical community needs as a real leader. there are lots of data series outside of the census bureau but the census has the gold standard for the process of taking out the impact you always see because a holiday comes in a certain month or because the

weather changes. you don't get as much paging activity in january as you do in july in the northern states. and so if you just look at the monthly variation without taking into account normal seasonal effects, he would be misled. so again, it's a way that we really depend on census being adequately funded so that we can get it right in what ever use we have for the information. >> host: looking at the economy by the numbers, our guests are economist of the census bureau, the other in private practice. and talking with you about your view of the economy and what might compare or contrast with what the official statistics are. phone numbers will be on the screen. you can send tweets or e-mail as well. the numbers are slash regional zones, eastern and pacific line, -- eastern and central, excuse me, one part of the country and the mountain and pacific. a little different than we normally do. going back to this chart, and this is a question for you, mr. simonson. this viewer says the chart

doesn't really look like cause and effect. it looks like normal economic cycle and recovery, meaning nothing really helped. >> guest: well, i think this is a great example of why you need to look below the top line. this is the top line, and then it adds up all retail sales. census actually provides 20 or 30 different cuts where the retail sales figure came from. and on some of the other theories, for instance the construction spending in the use for the associated general contractors of america, if you go to their web site for that you can find 150 different categories, and so, yes, people did spend more on cars during the month of the cash for clunkers program was in effect. but they didn't necessarily increase their spending by the same amount. the cutback in some other areas and so it somewhat washes out when you look at the aggregate number. and that's why it's really important to look below the top

line in the census or any other data series. >> host: despite the uptick this viewer tweets we are doing just well. can't you just feel that? home sales, anybody having that warm tingle yet? we are talking of the state of the economy with our guests. next is a call from wyoming. ed, you are on the air. >> caller: good morning. i would like to ask both of the guests with is a single thing they would recommend that the obama administration do? what they recommend that he would continue spending, or would they recommend some other something else other than what he's been doing? thank you. >> host: mr. bostic, the census department, are you allowed to comment on policy questions like that? >> guest: notte. >> host: all right let's turn to mr. simonson. >> guest: limited to one single thing is tough. let me answer from the standpoint of the company that pays me, the trade association for the construction industry association general contractors for america. and we see a very mixed situation.

we think that you have to distinguish between investment and other kind of spending. i think anybody who's on the road these days knows that we need to be putting more into the roads and bridges to the other times of infrastructure with a freely falling behind also. and really it applies for our intellectual capital, too petraeus of the census is one of those areas that would protect the spending, but we can't go on with $1.3 trillion deficit, and so i would like to see a comprehensive overhaul of the tax system that's not agc policy that is ken simonson talking from the nearly 40 years of watching the washington policy and the erosion of the tax base. >> host: houston texas. this is frank. good morning. >> caller: good morning. i'm calling as a commercial and the industrial realtor, and also

with a background in development and project management. and my point in question basically is there is nothing absolutely nothing in the general media about the stoppage of the funding for commercial and industrial money from banks and i find that quite troubling. for different as the -- different associations better discussing the the looming commercial inventory that is in default that's on the back burner but no one mentions and what impact that has only on our economy but also the commercial construction industry. thank you. >> guest: i will take a crack at that. i'm not a banking economist.

certainly the construction industry, part of deutsch relies heavily on the developers being able to get financing and what we have heard for three years now is banks are turning to the developers down. on the other hand we still have high vacancy rates on retail and office property, and so i think it's understandable that a banker is not going to let a developer a huge loan and to put a new office building. gradually we are seeing improvements in different segments. the warehouse segment, which is a developer financed one of its bank lending. that has come back quite substantially in the last few months. i think that office and retail will be some of the slowest but there are other types of construction that don't depend quite as heavily on the bank financing. manufacturing, hospitals and universities generally finance either directly or they go to

the investment market for commercial paper or tax-exempt financing in the case of some hospitals and universities. those markets have recovered much better. so there are a lot of questions about how you cure the banking system, but fortunately it hasn't stopped all construction activity. >> host: back to retail sales. this particular chart looks of monthly sales by motor vehicles and parts dealers and insure that once you break it up to the to because you would think part sales would go up from the economy as opposed to new car sales; and i correct on that? >> guest: that's for used cars and repair, etc.. >> host: so generally, the automotive sector in our economy has been a great focus of debate and we've had a lot of turmoil and the companies and the like. what's been happening when you look at the numbers? >> guest: as i mentioned earlier, you see the uptick in 2001 with the 0% financing. and then you will see an uptick

in july of 2005 with the manufacturers offered a program discount for their employees. so, you see that up to. in 2007, to those of eight come 2,009 you see the downward trend cover the recession, and then ken mengin you see the effectiveness of the cash for clunkers program in august, 2009. and in 2011 we have the japanese tsunami and the earthquake and so sales were dampened. but today increase. they are backed up to some reasonable level from those few months. >> host: the difference down 68 billion versus 82 billion at the height of the measurement back in 2005. just that little time of the motor sales. what more should we know about them? >> guest: this is a case where there is very good private sector coverage and a little more timely census. we still rely on the census for

verification and sometimes for more complete mess. but this is an industry where there are few producers. there are very large sophisticated in terms of their financial and reporting systems. and so, this is an area that fortunately we have other sources of information. >> host: this charge by the gasoline stations shows a big drop during the 2008, 2009. we stopped buying gas. i will ask the same question as before. this is in gilts were units but how much is being spent so it reflects gas prices? >> guest: exactly. when you see the $46.7 billion during the recession, we had high oil prices and it's reflected in the gasoline sales. in the oil prices decrease significantly and drop, but now has the prices have gone up you see that we are almost

approaching the $46.7 billion level which is at the peak. you have the close of demand and also prices. and so you get a reaction of on the demand aspect as the price is typically decrease. >> host: call from virginia beach virginia. this is the fit. you are on the air. go ahead, please. >> caller: thanks for taking my call. my concern is the approach the economists seem to be putting their data together. i appreciate the graph and the charting. however, why can't it be more of a pro-active d the implementation gathering instead of a reactive? it seems as if we are getting data and we have to look at the trend of history instead of getting data and projecting what we need to be doing. for example, the leedy you just have on the air prior to the two gentlemen the younger generation and how they are breaking

records going to the voting polls. and a lot of trend data bases of the baby boomers. there's a baby boomer generation that's coming that if i'm not mistaken is bigger than the baby boomer generation. so do they take this into consideration or do they bring those types of numbers into their analysis? >> host: thank you very much. for both of you. >> guest: well, i will -- our indicator programs, our monthly programs come and so we collect the data of the sales and we don't do forecasting. we'll leave that to the economists and the decision makers to evaluate the health of their economy. and so, what you are seeing here are trends and often you can't necessarily look at one month, and you need to look to the trend to see how the economy is doing overtime