made. this is a picture that would have gone in a small shop, mediator -- mabey grocery who didn't want to give credit to the customer. the owner of the shop could very easily point to this and say i will not sell for credit. what's interesting about this picture is of course it's the opposite of what we think today. weeding out the stores that sell on credit, people who lend credit are prosperous, but this picture is exactly the opposite of that story. you look at it and you can see a man on the left,, ragged cut his hair like mine. a man consumed by anxiety from his own business. now, the other one, the fat man as we will call him settled for

cash. he's busting at the seams. look at that. look at those jobs. they would envy those shops. look at them. something to behold. but behind their appearances was a financial practice. this man sold on credit and might earn a little money to be paid back in the future to his customers of the grocery store and in return would have these iou's that pile up. on the other hand, you have a gentleman that only sells for cash. and look at him, the flower filled with money and possibly

sushi. i want you to look at this picture not just for the fashion of course, but to understand the mirror image of what we thought today the office logic. the skinny man would write your name on the ledger and he had to land. she had to lend to his customers to keep them coming back but he wouldn't make the money doing it. he might have charged a little extra of a credit crisis but it wasn't profitable. it wasn't something that he wanted to do it was something that he had to do. it was a bad business decision because a was his money out there. the money that cannot his own pocket no bank would lend him

money. he couldn't resell the debt to someone else. loans were not commodities bought and sold as they are today businesses did not think that was a good investment. try to think that that way. that is exactly but it is for those that own it. there wasn't a good use of this man's scarce capital. now there were forms of lending for instance the singer sewing machine that we have probably all heard of. they did offer credit all across america so people could buy their seven machines. now they did it not because they made any money on it and this is why it is a good example. they made money on the manufacturer of the sewing machines, they made the money on the lending, and this is why it is different in the world we live today. one of the questions is how did

this world become inverted, how did this will become the opposite of what it was in the 19th century. that is how did that stop being personal so you could sell your the minute factory goods, how did the debt become profitable in and of itself. and most importantly how did that become sellable and commodity have become an end of itself rather than being something we had to keep real things getting sold and made in the process of becoming an end of itself, how did the debt ultimately displace, replace the making of things? this is the story they tell. now, that went in the 19th

century from being the province of loan sharks to board room investment bankers. and in this moment we began to see the connection between the indebtedness and the inequality. now, the common wisdom is of course that we began to borrow in the 1970's, the sense that it became a morality in the consumers last ran amok and what changed in the 1970's wasn't that the american character changed. we were already and always will be lost for consumers. no, it was that the american paycheck changed. we stopped being able to pay back what we borrowed. the lending which it paid those 99% good postwar wages no longer did so, so the one per cent got better. then the one per cent was all the money saved up decided not

to invest in businesses which is the only way to justify that kind of concentration of wealth. workers needed money because they got paid less and because they were paid less than 1% at a welcome audience to the loan. in 1955 and 1969, you can see 47% rise in the real wage. it period with 41 years there's only 3% rise. the economy continues to grow and the wages stay like this and all that except the 3% shows the people of the top of the economy

it's hard to understand and hard to believe that it was investment decisions that drove this transformation but this is how it works. it's the same decision you make when you are investing in a factory or farm and one of the key drivers in this moment was simply in that moment it became more profitable to put a dollar into consumer debt than into a factory the right to lend that money you need the borrowers as well as lenders and people who wanted and needed to borrow all that money. you need mortgages, credit cards, car loans and the like, please is to invest. he needed that to be read sellable and the picture to turn upside down. you needed to the practice is to change and bartsow. so to borrow the book tells the story of where all those practices came from sometimes in

the most unexpected of places at how the debt became a part of our lives and it explains for instance how the inventor of a modern car company henry ford also resisted and how gm embraces and nearly drove for out of business and told the story of how they give the first credit card and why they succeeded in citibank and first and how target even then in the 1960's was called tarjay and how it and ann taylor used credit to destroy bloomingdale's. but all of that will be too much for one night and i promised to be quick so we can go out to dinner before the snow comes but i did want to take a second to talk about the safety of investment and debt and what it had changed in the 1970's to

bring this back with a chance in a moment in the 1920's to bring back our new regime, so i want to talk about the mortgage-backed securities and i sure how these mortgage-backed securities then called participation certificates funded the housing boom of the 1920's and this is how the banker was able to sleep at night after the collapse he knew the money could come back the mortgage debt securities are shunned by the market because the toxic gases that couldn't be resold as the house's offer closed on. so they were banned by the fed and ignored by the market in the 1930's only to be resurrected in the 1970's as a way to channel

money into the inner city with no intentions conceived under the johnson administration that it was under nixon correctly under nixon secretary someone named george romney, father of a certain presidential candidate and he wrote on the occasion or said on the occasion in 1970 of this jury first mortgage-backed securities being issued this had been marked a revolutionary step forward effort to increase the fund available for mortgage financing but in the figuring of the 2000's of prime lending program it fell apart as the predatory wonders and unscrupulous flippers from the first-time home buyers. the government found itself unable to resolve the house's that add to foreclosure.

terse denying the problems romney was ultimately forced to freeze it in 1971 even as it's a particular lending program the mortgage-backed security blossomed the securitization works as an instrument that connects local demand and global coupled the new kind of bonds that could find any kind of house, transform global financing heat it bypassed the traditional links to the two banks the would allow the money to come from anywhere like small-time banks to the union pension and european investors preferred all of them can buy american mortgages in your home town. and landing on houses at least middle class housing became easier than ever before and i

was the problem. it wasn't the flip side of the urban crisis and didn't address the flip side of what was going wrong in the economy overall. the millions invested in mortgages in the dead and houses and unproductive houses was money not invested in business. the differently the policymakers of the 60's and 70's called prosperity which was good jobs with its symptoms which is home ownership and for 40 years kept doing the same, finding new ways to put money in housing and credit cards while doing little to put money into the small and medium-sized businesses and the very things that would have created good jobs. even than the security's even then as they were being discriminated in our economy may

seem confusing. they seem otherworldly and they seem mysterious and that is because they work. nobody knew except for the unknown. this is bad for freddie mac from 1984. and these are the loans, the cfo of freddie mac on how to use the securitizations because these new mortgage-backed securities offered something to the 1%, offered them a safe place to put their money and get a little extra on the side and on this moment supply the demand for the mortgages and then for credit card debt furnished by these folks on the mission associates and hawken won the company's third and industry the gulf came from the mission associates. if i saw this it wouldn't make

me want to invest in the freddie mac securities. it is terrified, but it would be fun aerating if it didn't end in tragedy and these developments were not inevitable. it wouldn't be the knowns that made mortgage-backed securities after all. it was government policy, business policy and ultimately it was us allowing this to happen and doing so it became easier to invest in my credit card debt than and the small businesses. i want to give you a sense of that very first mortgage-backed security and where it came from as well. this is an advertisement from 1969 in the associated mortgage company who they were very proud of getting money into america's ghettos. these were the companies offered

money in 1969, and these were the people on wall street that sold this committee's mortgage-backed bonds and the first debt issue in 1970, the name that should be familiar to us now it has always been a case there were connections of people on the ground and wall street, wall street producing the bond for investments for the 1%. and for 40 years since 1970 this is far earlier than we imagined the had begun but even from the get go they were unstable and produced misery in our lives. they have never worked. for 40 years we kept doing the same thing trying to find new ways to funnel money into housing while also doing little to put money into growth even in places we wanted to help. the regulations made it harder to profit in ways that didn't

help the many of the few were rolled back. profit was chosen over stability, finance was chosen over production. credit was chosen over wages, the memory of the depression and its causes or forgotten but let us not forget again, let us remember not only the recent history the long history of credit in america. but first before we can remember we must understand, and right now i fear we do not understand. the current crisis is not the result of a few people breaking the rules. it is not the result of a few bad apples. was the rules themselves the were broken. most of the borrowers followed the rules and i don't just mean oh-la-la but the rules of the lives and what made for the responsible assault.

they bought houses like responsible adults and they live inside their budget. they obeyed their budget. the scary thing about the recent crisis is that it resulted more from people doing what they were supposed to do than not, borrowing for houses, cars like responsible adults. but no matter how the budget may be laid out, no matter how it helps you discipline expenses and will you spend your money on, it didn't discipline the world around you. it doesn't make the economy more orderly place. and as americans lost their jobs to the working class in the 70's and then to the middle class and 80's and 90's their work lives became ever more precarious and the budget ever more meaningless then of course had could even if

they followed the budget it couldn't be sold because the crash. americans followed the rules just as they had done in the 1920's and even the bankers on the other side for the most part followed the rules. now there was fraud but it wasn't just housing for the poor that cost it was for the middle class. it wasn't just a few bad bankers doing bad things with their money. those pension funds investing in the aaa found some, it was following the rules that got there and while the mix for a good morality play to say that it was bad people, it was also good people just doing their job, good people who fought they were helping us by the things we wanted and it was the good people following the law, good people following the rules on both sides and those rules that need to be changed so it doesn't matter if rules are broken they

should have never been written that we in the first place. the idea that brought comfort because the system doesn't work. the fact of the rules themselves the were broken should comfort us actually because if it were just human nature we couldn't change that but we can change the rule, law, the institution, the morrill prescription but we think about our lives and decide what economic actions through. people do bad things sometimes, but they will follow the rules and the rules need to be changed like they were changed in the 1930's to bring order and stability to the financial system so the work of making real things for real people can happen again. we can bring back prosperity

because gnomes will work for us and not us for the gnomes. it's not just enough to stop like rahm needed what's not working. we also have to figure what what really does work and i hope this book will become part of that giving us a perspective, stories to tell so we can understand what really happened. thank you in and look forward to your questions and the q&a. [applause] if there is no q&a then we can just go. [laughter] [inaudible] what do you see the new deal that might come to get us out of

our current financial crisis? >> i think the most important thing to realize about the new deal is that fdr was no intellectual. he was not a consistent thinker. he tried but never came across, and i think whatever is interesting about the 1930's is that it offers us a lot of different experiments, a lot of different ways of thinking about what is capitalism. on the one hand, you have people saying we should spend more money, tax payer money directly create more jobs. they're certainly was an aspect of that in the new deal and i write a lot about herald, the secretary of the interior, the head of the twa, a very good liberal. on the other hand, there's james moffett who ended up being the head of the fha. he was everybody in the liberals age, the incumbent of the state of new jersey, he was like a rich man's son, he was no part

of what we imagined the new deal to be. now, unfortunately for this story, he and the fha could have a greater effect on the american economy. it was moffitt and the fha which created regulation that channeled the capitol and the investment. they spent no money. a creative ways for the private couple sitting on the sideline like it is today to be invested at a profit to safely and for social purpose. at the time we desperately needed housing and we have enough housing in vegas right now but we desperately need the housing comes with a new deal can offer us both of them and when we imagine what kind of policies its creative thinking, creative thinking about what we want to do is not sufficient to

say to capitalists to say what the profit, don't do that, just let us tax you and then spend it as you well. it is more powerful to be deterred domestic, to offer them a little bit of money. businessmen are terrified. they want to find ways to invest their money and we can offer the least to do this. we can offer them to treat mortgage backed securities, business back securities and ways to securitized small and medium-size business. we can offer them ways to invest in the things that will benefit americans to create jobs. this is what i think is the great lesson of the new deal, to use policy and finance creatively to channel private capital into the social we desire and not say either or. either the market remains free or roughshod over us and our hopes and dreams and our lives

or cash the crap out of each other, right? it's not an either or. we can make policies that will work, we can make policies that will bring growth back to make it possible for the small banks not just to invest in mortgage-backed securities investing in the credit card debt and all the things that produce nothing investing again in our communities. >> what are the other types of securitization and mortgages that have developed like security is a medical receivables or exotic things. do those have the same risks as the mortgage-backed securities? or are they more like what you're saying investing in business. it's interesting because sometimes when i get the stock people say that all well and

good but mortgages have something real based on housing, and when those loans to about you can always rissole the house. we all know it is the intrinsic value, right? that's a lesson you should take in the last few years. so, i guess the question is if it's not about the intrinsic value than what is the risk? and of course on the one hand, business people are not free creative, the mortgage-backed security was developed in concert with the federal government was used for consumers and was expanded incrementally as the of respect and it is a medical debt, credit card debt but those other kinds of debt outside of cars and houses are all on secure. there is nothing backing them except for your future income. that is what underpins these

loans so why not invest instead in businesses, not crazy start-ups that just came out of the blue, that is for venture-capital wherever he went to college. a plumbing supply business, things that have been around to make extra money. things that have defined profits come things which have standards defined by accounting to make something profitable, they are the backbone of the economy so there's a difference between different forms of debt. the distinction one might be between secured and unsecured the distinction and it is credit cards and we figured out ways to do but are there any other questions?

>> mengin participation certificates being a kind of secure test mortgage. i was wondering if you could talk for a while about their origins and did it play a role in the great depression that comes to the realization they were not a good idea. estimate you know i like about this question it's a history question and i historian so i appreciate that. let's talk about the history. their origins in the 19th century at the beginning of the book i talk about this, how ancient finances made in the west as a way to finance all those mortgages, and initially these kinds of mortgage bonds were sold to pay for people owning money in the west, and they were owned by two different kinds of institutions, banks and then things called bond houses that were active but mortgage companies today. they would lend the money and

then they would sell the bond against the mortgage and if they couldn't be resold there was no secondary market. but what happened was in terms of the great depression at least in the housing crisis of the great depression it's like i said in the introduction, most of these houses had to be refinanced every three to five years, so these balloon mortgages of the 1920's had to be refinanced for three to five years and then the idea is you could go to the bank and get another mortgage which is all well and good as long as your bank can find buyers for the bonds and after the crash within a couple of years, the buyers of the bonds were fewer and fewer and investors were holding back their capital and because of that the ex of the rate of the foreclosure rate which made people hold back their capital and accelerated the foreclosure rate which led to the crisis and its only in those moments where the government creates the home

owners loan corporation to step in and issue new kinds of bonds that we stop the freefall in the market. such as the capture and i write about the stories and the compelling anecdotes. the author of the book its colorful and zinni and i highly recommend it. are there any other questions? no? thank you so much for having me and coming this evening. i will be around for a little while signing books if you would like to have a book signing. thank you. [applause]this is an hour and 1.

my great grandmother used to live down the street so it has a particularly special meaning for me. let me move to introducing our panel tonight i will start on the far side from me michael cooper is a national correspondent for "the new york times," the albany bureau chief and began his career at times as a night copyboy while he was in college. one shot his whole life, particularly impressive in the modern world. nearest to me, jared bernstein joins the center on the priority in may, 2011 as a senior fellow from 2009 until 2011, so most of

the period he will be discussing tonight he was the chief economist and economic adviser to the vice president of the united states. before that he was at the economic policy institute, and earlier chief economist at the u.s. department of labor. i take it had an immediate administration in that. last in the middle my colleague michael grabell has written a fabulous book money well spent if you haven't already read a strong strongly urge you to carry both evenhandedly and in the sunday review section of "the new york times." yesterday and we are very proud of his work not only for us but in this book. he's been a reporter since 2008 and earlier was a reporter at the news and hispanic twice finalist for the livingston award as the of the leading journalists in america.

thank you for joining and i want to say that we are particularly honored to have in the audience life and of our friend the former lieutenant governor of the state of new york so thank you all very much for coming and away we go. [applause] to three years ago today, discussed the american recovery and reinvestment act of 2009. it was about this time with a house that already passed a bill 3:30 p.m. we were waiting for senator sherrod brown of ohio to return from his mother's week in the senate the bill i think ) and ten, 10:30 p.m.. the bill contained about $3 billion of tax cuts about 200 billion a safety net spending for medicaid employment and food stamps for education

spending to state teachers' jobs and promote education reform but $200 billion for infrastructure and this is a combination of the shuttle ready highway and road projects and long-term investments and clean energy broadband electronic health records and electric cars and high-speed rail. overall it's estimated it will cost of $840 billion all these programs over time are the louisiana purchase, the manhattan project and the marshall plan to rebuild after world war ii of the emplacement so this felt like the new deal of the 21st century there's a lot of anticipation i think among reporters and among the public at a time we were losing

several hundred thousand dollars a month we had a new president coming in bringing a lot of coke gold of people for a bailout for the people this would be something to create jobs and help ordinary folks make ends meet after they had been hurt by the recessions of the anticipation three years later most of the money spent, the unemployment rate has been coming down somewhat in recent months to 8.3%, and for most the last two years we've sort of saw that at 9% unemployment. some are very pleased to be here with them and the panelists here dolph more into this issue this country and obsession in my

life. very rare to be able to say that. so, let me start to explain the theory behind the stimulus, what were the goals of the administration and some of the discussions going on in the transition team as it is coming together to restrict thank you for inviting me michael grabell for the important book. i wanted to start with something that the book doesn't go very deeply into, it's not so much the topic. the booklet said the program this macroeconomics behind all this we didn't promise there would be no mass on the exam so i want to give you a free simple formula that is actually quite elucidating in this context.

output and gdp is the sum of the consumption that's about 70% of the economy of investment about 12%, government spending and net exports, so the exports - what we import. i will say that again because this is kind of at the heart of the fundamental insight back in the 30's, consumption is the largest part of the economy, investment, so investment in factories and machines. government spending and net exports which is just export the stuff that we sell abroad. when you hit a recession, the consumption tends to stumble. and in fact one of the reasons why the recession has been so difficult and intractable and so long is that it's taken so long for the consumers to kind of get back into the game. a lot of this had to do with being so indebted.

people may have heard the discussion about the leveraging cycle. that is just saying consumers kind of have to spend them down their debt until they were able to start spending again. when consumers stumble because there is a shock to the economy and the bursting of the bubble and the great recession was very much that you heard from my statistics investors tend to sit on the sidelines because there is not much happening in terms of economic activity to decide the foreign sector for a minute the only game in town is g. c plus i plus g, c is on the map, ausley is on the map, it is left to g. to step in and still love wade. this was above very much the pressing economic and site of the keynesian in paris this iou's imperative is december 16th if i recall of the

economic scene got together, the whole team got together with the new vice president-elect. chicago, it was a snowy afternoon. i should have -- i went to chicago and i realized i forgot to wear a sport coat. i had a suit but i brought a sport coat and i should have brought one in honor of this event, and we began with christie roemer the president of the economic advisers taking this new president through the lead of the land, and going over the depth of what we were looking at and beginning to talk about how we were going to need a big stimulus. the -- so that this kind of a macroeconomic overview.

i will stop now because we should mix it up but as we go along, we should perhaps talk about what i think i found particularly interesting and important and useful in the book is on the implementation. on the case itself one of the most important economists of the 20th century of course didn't read much tall about the implementation. michael grabell has written a lot more about the implementation of the stimulus. in fact there's a famous letter that came to roosevelt once where he wrote about the cage and a half, he thought they should do and it kind of says railroads are really good and, you know, there's some other come against people tax cuts and things like that but, you know, what really matters is you get the money out there and of course he famously joked if you can't find anything else to do find one group of people to bury the money and another group of people to dig it up. so come a good joke, right, but

if you're out there trying to implement this 800 plus billion dollars stimulus that doesn't give you much guidance. so i thought it would be perhaps to try to mix in some of the macrowith the micro and talk about how the very simple arithmetic i think works prettye election in 2008 and spent the better time of a year-and-a-half with the candidates when i was looking for a job after the

election and the president-elect around the time of the december meeting and gave a speech and recorded a message explaining that he was planning to do the biggest infrastructure projects since the interstate highway system and so my editor said infrastructure is going to be huge, they will rebuild the country. let's take the beat and give it to you and you will write about rebuilding america with a giant infrastructure package, so after the election i took a little time off to get reacquainted with the family i hadn't seen for awhile, and as i was gone from work i slowly found it shrinking and shrinking because as the package came together, infrastructure became an ever smaller part of the policy and i remember when i first saw also built a life of this grant the tax cuts and then i saw there's going to go to the states and the safety net programs and i am thinking what am i going to write about here. by the time the bill passed infrastructure was a relatively small part of the bill that was sold as an infrastructure bill but it wasn't to rebuild the

country. so within those parameters, i tried to look for things i thought were the most interesting. i spent a lot of time writing about the efforts to build high-speed rail in america which sort of started out with a great fanfare but then our very in periled right now as we speak. and then i tried to find stories to talking little bit about what she was saying, how is this being implemented and what trends can we see, so i look for stories that are not just single stories of government money and this, but it's what it would mean. so, for instance, one of the problems i think implementing the stimulus is even of the federal government was trying to inject money into the economy and grow their equations, the states were cutting back and so the federal government was cutting federal taxes but the government was raising state taxes. the government was giving you some more infrastructure. the state government was paying of things were negating it so for that story i went to st. cloud minnesota or the vice president at a cabinet meeting because there was a company,

st. cloud, that was going to -- huge we come under fire. exactly. you were there. so it was when to benefit from $8.4 billion for transit, and was going to be great. what happened? before anything went further, chicago was so broke the to cancel their orders for the investors and they found they couldn't, the assembly line fast enough and they end up playing a tree under people including direct next to the vice president on the stage. i went to the unemployment office with him and it was a very vivid example of one hand giving into the river and taking away. and the challenges like that i try to illustrate by going around the country. >> can i make one substantive point? i'm not sure everyone is aware of this but the states have to balance their budget every year, and so bought federal government obviously to the is the budget today from the federal government doesn't have that country, it's one of the reasons why if the federal government, when i talk about that factor in

that little summation i told you about before, why that is where the attraction is is because the states will often act as michael just described pros cyclical, that is they will make a cycle actually worse. we talk about a shovel and we named it our partnership shall watch which they turned out to be like watching grass. but women to talk about what works well in this package, and there's a lot of good that the stimulus package did. we can start with officials and after it got going, you know, this was the only game in town for the construction industry. if you look at the consensus of the spending, the private sector, hospitals, universities, everything was going down except

for the public construction, the road was about, you know, keeping steady. as we didn't see a huge increase, but what we saw the of the struggle to get these projects funded and now had the stimulus money to keep the work moving. another thing to allow the folks to talk to them, there was about $50 billion for a thing called the state stabilization fund, which when you look at the numbers it saves about 300,000 teachers and support staff, and there is a lot of questions about new york city or other places have been able to stop the political cost of laying off tens of thousands of teachers, but certainly a lot of numbers get the pink slips to go away.

things today like clean energy with solar panel and wind farms, a lot of it is because the recovery act. i wrote a piece about the battery industry in the u.s.. electric cars and batteries have things going for them but they got a huge boost on the stimulus package, and in talking to the owners of the plant they almost all uniformly say if it wasn't for these overseas comes it is amazing to see people opening plants in the cell rather than china worker reva where they haven't been bailing out. so those are a few things i read about in the book where you didn't see a lot and i would like to hear from other panelists about what they thought.

..

>> but if u. p. -- a few places -- there were about $5 billion for temporary assistance for needy families. some of that money could be used for direct employment. i went to tennessee to a very poor town.

this place had two major employers -- to auto plants, and both of them had closed and gone to mexico. unemployment was about 25%, which was great depression level red there is nothing going on. there was nothing until you got to nashville. the government said i'm going to take this money, i'm going to give it to the county, and i'm going to tell them to create as many jobs as they can. if that means public sector, great. if it means private sector, that is great too. the milkshake place got to hire some workers, the hotel downtown got to hire eight or nine people. they had about 10 stimulus

workers at my company and the pies were really good. about a year later, unemployment was down to 14%. i checked back with people over time. i recently got a call from the mayor there. one of the auto plants is going to reopen with some workers. this is the case where there were some direct hires. a really kept the community together. now the community is going to pick up again. but that was the exception to the rule. >> i guess i don't -- what you just described is that exceptional, granting that there are problems but i know we're going to talk about. as in my experience, my experience was generally how things work out. you stole my idea about subsidized jobs.

>> why were there not more direct subsidized jobs? michael cooper is right. the most direct way to create jobs is direct job creation. another great economic insight. [laughter] >> a lot of what we did, and i think a lot of what stimulus is aimed towards, is to set the right incentives in place and cross your fingers and hope it works. i would argue that that is about one third of the stimulus. by the way, i was interested beside -- and you are at the heart of the journalistic story, so i trust your word over mine. i remember vividly a tax cut, which one third of it was, and was very important to get republican votes. but to this day, i believe that

tax cuts are, in many ways, the least effective. for a couple of reasons. first of all, remember that i was talking about leveraging. as idea that people were highly in debt and needed to pay down their debt or it well, if you pay down your debt, you're not doing anything about that 70-cent consumption part of the economy, so that's not really stimulate the economy. if you go out and shop and you buy imports, you are actually stimulating someone else's economy, not our economy. there is is -- there is a fair bit of leakage. i think the other two thirds were more effective in much the way as these guys talked about. i will say a couple more things. the bailout bill -- it is a very

effective form of stimulus. i'm happy to say more about that during q&a if you'd like. but i think that should be included in the discussion of market intervention -- government interventions in the face of market failure that work in an important way to our economy, today and in the future. i will read a couple of sentences from "money well spent? the truth behind the trillion-dollar stimulus, and the biggest economic recovery plan in history." the project is using historic funds across america. the stimulus played a role in every major product on the book. new york city, perfect example. the subway was first proposed in 1929, and although construction began in the 1970s, it wasn't until 2009 that work on underway with help from the stimulus.

this book is replete with things that worked, and things that did not work. that is why, in my view, it is an important book for the next time we are facing this kind of moment in our economic history. >> since we are in new york city, how many of you knew -- the brooklyn bridge is getting a fresh coat of paint. we are restoring the long island seawall. $500 million to the transit center, replacing the planks on the coney island boardwalk. does anyone know that these are stimulus related? i think one of the reasons that

it is hard for people to -- i mentioned the subway a couple times and people have really encountered me about this. this is not a stimulus problem. i think one of the reasons that they have the way they view things, the new deal projects or projects, we now have a formula that typically says 80% of the funds come from the federal government. 20% have to come from the state or locality. we now also have two make sure they have on financing -- there is a mix and also an intense number of years of employment that go on. in other communities, you can take this as an example.

technically it is the stimulus money, but you have a hard time getting people to recognize that because we have a deal and we -- in all fairness -- >> in all fairness, seven or 9 million? billions and billions. the whole line -- the new yorker's underpinning for it in one way or another. that is true of many of the big projects. they have money from all kinds of parts, state and local money. it is hard to think of these things merely in these projects. >> michael cooper's question is a very good one. why don't we get more direct on job creation? we are very interested in that, some of us, including the president. one of the things we recognize at the time was that there were

about -- over 700,000 temporary workers employed by the federal census. if you actually look at the job numbers in the summer of 2008, you will see a big spike in the public sector. those workers actually have to have an fbi clearance. there is a fairly rigorous process. and you thought, my goodness, that have been through all this. the unemployment rate is very high. can we find something else for these workers? by the way, this is part of direct job creation by the federal government. we do it every 10 years. we tried to find a project that would fit and work area it turned out to be very challenging. i think that the way that economists think -- you actually have a section in the book that you and i have talked about at this time.

economists look askew at this kind of bang. people worry about boondoggles. a lot of people think, well, why should i trust this person more than washington? it is not like it was in the new deal when you can send a bunch of guys out to a camp and say start building. there are a ton of barriers that you have to get over. there's a lot of questions that need to be answered before you can do this. and there is political concern. one of the ideas we have -- for some reason, i don't remember exactly why. for some reason, what you need

to do every 10 years, it may have to do with gps -- you need to do census. -- a census of buildings. instead of a census of people, a census of buildings. so maybe we could have guys and gals doing a census of buildings. and some of them said no, we can't. so to this day i don't think that would've been such a bad thing by the stretch of the imagination. but there is the offense and he worry about it in that context. >> the word boondoggle comes from the hearing held in new york city about the new deal

with they grill people about what they were spending money on. they had a crafts teacher there, where he taught people how to make boondoggles. the next day "the new york times" had a big headline in the front page. it was teacher in question, boondoggles made. [laughter] >> then president roosevelt said if i had to boondoggle my way out of this depression, i would do it. something like $1.5 million -- >> if i could interject here, i remember one day picking up usa today while i was helping to implement the recovery act. i read that recovery project

causes traffic jam. this is a project that i generally thought was a good idea. it was an article complaining about the traffic jam. i was with a couple of journalists appear. i want to ask something i've been meaning to for a while. is there, in your objective view, any kind of bias -- pressure internally or externally, to write about the recovery act from a negative perspective? i say that as someone who used to go to the pressroom everyday. i used to do that once or twice. the sense that you were just trying to be as everyone and pull the wool over their eyes. it has led me to wonder if there is really a negative bias. >> i think there is a negative

bias. i don't think it's the press, i think it is human nature. in this room, probably two thirds of you have read dante's inferno. roughly 1% of you had read [inaudible]. you probably read paradise lost, but you probably haven't read paradise regained. the other part of it is that there is the function of the press were your time to look at public money and money well spent or not. that said, there are plenty of stories that i wrote that i think we are probably -- i did another story -- they direct work project in mississippi where haley barbour was running for candidacy. he also did jerk genesee --

>> i think you need to report back to the public -- you hear one side but this demonstration will put out. and you will hear from the other side. you want to make sure that you have the right view. the administration has the time for the american people. as a journalist, you have to provide the caveats and be sure about the paragraph in the story. you also don't want to be cynical. you still want to look for at those great stories, but there is a sense that there is a really great thing that we need to happen, like what we saw before, because otherwise when the government is doing its job

-- the government is supposed to be doing its job. whereas before we were looking at -- you want to have the public hear what they are not getting anywhere else. we need to talk to the public at press conferences, interviews, through the white house website, and through twitter feeds. get the message out to the public. >> early on the white house put out a very early list of stimulus projects. similarly, on the other side, you had john mccain and tom broker, sometimes those lists would fall up under scrutiny.

sometimes they have to tell the story the best they could. sometimes that meant bad news for the white house. >> and i think the two of you have been extremely fair. i am not criticizing you are at i would say -- i would not be so quick to stipulate that a new story that says the government did something right -- i actually think there is a real sense of surprise to the people if the government did something well. i'm not necessarily talking about people in this room or the city, but there are a lot of people who just don't believe the government can do anything right. they're also a lot of people who don't know what the government is doing. you read this article yesterday, i hope you read this in the sunday times about this. a lot of people, when push came to shove, admitted -- they like

a lot of the things it is doing for me. >> at the time they were pushing the stimulus and put pressure on congress and everyday people were getting back to work -- and it's going to be a problem. there needs to be a story that less than 6% had projects for approval in the state government. i don't think the administration like it. this guy went on television to rebut it on several television stations. >> 125%. >> it turned out later that there was a math error, less than 5%. [laughter] >> is this money going where it needs to go? that is what it really was.

>> let's move to the other side of this and talk about what things went well. we said something about boondoggles. let's talk about that. there are two ways of looking at it. the one that gets most attention with the classic boondoggle story -- the headline the divisors were worried about said that people have accountability. $92,000 went from the army corps of engineers to pay for costumes for something called water the safety doctor this was a mascot to teach about water safety to kids.

but, at the same time, they did have hundreds of people. we had a 27% unemployment rate. so a lot of issues, i think, in looking at the stimulus -- our investment -- like cilantro, that will continue to help her clean energy policy for a long time. where we saw this general high-speed rail in reference to the groups -- as soon as everyone thinks about amtrak. it is not in check. as soon as the american public sees the train, there will be ways of people wanting to have one in their city. this point of how to we get this

train, what is the best place to have this. the two places where we saw stimulus money was orlando -- tampa to orlando. tampa to orlando was rated the top group. in effort to get the money out the door for the stimulus -- the first place they went to was san jose. the san fernando valley, where the authority said we are not going to run any trained doctor until we can [inaudible] to the city.

soon other is a question about high-speed rail in the country. >> first, remember writing a story early on that boondoggles are in the eye of the holder. when you go back to the depression, or member finding some reports by a guy out west and he said wherever he went, he showed them that there were no boondoggles in their town. but if you went to the next town, you could see the outrageous things they were spending money on. another example i like to think of is turtle tunnel in florida that got some money. >> that is something my kids really like. >> they knew right where the place was that the turtles would migrate. it was the most gruesome website imaginable. it was pure turtle carnage.

people have different ideas. they wanted the stimulus to spur economic activity, and i saw that -- i would to akron ohio, where they were going to use infrastructure money on the suicide bridge. akron had a bridge that was called the all-america bridge in honor of an all-american city. the bridge went into a fork at the bottom. a psychologist called it a suicide magnet. people would just go to this bridge and kill themselves. they used about $1 million to build a fence. the mayor got unbelievable heat for this. there was a recall election. there were other issues too, but this was a factor in the recall election. our member talking to one person who was glad that the reelection was being done.

on the other side him a this was a very conservative person who just thought it was the worst waste of money. he said, i take it personally. i own property in average, it went through the roof. it just kind of shows the idea. the bigger question is when you talk about money, it is more productive to build houses. the thing i try to look at his was this money being spent on useful things for the economy? i think they chose -- the florida quarter -- the state owned all the land. it could be done quickly. even though it didn't make sense to most people about high-speed rail, there was a lot of information on it. i went on the floor to check this out. it really was a flawed plan in a lot of ways.

i drove the route of the realm -- the rail. it took me 90 minutes. the rail would've been 60 minutes. it went from the orlando airport to downtown tampa. but it did not go to the tampa airport. you could not use it to get from plane to plane. i took the bus to orlando comeau which would add an hour to your trip. i thought maybe it is for the tourists at disney world. so i thought what is it like? i tried to go by public transportation and it took for buses and three and a half hours to get from tampa to clearwater beach where i finally got my sandwich. and it was a 90 dollar cab ride home. they all have businesses downtown. they'll have good transit. you don't need to get up the train without a car -- get on

the subway, get on the bus, get in the taxi and get where you're going in new york. in orlando, you can't -- in the situation -- he would need a car. in wisconsin, you would need conventional money for rail speed in that state. in cleveland, columbus, a lot of that money kept getting redirected to florida. then break in florida pulled the plug on that. in some ways, this was something that excited rail advocates so much. at the same time, it was ultimately determined as lost opportunity. there were so many

inconsistencies that you don't have the advantage of having one big object read. >> i have a different viewpoint. i think it is import to understand what was going on in the economy in 2008 and 2009 -- to some extent, to this day. we still have 4% -- 40% that have been jobless for least six months. that is the highest unemployment that has ever been. we have five and a half million people stuck in long-term unemployment for months. in a good market, there is one or two. in this market there is 7%.

we have to create jobs. it would've been best if we could have created the best jobs -- a shiny high-speed rail going from the best place to the next best place. we have tried to do some of that the best we could. the book gives a good story on where we succeeded and failed. but when people are unemployed, it is not just that they are losing a month of honor payment or that the economy is losing billions of dollars that day. they're losing it forever. resources are gone forever. you can't get that back. that is a turbo ways. if it was recognized, it could be avoided. just sit on your hands and wait for the economy to get better? now. instead of just sacrificing weeks and here's and hours of

people's lives when they could be in play, try to find something for them to do. it would be optimal for them to have at least something. someone who has -- and i'll use this example of things that were -- i actually did go to a diner that was near one of our construction sites. i asked them, have you heard anybody ask? and he said, absolutely. so you might find jobs we don't think -- that these two do not think are the best economic investments. there is a multiplier effect. jobs create more activity in the economy down the line. i think he was right. >> we were going to do question and answer period i think we still have enough time. ten minutes.

i think we go until 8:00 o'clock. it is important that when we answer a question, that you wait for the microphone to come here. that way you can be recorded and listen to yourself again. [laughter] >> thank you. i wanted to ask about lost opportunities of them. i was wondering whether this administration is particularly telling the story. and number two, [inaudible question] back in round 2004 estimated -- there was something about one to $2 trillion with infrastructure repair maintenance, bridges need

to be done. the stimulus was mostly bad and not much else, would that have been very much of an impact economically. >> that is a good question. civil engineers updated it right around the time it was passing to try to influence the debate in washington. they gave american and the structure a great d. they said that we needed to bring american infrastructure into a better state. when you think about transit, there was a point for billion dollars for transit. i think the dot admitted that it would take $75 billion just to take the seven biggest, oldest, systems -- transit systems and bring them into a state of repair. just getting the signals working in everything up and running.

so that is $75 billion. the water infrastructure, which we haven't talked about much, it is a terminus opportunity. how do you rebuild these ancient systems? was money similar for that, but if you use the water metaphor, a drop in the bucket. these things take a long time. as he said, it turned out that it had to be a terminus time before any these projects -- we had environmental impact problems and contracting bids -- the part that would've been the most popular politically, i think, the administration talked a little bit about constrained. it could be too slow to get people back to work. >> that is all true. by the way, it is the american society of civil engineers that did it.

i think it is actually rigorous. i have a friend, though, that says never ask your barber if you need a haircut. [laughter] >> the only thing i have to add to michael cooper is this idea that we did a bad job of promoting our publishers, it is not for me to say that i was out there trying to put them. i am sure that i did not do as good of a job as they could have or should have. i am sure that's true. i will say that people -- normal people -- don't do counterfactual is. by that i mean that we did the stimulus program -- and there's nothing you can say to prove me wrong. that was the absolute that we encounter.

the idea that the unemployment rate would've gone up more -- as much as two percentage points more -- this something that independent analysts have found again in crunching the numbers based on the kind of modeling i described. also the type of numbers that michael cites in his books. once people have in their heads that they did this and things got worse, i think that our presentation was challenged. i am not excusing us, but i think that that was part of it. >> there were a couple of things where -- a couple of things that the administration was doing. her were a lot of events for groundbreaking or along the lines of infrastructure. i think the idea was that people were not going to recognize [inaudible].

again, a concrete example. i think when we realized in retrospect that there were parts that were more visible -- it was good tax cuts in food stamps creating a multiplier effect and creating jobs for a supermarket cashier. we never knew where the pleasant whenever the entire day and walk people through this process -- where they could've shown different people whose jobs could have been saved. there seems to be more than ever to focusing on the people. where the teachers job who will be saved. you're the cop's job will be saved in. >> two added little bit, i did a story in the midterm election. i went to north carolina, and i was thinking that the president has just cut income taxes for

95% of americans. it was a hundred and $6 billion. i've been round to people in the midst of the campaign and said, what did president obama do for your taxes? and almost everyone said that he raised taxes. and to be fair, they were paying some more taxes. but none of them knew -- and part of it was the administration and the reasoning that we send people a rebate check. they won't notice it in their count each week tom and it will be more inclined to spend it. in terms of people noticing it, it worked early and late. but in terms of people spending it, it did not. [laughter] >> it was one of the reasons people didn't realize their taxes went down.

>> [inaudible question] -- some construction and that they were hiring chinese workers. -- blue-collar workers. >> the one i recall, in the book i focus on a guy who was a typical person who worked for the same company for 35 years, ended up living the american

dream. one of the questions was how my going to get a job as a construction worker? i have been working the same kind of job over the years. there was a lot of efforts. i think that green for all -- blue-green along the lines of the group. we have expectations of people being trained in jobs. the president always says boyd, girl, boy, girl, right? [laughter] >> [inaudible question]

>> you had a very good point about this when we were talking. i think initially they were very supportive but the governors were doing this. what we have seen now, the governors have very low approval ratings. michael covered this -- >> about the democrats? is that the one? >> you have a lot of republican governors that were saying -- >> oh, right. i wrote a lot of work and governors criticizing the stimulus. rick perry completely -- there

was an easily accepted letter where he was begging the president some money down that way. people have documented that the stimulus actually closed a big hole in the texas budget. that sour politicians on both sides to do more of this. michael wrote about the contractionary stuff still going on at the state level. every month we have private-sector jobs, we are laying off teachers and construction workers. hundreds of thousands of public sector workers continue to lose their jobs. state budgets are still strapped. the budget that he raised today has something like $35 billion of funds for teacher preservation, and it is not going anywhere. one of the reasons is because they're up against and democrats are fed up providing money -- i

don't think it's good economics. i guess i can emphasize with the politics. >> when they think of governor scott in wisconsin, they don't think of railroads. they think of unions. early on we were talking about rails and stimulus, but then everything got overturned. it is hard to decipher. >> back their? >> instead of characterizing what happened in 2008 is a recession in historical terms,

-- [inaudible question] there were many things responsible leading to regulation of the financial -- [inaudible question] the long-term serious problem in which 44 million americans -- [inaudible question] -- and the fundamental limit problem has not been addressed. do you think the stimulus -- [inaudible question] i can type from the state point of view, that the stimulus has

now fallen, -- quick thought. >> the answer is that if we had known how deep and long this recession would have been, one thing is -- and it came up during this conversation and also through this book -- the public would not have worried so much. it turns up that we actually needed these projects to come not just the first year, but the second and third years as well. we absolutely wanted to get a

stimulus and the dollars out the door as quickly as possible. we did so with the tax cuts and state is covertly. the fact that the infrastructure trip longer, turned out to be commonly understood. in terms of whether we would've done a lot more stimulus, which is a common discussion. i know lots of economists -- a very corruptly say that the whole is much deeper. people like me knew it was much deeper, why did you do more from the beginning? i think that is pretty reasonable. there were two constraints -- big constraints that in my view -- it really could not have turned out much differently in that regard. one was just the magnet. we have never had anything close to this magnet. 200 billion -- the idea that you

were going to do an $800 billion stimulus was just shocking to a lot of the members that were going to have to work for it. secondly, there are implementation challenges. we really did have to implement this in a way that balanced speed and transparency and accountability. you really do worry about walking through the fire. >> one of the things i learned over the last few years, it is a test of how federalism works. i think you could argue in many ways it's sort of fails that test. if you take the federal government -- they want to set up eight transportation policy -- whether or not you think a good plan, the idea is a national network. who has to build a? the states have to build it. all of the states planned and wanted to build these railroads. suddenly you can't get from chicago to st. paul, minneapolis, because her snow line that goes from milwaukee, to madison.

>> or member reading that the chinese decided they were going to build a high-speed rail. i am not saying i was envious as an economist or anything like that, but i am saying that the federalist issue is real. >> and the issue of china is not that they are just building high-speed railroad lines quickly, it is also like the solyndra problem, where the ministers are not criticized for putting all this money into a solar company that went elian. part of the reason they went belly up was because they try to provide cheaper solar panels. >> the question i am talking about today -- if you like that

question is always raised in the beginning. a lot of people go in with $1.2 trillion -- and in my interviews it is true. people for reluctant and had their arms turned to agree to it. the real question is why his administration -- when they knew things were going south -- got involved and had 60 votes -- 60 democrats in the senate -- [inaudible] deficit reduction. why didn't the administration take advantage of the opportunity to enact. >> i can answer that. it had to do with this guided deficit operation. this guided -- this guided deficit budget operation.

there were a lot of people who have a very irrational fear of budget deficits at a time like this in a very poor understanding of the fact that temporary spending is not related to budget efforts. in 2014, the 840 billion recovery act will account for less than half a% of gdp in terms of its addition to the -- let me say again. in 2014, the recovery act will add less than half a% of gdp for the budget deficit. the stuff that drives the budget deficit is the stuff that stays in their. the bush tax cuts are the best example. over the longer term, it is unsustainable health care costs. economy is beginning to look a little better. the gdp began to grow in the

second half of 2009. it has been growing ever since. until we continue to be more -- one of the reasons i am very oppressed by the president and his budget, is because it does have a good stimulus impulse in there. were things beginning to get better and people beginning to get nervous, the idea did not have as much traction as it should have. >> [inaudible question]

>> [inaudible question]

>> well, you know this book is all about the first part of your question. it is all about the down on the ground granular look at the implementation of the stimulus. i said earlier, was the economic rationale. it is academic. it is certainly nothing i would say. i think if you actually look at my work while i was in the white house, it was much more so. i wrote a series in the huffington post. they were all -- obviously interesting stories -- very much in the spirit of your question. as far as why we would do more

direct hiring, i tried to ask -- answer that question. i very much agree that that was by definiestion. i very much agree that that was by definition on track. we actually got to be close. we were retaining jobs of teachers and so on. beyond that, you have some of the problems that michael cooper pointed out earlier. it is just not as easy to do that kind of thing now. >> another part of that question. i can see what your perspective now was. as michael pointed out in the book. the administration really let congress draft a law of the package and then they stepped in and tweak it. congressional democrats and congressional replicants -- do you think in retrospect it would

have been more effective to put out a marker as to the original role? >> i don't think it would've turned out as differently as you think. the formula is still there. i think politically, getting it over a top bar. it was not exactly like congress was lining up democrats to get behind it. i think politically it would have been as well. that said, you make a trade off. i have seen it happen with the dodd-frank act, the stimulus, -- when you try to get it over the bar, and you leave work to regulators and legislators are area. >> we are going to wrap up here. there is a question about why haven't we seen the [inaudible]

-- supporting the -- >> quicksort. >> if you look at the numbers, there are 300,000 jobs saved. it has slowly gone down with the stimulus for education jobs. jobs came in and provided some of that funding. i think this morning there was something like 111,000 jobs been supported by that. there is a big question -- 250,000 fewer public education jobs right now than there were in 2009. but you haven't seen a dramatic drop off. the question is what happens

when all of this gives con -- cut off? that is what i want to make clear. the only way you can have a great impact with the stimulus funding -- one example where we saw a lot of impact was in south carolina. it was to have a cold war nuclear plant it had to be cleaned up. the money comes in, within months, they have 3000 or 4000 people working at the plant. you can see the activity at a local bar and grill. can see the impact in the permits and hotels. there are several impacts you can see. several impacts that happen locally. but it is hard to find ones that would have this kind of impact. >> let me get back to my point

part of it is the way that it works. part of it is the states and what they decided to the money. the formula is for a competent. how much you give to the federal government and how much you get back. the oil industry -- they got a lot of highway money for that. the point i made before, washington county -- [inaudible] -- >> [laughter] >> with the senate on break for the next two, c-span2 is featuring booktv in prime time.

>> this saturday at noon eastern on c-span2's booktv, join our live call-in program with distinguished former navy seal and author chris kyle as he talks about his life from professional rodeo rider to becoming the most lethal sniper in u.s. military history. at 10 p.m. on afterwards -- >> if you think of yourself as a family and if you think of yourself as a team, she said when i get a raise at work he is

so proud of me. it's like we got a raise. our family got a raise. but i really felt that though she had redefined providing to include what her husband does and that she had a lot of respect for what her husband was doing. >> "the richer sex" author monday on the changing role of women as the breadwinners of the family and how that impacts their lives. also this weekend, "america the beautiful" director pediatric nurse or a cheap at johns hopkins ben carson compares the decline of empires past with america and shares his thoughts on what should be done to avoid similar fate. sunday at 3:30 p.m. booktv every weekend on c-span2. >> today on c-span, irs commissioner douglas shulman on the past and future of the nation's tax system.

>> you're watching c-span2 with politics and public affairs week a stage live coverage of the u.s. senate. on weeknights watch key public policy this. every weekend the latest nonfiction authors and books on booktv. you can see past programs and get our schedules at a website. and you can join in the conversation on social media sites. >> the council on foreign relations hosted a discussion yesterday on where the global economy is headed. they talk about the u.s. economic recovery, europe's debt problem and china's expanding economy. from new york city, this is about an hour.

[inaudible] >> i think we have been doing this session, i've been showing it for two years. every time i do if somebody comes up to the outdoors and say why did you press be so much? the economic news is terrible. i said i am just the messenger. i like to be a better messenger this time. i'm hoping the rest of the spin will be more optimistic than i just was. it's a very veterans all of you on this stage. lewis alexander over there, united states chief economist at nomura. next to me here is joyce chang from emerging markets at j.p. morgan. and here, vincent reinhart, chief u.s. economist and co-head of global research at morgan

stanley. last time he came to speak your he managed to invoke wearable without a cause. he invoked the lincoln assassination. you better not let us down. we want a follow-up. we need culture. we need history. just a couple of housekeeping notes. remember turn everything that goes bleep off. i think we've c-span here so we care a lot about it. and secondly this is on the record. so keep that in mind. let's start, joyce, with the eurozone. the turbulent part of global economy. we had in the summer and ephedra. they seem to stabilize things. which is that the announcement of a big new, whether it is bigger now, question, agreement. joyce, are we out of the acute phase of this crisis in europe?

>> the acute phase of the crisis which i would define as liquidity, i think we're out of right now. but the chronic phase of the crisis, which is the economic investment and the pain of economic adjustment, we are embarking on that for a very, very long road. we are forecasting a recession of 1.5% contraction in the economy this quarter. if you look at the firewall, that's not what's going to move the market. that really led to the risk rally but if you look at where european central bank balance sheet out as a percentage of gdp is in line with the bank of japan, 30% of gdp. so acute meaning the systemic liquidity issues have been addressed through ltr oh, not necessarily to firewall or other action, i think that's over. but the chronic economic painful adjustment, take a look at spain, 20% unemployment, fiscal

deficit 8.5% of gdp, well above what the target was. and a recession. that chronic phase will extend for a long time. and i think that's not just the european story. as you look at developed countries out large, burden increased by almost 23 percentage points since the onset of the global financial crisis. >> vincent, we've had three countries in europe so far, how long before spain falls to? >> that important depends on the willingness of the leaders of the rich countries to continued to spend resources to keep the enterprise ongoing. i worry, as joyce has explained them about the chronic aspect. we have a continent in which a large number of countries will be shrinking as part of this coal consolidation, and the poor

rich countries expect have export growth. not obvious to me who they will be selling to, and particularly as we get past the funding stage, could be that the euro will be failing. so the chronic aspect will be windy people see the benefits of keeping the exercise ongoing? now, back to the immediate question. spain, funding which is essentially a program exercise the imf used to do in the 1960s. what's the official resources, what do they have to rollover, how much can a contract? and the answer is going to be the same thing, and important depends on the market as the, how wide are the spreads. >> this cycle with a crunching down of the fiscal deficit, every time they did they drive people out of work, then they have worst deficit.

>> think about the debt sustainability edition. it's a racial. the current stock of debt, on the bottom is the real cost of borrowing and real growth. when you try to consolidate you don't do anything good to real growth. and, therefore, often you make the problem even worse. the moving parts are is a real cost of borrowing. so what we're seeing is increasingly domestic institutions as the depositories of the debt that you could otherwise so. so in some sense the answer to your question is how much more room is there to impose on the european financial system semi-forced ownership of debt in those countries spent but even that would not solve problem. greece on the other hand is a great story. is completely in compliance with its program.

that is because the program has long been there for 10 minutes. [laughter] how do you solve greece? >> i think you sort of highlight the important question. i very much agree with what both have care crisis in terms of the ltr omega huge difference. ultimately this still does depend on being an agreement with european for contention for me. there is this fundamental issue of the greeks have to make commitment that the rest of europe is going to fund. they did not have a primary surplus at this point. as long as that is the case, you run the risk that gives that basic political equation breaks down, then we will be back more in a key face. we have a greek election coming up, and that is going to be very difficult here and so while we are definitely in a different pace than we were in the summer, there is the risk back to a world where you see the potential of a breakdown of one

that supported the funding for greece, event greece's ability to stay in the eurozone will become an issue. i very much agree where kind of at a different world, long run growth issues, but the tail risk associated with them are very much do. we still have how exact are we going to do with portugal. it's official policy is no psi for portugal, but you can't look at the numbers on that and one can easily raise questions about the. and then all of the broader financials are still on the table. >> it is quite disturbing. >> those are all sort of complicated factors. those things can just make the problem worse. and i think we are at a different phase, things are going better, but there are those risks, those tail risk coming up. >> would you say the fundamental theme in all these debates about europe and about being that, you

have one camp that is sort of doom and gloom and break up, and another camp, the optimistic care, the thesis is a model for. the question is, if you only can muddle through as your optimistic center, what if you model and model and model, if it is infinitely long you will wind up floating off. >> i think it's also, i mean, it's inherently a risky path. and so while one can imagine it working in some sense, it doesn't take large deviation to put you over the edge. and i think that is the problem that people in markets have to face. the europeans have successfully managed the what so far. and each time we've come close to the edge. said for example, the greeks proposed a referendum, we came arguably very close to a disrupted the breakup, and people kind of pulled back. and i think there is some very strong incentives for the system

to continue to manage in that way. but it is difficult, and dangers for the system to be kind of constantly on the edge. i think it is a drag on global growth. everyone i think looks at downside risk in europe as something we have to filter into how we think about the outlook. and that of sexual decisions. i think at the moment one of the reasons things are moving better in the u.s. is that big downside was that we were facing last fall has faded a bit. and that's part of what has got people i think more optimistic. it's not hard to imagine that is not still in people's. >> i want to put one of you on the spot. three years from now, will there be 70 members of the euro, 16 or fewer? >> i think fewer. >> joyce? >> i think ill be missing. they would just be more debt restructuring to i don't think it's much of an exiting fear so much as restructuring the debt.

>> no one is on the 16th greece only can. let's talk about the u.s. and maybe i should start with you, vincent. we had the fed minutes out yesterday. you have been arguing in a month or two before that the chances of two we three were rather high. have you changed your mind? >> cercla. you have to respond to what they say. it's an open and transparent that and they're telling something that matters. we have been thinking a bit about a two in three chance of some form of balance sheet operation in the first half, and that had three parts. forecast with economy grows essentially to trend, but we have been above trend and would come back to trend. that's the second part. the third part, there is an election coming and the fed would be reluctant to want to step back during the campaign season.

but if you logically see the window close at the end of the first half, you will more likely want to act in the first half. what the fed told us was that it was that independent, that policymakers would be willing to act if there was evidence of a cooling in economic growth. so they're not in the mode to buy insurance in advance of that. bu..

>> you don't have to put it in terms of the morgan stanley forecast, it's the fomc's forecast. they admit there's a lot of slack, and the increase in inflation now is only temporary and inflation expectations are well anchored. so they are short of both of their goals. so the real risk is that two out of three chance they don't act, and in that case it's possible it was just a growth spurt, we'll see the economy come back to trend, and it will be june, july, august when they come to appreciate that. but then be hesitant to act immediately in the heat of the election season. so i think the timidity could prove to be a mistake. in the same way in 2010, they waited probably too long to nurture the green chutes. they only embarked on qe2 in november as evidence the economy was softening started to

accumulate as early as the spring. i think we're, we could be in a replay of that. >> i want to come to joyce in a second for the international aspect of this monetary stunt in the u.s., but maybe there's, you know, part of this is the kind of discrepancy between the employment data which have been fairly strong and the gdp data which have been less strong. how do do you see that conundru? >> yeah, that's an important outlook of how you see the chairman has obviously stressed in his statements, and that is very much, i think, part of what the fed is struggling with. i think when you look at it, basically, over the last four quarters you've had gdp growing only about 1.5% while you've had the unemployment rate coming down a full percentage rate. the fed's been pretty clear they don't expect that to continue. what's driven that performance is primarily two things. it's a combination of relatively weak productivity growth and very weak labor force

participation. so you've seen people exit the labor force, and you've seen low productivity. now, i think the fed has argued and i think we would agree with them that those trends are not likely to continue. and consequent hi, i think that the pace of improvement in the labor market is likely to slow. and i think that's part of what creates the argument for them doing more. if i could just add kind of one aspect to the way vince, the way that vince talked about the near-term issue. i think the other problem they have is financial conditions. and i think, um, you saw in the way the market reacted to the minutes yesterday, essentially, their conundrum if you like. if they make it clear that they're not going to do qe, there is the chance that rates will rise, that equity prices will fall, credit spreads will widen and they will, in some sense, engender a tightening of financial conditions that they do not want. one of the things that all policymakers have been pretty clear on is that they believe at this moment we need to have

continued, very accommodative policy. and the market's own reaction to what they do can sort of create, can create a situation that they don't want. and so i think the one aspect in addition to the way vince characterized it, i would say we're push anything that direction is if you actually get into one of these feedbacks where in anticipation of them not going market circumstances sell off, and you get an effective tightening of financial conditions which then undermines things. i think that is one of the trickiest challenges they face. >> be prepared because of that for confused communication. because right now they've embarked on two sets of unconventional policy, one is the ongoing balance sheet operation, but the second is managing interest rate expectations by offering the assurance that rates would stay til late 201. if you look at -- 2014. if you look at money market futures, they have priced in that tightening before 2014.

federal reserve officials are going to have to protest that, but -- and how do you protest that? emphasize how much room there is for the economy to expanld. when you hear that, don't assume they're signaling they'll qe, they're actually defending what they've already done. >> it's an interesting conundrum about the way central banks function in the sense of the theory of being, you know, if we communicate more clearly, more extensively, more openly, then the markets will get exactly what we want to do, so there'll be none of these miscommunications. but lo and behold, they do that, and we're still talking about potential miscommunications. i want to come to joyce and ask, you know, if there is a sustained recovery that the fed appears to believe in now, what does that mean for emerging markets, emerging market currencies and the global outlook? >> for emerging market currencies, much of the story has been a dollar-weakening story.

you've seen in recent weeks a pullback in a lot of the em currencies. it's a dollar-weakening story particularly when you look at the growth prospects for europe. i would, you know, just add to vincent and to lewis' points, the message has been no further asset purchases by the fed, but we want zero interest rate policy to continue through 2014, and the g4 central banks, you know, at large have -- [inaudible] so that's still made emerging markets a pretty attractive place to be given how low yields are. peripheral europe at the beginning of the year was 3%, it's -- 7%, it's now down at 5%. emerging markets is at 6%, you have four times the growth, china low is 50% of the crux to global -- contribution to global growth. for capital flows it's still a fairly robust picture given where interest rates are likely to stay for the foreseeable future. the question, though, for the currencies is are you through with this em currency

appreciation trend. particularly in asia, are you looking at a scenario where rates have to go up? overall, when you just look at what g4 central banks have done, you have to be looking at a period where we're heading into higher rates and higher volatility. particularly after the first quarter that we've had where, you know, asset class, the risk rally has been very strong. so you've had a market that's been very range-bound over the last few weeks. but emerging markets looks like an attractive place to be on the growth differential. you getting paid more for being in emerging markets. currencies, that's more of a question mark at this point in time particularly given the appreciation we've had over the last few years for some of the currencies. >> do you think that in terms of the ways the global system is perceived to operate the waves of dissatisfaction that we've had out of emerging markets are

going to continue? just to recap i'd say the first shot comes in 2008 when china particularly holds dollar assets and suddenty realizes, gee, u.s. capital markets aren't that safe, and they talk about dollar hegemony, and they want to change that. then you get the currency war rhetoric more recently with the brazilians leading that. do you think, you know, as things go forward we're going to hear more of that dissatisfaction about the way the global management system works? >> i think you are hearing that dissatisfaction, but until you see country like china really make deeper progress on currency convertibility, interest rate liberalization, where else can they go, right? so it's one thing to talk about the opportunity in emerging markets, but you have a lot of distortions as far as, you know, macroprudential controls and what is investable, the size and

liquidity of these markets. so there is, i think, growing dissatisfaction, but emerging markets are still in many ways going to proceed very slowly on how they manage the capital inflows that are coming in given some of the risks associated with that. so we're still in an environment where, you know, there are not that many investable assets for just the size of the reserves that we're talking about. i mean, emerging markets now have 80%, more than eight trillion of the global foreign exchange reserves, and where can you invest most of that just given the size of the emerging markets? >> vincent, i think you've argued that the kind of level of distortions around capital controls in emerging markets are converging in a way. >> so it's a couple things. the first is expect more capital controls on average. why? because in 2009 half the economies in the world were in recession, but if it was an advanced economy, it was because they had a financial crisis, if it was an emerging market, it was because they had a demand

shock. you snap back from demand shocks, you grow more slowly as a consequence of having a financial shock. so that growth differential we had growing into the financial crisis where em was growing faster than advanced economies is only going to widen. that implies that emerging market economies are going to be dissatisfied with the very, very accommodative monetary policies in the advanced economies and, therefore, going to want to reclaim a measure of independence. the way you do that is put on capital controls. but they're starting from a very uneven base, and that gives china the opportunity to liberalize at its own pace, but the brazils and more globalized economies to tighten at their own pace. and they'll sort of converge in the middle. on average, there'll be more. >> lewis, let's ask another question here about kind of global governance. you've got on the one hand the

u.s. proposing a new president of the world bank and some commentators observing that the the nigerian candidate seems to be much better qualified. you've got a fight going on about imf resources with the europeans hoping that the emerging markets will kick more money in to match what they've promised. how do you see that part of the governor nance of -- governance of the global economic system evolving? >> well, in some ways if you look back over the last several years, i would argue the g20's been a success if you look at the role they played in 2008 and what not and the evolution that we've seen from the g7 back in the '90s up until where we are now. i think there's some real momentum. and say, for example, the commitment that was made in seoul, the g20 summit to sort of change imf governance, i think, is a very positive thing. but i think if you look at kind of what's happened with europe and what's going on here, it's taken a bit of the steam out of that momentum. and i think that that is

something to be concerned about. um, i think about the situation in the u.s., and one of the things that's interesting is i've been doing a lot of looking at sort of polling data on what sort of priorities voters have in the context of the fiscal challenges we face. one of the few areas of consensus is less money for foreign aid. if you translate that into what's on the agenda for the fund, that's a material issue. >> for the imf, you mean. >> yes. the g20, essentially, made a commitment to try and complete the changing governance of the fund by september of this year. and, frankly, the chances of getting that through the u.s. political system this year is slim to none. and, frankly, if you were to try and do it, it would fail, and you would have to take a step back. i think about the risk in some sense when i look at all of those things of the u.s. taking a step back, frankly, from sort of being part of sort of global

governance as being a real risk. and in some sense the debate over the world bank, i think, raises some real issues there. i, you know, i have personally felt for a long time we ought to open these things up, but i think there is a bit of a risk just from the perspective that if we kind of take less of a leading role in those things, that our overall commitment to the process is going to wane. at the same time, you see what's going on in europe where they are in some sense understandably obsessed with their own problems. and that, that in and of itself has also taken some of the impetus away from sort of the global governance side of things. and, you know, at the same time there's, obviously, you know, a bit of a reticence on the part of the chinese to sort of step into the breach, and it feels in contrast to what it felt like in 2008 where i think there was sort of legitimate, there was a real commitment to this, and it actually added to the policy response.

you get a bit of a sense of things kind of pulling apart in a way that i think is problematic, and i think it, um, you know, i mean the realities of an election here in the united states are what they are, and i think it would be a mistake to try and push this agenda now because you'd get an answer you don't want. but it does raise risks about where we're going. >> i want to open it up to the audience members in a second because of the talent in the room, i want to get questions. but let me put one last thing to all of you maybe starting with joyce. is there a crisis sort of over the horizon that we haven't talked about, that we haven't focused on? is it you are the can key or some -- turkey or some other economy that's running a massive account deficit that's going to be in trouble? is there anything you worry about, is it oil prices spiking with iran? whoo's in your kind -- what's in your kind of risk set looking out six months to twelve months?

>> looking out i don't think it's an emerging markets crisis because even though you have a country like turkey that is more vulnerable, it doesn't have a funding problem. it has a pretty deep domestic investor base, and i think that situation is manageable and, you know, frankly, the higher commodity prices on the whole, that actually benefits emerging markets a bit more. so i don't think the crisis is actually one that would be coming from emerging markets. i think near term it still comes back to europe. it still comes back to europe that, you know, had we graduated from acute to chronic, but is it really that greece was kicking the can down the road restructuring, an exit from the eurozone is something that gets, you know, more debate over the next 6-12 months and it comes back to europe? you know, the big surprise last year wasn't europe, it was the u.s. ratings downgrade. that's what sort of started the whole selloff last year. so we're getting into a u.s. cycle again, another debate about the debt ceiling. so i don't think it's in

emerging markets. i think medium term, the markets will continue to focus on china because there isn't as much information available, and, um, because there are more question marks about how -- we're finally seeing that shift this growth in china from 11.5% to 8.5% which, in my opinion, is not a hard landing. they've talked about that for a long time. now it's actually happening, but everybody's worried about that. that does pose some uncertainty over the medium term. >> any over the horizon shock you want to predict? >> december 31st. >> [inaudible] >> because on december 31st an unstoppable force meets an immovable object. we have adverse debt dynamics and a legislated sudden stop on the equivalent of 4.5% correction to gdp around the same time we're talking about the debt ceiling. >> and the ability of the u.s. political class to reach sensible compromise is not as robust -- >> not proven. [laughter]

>> i very much agree with vince that that's, like, the preeminent risk. i just want to put something on the other side whichs i think there is an upside to the u.s. as well which is if you get an electoral outcome that allows you to do things, i think we're lining up to do some things that are positive. in addition to some long-run fiscal deal, i would point out just in the last couple of weeks there have been a bunch of plans put out on the fiscal side. the difference really isn't about stabilizing debt. they all do that. the difference is in the vision of government that you have. and so i think if you get a clear outcome from the election on one side or the other, there's the potential for both doing a big fiscal deal, but that would include things like we're getting ready to do a major tax reform which is, i think, potentially a very positive thing for the economy. i think we are lining up to do mortgage finance reform. so i think if you get an outcome of the election that essentially

puts gridlock to the side, there are very positive outcomes that come of it. now, you look at the polls and ask yourself the question how likely is that political outcome, and it is clearly not the most likely outcome. so, you know, partly as i think about how we think about the second half of the year, it's just going to be very complicated because there is, there are very negative outcomes that are possible, and i would argue there are actually positive outcomes that are possible, and it's going to depend on the complicated interactions of what we get out of the election. >> so in some sense, the good news is we are so inefficient in delivery of fiscal policy that there is no one direction we have to go. that it's about taxes, it's about appropriations process, it's about entitlements, it's about the way we budget, it's the lack of rules. so you could actually contest the election on two different views of what, how big the government should be, opportunity versus safety, marginal structure tax rates.

two different views and whoever wins puts it in place. the problem is if we don't contest the election on those issues, then it's very difficult to put it in place after the fact. >> and i agree with that, but i think -- >> parliamentary system. that's dangerous. [laughter] >> well, but one of the things we are shaping up for, i think those choices are going to be much clearer this time than they are normally. the republicans, to their credit, have put on on the table a credible budget plan that is in full detail and is very severe. it's not the plan i would choose, but it is a very clear vision for how you get fiscal consolidation. i think the democrats have a very different vision of how you approach that same problem. and in some sense i think you are going to have very clear choices presented to the electorate. now, it's an election, it's complicated. these are not issues that are

easy for people to understand. one of the things that jumps out of the polling results on this is it's interesting that there is consensus in the electorate across the political spectrum in some areas that is encouraging. for example, you ask people both republicans and democrats would you be willing to raise taxes, do you think it's a good idea to raise taxes on people that make more than 250,000, and the answer is, yes. and you get majorities even among republicans for that. i think that's encouraging. you look at some categories of spending and say should we -- is this an area we should cut? and you see some areas where there's consensus. unfortunately, on the spending side that tends to be relatively narrow areas; getting out of afghanistan, foreign aid. and, unfortunately, that's not going to do it. one of the, you know, one of the places that's a little more troubling when you look at this is when you ask them about medicare and social security, you tend to get majorities on both sides not for less, but for more. the republican numbers on medicare are fascinating.

21% of republican voters would support cutting medicare, 24% would support spending more. which puts the sort of republican plan in sort of an interesting context. so, look, when you look at those numbers and ask the question if election were held today would you get a sensible response from the electorate on the fiscal challenges we face, i think the answer is probably no. >> but and both of you seem to be saying the chances of a bipartisan solution look incredibly slim, the electorate may not force this issue. so are we still at a phase where it is kicking the can down the road? there isn't necessarily a drop dead date that's 2013 because if it can be postponed, will it be postponed? >> i think the odds of a, you know, a bipartisan solution of the sort we had in, say, 1983 on social security unfortunately given the political alignment is low. to me, the good outcome for

policy is a sweep either way. it's all republican, all democrat. that's the clearest way in my mind for where you are going to get progress on all of these things. if we get the most likely outcome which seems today to be the president gets reelected, the republicans take control of the senate and retain control of the house, that is problematic, and that is the outcome where i am much less confident that we get, you know, progress in all the wrong ways. i personally think we'll -- the problem of, you know, the beginning of the year will be handled in some way, but it's likely to be messy and noisy and have adverse effects for the market. s&p downgrade seems possible, another one, fitch downgrade. sorry. >> you'll be happy to know that this reminds me of my second favorite quote from cat ca which ises from the country doctor

which is writing prescriptions for people is easy, dealing with people is hard. [laughter] >> okay, who's got a question? i see one right in the aisle there. please -- [inaudible] microphone there, ken. >> ken brody from -- [inaudible] finish -- a little twist on the question that you asked, sebastian. there's some discussion among economic democratic elites that's sort of a hopeful discussion on our economy, and i'm interested in the reaction of the panelists to it. for one you discussed gdp growth has been inconsistent with the employment numbers, and typically the gdp numbers are less reliable than the employment numbers. we've had a lot of revisions

there admittedly on the downside since 2008. the national income accounts which should be about where gdp is are a good bit higher than gdp. and putting these facts together, the hopeful democrats say this is probably a pretty good indication that gdp growth has been stronger than we have seen reported, and i'd like some reaction. >> so, vincent, are we richer than we thought? >> so if you look at gross domestic income, it's increased faster than gross domestic product over the last year. we've seen some revisions. problem is that the spread between the two does vary a lot over time and can reverse itself, so it's tough to know if it's true, for instance. we've got more household

employment in the last month than payroll gains. however, when you look at it from the trough, we got more employment than household. these numbers -- these are erratic readings on the economy. there is, clearly, a possibility of a breakout on the high side. we had an inventory bulge in the end of last year that led to hiring. hiring leads to income, income leads to sales, sales leads to sales expectations and then all that cash that is on nonfinancial firms might start getting to be employed. but i work backwards, you know, and, you know, and hope is a strategy. hope is a thing with feathers. [laughter] but when my optimism flutters upward, i think that the world's a risky place. we have an ongoing sovereign crisis and banking crisis in europe, we have the possibility of elevated energy prices, and we have a fiscal cliff come cg. coming. those are not the baseline outcomes, but the presence, the tale, those tales to the

potential outcomes are reasons investors shouldn't have conviction, and if investors don't have conviction, you don't get the wealth creation that pulls an economy up relative to trend. >> knicks hand right here. next hand right here. >> byron wing, blackstone. i think you're all too complacent about europe. >> you're supposed to be the optimist. [laughter] >> i'm trying to be. um, the european central bank has changed its spots totally from focusing on inflation to focusing on showing up -- shoring up the banking system and keeping the economy afloat. that's likely to continue for three years or so. but three years from now isn't there a very strong possibility of breakup? because none of these countries are really going to be able to make the fiscal changes that are necessary. they're going to -- growth is going to be slow or negative, you're not going to, um, be able to implement the austerity with the work rules that exist there.

so consequently, three years from now the ecb will have run out of money, and europe's structural problems will still endure. am i too pessimistic? >> well, even the next three years, i think, are pretty difficult. i mean, not just after three years. if you look at spain and italy between now and the end of 2014, they have 800 billion of gross sovereign funding. so the next three years are hard. it could be about a breakup of europe, or it could be that you have weaker europe and stronger europe which is the equivalent of a breakup. it is just very clear that the fiscal path cannot be held amongst all of the countries, and i think the focus will be, you know, less on the greece/portugal than on the italy and spain and what happens with those two because that's 800 billion of sovereign gross funding needs not even counting the bank recapitalization needs they're going to have. >> maybe just to follow up on that, in some sense what byron

is asking about is, is this sort of superman central bank thing an act that's going to be revealed to be a cartoon? in other words, you know, you have a long debate in the europe about the esf bailout fund. it's supposed to have 440 billion euros of bailout capacity, and one fine day in december the central bank says, you know what? 340, nah, we'll just print half a trillion in one day, and then we'll do it again in february. this is massive central banking. >> i would distinguish, i would -- [inaudible] the following way. the central bank can provide liquidity, andly liquidity is important in a funding situation, and that is the contribution they have made. that was obviously an issue in terms of the response to -- i mean, if you go back to a year ago, there was this perception that sovereign risk was a limited thing and very concentrated. essentially, we went through an adjustment to a new world where there are serious sovereign

risks within the eurozone. what the ecb cannot respond to is this fundamental question that there are fiscal imbalances that need to be funded and are not going to be funded by the private markets, and it fundamentally depends on the political relationship between the countries that need the funding and, essentially, the european institutions' willingness to provide it. there's a sort of political set of challenges. if you can think about it between greece and germany. the greeks have to commit to doing certain things, right? in order to make it politically feasible for the germans to fund them. and as long as they can find a balance between the greeks' willingness to make commitments and to some degree actually deliver on them in a way that is consistent with the political constraints on germany on providing the funding, this thing can go on. and, you know, as somebody who's watched european integration from this side of the atlantic for decades, i'm always struck by we tend to underestimate sort

of the commitment of the europeans to that. i fully agree with you that there are risks and there are parts of this that i'd like to continue. my response to sebastian's question was fewer than 16 down the road. and, you know, is that too optimistic? i don't know. [laughter] but there are very big challenges. i think there are, there are risks of accidents along the way. i don't think the ecb -- i mean, i think the ecb's done what it can do, and i don't think it ultimately faces a problem in the same way that i tend to think the fed is perfectly able to exit from its current situation, and that will all be manageable in a reasonable way. i don't see that as the core problem. there's a different problem that is very tough to manage. >> monetary policy can be a bridge, but it has to be a bridge to somewhere. and so if there isn't the fiscal consolidation that was important, then there's nowhere to go to. and before we give the ecb high

marks on everything, their attitude towards private sector involvement has been unhelpful because they have put -- essentially, what they've said is they don't participate in the haircuts, in the greek rangement. but what that means is when the ecb buys sovereign debt, it actually places itself senior to everyone else. and so it doesn't remove sovereign credit risk in its own market operations. that then raises the question in a sovereign crisis in the future, what exactly will the ecb do? >> another question? right over here. >> i'm chris mcdonough from -- [inaudible] question for joyce. i guess i was struck by your response on what the everything m country -- em countries are willing or not willing to do on

exchange rate appreciation. having traveled to asia, i guess i share a lot of that, they seem very willing to allow for their appreciation. but i guess the question i have is what would you look at other than seeing prices move, right? what would you look at as a signal that the ems are actually allowing, you know, the euro, the dollar to depreciate more substantially to allow both regions to grow their way out of their problems through exports? which is kind of what both need. and can help in rebalancing the global economy. but given their unwillingness, there's got to be something that you might be looking for, some sort of policy change or some sort of economic change that would signal greater willingness. >> i don't see the greater willingness right now. in fact, if anything, i think that there are emerging markets that are willing to, you know, look at more unorthodox policy mixes because they have their own domestic agenda.

and i think going back to just -- >> you mean unorthodox mixes in order to prevent appreciation of that kind of -- >> yeah. and we've seen that across the board in a number of countries, particularly in some of the commodity-export being countries where they've had appreciation pressures. but i go back to the point lew made about the g20. how are you going to get this kind of coordination we merging markets countries and be developed countries? for emerging markets country, you still have such a big income differential that to try to convince emerging markets countries where you have a standard of living which is the key objective they're looking at that they're still trying to bring up to provide resources for a bigger firewall for countries that have, you know, 35,000, 40,000 per capita income. i mean, i think the four emerging markets countries, you know, now it is more about what are their own domestic self-interests. they have a deeper domestic investor base that's also increasing in size as well. so i'm not so sure that you get

a catalyst that comes out of some sort of global policy coordination that's going to result in an agreement that will work. it seems to me you had a moment in 2008 and 2009 that looked more effective than it's become now. i think the european crisis has made that harder because convincing poorer countries to bail out richer countries is politically very difficult. and we go back to the politics in all of these countries when we talk about europe and the u.s. emerging markets has its own set of politics as well. >> it sounds like the climate change debate a bit you know where the rich countries say you guys are growing emissions faster, and the emerging markets are saying, yeah, but you still emit more. i see a question, right there in the back. >> i'm david -- [inaudible] with encima. i wonder if you could comment on china. there's two schools of thought. one is that they're in trouble, so that's showing up in the currency not strengthening, and yesterday china raised its quota

on foreign investment into china. is it headed in the right direction, or is it still headed for a harder landing? thanks. >> want to try that? >> china is a very opaque economy, and the line between the public and the private sector is extremely indices at this point. what that -- indistinct. officials have levers of policy to keep demand growing quickly. and our own forecast is they'll succeed in that. that they can shift, essentially, credit and capital and get some infrastructure building out of the private sector, they can support credit and so that, if anything, growth is going to be very well maintained in china. >> okay. did you have a question here in microphone coming. >> [inaudible]

sarkozy is not reelected, will there be a spillover to the rest of europe? >> that's, actually, a great question because it relates, also, i think, to the german political situation where there's also pressure from the opposition on merkel to change her stance towards austerity versus growth. so it seems like both in france and in germany, two core economies, you could get political shifts that made more pace for progress. lewis? >> i'm not going to pretend to be an expert on french politics. >> i didn't ask you about the election in spain, come on. [laughter] >> look, i do think, um, the german situation is sort of a very complicated one in the sense that i think there is actually more support for europe outside of the government than sort of within the government. and there is this problem within the german government that it's a relatively narrow base that is taking the most hawkish position. i think merkel, unfortunately, is in the position of trying to sort of lead a coalition that

has that at the base, and it's a tough challenge for her to walk that line. i think having a partner in france who she could work with was very important, and my guess is they will continue to find a way to do that. but it will make things harder, i think, for them to sort of manage going forward. i'm, you know, my impression is that, you know, the french, the way they see these problems is, ultimately, consistent with sort of resolving the issues in europe sort of regardless of which sides wins on the election -- so i'm not sure it's a long-term issue, but it's going to make what is already a difficult process harder at least for a while. >> joyce, one thing that comes out of these political shifts in europe could be a transactions tax, right? because the german opposition is saying that condition supporting what merkel wants, is that something your clients worry about? >> and i think that most clients

feel that that's something they probably will avoid at the last moment or that for one country to do that unilaterally is really unlikely to happen, that we've seen on a lot of these regulatory and risk issues, that's where there has been more coordination. i mean, all sides are actually worried about the amount of regulatory arbitrage, um, that could occur. so, you know, there has been, you know, questions about the pace of which, you know, the u.s. is moving versus europe. and that's where we've seen more delays and more, you know, postponement even though these become political issues. so i don't think that's come up, you know, as a burning issue, you know, more immediately. but i would say that just on this political question, all of the peripheral governments have been overthrown and belgium as well. so it's, if you look at the trend in europe, i mean, look at all of the periphery, um, and, you know, your question on france, you know, it is, it

is -- i think the risk still does come back to, you know, politically how can this hold together given the kind of adjustment, you know, that needs to occur in europe for them to make -- >> of course, the key debate is france periphery with france -- [inaudible] let's go to the lady in the -- >> yes, carol brookens, former uscd at the royal bank. what energy or oil price over what period of time becomes a real game changer in your models? >> for u.s. growth? >> well, for u.s. growth and world growth. >> i'll speak for myself. i think in general these things are not cliffs, they're not sort of generally, they're not -- there's no question that higher oil prices are generally a drag. we did see in this first half of 2008 when gasoline prices hit $4 a gone, you saw a very discreet kind of changes in consumer behavior. having been $4 before, i don't think we're going to see that again. i think if we're talking about

normal supply and demand in the context of coming into a driving season when things are going to go up probably until june, i don't see that as a big issue. if we get a supply disruption out of the middle east, there are obvious scenarios under which that can happen. that is a different kettle of fish. i don't think that's the most likely thing to happen, but it is certainly one of the things that would be on my list of risks. >> yeah. and, you know, i'd also look at whether it's a supply shock or a demand shock that's causing the change in oil prices. so, you know, the first half of last year you had a 33% move in oil prices that was largely off supply shock with libya. if you look at where we're at currently, the 120, 125 range, we estimate that make it takes .25% off of growth. not a huge move off of growth. so whether it is a supply rather than demand shock, um, you know, i think makes a big difference can. i'd also put the risk of -- it seems like sanctions the path

we're going, i would put the risk of military conflict as an unlikely scenario at this stage in the game. what we look at at least in emerging markets is, you know, what is the break-even price for these countries where they're budgeting the price of oil and whether they're saving the windfall or spending it. and i'd say in emerging markets most countries have been really pretty conservative. they have budgeted oil, you know, conservatively. maybe a good, you know, $30 below, you know, where it's at. right now. so it's more of a problem for the developed, you know, markets countries, and right now the current trends seem to me in less worrisome than we saw a year ago given the move we had in the first half of the year. >> vincent's been sneaking a peek at the chart book he's concealed in his lap. [laughter] >> so i think from the u.s. perspective all about gasoline prices, and the evidence suggests that households basically pay for higher prices at the pump by cutting back on

other parts of consumption as long as gasoline prices are within prevailing norms. once they break out more significantly from prevailing norms, then they cut back in total. if we remain around where we are, then that means it's a problem for, you know, lodging or food away from the home or components of consumption, but not for overall consumption. it's a modest drag for economic activity because we are a net oil importer. our chief risk is we've now, essentially, rolled back the earlier declines, so we're at the high end of prevailing norms. so any increase from here on would more likely be associated with more restraint. >> one last question. i saw the one in the aisle there, sir. >> [inaudible] where do you all think the dow will be in the first week of november, and do you -- >> specify which day in

november. [laughter] >> and do you think that any industries or countries such as iran will make any unusual attempts to influence the outcome of the election, say, by constricting oil supplies? >> okay. so there's two parts to that. foreign meddling, um, and where will the dow be on election day. >> i, thankfully, am an economist and not an equity strategist so i feel acceptable to not give you a straight answer to this question. having said that, one of the things we're thinking about is how the uncertainly around the election will effect markets. there's the economics of the fiscal cliff and what not, but there's also how are markets going to react in anticipation. if you actually look at what happened last year around the debt ceiling and what not, the interesting picture you get is that the primary effect of the uncertainty that was created by that showed up in weaker, um, equity prices as opposed to

higher interest rates. so there's a sort of interesting question if you're facing, you know, fiscal chaos. how do markets respond to that? and i think the, certainly, the experience last year would suggest that that will show up as uncertainty about the economic outlook, uncertainty about earnings that translates into weaker equity prices as opposed to people decide they want to sell treasuries. and i would suspect that that would be the pattern. so to the extent that you come into the election with one of these uncertain outcomes that we kind of talked about earlier, by guess is you are not going to get the reaction of, oh, my god, people are going to look up and decide they don't want to hold treasuries. it's going to be more uncertainty, the economic outlook is weaker, and that will mean weaker equity prices. um, on the foreign meddling, my guess is -- it's hard to imagine anyone could do that successfully. it's a blunt instrument, and my guess is it wouldn't do it.

as someone who's worked in washington for a good part of my career, i often hear conspiracy theories about this and that, and my general argument for why they're wrong is that assumes a level of competence that isn't there. [laughter] and i would apply that argument here as well. >> joyce? >> yeah. so jpmorgan is forecasting for equities about a 14% return this year, the fortune 500, you know, for the equity markets. and what -- >> we've had a lot of that already. >> we've had a lot of it already, and i think what investors are trying to do is lock in what they made in the first quarter which is in some cases what they were forecasting for the full year with all of this uncertainty ahead. but what i have seen over the last couple weeks is a real breakdown in some of these correlations where everything is very correlated, and there is more bullish sentiments right now about u.s. equities because of the strength of corporate balance sheets. so that's, you know, jpmorgan's forecast on the equity markets.

on the whole issue of foreign meddling, i have to say, look, if you act unilaterally, you're going to have retaliation. so there's that whole question of who's the first mover in the whole iran situation. who's going to do that in a unilateral way, face retaliation, and where you get something that, you know, involves more global coordination which has been very difficult. so, i mean, the approach has been sanctions which seems to be having some effect and, you know, that's what they're going to stay with. but i have seen recently, though, that, you know, some of those fears on iran seem like they have actually dissipated a bit over the last month compared to a bit earlier this year. >> vincent, kafka believed in devious bureaucracy. >> no doubt about it. but meddling is hard to do, and it's not just one country that might be thinking about what it could do to effect the election outcome and, perhaps, the offset. i don't know. and i sort of agree, agree with lewis' point, it assumes a level of competence that's probably --

and an ability to predict the consequences of a campaign, the consequences on two campaigns. with regard to equity prices, our call's fairly straightforward. the world's a really risky place, and with such risks it's tough for investors to have conviction and, therefore, tough to get durable wealth creation and, therefore, we'd say the equity market is going to be considerably lower than relative today. in particular despite the fact we have known since 1786 there would be an election, equity investors haven't really, their window of observation hasn't embraced november or december 31st yet, but it's beginning to happen. as that happens, we're going to be spending the summer and into the fall looking at end trade quotes on who's going to be president, who's going to win the house, who's going to win the senate, and we're going to be multiplying that into what we hear on sunday morning talk

shows on what they do for power. that's not good for markets. >> we apologize for running over by 203 seconds, but it's been a great meeting. thank you very much. [applause] [inaudible conversations]w3 [inaudible conversations]

[inaudible conversations] >> we're live this morning at the carnegie endowment for international peace here in washington. they are hosting a daylong conference on emerging islamist political parties. during the day we'll hear from representatives from recent elections in tunisia, morocco, jordan and libya. panelists will discuss building new regimes after the uprisings, writing a new constitution -- that'll happen at about 11:15 -- and some of the economic challenges of the transition. that will be later this afternoon at 2:30 eastern.

this is live on c-span2, we expect it to get under way in just a moment. [inaudible conversations] [inaudible conversations]

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[inaudible conversations] finish [inaudible conversations] >> just moments away from the start of this discussion at the carnegie institute for international peace. they are hosting a summit on the emerging islamic political parties from recent elections in tunisia, morocco, jordan and libya. we'll hear from the moroccan communications minister, members of the muslim brotherhood and

other representatives from egypt, tunisia and libya. it's expected to start this just a moment. we'll have it when it gets under way here. other programming coming up today, on c-span starting at 1:00 this afternoon, the national press club, we'll hear from irs commissioner doug shulman, he'll talking about the future of the nation's tax system getting underway at 1 p.m. eastern on c-span. also this afternoon president obama will sign the jobs act, it includes key initiatives the president proposed last fall to help small businesses and start-ups grow and create jobs. that is live at 2 p.m. eastern, you'll be able to see it on c-span. [inaudible conversations]

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