most attention is focused on what happens first tuesday in november, but we're also headed into another debt ceiling episode soon after the next administration, be it the incumbent returning or be it a new president. vince, are there any clients starting to ask about this? >> here's the bad news, i think we're mostly going to spend all summer looking at end trade quotes of who's going to be president, who's going to control the house, the senate, and multiply that in to what we hear on the weekend talk shows about what they'll do, actually, if they're in the power. and fiscal policy's going to be material. we have dug a five percentage point hole worth of g,dp in 2013 associated with subsidy in the bush tax cuts, lapsing of

payroll, unemployment benefits, alternative minimum tax relief, sequestration associated with the budget control act, some tax increases associated with the affordable care act, and i've probably left a few out. doc fix, yes, medicare. and the problem is it takes a decision, it takes the lame duck congress and the president to agree to something to avoid that 5% cliff. about the same time the secretary of the treasury will probably have to declare a debt ceiling emergency because they'll be bumping up against the debt ceiling, and depending on what congress does in the next couple weeks, we may very well have a problem with funding the government in terms of a continuing resolution. so if you think back to august, the last time we had a debt ceiling problem, well, it's a debt ceiling problem, a funding government problem, and there's a fiscal cliff. that's a lot of uncertainty. ..

>> political system is not focusing more on what's good for the country, but really what's good for the party. and you know this is across the board statement. and i think that the economy is actually going to be hurt by this, by this attitude. >> by the way, at morgan stanley our forecast is we muddle through. politicians don't. >> that's the american faith. don't drive into, drive into the

council. european leaders go for a summit meeting, the summit meeting and don't solve the problem but they don't make the problem worse. i was passionate it was encouraging to hear -- that's not really bad -- bad things happen. but the general principle is when you're making a forecast, the presence of the tale that say something about investors willingness to take on risk. and in an environment in which details are so stretched out, you don't get the wealth creation, that means your central tendency is at best tepid growth. >> if we look at, as you said it's a political problem but sort of the problems are very dominating, that as a result of the last four years our policy has actually become more polarized, less communication, less ability to work across party lines than it was in 2007-2008.

>> actually than it was in 1870. we do this count of partyline votes in the house and senate, and we are as polarized in our history from i think 1870 onward in the house, rather in the senate, and just in the previous peak which was arguing about reconstruction. so we are fighting about, you know, about two extra months on employment benefits. to the same extent as we're trying to bring this nation back together. >> and we can see it, there's a penalty now for people who were kind of more bipartisan basis in primaries and so forth. that wasn't necessarily there before. so reinforcing your point your. >> anyways that washington is helping? silence. >> give us a minute. >> could have been worse. >> next question.

>> the fed has provided the extraordinary policy accommodation. here's the bad news. if you choose of the 15 things that washington -- washington could do to help, sustained economic expansion, quantitative easing and managing interest-rate expectations, a number like 14, 15. but i think everyone appreciates that one through 14 are just not possible giving how polarized our system is. so we put this pressure on, on our monetary policymakers to do something, even if they don't have a particularly effective instrument. >> i think that there is just, think about it, fundamental disagreement that's sharper than it's been in many years about the role of government, and what it should be, in the economy. and i think that probably that the kind of overhang, debt and everything we have, is kind of so awesome, it's just dominating

political fact. >> thank you. my colleague is indicating there are some questions. >> we have a question not directed at anyone in particular. how does the fed to ignore non-core inflation when it is the driver of the trend? why don't you pick whoever you think -- >> we'll put that went to you first. >> so this is an inter- house dispute apparently. and the answer is that the fed cares about core inflation, about inflation expectations, that price stability is something that is in the eye of the beholder. win changeable prices are not material in the decision-making of households and firms, you're at the right place and you are at the right so they will see

through the clips associate with the effects of energy prices. >> i would add one thing. not so directly answering the question, but it seems to me we, as global society, -- a little bit of inflation would do a whole lot of good for europe, which would allow the weaker economies to be more, more rapid and more seamless. and i think that our notion of what inflation targets should be revised. we haven't had serious inflation in decades. i think we have overdone it.

>> i think, as you were saying reflecting on europe, you can see now the politics or policies austerity are just buckling under, under constant pressure. can you imagine if we're 2500% unemployment in the united states, what would happen to our fiscal system? hard to imagine. >> let me weigh in with a quick question before i had a go today. let me put this question akin to all of our panelist to if i am ben bernanke right now, and the question that i was lucky enough to put him at the top, at the end of his last news conference, what is keeping ben bernanke up most at night? what should be worried him most? and what should you do about it? >> 2% transcom an economy in which that wealth creation is impaired. i think you look down the and,

you know, the street to congress there to say there's a heck of a lot of uncertainty. and if the major risk to economic progress is politicians, it's really hard for an independent central bank to weigh in on that. >> does anybody else want to weigh in on that? >> that's kind of the way i feel, too. doesn't seem to me the fed has a lot of effective tools still ready to go, and i, if i were ben bernanke i think i would be worried that the rest of the government wasn't doing what's needed. >> certainly worry about the rest of the world, particularly europe. >> we are going to go overtime here, but i really want to come back to something. you talked about rethinking

inflation. how do we do that? >> well, i think we might talk about the housing market, for one thing. i mean, we have all these houses that are underwater. how do we deal with foreclosures? how do we deal with all this misery? well, if we have just a little bit of inflation and house prices went up, all of a sudden they would be above mortgages. now, this may be an expensive way to do it, but all the alternatives that have been discussed are so quickly dismissed by one party or another. there seems to me inflation might be one of the easiest ways to do it. if you saw this as a benefit to the way the housing market worked, i think everybody might feel like they were more comfortable with it. >> there was a siren song in that. the easy way to do it, inflation is an opec attacks.

i think part of the answer is when there's nothing but hard choices you to think about all taxes. the risk associate with it means its opaqueness means you overdue. historical how do government work on large that looks? they have control of finance l. bit of inflation. the trick, he worked in the '50s and '60s because with a little bit of inflation, it didn't work in the '70s because if it's too much and you wind up the routing the controls and making everything, everything worked, worse. here's the problem. we haven't had a conversation. central bankers asserted for reasons that were mostly framing, inflation was around 2%, they said to present looked good, therefore it was the goal. we never had the conversation in the united states about what's provide inflation goal. in fact the central bank shouldn't assert it for itself. it should be part of the

national dialogue. we are having an election. the election should be about fiscal policy. the election should be about central bank he. it should actually be important this time. >> i think it's a profound question that they leave us with. >> thank you, gentlemen. >> thank you all very much. appreciate your participation and the panel. we leave you with a profound question. we ask you all to make way for our next panelist. will head up here and talk about another profound issue, that fiscal cliff that was just discussed up your. we're moving onto the topic of government spending, revenues, deficits and debt and this discussion will be led by jodi schneider. our panelists are taking their seats, first of all gene dodaro, he is the comptroller general of the united states, head of u.s. government accountability office, appreciate him being here. we have alice rivlin, of course is a senior fellow of economic

studies at brookings institution to choose a member of the national commission on fiscal responsibility and reform. former vice chair of the federal reserve. she also ran omb and cbo as well. so many hats of course involving the budget debate. and with chris van hollen, the ranking democrat on the house budget committee. he was also a member of the supercommittee and someone intimately involved in the budget and spending issues up on capital hill. jodi, take it away. >> if we talk really fast we probably won't get through it so i will get started on december 31, 2001 and 2003 income tax cuts expire. the estate tax will rise to 35% to 55%. automatic reductions in spending will begin in january, and the alternative minimum tax, and as we all know as we just heard, the u.s. debt limit will probably run out in january.

so, given all that, and the fact that congress had enough trouble finding $200 billion to extend its payroll tax cut this past year, what are the chances of congress addressing the so-called fiscal cliff before the end of this year? and what are the potential economic and fiscal implications and implications for the budget deficit of congress waiting? >> do you want me to lead off on that? all right. i heard passionate the previous panel said it was all gridlock on capitol hill. as to the first part of your question whether i think is a reasonable prospect of us resolving some of these major issues before the election, i would say regretfully no. having served on the supercommittee where we try to resolve a lot of these issues, and many of us push for will recall a balanced approach, a combination of cuts and revenue, and we were not successful at achieving that outcome, i believe these major issues will have to be dealt with after the election. i say that, as i said, out of

regret. i do think that the cocktail of issues, very combustible cocktail of issues that you mentioned could have a positive action forcing consequence. especially because you have the expiration of the 2001 and 2003 tax cuts. now, there are very few people that believe that we should keep, you know, allow all those tax cuts to expire, about $5 trillion over 10 years. but it does create an opportunity to take what has been described as a balanced approach, meaning a combination of revenue plus cuts. now, i'm not suggesting you can resolve all these issues in a six-week lame-duck session. i don't think that's realistic, especially if taxes from is piece of it, which it will probably be. but i do think that it provides an opportunity to move forward.

and we don't seize that opportunity, i think we're in a world of hurt going forward. >> i totally agree with that. i don't think anything will happen before the election here i wish it would, and there are people talking across the aisle and trying to say, if we get the chance what will we deal. i don't think that's realistic. but this confluence of bad things, many of which were deliberately put in place, could be bad things, things that didn't want to happen that would force some action that's more reasonable. i think that will help. now, they certainly can put together a grand bargain in six weeks that everybody would sign onto any lame-duck session. but they could put together a framework that would kick the problem into the next session of congress. but not too far.

a deadline of six months or something like that, that would say we will avoid this catastrophe and give ourselves a time to put together a grand bargain. now, the staff were all done. the congressman knows this. use a lot of what came out of the two commissions as the supercommittee got close but didn't quite get there. so the pieces are all known. we are not inventing new things. and this could be the chance to do it. now, if congress doesn't act, then we will have i think an economic catastrophe which will force the next congress to do something. if everybody's taxes go up, if you start cutting spending mindlessly across the board, that would be a super wakeup call. what we thought to have a good sense to avoid this. >> i think the action forcing

event that you talk about are going to require action, sometime before the end of the year. hopefully to achieve the balance of maintaining economic growth. but yet developing, laying the groundwork for a long-term plan to do with the federal government's fiscal imbalance which is on unsustainable fiscal path. so i think we need to take action in the short-term, but we also need a medium-term and long-term plan to set the country on a more fiscally sustainable path. and i'm optimistic that congress will rise to the challenge, whenever it might be to be able to do that. >> doctor rhythm, you mentioned sort of short-term extension to which some people call kicking the can down the road. isn't that what has been happening the last few years? we've seen even in things like the payroll tax cut, couldn't agree, congress could agree in the summer to do it so they waited until february, short-term extension. we're seeing a lot of short-term extension.

>> very bad way to run a government. absolutely terrible to i don't think we have a choice right now. if the grand bargain could come together and lame-duck session, that would be better. i just don't think it's feasible, and it is feasible to do a framework which says we are going to do these kinds of things through entitlement programs, we're going to do this. i hope comprehensive across the board tax reform that will give us a simpler, broader-based tax system with lower rates and more revenue. that's what we need. if we put those things in place and say okay, congressional committees, you've got until june 30, or april 30, or some reasonable period to get this done, then there's a chance that you and your colleagues might actually do it, right? no question. >> let me just say, i agree with

everything dr. rivlin just said, which is that it was hard to get all done in six weeks, especially if tax reform is a part of it. a lot of work has been done on tax reform. but it remains to be done. i think there's still a lot of misunderstanding about, to what extent you can lower the rates and expand the base. just in terms of what the numbers are, there are different numbers coming out of different organizations and different analyses. but that is the goal. and as dr. rivlin, a very important part of that is to generate some revenue for the purpose of deficit reduction at the same time but if you were to do something that created a structure for the decision-making and made sure that you kept a very short fuse on the process, that could be a recipe for success. the danger, of course as you suggest, that you just get to the end of the three months or six months and trying to kick

the ball down the road. again i do believe that outside pressures will be great enough to require, you know, forcing the action. and as dr. rivlin said, we have tried, these efforts are designed to try and force action because the alternatives are worse. >> and they are the law of the land. they happen -- >> no, no. we have all said and action forcing event. sorry. >> doesn't a lot of this rest and actually wins india election in november? and is there an ideal election outcome from the standpoint of the budget deficit? isn't it true that when major deficit deficit pakistani capacity had been divided government? >> well, i do think it depends on the election and they do believe that the outcome, one outcome will favor a solution more than the other. obviously, i'm a democrat,

ranking member on the budget committee, but i would just proposed everybody on a nonpartisan or bipartisan basis, what constellation of outcomes in this election do you think would best lead to a solution? every bipartisan group, rivlin-domenici, simpson-bowles, say we need a balanced approach. it means raven asked be part of the solution and cuts in other reforms need to be part of the solution. i would suggest that if one major party candidates is running on a platform of absolutely no revenue increase, in fact, running on a platform of additional tax cuts, which will lose revenue, that that makes it very difficult for that candidate to then turn around and enter into a balanced bipartisan deficit reduction agreement. you know, i've seen people turn very quickly on their positions, but i just think that that is

sort of gymnastics on the budget that is very politically unlikely. and, therefore, if you believe we need agreement and he believed that the only real likely outcome is a balanced approach, i which is the challenge people to say how that candidate would do it. how would a republican president who has run on a platform of no new revenue, not 1 penny for deficit reduction, turned around and into a balanced agreement? >> dr. rivlin? >> i agree with that. i think this will be very interesting if mr. romney wins to see how he gets out of this box that he has built for himself. now, one way out for republicans in general is to say well, we really meant lower rates. we didn't mean that we wouldn't raise more revenue, and we believe that the lower rates will raise more revenue and,

therefore, we are willing to broaden the base drastically. now, what republicans have not done yet is to say how they would broaden the base of the tax. and to get where, for example, congressman ryan wants to get on taxes, or indeed where mitt romney wants to get in terms of lowering rates, you would have to get rid of almost all deductions, exemptions, exclusions. and that means a ton of stuff that nobody wants to talk about. the home mortgage deduction, the exclusion of employer paid health benefits, charity deductions, state and local taxes. you name it, these are very controversial issues. there are ways of putting together a plan that will still protect homeowners, but be less generous to those at the top, for example. but nobody has been willing to talk about that on the republican side of the campaign.

there's this big thing that we will lower rates and it's all going to work out. >> aren't some of those things going to need to be on the table for both sides to get serious about the? >> certainly if you're talking about dropping the rate from 35% to 25%, or 39% where it would otherwise go. you will have to do exactly what dr. rivlin said. and i think that that is my point when i say if tax reform is part of this process, it's very hard to get done in a six-week period. because i think that there's going to be great reluctance to make radical changes. i think there's significant things we can do. i also think that there are ways to do it where you're not picking on anyone deduction or another. you are taking sort of the marty feldstein approach, and i'm not endorsing the specifics of the proposal, but the ideas you're not picking on anyone kind of deduction but you're reducing the value of the deductions overall. but let me just give you one

fact. in order to get from 35% to 25%, according to the tax policy center, that's $4.6 trillion in revenue. now, that's on top of the $5 trillion of revenue from the end of the 2001 -- making up the $4.6 trillion of revenue by reducing, eliminating some of the tax expenditures. i would suggest the huge challenge, and i've not seen, we have challenge our republican colleagues to show us how you do that without reducing the tax code. that's a challenge we've made to them and did not put anything on the table that shows is that it wouldn't increase the relative burden on income taxpayers. >> independent nonpartisan head of the gao, i don't prognostic is to get on election issues. so i prefer mr. van hollen and ms. written on this issue. i would only say the size of a

strong, the national government faces means that everything one needs to be on the table in order to solve this at some point in time. revenues, spin, discretion to come mandatory. it all needs to be addressed in order to come up with a proper solution. that's going to put us on a sustainable path. >> the gao has been very good for a long time. in pointing out the cost of a much larger, older population and their health care. >> definitely. that's really the two main drivers. that affect state and local governments as well as the federal government were really of fiscal challenges at all levels of government right now, which compounds the problem and needs be taken into account as the federal government deals with these issues. they will be important consequences for the state and local sector that need to be factored in, both from tax reform as well as spending decisions spent i wanted to ask you about that. in an april report from gao on

the state local governments continue to face short and long-term fiscal stress with the total tax receipts that states and and his spouse have only begin to return to pre-recession 2007 levels but what's the effect of the 2009 stimulus when, what can and should policy and lawmakers do about the states fiscal concerns? what makes sense and what's the discussion about the? >> i will take a stab at the, and i'm sure my colleagues will want to as well. let me just go back to the recovery bill, the stimulus bill. much maligned by republican colleagues but according to the congressional budget office helped save or create up to 4 million jobs, and use a direct correlation between the end of the stimulus package and increase in public sector unemployment. on the private sector side, of course we've seen positive private sector job growth for 25 months.

but on the public sector side, largely because the recovery bill ended after about two years and begins to tail off, you have seen that continue to be a drag on the economy which is one of the reasons why the president, when he submitted his jobs plan to congress back in september, to have a number of elements include a major infrastructure investment, which we still haven't done which we should do. we have very high unemployment in the construction industry, close, it's over 15% and we have the needs. it seems like a no-brainer. but another component was to provide some additional releases state and local governments to prevent the layoffs of our teachers and firefighters and police. and i just want to emphasize what i think, i know transform has said in a -- i no dr. rivlin has said in the past. we need to do two things at the same time. they are not contradictory at all. we need to make sure that we sustain a very fragile recovery. at the same time put in place a

plan to do with a long-term deficit and drivers of the deficit. and we can do both, but some of our colleagues have pushed for more austerity now, which would only hurt the economy. and then refused to unfortunate take a balanced approach to long-term deficit reduction. >> i thoroughly agree with it. the biggest drag on the economy right now is continued layoffs at the state and local level. you here on bloomberg radio governments, government employment is going down. that's not the federal government. it's the state and local governments laying off teachers and firefighters, and whoever, to balance their budget. so we need some counteraction to that immediately to keep this recovery going. but it should be in the context

of a legislative long run solution to the sustainability of the budget, to stabilizing the debt. and that has been my theme for a long time. i think we should have been focusing on how these two things are not antithetical. they need to be done at the same time, and we need to do them now. >> the state and localities are already starting to take some action. for example, pension cost is an important component and they're making some revisions to their pension programs and long range cost but i think from a national level, there needs to be a continual monitoring of health care costs, as the new reform legislation's implement as to what impact will be on the state level, as well as at the national level. because health care costs and changing demographics are really the two main drivers, both of the national level and at the

state level as well. so i think that's really important. and there needs to be sensitivity i think particularly in tax reform issues, the implications for the state and local tax systems, particularly the state and local spent another gao report, this was a year ago, found that there was, there were 81 opportunities to reduce potential government duplication, achieve cross savings, an update on that shows there's 51 areas where there may be greater efficiency. little has been done. why? and with such concern about the deficit and gao roadmap for this, why is it so hard to bring inefficiencies out of the government? dr. rivlin, yet a lot of expense with us, do you want to take that first? >> oh, it's just hard because there may be duplications in programs. there certainly are, but every

program has a constituency that it is serving an that believes it shouldn't be cut, and the subcommittee that is protecting it. and so it's very difficult to do grand design that says these things should be consolidated. it also doesn't save much money. so the motivation to do these difficult tinkering things in defense or domestic spending, and there's waste involved, is limited because you go through it enormous effort and political cost, and you haven't saved mu much. >> i which is a the should be an added incentive for a lot of the federal agencies to make some of the changes that the gao has proposed, because as part of the budget control act we did put spending caps on discretionary spending, which is close to a trillion dollars over 10 years. so that will build a greater pressure in the process, if

those caps are maintained to achieve some of those savings. so look, those are important recommendations. as dr. rubin has pointed out and as mr. gadara, some of the big drivers in the long term are in the health care cost, but i think where there are savings to be made we should of course make them. and i think the pressure will build because on the discretion a side of the body, under the president's plan, it will be reduced to a lower percent of gdp since anytime since the eisenhower administration, by the end of the 10 year period. >> i'm worried we are squeezing down government too much. it's true that it will be hard to do the consolidations and reduction, but even if you do that, i mean, there are lots of things we need our government to do that would be done worse if

we are squeezing everybody and saying don't modernize the air traffic control system. what? we ought to be modernizing the. we ought to be invested in a whole lot of things that make our government run better for the future. >> a couple things that are important to know. of the 81 areas that you mentioned, about 40 or so of them dealt with overlap and duplication. the rest were cost savings and revenue enhancement opportunities that have greater consequences for, if implemented, tens of billions of dollars in savings. and there's been partially action taken on about 60 of the 81 areas. there's only 17 where there hasn't been any action. most of those are dealing with the tax-cut issue which now is estimated to be $385 billion. so i've seen some encouraging signs. the administration has required all the agencies to address in their budget submissions all the 81 areas that were identified in the report. congress is beginning to take

action. one notable example is the reauthorization of service to his petition program. we put out 100 different programs that developed over the years. there's consolidation efforts under the way, and congress is asking a lot of good questions, not based on the report. so hopefully that dialogue that will continue, and will yield some good results. >> we have been talking, there's a lot of talk in washington about a grand bargain. that maybe would occur last year, there was an opportunity may be, there was a little optimism but not a lot that has to between was going to build to find a grand bargain. obviously, that hasn't happened. what would it take, what would it take to be able to reform taxes, to have a tax overhaul, and at the same time not have major effects on the deficit? >> well, what will it take to have a grand bargain?

well, it's going to take us adopting the kind of framework that has been proposed by the bipartisan commission. rivlin-domenici, simpson-bowles, all of them laid out a pathway that said you've got to get here through this combination of increased revenue, and some tough cuts to reforms and modernization with health programs. and as we started out the conversation with the action forcing events that we will see at the end of this year, i do think that has the potential for bringing the parties together to look, you have a lot of political gridlock. i think it's pretty clear than when you have an overwhelming majority from one party that has signed a pledge, the grover norquist pledge which is they will not allow 1 penny from additional tax revenue to go for the purpose of deficit reduction. we have got a challenge. as dr. rivlin said at the end of

this year, by law, all those tax cuts would expire. that's about $5 trillion, just to give you a sense, simpson-bowles suggested about 2 trillion of that 5 trillion go to deficit reduction. so you could see a possibility where you couple that with the cuts in a number of various. reforms and a number of areas where you can achieve deficit reduction. but as your question implied we need to be very careful that in the process we don't hurt a fragile recovery, and i agree with doctor rick lend that investments that they can make in the economy do help strengthen our economy whether its investment in science and research, infrastructure, or education. >> dr. rivlin? >> i agree with it. and i think we may have the forcing events staring us in the face in november. and i hope so. the grand bargain has been on

some table for quite a long time now, and the history of the last couple of years is a history of opportunity missed. now, i just hope we don't miss the next one. a piece of the grand bargain has already been done. i think we should be clear. there were always three, maybe four pieces. entitlement reform, tax reform that raises more revenue, and holding the line on discretionary spending. we have done it. that was in the budget control act that capped spending and saved, as the congress been said earlier, a trillion dollars over 10 just to we don't need to go back to the and cut discretionary spending more. we need to solve the other two pieces, and the final piece which is how do you keep the economy going while you face in these long run deficit-reduction measures. and i think there are lots of ways of doing that, but we need

some more, you should pardon the expression, stimulus up front, particularly directed to easing the pain of state and local governments. >> why do we take one last question into before run out of time here to congressman van hollen. to talk about the balance approach of simpson-bowles. dr. rivlin was on the commission. a version of simpson-bowles mated to the house for a few weeks back, 38 votes in all. what encouragement should this audience take away from that? >> well, as those of us who have really delved into simpson-bowles, no, and as i mentioned in a "usa today" editorial and response to that, there's a huge difference between what was proposed in the house and in simpson-bowles but they go to this argument we're having on baseline issues, which is our game but very important debate. because the proposal on the floor of the house was about $1 trillion in revenue short of

what simpson-bowles proposed a simpson-bowles as a starting point assume that we would achieve the revenue that we would gain if the tax rate on the top 2% went back to 39%, when it was during the clinton years. that's now about a trillion dollars in revenue over the next 10 years. so the simpson-bowles starting point assume that the revenue, whereas in the proposal offer on the floor of the house they essentially ignored that trillion dollars of revenue, which totally changes the balance of cuts to revenue. so while that may have been paraded out as a diversion of simpson-bowles, the math just didn't square with simpson-bowles. i support the framework of simpson-bowles but i support the ratios and the accounting methodology of simpson-bowles but i don't necessarily agree with every recommendation they make but i think for those of us if we disagree with a particular

recommendation, whether it's on revenue or cuts, we have an obligation to come up with an alternative. so i support the framework there, and the proposal on the house just was $1 trillion in revenue, below simpson-bowles. that's a pretty big difference. >> all right. listen, thank you all for participating in this panel. great discussion. jodi, thank you very much. will have to move on to our next bill. again, thank you very much. [applause] >> we will move from one tricky subject, the fiscal situation here in america, to another tricky subject, the housing situation here in america. my colleague, nela richardson will moderate the next benefit if they want want to make away up to the station i would a quick introduction. shaun donovan, the secretary for the obama administration joining us here on stage, james lockhart as well, chairman, vice chairman

of the bl ross and kobe. is the former director of the federal housing finance agency under president bush, former deputy commissioner in sql all of the social security industry should. sugar and also jim milstein, chairman and ceo of millstein & co., former chief restructuring officer, responsible for aig and we're very pleased to have the three of them here. nela, please take it away. please and your questions, q&a at bloomberg.net. those of us here in the live audience and those of us watching at home or in the office, please send us question. nela, please take it away. >> i'm very excited about this panel. there's been 7.9 trillion in housing the raised since the boom. 18 mortgages are delinquent, or in foreclosure. there are 11 million underwater borrowers in the u.s. right now. and so the question i have, the first question, and i think the question that is on everyone's mind, secretary donovan, directed to you, have we reached

a bottom yet in the housing market? >> well, my view is that we, this winter has been a turning point in the housing market. and i think first of all it's important to recognize what we have accomplished, even over the last three years. all of that loss of housing wealth that you talk about happen before the president even walked into office. 30 straight months of housing price declines. and we have made real progress over the last three years. the number of families falling into foreclosure is down i more than half from where it was. we are seen, we saw the deficit, which also since the crisis began, the federal housing finance agency index, which jim knows a lot about, was up year over year for the first time since 2007, just last month.

and i think most importantly, whether it's on sales, on the number of contracts being signed, where credit availability is, i think we really have begun to see a different view in the market today, from even where we were six month ago. so there is real progress. and as i said i think we have turned a corner. having said that, you are a set of places, three critical barriers that remain to a fuller recovery. beyond the discussion we just had around the broader economy and jobs, and where support for the economy more broadly is, we still have to lower the number of families falling -- falling into foreclosure and limit the number of new foreclosures that come onto the market. we have to deal with the shadow inventory that's dragging down too many of the hardest hit markets. and then third, credit availability is a real issue. my sins, our sins in the

administration, with 15 to 20% of homebuyers who could be successful homebuyers who are either priced out of credit completely or something making decision not to because of the cost of differential or the hassle frankly of getting a loan the secrets of those are three key areas that we continue to push on to accelerate this housing recovery. we made real progress on each of those over the last few months, but we will keep pushing on that front both within the of ministration with what we can do and within congress. >> mr. lockhart, even if housing has indeed turned a corner as trenches just, there is upwards of maybe three to 4 million foreclosures expected to go on the market according to the new york fed, 2 million foreclosures are actually still in the pipeline. during the bush administration there was an initiative called the ownership society that encouraged an increase in homeownership industry like a zero down payment mortgage. yesterday, the u.s. census

reported that the homeownership rate has declined to the lowest level in 15 years. those initiatives began in bush and promoted over the last 10 years contribute at all to the financial crisis that we are seeing right now? >> there's a lot to contribute to the financial crisis. it started in the clinton administration, not just the bush administration. >> duly noted. >> and the ownership side probably pushed too far. i think the affordable housing goals that were set by shawn's predecessors were too high in both administration, and that really pushed and in 32 much. it's easy to blame high. it's easy to blame congress but it's easy to blame wall street. but we haven't asset bubble around the world. investors and banks in uk and ireland, they have bubbles. ireland's go was almost twice her bubble. they are housing prices are down 50-60%. so it's not just u.s. policy

that caused this. and mighty is that we are bumping along the bottom. i agree with the secretary that probably up bombs are more than the down bumps at the moment but we are still not out of the. and part of that is really all the uncertainty that has come out since the crisis. dodd-frank on what's going on there, all the regulations coming out of that. consumer protection finance bureau, all the suits going back, the pushback, it's really hard for the 15-20% of the secretary mentioned to get comfortable enough to buy houses the we are owners of banks and were having trouble making loans. there is money of able out there in the banking sector. we're seeing banks that are starting to make mortgages rather than selling them to fannie and freddie. >> would you care to join in on this? from where you said, as the architect the time to do behind aig bailout, when you look at the housing market, the government initiatives, has the government done really anything it can do to turn, to jumpstart

housing recovery? >> i think the housing finance system is broken. 90% of every mortgage is ending up on the government's balance sheet today. and while jim talk all of it about banks making loans and came back into the market, the truth is over the last three, four years during this crisis, banks balance sheets have shrunk by about 20% to 3.6 trillion of residential mortgages on the balance sheets, now we're down to about 3 trillion. the banks are going the opposite way. this was the crisis where the providers of mortgage credit, both fannie and freddie, government sponsored, large banks, largely government sponsored, and private mortgage insurance were all grossly under countless. that insufficient capital to support the risks they were

underwriting. and the problem we face that is how do we'd rebuild capital in the system? we have 10 and have turned of outstanding residential mortgages, and they need to really rebuild capital to support that debt stock. we look at fannie and freddie, we have been nothing in the last four years to rebuild their capital. the treasury department has maintained their net worth at a dollar, having invested a net amount of 150 doing to our list frankly do we put into aig, yet we still don't have a plan to unwind that support. nor has the administrative succeeded jim really perform statutory duties, the first statutory duty was obligated to reform which was to resolve kashmir restore their solvency. this was a simple task to adding capital to this part of the government sector, which is to raise -- in a very and historically low environment.

the availability of credit. and we could accomplish, creating capital ahead of the government inside these entities to protect us against future loss. so i think, i think we have gone through the worst crisis in really two generations. we have between the guarantees and extraordinary relief that provided to the financial system from almost $7 trillion of support came into the system, and has now been withdrawn. the banking system has we capitalized. the aig's of the world have we capitalized on and we're still sitting with housing finance sector that is still under government ownership with no clear path to an exit, and still under countless. so i think until we figure out how to bring capital back in and freddie freddie, you're not have capital formation or private parties in any meaningful side. >> can i jump in your?

i want to be very clear that there are two pieces to what jim is talking about. one is, what are the actions that we can take without congress moving? and one of the actions that require congress to move? we laid out in a white paper last year and a set of clear steps we can take without congress moving, and we have gone down that path. we raised at fha our fees just in the way that jim described four times, including just in the last month. we have raised and even more on larger balance lost because want to bring out the capital back into. we recommended that the loan limits be lowered. they were lowered for fannie and freddie, and in addition we raise the fees are the large funds even though congress didn't take the step we recommend to lower fees. we are taking a step there to make sure there's more capital available for large loans. and we are working cooperatively

with fannie and freddie, both to raise their g-fees, that did happen. you are the about whether they've gone far enough. but there was an increase in the g-fees to end edition we're looking at ways to restructure their guaranteed to be able to put more private capital into all of those, and, in fact, the fha market share is shrinking as a result of that. where i will agree with jim is that there's much more that needs to be done, and particularly we need action in congress to lay out a framework going forward. >> i'm going to ask him to respond to this question and also like to get mr. lockhart of you on this. everyone seems to agree that we need to get private capital back into the housing finance system, with fha and fannie and freddie in the game making, funding the lion share of u.s. mortgage. the question i have for you to respond to at this point is, can private capital come back

without gse reform? >> no. i think as long as you've got holders of six and a half trillion dollars worth of mortgage residential mortgage credit, the future of those holders is uncertain. are we liquidating fannie and freddie? is that the gameplay? will we engage in a ritual slaughter? are we reorganizing them to send it back in the world as private mortgage insurers? until the question is answered i think it would be risk takers around the edges, but you're not going to have a massive resurgence of private capital into the system because it's too risky. that's too big a pool of debt, the fate of which and the future of which is uncertain to suggest to anyone in his right mind to step in and start providing mortgage credit. because the government turns off the tap quickly you could have a radical interruption in the provision of mortgage credit

which would have a disastrous impact on house prices. if the government stays involved where it is without properly pricing credit, the returns to private capital are going to remain low and, therefore, not attracted to private investors. so i think, unfortunately i agree with the secretary that the congress does have to act, but in the interim i think the administrator come the conservator has to act as well. and the need to raise g-fees, to provide credit risk become is now taking to these two entities is clearly required in order, as part of the key to get private accounts come back and also to protect the government did and he can do it on his own motion. and while i agree we raise transit as part of the payroll tax deal at the end of the year, those g-fees didn't go to fannie and freddie. so it really isn't promoting a

housing go but it's promoting a compromise on the. and my view really is, now as a private citizen is where these two methods in conservatorship, and they could easily become a cookie jar, as the date for the payroll tax cut. neither serving goals or improving housing finance, nor frankly serving goals or improving budgetary discipline. and so i think it's really important that we come up with a plan that the administration, but they plan to at least focus congress' attention on what is to be done. the answer to the question, what is to be done with these two giants? and to we have an answer to the question i think it's hard to imagine private capital coming back meaningful into the sector. >> mr. lockhart, is there anything that makes you at all optimistic when you look at the critical landscape? and i would also likely to respond to the original question. is there anything that makes you

optimistic that congress is going to take up the kind of reform that is required? >> not a lot at the moment. we have a divided congress. there's a group that wants to kill fannie and freddie no matter what it does to the housing market. there's another group that really wants to keep them exactly where they are. unfortunately, and it will take the november elections may be to break the chains. congress did raise the g-fee but it didn't go to fannie and freddie. it went to pay two months of payroll tax holiday, a 10 year raise. that's the politics in this down at the moment which is very unfortunate. you know, my view is that we need a government guaranteed system of some form, but it has to be a lot more than fannie and freddie, and it should be very small, but markets, and only increase when we need to do it like we did over the last two or three years. and that will take congressional action. we can't do it without congress. the administrator, ashley not be administered, but the director

has, if you start to raise the g-fee dramatically, the hill will come down on him. all over the place. so he has to gradually move it out. we still have a very fragile market. but i also agree with jim that because the guarantee is underpriced at the moment, if you will, the private sector will not come back and we figure out a mechanism to encourage the private sector to come back. and that solving the fannie and freddie problem first. >> one of the things the administration would like to see happen with fannie and freddie is printable forgiveness of certain loans. do you agree with the director of fhfa that, you know freddie and fannie shouldn't be doing printable forgiveness at this time? >> well, when i was there, it was certainly an area i looked at. we have discussions in the agency. it's been an area that has gone on since the start of the crisis. and in my view there should be

some extreme edition. we need to look at various alternatives. there are foreclosures not the answer, if we have, you know, other 4 million, i've seen numbers -- it will destroy the housing market. so we need to figure out alternatives. my view is if it is printable forgiveness there should be some sort of shared appreciation to go with it, or every time you make a payment to get a little of your printable forgiveness. some way to encourage people to continue to do it. but we are destroying neighborhoods with foreclosures. houses are being run down, and we need to be created in alternatives. i don't think a massive program at this point because we don't know enough but i think we should start looking at the alternatives. >> secretary donovan, you've been very outspoken on this issue, especially with foreclosures affects on neighborhoods. with the administration be willing to extend their primary modification program, hamp, past

december 2013? >> so, a couple things here. first of all, we are starting to see substantial principal reduction happening as result of their settlement we reached with the five largest services. that is already begun to our expectation is that we'll save tens appearance of dollars of principal reduction as result. ..

>> has been substantially improved as we've pushed the servicers to improve their servicing. we now see a far lower redefault rate than was happening before hamp was introduced. typically, 85% we're seeing succeed in going to a permanent modification and a similar number that are successful that get permanent -- successful after a year. so dramatically improved performance, and i think that's why you're seeing not just hamp modifications, but there have been millions of modifications sort of following the hamp model that are being done outside of hamp -- >> and the success of the program, do can you see it being extended past december 2013? >> again, we would be open, we extended it to december 2013 because we thought that was long enough at this point. i think we're certainly open depending on where the housing market is at that point to consider that again. we don't think that's an

immediate question because we just extended it an additional year, but it's something we'd be open to. >> and, mr. millstein, you said at columbia the principal forgiveness as a result of the mortgage settlement, i think the quote was a drop in the bucket. what do you think the legacy of the settlement will be on the servicing industry? >> well, i think the part of it that helped create standardization, i think, is a very important part. you know, one of the great problems with the private label securitization market was each pooling and servicing agreement was a one-off, ad hoc recreation of the wheel. you know, the advantage of the fannie and freddie system is that there are standards at least in that system that are broadly applicable across different pools. in the private label securitization market, you had, you know, vastly different contractual obligations and duties for trustees and investors. and so to the extent that the settlement actually creates some

standardization across those institutions, i think that's a real plus. >> yeah. i think there's another piece the that, too, one of the -- we talked a lot about sort of reestablishing private capital coming back into the market. we should recognize that there are big barriers to even getting a fannie or freddie or fha loan today, that there are whether it's credit screens or other things that are stopping a significant number of those folks who could be successful homeowners today and getting credit even from fannie, freddie or fha. a lot of that has to do with the uncertainty that we had around the foreclosure process, around the servicing process and, also, around the origination process. so what was so important in addition to the servicing standards was creating a foreclosure standard that was stronger but consistent. i mean, the nightmare scenario here was more than a decade of litigation in 50 different states around the country that came out with different results

in the end. what we need, the third leg of that stool, though, in addition to the servicing standards and foreclosure standards is origination buyback standards. and i think that's one of the things without congressional action that's critically important for fhfa to do. we've done that in fha recently, put out new regulations on indemnification for fha loans. we need that to happen for fannie and freddie loans to clear away another piece of this -- >> sure. mr. lockhart, would you care to jump in on that policy aspect? >> i agree with the secretary that the putback risk is one of the reasons that banks are doing less origination of lower quality, lower fico, lower credit score mortgages at this point. and, certainly, that needs to be clarified. i remember fighting with fannie four or five years ago to put back mortgages with countrywide, and they wouldn't do it because they were their biggest customer, and they didn't want to insult their biggest customer, and now the pendulum's

swung probably too much to the other side, and we do need different standards on that. you know, one of the issues, the private label securities that have not really been touched as much as they should in this whole process. they only represent about 9% of the mortgagings, fannie and freddie 55 percent of the mortgages, and so we need more, and the settlement helped a little bit on the private label, but even know the invest -- even now the investors are rebelling. we need mechanisms to work those in the private label world and maybe even services or buyers that will be able to work them better. >> i think just to provide a little historical context, in 999 there was about -- 1999 this was about $5 trillion principal amount of mortgages outstanding. the end of 2007 there was $11 trillion. we had a huge expansion of residential mortgage credit in this country burdening the housing stock of the united states, but it was also a huge

expansion of mortgage origination, mortgage creation, mortgage pooling, securitization. and it, that system grew too fast, effectively, to have a set of standards and uniform practices, and there were tremendous what the banks now call manufacturing defects in the creation of those more gams. if you think about, like, the creation of a car. they just made too many mortgages too fast, and there were many defects that are now come -- coming back to haunt them in the putback for violations of warranties. if we're going to be supporting this level of debt across this many homes, 55 million homes with mortgages in this country of an 80 million homes in ago regrate, so 55 million, if we're going to support that system, we need national standards, we need uniform laws on fore foreclosure.

we need to create a system that is much more transparent and much more coherent and where the rules and obligations applicable on parties are much clearer and easily enforce bed. enforced. and i actually think that the whole system of putbacks and reps and warranties is kind of crazy and arcane. you know, when you buy a car, the reps and warranties last for a period of time, and then they die. when you buy a company, they last for a little period of time, and then they die. the point is it forces counterparties to do due diligence. this whole system that allows the reps and warranties to survive for the length of the mortgage, 30 years, means no one actually has to look when they're buying the loan at what they're getting because they say to themselves, well, i can always put it back later. and we need to actually have risk transfer in the system rather than this contingent risk transfer system we currently have. so i think there's some fundamental reform in the way

the whole system is currently organized and structured so as to force people to actually understand what they're buying and take the risk of what they're buying in the securitization market. >> [inaudible] >> look, this is exactly why the president pushed so hard for dodd-frank, it's why we're now moving through the process of creating standards for servicing, for what a qualified residential mortgage would be, what the capital that needs to be held, and it's why in sort of the next step after the servicing settlement was the mortgage-backed securities working group that the president put together to try to clarify in the way that the servicing settlement did these same issues around all of these private lawsuits that are out there, around securitization. if we can create a standard template of what disclosure looks like for these securities going forward, that transparency could be a huge benefit in the way that jim talked about. and that's exactly this next step that we're moving to.

but i think there's also one other thing. jim mentioned that we ought to be focusing more broadly than just on fannie and freddie. i do think one of the critical things we have to recktize in the short term -- recognize in the short term, we've had the lowest interest rates in half a century that aren't providing the same macroeconomic boost to the economy we would expect to see. one place the press, no offense, likes to focus on where we disagree on certain things, there's been very broad agreement with fhfa and congress around expanding refinancing. we've made a lot of progress with fannie and freddie on that. we have about a half a million applications in under our harp 2.0 effort that five of the largest lenders, we're seeing real take-up in that. what we need next for congress to do, and there are bills that were just introduced and about to be introduced on this, we need them to move to the private label market and give those homeowners an opportunity to

refinance. there are about three million families who don't have access to refinancing even though they're current on their mortgages because they're underwater. >> right. >> that's a real boost to them, to their neighborhoods, but also to the broader economy, a step we could take. and there is a lot of consensus around this in congress. it's something we need to move quickly. >> peter has a question, i'm going to -- >> one question before we run out of time. secretary donovan this is, again, from someone here in the audience, i believe. much of the wealth lost in the crisis was illusory, yet the talk is of how to revitalize the housing market, presumably restoring this bubble-created wealth as opposed to finishing the deleveraging process. will we as a nation only be satisfied with a renewed bubble economy? the question is from bart mosley of trident research. >> so i think the easy answer to that is, no. [laughter] we're clearly not going back to where we were, and our white paper last year laid this out in very explicit terms.

it said, you know, the fannie and freddie model was a structurally-flawed model, they need to be wound down, and what we need to replace them with in this system we have to recognize that it is going to be more expensive to get credit. there will not be credit available on those same terms. we do want to get back to a place where families see homes as a place to raise their kids and as an investment that they can count on for the long term, but not as an atm. and so i think fundamentally there is no question that we should not be going back to that, where we had. on the other hand, we also should recognize that home ownership does have benefits. if you look at kids that are raised in homes that their parents own, they tend to do better in school. there are other benefits to neighborhoods of that stability. and we should be encouraging

sustainable home ownership through the right kind of mortgage products. and today you have families that can be successful homeowners that are getting screened out of the process where the pricing is higher than it might otherwise be because of many barriers, the uncertainty that we talked about, a range of other things. so this is about finding the right kind of lending products and getting back to a place of plain vanilla products not recreating the bubble by any means. >> we are out of time, but we do -- i can't leave without asking mr. millstein this one last question. if you could be brief, i won't get in trouble. [laughter] if you could change anything about the housing finance system, one aspect, tomorrow what would it be? >> i think we have to end the conservatorships. i think the language in this town about winding fannie and

freddie down, if that's where we're going, let's do it. let's have a concrete plan and move forward with it so that we can tell private investors what the landscape's going to look like. if we're talking about winding down the government-sponsored hedge funds, let's talk about that and privatize fannie and freddie and turn them back into private mortgage insurers. but we really need to get a consensus in this town between the administration and the hill on what the fate of fannie and freddie is. and i think we have to do it soon because i think those are living, breathing organisms, they're providing an important service to the economy right now, and the uncertainty is creating an exodus of talent out of that. and before, the if we're not careful, we're going to destroy these things before we ever make up our mind what to do with them. because there will be talent flight and a loss of the ability to serve the market. i think that is the most important topic, the congress and the administration really have to get together.

and even if they don't pass legislation, they at least are to find consensus on what the path forward is so that people working there can either stay and have a career, or if we're winding them down, they can leave and move on to new jobs and private capital, hopefully, will fill the pace. i'm very dubious that private capital comes back in size and in a pace that will fill the void created by fannie and freddie if that's the choice that policymakers make, to wind them down. i think we really have only one responsible choice which is to recapitalize them and better regulate them. but i do think that, i do think that that is the most important point for housing finance right now. >> thank you very much, gentlemen. appreciate it. >> thank you very much. [applause] >> jim millstein, jim lockhart, secretary donovan, thank you all for participating. thank you very much. interesting discussion about a tough topic, housing. we're going to move on to another difficult topic, interesting topic, one that not

too long ago people were talking about currency wars, we're talking about the dollar now and currency issues. joining us on stage with rich is tim adams, he is with the lindsay group near washington, managing director, he's a former undersecretary of the treasury under president bush, someone who knows these issues well, and with him c. lowell harris, professor of economics at columbia university, adviser at pimco, former assistant treasury secretary. rich, i will let you take it away. the summit, the dollar. >> thank you, peter. it seems like every time we get up here for a new topic, the topics are just as dire as the previous one or, if not, more so. [laughter] so we're going to tackle the dollar here, and there's plenty to be said about the u.s. dollar. certainly, a major issue in the election year. a lot going on there. and we have two brilliant seekers here today to help us.

so thanks. i guess you can't talk about the u.s. economy -- i'm sorry, i guess you can't talk about the dollar unless you talk about the fundamentals, the u.s. economy. so i'm going to, again, a 30,000-foot perspective. my question is for each of you, wtf. what's the forecast? [laughter] tim, do you want to tell me -- economically speaking, that is. >> from i have lots of forecasts. but you're right to think about the economy because in some ways the currency of the dollar is a reflection of the u.s. economy. if people believe in the u.s. economy and the u.s. economy remains competitive, we have a sober fiscal -- stable fiscal trajectory, we've heard from alice rivlin and others, if we put all the fundamentals together, then that will be reflect inside the exchange rate, and right now there's a lot of people around the world

concerned about the ultimates of the u.s -- fundamentals of the u.s. economy, and they should be. we have lots of challenges, wage growth is flat to negative. it's tough to see how you get acceleration growth this you see an acceleration of wages. >> i would add to that a couple of points. one, and one that a lot of people get wrong, but it's a fact, if you look at the average value of the dollar since august of '07 when the crisis began, the fed began to cut rates, then did qe 1-rbgs, qe ii, you'd think there's been this spectacular deterioration of the dollar. in fact, on average it's flat. what we had was a period after lehman when the dollar appreciated, the flight of quality was still relevant. but on average it's been a roller coaster and roughly at the same level. so that's one point to keep in mind, just to mention that macro fundamentals are key, exchange rates are always relative prices, you know, so w.c. fields, you know, how's your wife, compared to what?

how's the u.s. economy? well, it's doing pretty well compared to europe right now. and, of course, the second point is the flight to quality bid for the dollar and other currencies like the swiss franc is still relevant, and as i mentioned in those recent episodes. so i think, i think on average when you look at the dollar, you need to take into account both the u.s. and global outlook as well as risk appetite, and right now risk appetite is a relevant factor in understanding the dollar. i think the second point i'd make just to get it clear is that no country and certainly not the u.s. can devalue its way to prosperity. and so, you know, that's not the policy now, i don't think it will be the policy. that's not to say the currencies cannot go could be as well as -- cannot go down as well as up, but i don't think it should be a policy to think of using the dollar as a tool of devaluation in many long-term strategy. >> that brings me to a couple points. first, so the odds of a u.s. recession in 2012?

>> oh, i think are low. i think we'll -- a continuation of what we've seen in q1. but 2013 is a question mark because as we heard, there is a fiscal cliff, it is enormous, and if we bumble our way through it which we are capable of doing, then we could see a real challenge next year with respect to growth. >> richard this. >> i think whenever the average rate of growth is muddling through -- and i agree with tim, i think the most likely scenario is 1.5-2% growth -- that means you're always closer to the risk of recession. but my baseline would be with tim, a muddle-through. downside risk to the u.s. is, obviously, a meltdown in europe. the last two years have been very similar. we began the year with optimism about the growth, europe then begins to get dysfunctional. risk sentiments shifts, the economy slows, and so, you know, that's obviously a risk this year. but the baseline case is muddling through. >> so you have some comments

about devaluing currency wars, basically. >> yeah. >> um, does the u.s. have a dollar policy? strong or weak, first. do we even have a dollar policy? do you believe? >> well, since bob rubin, it has been the stated policy of the treasury department that we believe in a strong dollar. for every administration, every treasury secretary, it's a little different. the way i interpret that is it's an implicit pledge that we won't use the dollar in a competitive manner, we won't seek to devalue in order to play a bigger thy neighbor policy game. and i think by and large this administration would agree with that. that doesn't mean we won't have adjustments with respect to external adjustment. as richard noted, it goes up, it goes down. but i think -- is it a policy tool that we target? and we don't. >> you don't think we do? >> no. i think it's a derivative of

other policies, obviously. it's an outcome of policies here and policies relative to the exchange rate that we're talking about. the other country, the other currency, the other economy. but, no, i don't think this administration targets a weaker dollar. we may have a weaker dollar as a result of policy, but not because of direct intervention. >> not because -- so you're saying that it's just market determination, or market determinants saying all in this manufacturing, this exports boom that we've had as a consequence of a weaker dollar makes things pretty good in the rust belt which, by the way, just happened to coincide with key battleground states? you're saying that's just a coincidence? >> i think from the point of view of forecasting at the fed or any other forecasting one would think of the dollar as being one way to transmit monetary policy. and in that context i think low interest rates are facilitating aggregate demand x to the extent that the easier monetary policy would lead to a dollar that's

lower than otherwise would be, that would show up through exports. but the key point is on average in the last five years we've had historically very easy monetary policy and largely, i think, appropriately so. three wounds of qe and cutting the rate from 25 to 0, on average, the dollar's where it was five years ago. on average, they've been doing qe in the u.k. and in japan and in europe as well, so on average it's neutralized out. >> and let me say, you talked about the industrial heartland. i think there's a recognition that, in fact, we do have great advantages here. wages have adjusted, we have excess labor, we have enormous productive capacity in places like ohio and indiana, and produce anything china's more expensive than it used to be, and it's quite complicated. so, you know, this run to china to open your factories to ship back to the u.s., i think that's a phenomenon that's fading quite quickly. >> and, of course, not to mention the earlier panel this morning which is the shale

energy revenue in the u.s. actually gives u.s. companies a cost advantage that's pretty substantial for a lot of exports. >> but can it be said that the weaker dollar's contributed to the commodity price inflation, particularly energy, that we've had? >> well, again, on average for the last five years the dollar's not weaker, so you can always pick an interval when it's weaker -- >> on average, i had a whole head of hair my entire life -- [laughter] less than i do now. but i'm looking at -- >> and it still looks good. [laughter] >> you know, the idea behind qe is you raise the value of oils and assets so, absolutely, it does feed into commodity prices. there's no doubt that it certainly helps at margin with respect to exports. but there's so many other factors that go into the determination of where you're going to put a plant. and richard is correct, the energy boom in this country is a real game changer. >> yeah. i would mention, i think what feeds into commodity prices is the global qes, right? that is, we've done qe, the u.k.

has done qe, the ecb's done qe, and central bank have rates near zero, and that clearly feeds into commodity prices over and above whatever impact the dollar has on it. >> so let's go global and pull something in from left field. is china a currency manipulator? [laughter] we're having, our government's going over there this week, we're going to do some talking, we're going the find out some things. are they, you know, are they a manipulator of the current i?? -- currency? tim? >> in the strict terms the way the law is written, you could find intent. but do they manipulate the exchange rate? absolutely. that's a no-brainer. >> richard? >> well, they certain he run a very actively-managed system. obviously, as everyone in the audience knows, it's not exactly

fixed. under john snow's leadership originally, they move today a lying adjustment. that period from '05-'08 it was pretty significant, close to 20% on nominal terms and then adjusting for real exchange rates even larger. they did resume a peg after lehman brothers for about 18 months and then in '10 began to allow it to adjust again. the trend is to get stronger but with periods in which that pace of appreciation is zero or slowed down. >> i agree. you have to applaud the progress that has occurred, and it started back in 2005. and especially on a real adjusted basis. but it's still undervalued somewhere between 10 and maybe 30% depending on how you do the analysis, but the chinese have said the right things. there is an internationalization of the currency. i think eventually they'll bin begin to open up the capital markets, but i don't think the day of being a reserve currency is anytime soon. >> anytime soon is when?

>> well, i think it's a decade away. i don't think the chinese are prepared to open their capital account and make the currency convertible. they don't have a banking system that's durable and sound enough to withstand that. >> can the dollar be replaced by a currency basket? more likely than -- >> currency basket of what, you know? look, if you look at official reserves globally, the dollar composes about 62%. that's down from 71% a decade ago but up from 50% two decades ago but down from 85% three decades ago. we've oscillated between 50 and 80% for four decades, for 40 years. the only real rival is the euro, and obviously, with the chronic problems and the challenges in europe it's hard to see how that's going to overtake the dollar anytime in our lifetime if euro still exists in our lifetime. >> see, but here's the thing, the dollar on a trade-weighted basis, a broad basis a around 95 or 98, whatever it is, and it hasn't deviated too much. but that's pretty low by historical comparison.

okay? currently this, spain's in, arguably, a depression if you look at their employment statistics. you look at the u.k. is a double dip and pretty much that's, you know, that's an accident waiting to happen. but still the dollar is getting no respect as the rodney dangerfield currency. >> i think it's important to note if you replay the tape back to 05, '06, '07, a lot of the discussion was not only are countries accumulating vast reserves, but why are they holding dollars? the fact of the matter is, though, in a period of crisis the dollar was a great thing to hold in october and november of 2000. and i think whereas i agree with tim, one could have extrapolated a much larger role for the euro, at least for the foreseeable future the euro's likelihood of becoming reserve currency is really limited by their own -- and you can't beat something with nothing.

global reserve current si serves a purpose, and the u.s. as i and others have written enjoys a real privilege. there's a real benefit to providing the global reserve currency. and i can see why a lot of countries would like to have that, but for now there's no viable alternative. >> we're still 25% of global gdp, we have very broad, deep capital markets, so you have a vast array of risk assets to purchase, we have political stability, economic stability relatively speaking, so it's hard to see who knocks us off that perch anytime in the foreseeable future. >> well, because the dollar, obviously, is influenced by fiscal policies, okay, um, do you believe that the u.s. economy can afford -- do you believe the u.s. economy should have more fiscal policy, additional fiscal policy? stimulus, that is. and can we afford it? or can we not afford to have it? fiscal stimulus -- >> let me jump in on that.

apart from what should happen, i don't think we're going to get more stimulus. we had an excellent panel this morning. i think that the fiscal cliff is going to be the action-forcing event. whether or not it occurs december 31 or in the new year, we get some combination of tax reform and a credible, long-term fiscal plan, but i don't think that's going to have stimulus in it. >> i'm talking about real stimulus. not, like, extending unemployment benefit insurance. that's not stimulus. >> no. we've made the transition. the debate now is about how quickly and what's the content of fiscal austerity. what would be helpful is to see different fiscal trajectories in europe and other places around the world that have the actual space. china has the fiscal space to do more and so do a whole host of other emerging markets. europe is having this debate. in fact, the people in france and greece will go to the polls on sunday to cast a ballot for more or less austerity. in the u.s. the debate really is

about how quickly, what does that trajectory look like, and can we muster the political will to deal with our fiscal challenges. >> what are the odds of a dollar implosion metaphysical meltdown, if you will, what are the odds, tim? >> my european friends used to talk about that all the time before the euro went to the brink, so i always -- [laughter] you know, what does it look like? if you're selling dollars, what are you buying? so there's a, you know, there's a market mechanism that whatever you're buying gets more expensive, you want less of it, so it corrects itself. i don't know what a dollar falling apart looks like, so it's hard to theorize about something that is tough to visualize. >> and also remember that compared to the global financial system of 2006 or '7, i know it's hard to believe, but there's a lot of good work on this. there's a relative scarcity of quality, nominally default-free

assets. remember this opaque stuff was viewed as being aaa. well, that's obviously discredited. you know, the bonds of greece and portugal were trading at ten basis points in 2006, so that's no longer happening. so, yes, there is a lot of treasury in another supply, sovereign supply, there's also a big increase in demand as well. so, again, you know, never say never and never say zero, but look at what happens when a country becomes a viable alternative. they resist absorbing that. so the swiss are a great example. swiss monetary policy in september of last year said, you know, we are not going to let our currency and our competitiveness be decimated by this huge inflew of capital. so the swiss national bank has successfully resisted that. and you can bet that under the scenario you outlined, there would be others as well. it's hard o sort of game plan that because other people would have to go along, and the global economy would want to rebound,

and it's hard to say into what. >> so i can't get you to beat up on the dollar no matter how hard i try, so let's ask about the euro. >> much easier. [laughter] >> much easier, but let's ask about that. next year when we have this summit again, how about that? you come back here, what are the odds that whatever's in -- whoever, rather, is in the euro is the same. what are the odds, or do you see it changing -- >> no, it's a chronic problem. a gift that keeps giving. i was joking it's going to put my children through college. i can't imagine it gets resolved anytime soon. you cannot have a currency union without fiscal transfer mechanisms, some sort of fiscal union, and you can't have it without financial integration, and is we have neither. and then there's the competitiveness problem where you saw over the last decade union labor costs in the italy went up 30%, in germany they went up 6 president. so you've got fundamental

structural challenges in europe. chairman greenspan, i'm sure he'll give us his wisdom as well. but until the europeans find the political will to overcome those challenges, i think it's a chronic problem in which we go to the brink every 90 days, and we have some half-hearted, half-baked measure to take us back from the brink. >> and i would just add to that, and as i said on bloomberg air many times, i'm confident that the euro survives. whether or not the euro has the current 17 members or 15 or if it has more but with different -- so the membership of the euro may change, and that can occur either through expulsion or resignation, but i think the euro survives. >> euro survives, it's just a different country club. maybe it's the north country club -- >> it could well be a different country club. >> eight of the 17 countries are in recession, 11 of the countries in are recession. the ecb apparently thought they bought some time with the ltro in december and february, and

all we saw was spanish and italian banks leveraging their own sovereign debt which means the relationship between the sovereign and the banks in those countries just became all that much more acute. again, it's half-baked measures, and it's very difficult because they put in place a currency union without the underlying fundamentals. now, can they get there? sure. but we've got a long way to go. >> and also, just to remember and, again, tim made an excellent point, remember, part of the bargain and the appeal of the euro initially was the fact that for a decade it was a huge windfall to many countries because they were no longer paying a devaluation premium in their bond yields. so one of the reasons why you had these booms in the periphery is their borrowing costs plummeted. you can save it or squander it, and i would argue it was mostly squandered, not saved. the problem going forward is you're not going to repeat that. so the countries that remain in the euro are never going to go back to borrowing a bund plus five or ten basis points.

and it's a less appealing bargain than it appeared when they entered. >> what do you think the fed thinks of this, quote, weaker dollar policy? that is, arguably monetary policy is somewhat of an impotent instrument, right? in trying to prop up the two most interest rate-sensitive sectors of the world in the economy, and housing is pretty much -- let's call it stabilized. so now maybe the fed likes to see this, likes to see somewhat of a weaker dollar so that it can boost some of those things? what do you think the fed thinks about that? >> we really don't have inflation, right? if you look at most of the -- >> as i said earlier, i think the fed thinks about the transmission mechanism for policy, and its models incorporate a range of channels, interest rates as well as currencies, but the fed also recognizes the currency values reflect what's going on in the rest of the world, and at the

the time we're running easy policy, the rest of the world is. i think it's more or less a wash. >> peter? >> we have a question from the audience, and i'll put it to both of our guests here, and it touches a little on fed policy, in fact, significantly on fed policy. also touches on china policy. why is it okay for the united states to manipulate the value of the dollar with ink money but not okay for the chinese central bank to manipulate the u.n., be of their central bank's purchase of treasuries with ink money? tim, to you first. >> because the chinese intervene directly into the foreign exchange markets to stabilize the value of their currency, and then they sterilize to thwart the impact it has on domestic monetary policy. the fed is engaged in monetary policy in which the effect of the currency is a derivative of. one is a target, one is a derhode islandtive. it may have the same outcome, but it's two different policy

regimes, two different tools and two different objectives. >> rich -- >> well, let me put an addendum on that. >> well said, i have nothing add. >> would chinese policy be acceptable if they'd manipulated the u.n. of some asset other than treasuries? >> if they want to open up their capital account and have flexible interest rates and a flexible exchange rate and use interest rates to respond to the business cycle in china and that effects the exchange rate, that's fine. that's fair game. intervening directly and sterilizing, i think most of the members of the imf and, certainly, the staff at the fund and others have said that's not okay. that's a different, it's a different regime. and, but to that i would add that we're also where we were in '03, 04, 05. i mean, china has come a long way -- >> i agree. >> as well as the opening up of their financial markets. so it's, you know, a marathon, not a sprint. but china's definitely move anything the direction of a much

more open market and giving up some control gradually over the currency. >> we saw the widening of the bands a week ago, and i think it's stated chinese policy. i think they will get there, but it is a marathon. it will take a very long time. >> and they move in dynasties too, it's not like us. [laughter] >> one more question that we've received here, again, from someone watching perhaps here or perhaps on c-span or bloomberg television. warren buffett says do not invest in any fixed-dollar, denominated investment. what is your opinion on his view about strength in currency? >> if i'm not mistaken, his track record investing in currency is abysmal. i think he should stick with buying companies like dairy queen. >> i don't have anything -- [laughter] >> rich, i'll let you wrap it up. >> all right, want to -- hey, thanks to my, to the guests here, tim and richard. appreciate your time and your input for solving this situation that we have here.

>> thank you. [applause] >> thank you very much. our thanks to tim adams, rich clarida and to rimm yamarone. again, another tough topic. now we have one of the real highlights of our day. we have, doesn't need any introduction, the former chairman of the federal reserve alan greenspan joining us, and this question and answer period will be moderated by my colleague, tom keene. tom keene, of course, is the host of bloomberg surveillance on bloomberg radio, also the host of surveillance midday on bloomberg television, he is the hardest-working man at bloomberg and be, chairman greenspan, thank you for the time today. we appreciate it. tom, the stage is yours. thank you for the time and, again, we will have some time at the end, we hope, for questions from our audience and those watching at home. tom, take it away. >> well, let me start in the wonderful conversations we've had in the last few days, let me quote from the bible here --

wait, it's the age of turbulence. page 483. i suspect it is likely that to restore policy sanity we will first have to trudge through economic and political minefields before we act decisively. i'm looking to my right, chairman, at capitol hill where there's many minefields, and it is corrosive, isn't it? >> where i said that four years ago, and i guess i could still say it today. there's something very unusual going on in the political system in the sense that it is quite correct that there's a huge divide between republicans and democrats. and if you're looking for the caucuses, the nat and the house -- the senate and the house, democrat/republican, they are all basically single distributions with nothing in the middle of either the senate

or the house. and it struck me that this is probably unusual. but i went back, and i looked at the data, and it is not. there are data which enable you to construct the voting records and the individuals who are voting going all the way back to the first congress. and what it shows is that this distribution where you're getting a big lump in the republican caucus and then the democratic caucus and nothing in between, that goes all the way back to 1850. that is not what the problem is. the problem is despite the fact that we've had this distribution up until very recently there was always a capacity to reach across the aisle and come up with compromises. because, remember, it's in the nature of a democratic society

this which we've all chosen to live together that it must compromise. and the question is -- [inaudible] compromise of principles, but it's tactical compromises which enables legislation to the change. >> we felt that capacity after november of 1963. we found that capacity in 1986, various commissions that you have been on. how do we get that capacity back? >> that, to me, is the fundamental question, but i think it's important to recognize what it is. the basic problem here is to recognize that compromise is implicit in a democratic society and that unless you're going to do that -- assuming you don't have supermajorities which would work as happens in the past -- >> can we get an election

prediction out of you right now? >> yeah. it wouldn't be worth anything. [laughter] though my wife's in that business, i'm not. >> well, when you look at the politics, let's bring it to this fiscal cliff that we have at the end of the year. first of all, do we face a fiscal cliff? >> uh, well, legally, yeah. obviously, one doesn't have to look very far to find out there's a huge fiscal cliff out there, and it's basically the result of kicking the can down the road. people, and this is part of what the current environment is, don't wish to inflict pain on anybody under any circumstances. and the problem is we're not going to get out of this both political and economic mess in which we exist without some pain. there's just no credible scenario which does that. and the endeavor on the part of

both republicans and democrats as soon as an issue comes up where somebody is against it, they back away. that was never how we funked in this country -- functioned in this country. and unless we break that habit, i think we're in trouble. >> well, we had bowles-simpson, and i heard secretary geithner in new york just hesitate as he suggested we would get back to bowles-simpson. are you optimistic that we can revisit a form of the work of domenici and rivlin or the work of bowles and simpson? can we revisit that after the election? >> i remember saying -- i think it was one of the sunday morning shows, it was probably "meet the press," the day after simpson-bowles came out, and i said that something of this nature or this bill -- i know what it was, i was asked whether or not i thought it would pass the house and the senate. and i said the answer is, yes,

it's only a question whether it occurs before or after a bond market crisis. i still hold to that view. there -- i think the worst mistake that the president made was not embracing that particular vehicle right away because there are very few initiatives which have the wonderful capability of getting republicans and be democrats -- republicans and democrats onboard the exact legislative language interpreted differently. i mean, what's in the bowles-simpson initiative is a trillion dollars in tax expenditures. now, tax expenditures to republicans are subsidies, and eliminating them is an excellent political maneuver.

for democrats it's an increase in taxes on the rich. now, you can't get better than that for getting some form of legislative compromise. and i think with, basically, the ryan-wyden amendment to bowles-simpson addressed as medicare wasn't addressed. i mean, bipartisan. i mean, ron wyden's a democrat and paul ryan's, obviously, republican. it's the ideal vehicle which won't get us fully out of this. it would have when it was originally offered. >> and the age of turbulence you certain on 2030, and you show higher yields and lower bond prices on a path to 2030. you mention a bond crisis. some of the tone i hear there is you would find a bond crisis to

be constructive for washington even as it could be destructive for our retirement plans and for new york. why haven't we seen it now, and krugman of princeton, are they correct, look, interest rates are low, there isn't a crisis? i just want to get you going this morning. [laughter] >> interest rates are low before they go up. [laughter] look, at the top of any speck rahtive -- speck speculative bom not saying the market's a speculative boom, you'll always find just before the top, bids outrank offers of that particular product very significantly. and all you have to do is remember 1979. i remember it vividly. the treasury, i think the ten-year note had gotten up to 10% yield, and the general consensus at that point was the

united states is not an inflation-prone economy. this is as far as it can get. the next three months it went up 400 basis points. you cannot anticipate changes. in other words, basically to say but make a historical statement, namely that interest rates have been low, therefore, they will stay low. that is not a syllogism. >> well, it does link into fed policy, and i know you don't speak of fed policy after 2006, do you envision giving your historical study that when we get higher interest rates, it will be sudden, abrupt condition, or will it be a glide path that any institution including a central bank can get out in front of? >> the general view of market investors and be, indeed, this was the case in, basically,

2007-2008, it wasn't that investors basically professional investors, institutions and the like weren't aware of the fact that there was potential instability there, but remember citigroup's prince making that wonderful statement that everyone must keep dancing until the music stops. and what the problem is, is that nobody could move their portfolios out for fear of losing competitive position. >> uh-huh. >> and they all thought that because of the huge liquidity in the market, i mean, you were getting huge liquidity on synthetics and synthetic cdos of all things. >> uh-huh. >> you couldn't supply enough of them. and so what the general view amongst most investors, well, we

will have time to get out when the music stops, so to speak. they were wrong. because when liquidity disappears, it doesn't disappear incrementally. it disappears suddenly. >> suddenly. >> and this is what i think we have to confront. i don't have a clue when or, in fact, if it's going to happen. i grant there is a definite possibility that we -- one thing i can say for certain, that interest rates will rise over the next ten years. ten years there now or on average it will be higher. i probably would say that for five years, if you kept pushing me, i'd move it even closer. but markets don't behave in the simple way we'd like them to behave. >> our viewers, our listeners, the people here in the audience, we're all buying bonds. there's no question the bond flows now. you mentioned this earlier.

before we move on to another topic, are we in a bond bubble right now where we see the asset flows in just extraordinary, and we need to get an equity prediction from you, does that mean that stocks are cheap? >> well, stocks are very cheap. all you have to do is look at the equity premium. the best estimate of the equity premium is expressed by jpmorgan's. that's at the highest level in 50 years. and that, essentially, means with earnings still moving up -- which they have up until very, very recently -- when you run up against very high equity premium or, in its more simple configuration, a very low price earnings ratio, there is no place for earnings to grow except into stock prices. and the point that i've been making recently and expounding

on it is i think we are underestimating the extent of equity, stimulus as distinction from fiscal stimulus, in driving this economy. >> and you wrote about this in the ft, i believe it was, a few years ago, the need for good equity markets. and that's been more of an effect here than what we've seen from capitol hill. >> yeah. i think that we don't recognize how important the equity markets are in a market economy. i mean, we lost globally during the crash $35 trillion in listed corporation value. equity is the collateral of the financial system. it's not only the equity amounts, but it's also the fact that where equity prices are essentially tells the bondholder how much buffer is there between what he holds and bankruptcy. >> uh-huh.

>> and the bigger the market value increase in equity, the greater the quality other things equal of what bonds are. so, i mean, for example, you could have a corporation with technically a bbb yield, and then the equity price doubles, and the equity buffer rises, and what does it do? it improves, it raises the bbb to maybe a aa or something like that. so equities play a hugely important role which i think is grossly underestimated. and one of the things i'm working on is trying to estimate historically and do a little metrics on this as to what the relationship of, basically, equities and equity premiums are in the real economy. you know, we do have this discussion at the so-called

wealth effect, but that relates mainly in most of the discussions to consumer expenditures. it's a far broader issue than that. and i think that what we will find is every time stock prices rise in the -- especially in the context of very high equity premiums, you see a fairly quick response, obviously, not only in equity prices, but in the economy. >> i want to get to your research, but i want to squeeze this in because it is the debate at the moment, and we see the imf talking about a need to reflate. we see others, paul krugman and others, talking about one form of stimulus is to get out front and reflate the economy. what does reflation mean to alan greenspan? >> it means somebody else is lending you money. and your debt is rising. and if you think in terms of the issue, for example, this big

debate that is now going on in europe where they're now talking about pulling back the austerity you issues, i have no objection about doing that, but you have to remember that to the extent that you're pulling back on austerity, somebody else has to fund the gap that will, that still exists. remember, if you're pulling back from austerity, it essentially means that the ongoing deficits pretty much across the whole spectrum of the 17 eurozone countries opens up. but that means somebody's got to fund it. up until now what's, essentially, happened leaving out all the various alphabets of the various different vehicles which are being used to fund this, it's essentially the european central bank which is doing virtually all of it. and what that means is that the

ecb asset levels are rising significantly, and the fact that they're able to do that is that we have global economy which is partially stagnant and will continue to do so largely because i think the agree to risk aversion in the system is so high that you cannot get a growth rate going more in the united states, for example, than 2, 2.5%. >> to our viewers and listeners that don't have the sophistication of the interdependencies of these institutions and the movements, the answer is at some point be, as you mentioned mr. prince, the dancing stops, the music stops, and you have to sit down and find a chair. if ecb continues to providely liquidity, where's their chair? how do we clear or finish off the crisis in europe without

financial liquidation and massive consolidation? >> well, remember, the ecb is supplying the chairs. that's what it's doing. >> so we get endless chairs. >> well, so far. i mean, and this is giving, i must admit when i speak to my friends at the -- [inaudible] bank, they're very happy about what's going on. look, looking back at history you just do not get this type of very substantial expansion in the monetary base, if you want to put it that way, without ultimately triggering inflation. the only problem, basically, in forecasting is it can go on for years. in the end, it happens at the most, it changes in the most inconvenient time. and i don't see, essentially, how we're going to get through the european situation a at this

stage because right at the moment they're caught this a very deep -- in a very deep dilemma where they are fully aware of the fact, i mean, the people at the european central bank, i mean, the master treaty is, essentially a clear-cut vision of what that bank is supposed to do and not supposed to do. you have -- the language has got to get awfully fluid to reconcile what their actions currently are, and everyone is uncomfortable, but they all have mr. prince's view of what can happen or hope. you know, we don't, you know, everyone likes to say, well, we should put off the actual tough adjustments until the economy can take it. there's a presumption in that statement that the markets will allow us to do that. and i'm fearful that the markets

are going to say, no, at precisely the wrong, the most inconvenient time. >> those markets, as you personalize them, are they vigilantes? >> yeah. >> when you look at europe, and you and i have talked about this in a number of times we've spoke n and met, you continue to go back to what i call cultural economics. not the purity of model making or behavioral economics of bob shiller as he searches for a good society, cultural economics in europe is different than in america. give us the nuance there not only of peripheral europe, but of eastern europe as they try to amend to the culture of germany. >> well, look at east and west germany. you had, basically, essentially two countries starting at the end of world war ii, essentially, from scratch.

and same language, same culture, same history. and they grew up, obviously, when the berlin wall came down, the productivity level in if east germany was one-third that of west germany. and then when the merger occurred, there was the recognition that it was going to take a significant transfer of funds from west germany to east germany to maintain the system. that flow is still going on. it hasn't fully come together. in europe it's even a broader, more difficult problem. i did an op-ed piece for the "financial times," oh, maybe six months ago, and i've also done an analysis which i've published several different places which really takes the issue of observing that when, as i recall -- and i used to sit in

on the meetings which formed the european central bank, i was sort of a g7 and trying to keep my mouth shut -- >> were you successful? >> no. [laughter] .. tenure note was 500 basis points over two or three years before

it went to place. by that time they actually move into the euro it was down to 30 basis points, so the markets believed that culture would be coal call last and forced into the current currency, regrettably they were mistaken. and what we have found is that it was the global boom which kept the euro system together but once it let down, then culture re-emerged in a massive way. we could talk on this for hours but because of time, i want to move on. you and your non-retirement. looking at elderly assets. what is an elderly asset? >> this is my explanation of why the american economy is stagnant. the thing we talk about in the media right now. >> i think so.

>> thank you. >> you're welcome. >> you have to ask yourself what is wrong with the american economy. you can basically look at the gross domestic product and instead of looking at it as personal consumption expenditures and a variety of other things, what kind of returns on how long the asset is spent what last come in extreme case here cuts last month, software will last three to five years. industrial sectors, for 30 years, presidential, much longer than that. all of the weakness in the american economy expected to be at this stage is a life expectancy or durability greater than 20 years. with that is is if you think in

terms of structure as roughly 70% of the gdp and then cut it in half, you've got three to 4%. both three to four percentage points actually translate to the unemployment rate explains the whole difference of what this weakness of jobs is. and the problem here is that the assets under 20 years are behaving pretty much the way they always have in every recovery. >> the government policy to clear the market for those longer assets or to incentivize the building of those assets. >> i think they try to do too much and it's been counterproductive. what you need is -- look, before i got into government i used to do a lot of work for corporations and capital

investment projects. what we used to do is get the project managers to give a forecast and they would estimate the average expected return, and as a result of that, we quickly threw out all potential projects that didn't earn their return of the corporation. but that then moved into step to which is the determinant which is the variants, the spread of the range over the expected outlooks. for example, if you are expecting an average rate of return of 20%, but it varies between - ten and plus 50 that is invariably shelved and then what we are looking at right now and the reason why it's getting this particular shortfall in economic activity specifically and longer-term investments is

if you look at cash flow of the american corporations and the proportion they choose to invest in the long term in liquid assets that ratio is the lowest level since 1935. is that investment going abroad, is the issue here with all of the studies of crisis and recovery from crisis we are dealing with not only globalism, but a reaffirmation of the investment pushed a broad. >> very little. the investment has been doing very well abroad but it hasn't accelerated and you cannot very readily take the orders of magnitude that we are looking at changes in the united states and describe them to being shifted abroad. >> if of that the charts of the unemployed or i look at the unemployment the spike up they would tend to look less educated

individuals. how would they fit into incentivizing a business to make those structures? the answer is we have missed a lot of construction jobs. >> it's not only construction jobs, which obviously are a very substantial part of the job loss, but it's all of those secondary related issues because remember when you bring the level of building down by half, it has an impact on the whole multiplier when you put it in those terms, so it shows up as unemployment and a series of other industries that the general level brought down by the fact that constructions impact on the incoming investment has been so powerful, is a powerful force. >> how do you propose the we jump-start this and start building the structures? >> i think the first thing to do

is to stop doing what they're doing. let the markets calmed down, and i think the endeavor to actually try to support the market's is counterproductive. when you have an unbalanced market any time, whether it's stock, bond, copper, zinc, whatever, but market will readjust one way or another. if you try to support it, you will be laid the adjustment process. i think it's instructive one of the only areas in which we endeavor to support -- we have not endeavored to try to support prices or values in one way or the other as the stock market. the stock market is a particular area and the economy which has been untouched and which has come back the most. and it is not an accident. i think we have to learn that

sometimes leaving things alone and letting the markets work is the way the system is supposed to function and the way that it has and will. if we can tread delicately on the monetary economics without asking you when the fed will raise the target rate, i was talking to steve the other day at the university formerly with morgan stanley about the asymmetric challenges that in the central bank faces. as you wonderfully quoted in your book, you did not received many phone calls from politicians or presidents looking for you to raise interest rates. it's a substantially asymmetric universe that any central bank works in. how do you told the a symmetric realities in the desire for inflation targeting? >> first of all, what i actually said was in all of my years i

got bushels full of mail. i cannot recall a single call from the congress or any other political figure that said raise the rates. every single province, it wasn't even asymmetrical, it was zero plus come and basically because the political system seeks the short term solution. and the fending off any a semblance of came. you cannot run of the society unless the average age of assets this 20 to 25 years with everything being short term. there are occasions where the thing to do is to allow the market to liquidate, and i think the best example i can give is the actual experience that we had in the resolution trust

corporation. i was on the oversight board, and as a result i had a seat in all those meetings and they did and interestingly good job which i don't think we could do today. what they did was 800 snls field, this was back 20, 30 years ago. all the assets and the resolution trust corporation to get rid of. it was easy to get rid of the mortgages and the liquid assets, but then there was a very large chunk of assets which were in the golf courses, 40 skyscrapers had been built, and we could see the erosion, the maintenance cost maintaining all this stuff eating away and all we are seeing are the taxpayers' dollars going down.

what they chose to do is a bundle all of the stuff, and a billion dollars back then was a lot of money coming and they hit the market. they just basically said we are going to sell them, and of course we expect it 50 cents on the dollar, less than 50 cents. >> why can't we do that now? >> what happened back then is the congress was up in arms, but one very interesting thing happened. all of the people on wall street are looking at the process whereby the funds were bought cheap and all of a sudden were making a ton of money. >> how did this cake in? >> what happened is the movable inventory of the unsellable assets was cleaned out in a matter of months and i think that particular action probably saved american taxpayers a very

large amount. >> could we do that today? >> it would work, no evidence of any political mess on either party to move in that direction. >> we got away from monetary economics and the fed to discussion. you migrated away. >> really? >> you did a great job of migrating. we left it back to central bank policy. central bankers today in an op-ed the talks up the task of central bankers been arduous. in the path forward for the central bankers come to the need to say to other institutions know, we at the ecb are going to do this. you are going to find the courage to do this. harvard talks about this. he writes about it. we need institutional courage to lead to the central bank's just have to say no someday?

>> basically. central banks were prohibited from doing certain types of things. yeah, i would say certain things which ought to have been done by governments, not by central banks -- i mean, for example, it was very unfortunate when the interventions of 2008 occurred, which is a once in 100 years event that requires that sort of action, the only vehicle available to act quickly was the fed's actual legal authority to lend virtually to anybody under any conditions. it was an amendment which was very rarely used, and was the only vehicle that would enable a quick response to occur.

and so, the federal reserve has the fiscal treasury with lots of assets on the balance sheet, and what i had hoped was going to happen very quickly is that the treasury would take over those assets of the treasury subsidiary. but would require the appropriated funds which is ridiculous because one of the folks in the budget accounting system in which if the expansion is by the federal reserve it does not require corporate funds but exactly the same use of sovereign resources and the treasury was to the assets are held on the federal reserve on the treasury's balance sheet is the fact of the incumbent

procedure, period. the inability or the unwillingness of the treasury department to go after the hell to get appropriations for that is what created big problems in the federal reserve because they were during involved obviously and fiscal actions, which is not the role of the central bank. >> you and others, but you in particular, have been criticized for not raising rates in 20003 come 2,004 i'm guessing. jeffrey among others said in 1994 you did get out in front with preemption. when you see the global debate today, not the fed put the global central bank today about when we raise interest rates, but data coming in you as a great student of data, what data should any central bank study when to raise interest rates?

>> it basically is a necessity involved in the forecast. all central bank actions presuppose and not look which you are investing because obviously the impact of the monetary policy brazil over time and you have to try to unfold is going on. in other words, the issue of the question of all rates in 2003 which we did was the right thing and still is the right thing to do for insurance against the tide of deflationary forces we're looking at now. the impact on the money supply had zero affect on their rates and no effect whatsoever on retrospect that i can see, and even the central federal reserve milton friedman said that the performance of the federal reserve from 1987-2005 was

excellent. >> did it fuel the leverage that led to the housing boom? >> the housing boom comes out with a different force. it was lower interest rates that induce the housing boom, but no long-term interest rates because remember housing is a long-term asset. mortgages are longer-term. it is not affected by overnight rates. and indeed what caused this extraordinary housing boom was the remarkable change that occurred after the fall of the berlin wall. all of these very large countries that are one form of socialism or another in the bible long-term failure. >> what they did is he essentially decided looking at what happened to the soviet system in china became the most

capitalist economy in the world, and the extent of the growth in china is a tribute for capitalism if i may put it that way for chinese communist government, but effectively with that essentially is doing is creating a huge increase, remember the number of increase, the developing world's gdp from 1991, 1992 and forward and especially 2004, there was a huge increase in the developed gdp that got so large it couldn't spend it. so it was pushing long-term rates down globally. islamic 75 basis points? >> far more than that. what it was however is important

to recognize is the housing boom is not an american phenomenon we are centered somewhere in the middle with 20 countries with big housing booms, and the question -- >> i want to squeeze in one question and i know peter has questions as well. there's a job opening of the bank of england. everybody else is considered to be the bank of england. would you accept the job if it was brought up now? >> i would ask the current governor, an extraordinarily good central banker to stay in place during an excellent job. >> mr. chairman, we have a few great questions submitted and try to squeeze at least one or two in here. movements are obvious as people search for yielding the potential for the destruction is very real. as the rates will rise doesn't

the bursting of the bond a bubble have the potential to be much more broad than the 2008 financial market implosion? >> it's extraordinarily difficult, which is something the was worse than the impact on the markets that followed september 15th, 2008. and as far as i can see, the prices hugely cannot move, so the size of the capitol gains just cannot be the equivalent in that respect. that is what to say you cannot have a real -- i think if you are going to look at the criteria of what type of things we're looking back to the address look at 1970 and 1980. >> this is a quote submitted by the secret of the welfare status tirades against gold deficit spending is a scheme for the confiscation of wealth.

the gold stance in the way of this insidious process and as a protector of property rights. if one grasps this one has no difficulty in understanding the status and antagonism toward the gold standard. the writer suggests that you wrote these words some 45 years ago at the end of the economic freedom. looking back over 45 years could you get your thoughts on that essay today? >> i thought it was very perceptive myself. [laughter] >> did ron paul right that questioned? >> that was not submitted by ron paul. >> in fact i had a very interesting conversation with ron paul when he was complaining that this was a house hearing here. that the federal reserve, you know, should be going back on the gold standard. i said look people have chosen to have a monetary standard because they want over all state. you cannot have the gold standard and the welfare state at the same time. you have to make a choice. and we have made the decision as

a society that we will be dealing with the welfare state. now, i also told him i said the purpose of the central bank is to look at the actions -- this is the gold standard before world war i. not subsequently. i think the markets today are simply very important, meaning that gold is a currency, and it's by the necessity has to be a zero sum game. gold is the only one of them that doesn't require some of these credit. there is no name associated with gold. gold is acceptable for reasons and all of the years i've never fully understood what is it about human nature which

attaches itself to this particular single medal that goes back, and it is never changed. islamic i've asked my wife that question. >> chairman greenspan, thank you very much for the time. we will continue on bloomberg television. again, thanks very much. [applause] we do want to move on to the next panel as well. we are going to continue our focus on the economy, talk about the economic agenda with a slightly more political spin on the next panelists. want to call to the stage paula dwyer, the editor of bloomberg view and she will be moderating the discussion here. if you want to head up with your crew. joining paul on stage, and johnson, professor at mit sloan school of management and columnist with bloomberg view as well. a lot of gusto him as the former chief economist at the international monetary fund and the author of white house monday the founding fathers on the national debt and why it matters to you. joining him on stage, richard

trumka the president of the afl-cio. right behind richard trumka is jim weber, republican from minnesota. he's an adviser to the mitt romney campaign. although he is not here as a spokesman for the campaign i should point out and he's the coach and a partner at mercury. paul the stage is yours. >> thank you, peter and simon, rich for agreeing to be on the panel. and good morning everybody. i am paula, an editor and bloomberg view. if you don't know what that is that is the opinion section of the bloomberg media family. we are one of the newest parts of the family, and everything we do is free on the web commesso come visit us. we have opinions. a lot of opinion. it's, for example simon is one of our columnists and we have editorials, of eds and blogs. it's all free at bloomberg.com/view. that is our commercial and now we will get to the regularly

scheduled show. i think just a few months ago the economy looked like it was going to be more of a plus for the republicans in the election than for the democrats. but things have changed ... then. the job picture is improving, it's still terrible but it's improving. the economy seems to be getting momentum although it does need to do 264 word, one step back still. so we are going to talk about this and we are going to talk about the economy both from the issues should be, but also how the candidates are going to try to frame the issue so they will define it from their perspective and advantage. i want to start off with our economist, simon, and ask him what he thinks the president election will be more about. will be more about jobs, looking more about taxes, will it be more about the deficit? simon? >> i think it's going to be about jobs. this is the biggest loss of jobs come sustained loss of jobs since the 1930's. it's an incredible shock on the

bank or financial crisis. and people want to know when are the jobs going to come back. if you are proposing the policy, for example, a particular approach to the budget, or if you are trying to abolish some part of dodd-frank, for example, is that going to give the jobs that or is that going to solve the problems for just around the corners of the two big to fail banks for example may blow up again and the damage the economy again. those are going to be the big issues. >> ben, wearing your strategist hat, the economy is recovering, but not, you know, it's not mocking anybody's socks off. so is this a plus for the republicans or is this a request for the democrats? how do you think it's going to play out? >> first wave of the economy is recovering regardless of what impact the election because i have two kids in college. let's say we want to see the economy recover i don't think it's recovering in a way that's going to be helpful to the president.

the effect of unemployment rate if we have the same labor participation rate as we did in october of online and would still be around 10%. furthermore, i think that there are other economic indicators related to but not quite the same as the jobs picture but are more important politically. historically, the connection to the disposable income growth has had a greater correlation with political activity than even the unemployment rate. so i think the election is primarily about jobs. put jobs in the broader context of economic issues, disposable income, housing values and things like that and it doesn't look very good right now. so probably on balance will be helpful to the republicans. we will see what the next couple months of economic data show. >> rich, as the national voice of the labor movement, i don't think there's any disagreement that jobs should be the number-one issue in the election but does it worry you that that maybe the spotlight will come off of that and move more towards a budget balancing or

tax cutting or the debt ceiling, which could be hit right around the time of the election and the spotlight will come off of what you think should be the number-one issue? >> it's not just me, it's what most americans believe the spotlight should be on three issues. jobs, jobs and more jobs to be out there. and i hope quite frankly that the election is about that and about how people are going to create those jobs. not about whether somebody put a dog on the top of the roof, and all of those issues. they are sort of amusing. but they really don't solve the problems that we have. and i hope that we will get out of the negative stuff and start talking about -- >> what should the president be talking about, what should his program before employment? >> and she started that. i think there are five or six things that need to be done. one is i think we need to make a sustained investment in infrastructure. the country is a $2.2 trillion

infrastructure in the deficit right now in old infrastructure, and a trillion dollar deficit in the new infrastructure, stuff that will bring us into the 21st century. these are things that used to be bipartisan. there was never a fight. they would come out. we would do them in a very businesslike manner. dfa and all of a sudden became catastrophes and major fights because i think it goes back to what mitch mcconnell ultimately said. their primary goal is to make sure that this president is a one-term president and not about fixing the economy. >> can i say first of all i do agree those used to be bipartisan issues, and they still should be bipartisan. i don't entirely agree. i a understand the political point that mcconnell said. but there's another reason that we are focusing on expenditures that used to be bipartisan in nature because we are not dealing with the long-term spending drivers of the deficit.

when i talk to people, republicans and democrats alike, they do get the problems we faced with economically short term and in terms of the budget long-term. for a variety of reasons in the previous p.m. today we talked about seemingly unable long-term drivers of the deficit so the members of conagra's are focusing only on the short-term stuff and that leads to taking money away from things your right we used to be in agreement about, and probably if we are all sensible level of this makes sense at least in the short term given the economic problems. >> one way they come together and the long-term issues are put on the table of courses by paul ryan and the budget he stood for. it remains a little unclear whether there will be the national issue presumably in the house i don't know in the presidential election. now mr. ryan opposed to fundamentally, well, let's say transform medicare. i would use a bit more than - four become a disarrayed, but somewhere between this, and

medicare. he was also -- if you do the numbers and if you assume it doesn't come down below 3% of gdp as it's been in the postwar period his budget with a basically eliminate almost all discretionary domestic spending. it is a pretty critical transformation and in addition as a part of the budget process coming from the house side right now, title two of dodd-frank which is the of liquidation authority allows the fdic and others to wind down a mega bank without that causing global destruction. the house republicans want to take it up. so that's a pretty broad agenda, and the longer-term stuff is in there, too, stuff i don't think is a particularly good idea. >> i want to get back to rich, and then talking about the bipartisan nature of asking for more infrastructure. i don't think anybody disagrees better roads -- >> not just better on the fact

we don't have the money. corporate america has made two years of record profits, the fatalist share of taxes in gdp that we've had the money is there. it's allocated the money and setting priorities. we are still the richest nation on the face of the earth and the most rich point in time. everybody else has figured out how to do it. i don't believe that we are the idiots of the world and we can't figure out how to do it, too if we sit down and decided to put the country first. >> ben has the right answer, higher corporate taxes? >> lower corporate taxes. we now have the highest marginal corporate tax rate in the world not necessarily the highest effective corporate tax rate, a very low effective rate which is the only thing that matters. estimates of the leading the matters because the determines a lot of the allocation of capital

people are allocating capital based on their appointment at the rate. i think that simpson-bowles got it right. they projected an increase in the revenue, not the stuff the you conjure up out of the fears that real revenue growth but they did in the context of the reform of the code the republicans and democrats alike on that commission agreed with produce higher levels of economic growth. i still think that is the correct way of looking at this problem. >> i think every study out there has debunked that. and let me say this about -- i think everybody would agree here that the recovery is still precarious. that is not a road to recovery that began put on autopilot and let it go forward. the worst thing that we can do right now lease to do more austerity, to cut into the program, to take away from the ability of the government to respond to all of that. and that is what you are talking about.

george bush came into office, he hit a great surplus, an economy that was booming, after eight years of doing exactly what you say, cutting taxes and deregulating there are fewer jobs in america when he left office than when he came into office. if those were such a great prescription, why did they almost destroyed the economy? what we have to do if he does look at the deficit and the midterm and the long term. i don't want you to say i don't understand if there is a deficit and they can't go on forever. what i'm saying is it's not a short-term problem. that austerity program is shoved down the throats of countries in europe the less likely the recovery is. >> we are going to get back to that what lessons from europe but i want to ask simon to respond to this.

when is the right time to start attacking a deficit? >> i think, paula, we have a very special moment approaching this year. a lot of investment -- look of the disagreement between the left and the right and my goodness this is going to drive us of some sort of a fiscal cliff, for example of the busheir tax cuts and the obama tax cuts now don't get extended. i think it is a great opportunity. in the following since you don't extend the tax cuts and then if president obama is reelected he were then to propose to congress a temporary payroll tax cut linked to employment relative to the total population i've written about this in the pages and so has peter orszag said it would fade away as employment recovered and he would not have the immediate austerity affect, but you would have the fiscal consolidation over one or two decades. the problem with the bush tax is the markets are looking at that and very worried about that. if you replace that with the role of a temporary payroll tax

cut will let actually removed the issue and everything that plays out and help politically unless you think the house republicans would vote against the tax cut that seems pretty unlikely. >> ben, is it? >> the one thing we can all agree on is to extend the payroll tax cut. the only thing i might disagree with is can you get every? >> i doubt that. the evidence the past couple of years would show that we are not anywhere near making a payroll tax cut extention a timber reissue. clive almost an ambivalent on whether or not we should accept we do have implications for long-term solvency of social security and the nature of the social security program if indeed we will extend the payroll tax cut for ever, which we may be coming out to do. >> that come to me, argues for dealing with all of this in the context of a broadbased tax reform in which you're going to get something you like and i'm going to get some things i like but none of this can be dealt with in my view on an individual policy by policy basis.

it should be dealt with in the context of an overall reform. >> would you go one step further and say that we need to have, we should have in an aging society support social security and medicare were revenue as a percent of gdp than we have in recent decades with federal revenue of about 18% of gdp. if you will revenue to that level these are social security and medicare or both. >> my personal view is that yes. we can't adhere to the historic levels of revenue as a percentage of gdp and support the level of benefits that we are currently projecting certainly. but i also don't think that we can maintain and support the level of benefits that are projected. i think there has to be a compromise. this is what sponsor team is all about, find out how we can bend the curve on spending on entitlement programs that you're talking about, and, and then figure out how to increase revenues to sort of get the lines together and come up with a fiscally irresponsible

approach that doesn't decimate people's retirement years and that doesn't put a crushing tax burden on the private sector of this economy, either. >> is a question that i have and i think rich probably is the same question will republicans after the election come to their senses and agree with you on that? [laughter] >> well i appreciate the neutral phrasing of that question. [laughter] spinet i was reading rich's mind, i was just channeling. >> my own view is that if republicans see meaningful entitlement reforms and meaningful pro-growth tax reform that they can be brought to support revenue in trees, but the first two parts of that are absolute preconditions, and it's not easy. as the mexican after the election defeat the -- so, after the election -- >> rather i dispute that its current be a lot easier after

the election. >> i agree it won't be easier but maybe it just will be feasible. >> let's assume that mitt romney wins. but, if you were advising him, what would you say his approach should be? should we extend the bush tax cuts or extend the ones for the middle class? should we extend the payroll tax cut? i think you already said you would be in favor of that. >> my advice is it should be dealt with in the context of a large negotiation. i think the worst thing that has happened in the last couple of years is the president is basically stiffing his own fiscal commission. i think we could've changed the politics and perhaps the economics the last couple of years when the simpson-bowles commission reported the president have welcomed it and use did not embracing the detail but included details using it as a jumping off point to start negotiations with congressional republicans that the congressional death duties could

democrats. i think we could have used more. i think the president did substantial damage to our ability to solve this problem by basically turning his back on his own commission. nonetheless there's a reason we keep talking about it and about domenici-rivlin and the old lines of the gang of six things. the moving parts are not hard to identify. long-term entitlement growth, revenue growth through tax reform and that restraint on defense and domestic discretionary spending consistent with the fact a lot of that stuff we really would support if we had a longer-term solution in place the markets could have consequences quote. islamic let's have a revision of history. let's remember that there was the president and john boehner who came pretty close to a deal, probably a deal i would have liked but a deal it was john boehner who couldn't deliver. >> that's not true. >> it is true. it is very true.

and was john boehner that backed away from it. >> you can't really write history. >> nevertheless, he didn't get a deal. simon? >> i think some of the things i want to press a little bit on the two items. first, grover norquist. there's a perception that mr. norquist is opposed to anything that would involve a tax increase including adjusting the tax expenditures and in that context it is a question of which tax expenditures would you regard as being on the table for the tax reform, which ones are you going to eliminate to boost revenue if you are pushing and i think you are for the lower tax rates, that is a hard combination by the way. >> it is a hard combination and i think that ryan was speaking not for the committee but by himself probably of land the conceptual approach that makes the most sense which is to start looking at all the individual income tax deductions and means testing. i haven't done all of the math

on that but you get to a point where you figure out how much revenue we can generate by means testing and charitable contributions and all that stuff you have to figure out where you are going to draw the line so you don't hurt people that can't afford it but that is what paul out light and that is a sensible starting point there may be other ways of approaching them on the base broadly but that seems to me to be a reasonable approach and it all to play to some of the democrats' concerns about tax fairness. >> i want to point out. >> many have said the budget is immoral, both of us are. it's immortal because it does a lot of what's been done in the past. it takes from the poor and gives to the rich. that's with that approach does. that's not going to fly when an economy that's been benefitting the 1%. it's great to have to be a better deal. it's going to have to be a better deal for working people, it's great to have to be a better deal for the economy in order for it to work. >> i hope we can get there. i do agree that we are both

catholics. [laughter] >> i want to point out the way that you described the paul ryan budget proposal is that he does envision tax increases for some people so he steps over that line. i just want to bring it back to something else that may not be an issue in the november election, but is in the back of everything we talk about and we've just come through this economic and financial crisis and what are the most important lessons we've learned from that and i wonder if each of you could just give me what is the most important lesson and i think tell me of all things that fl happened to get away from the depression what is the best thing that a bush or obama did? >> boesh or obama. probably the best thing responsible to the federal

reserve which beebee was bush or obama. i do think that the t.a.r.p. program was helpful. it wasn't perfectly designed, but it was designed as a sort of pace under a emergency circumstances so you can sort of forgave it for not being well designed, but i think given the freezing of the credit market at that particular point in time, something had to be done to liquify those markets a little bit, and i think it was not as helpful as what the fed did but helpful. >> rich? >> several things. i think that the wall street reform was important. the bailout in the t.a.r.p. was important and the stimulus program was too small come and was a structure the right way. it prohibited any of the long-term construction projects from being considered, because in order to get the stimulus funds it had to be done by 18 months or 24 months, and that meant that none of the big

projects that need to be done could be considered. they should be out there. i hope that we have learned lessons, but my experience has been dealing with the oecd when you talk to finance ministers from other countries, it's like the recession never occurred. when you talk to people in this country many times it's like a recession didn't occur. so we need to say we can't have the double economies. we have an economy that works for everybody. if you have to create the demand to do that by putting little bit in everybody's pockets, not a lot in a few and we have to change that structure. >> simon? >> it's interesting how many people the past few years have come to some version of the few that too big to fail is just too big. richard fisher the head said that, from kansas said jon huntsman main issue in his

presidential campaign in the fall there are also people on the left of your taking his view but if you have these mega banks that can serve very little value on the rest of the sector and they are able to take on huge risks, they can't be controlled by regulators either because the kept regulators are inherently able to rein in that kind of risk why do we allow the structures to continue? we are taking a lot of risk with of fiscal account. the fiscal shock on the budget on the national debt according to the congressional budget office one up being 50% of gdp. so whenever you think about the long-term fiscal issue is definitely out there. this doesn't help, and it is of course a key part of how many european economies, not all that so many have really brought themselves to the brink of absolute disaster because they allowed the banks to get too big, not to be careful with the risks that they take, and the bailout. so on the day you might like with the central bank does this do see these things got bigger

and the risk including the fiscal risk and the job risk are enormous. >> so banks are too big and the stimulus is too small. it's time for audience questions. and i hope somebody wants to ask a question. but if not, we can keep going here. anybody? no? okay, peter. >> but do you think [inaudible] will cut a deal before the election. >> to say july of 2013 to get into the next years of the next president of the next congress can handle it. would that be good for republicans and democrats to deal with this before the election? >> i was preparing to answer a different question which prepare to cut if they had a good deal

which would benefit the president. the deal that kicks the can down the road probably benefits romney a little bit or doesn't benefit anybody much because of your body will say that it kicks the can down the road. we have seen this happen once last year on the debt ceiling issue. the failure of the super committee, and i don't think that really benefited anybody. the failure of last summer over the debt ceiling issue and of the super committee ended up hurting the republican party and the president, and i suspect a deal that is perceived kicking the can down the road not dealing with these problems has sort of the same impact. >> what do you think will be the economic and head of the market uncertainty if we have to wait for this session what is going to happen in the markets during that period of time? >> a lot depends on europe. the european situation is so bad and so out of control that remarkable low as it may seem, the u.s. is becoming a stronger safe haven in the recent weeks.

now the lack of an agreement for the messy politics political would not help us in the eyes of investors. but it may be the safest support for the market pressured that is taking off the budget or say we cut taxes and worry about the consequences later. this isn't a good time for that sort of approach to the fiscal policy, international markets are unsettled and we have a break on this it might help through the end of this year or next year but i wouldn't bet on it. we need to have a trajectory for the policy over the next decade or two to bring the debt under control and there's ways to do it that are completely consistent with keeping the recovery in jobs and keeping sensible and investments in the country infrastructure and all the other activities reasonable response activities. i think they've given a great

taste of the campaign season, the financial season as well. thanks to all of you for participating. i promised i would keep the trains running on time and air traffic control cleared. [applause] thank you. appreciate it. we are going to move right on to the next discussion again. the awaited a conversation i know for all of you here in the audience and those of you watching at home as well in on your bloomberg professional service. we are going to ask the editor-in-chief of bloomberg news step up here to this stage with his guest. we have the former chair of the federal reserve alan greenspan a short time ago and now we have a sitting member of the fed open market committee jeffrey lacker and i have no doubt this will be part of the conversation. >> thank you, peter.

president lacker come everybody familiar with your record, you're history coming your bio you've been with the fed longer than the most and have seen a lot. we are at - in your opinion a very critical moment for the fed and the economy. earlier this month you said that you see growth accelerating to 3% next year. we had the gdp report on friday, someone may have shown consumer spending rose while inventories had a smaller contribution and business investment cooled how does this makes the evidence of the expansion shape your outlook and why are you so persistent in calling for a change?

>> well, my outlook for growth to pick of about 3% next year and beyond to maybe three and a half the year after the labor markets are likely to continue to heal the unemployment rate is likely to continue to fall. we are likely to continue to add jobs on that. i think that's going to leave it to consumers, households having a greater confidence overtime slowly in their job market prospects. and i think that's what i take from the first quarter data which is heartened from consumers that not only are they willing to increase spending at a faster pace than in the previous quarters, but the composition, so much on the big-ticket items like automobiles suggest that their confidence in the sustainability of this recovery is growing. for sure it's not gang busters and there's good reason for that and there's reason to think this

-- by the way we ought to reasonably expect. >> you also said the fed should be raising interest rates next year. do you just providing a good backdrop of why you think that's the case. if you are right, how should the central bank about preparing to back out of a pledge to keep interest rates where they are in 2014? >> you may know my view is that it's not a pledge, it's not a promise. it's certainly not in on contingent that the language is currently expects the committee anticipation of how their behavior in the future is going to lead interest rates to untold, that interest rates sitting the behavior in the future on the part of the committee is going to depend on how the data comes in and the outlook evolves. and the committee has brought a sense of how that outlook was going to evolve and how the data

was going to come in and led them to the assessment of late 2014 as though most likely time for the rates to rise. i can to a different conclusion that 2013 is a central tendency of mind when we are likely to lead the rates to keep inflation pressures from rising and i descended on that basis. if i don't agree with that statement i should dissent but >> if things go as you have already anticipated, do you think it will be a nice problem for the fed to have to announce that they will be raising interest rates sooner than advertised? >> i don't think it can't be an easy transition. i think it will be challenging. i think this is the most challenging time in the business cycle for a lot of the central banks. i think chairman greenspan, tom mentioned in 1994 he led the federal reserve, raising the

rates before inflation actually rose substantially. and i think that sort of precedent of preemption of inflation pressures if you look at the record has led inflation to average around two per cent since that time, a signal achievement i think this sort of second chapter after the disinflation of the early 80's that has given us 18 years of very good price stability of all things told. and i think that finding that time when interest rates need to rise to prevent them from the emerging before you see them emerge, before you see inflation moved up steadily in a way that looks like it's the trend rate is rising i think that's really tricky. issac maybe you could give us some perspective on what appears to be sort of a polar size on this issue. they said the fed is being too restrictive, and in fact singled

out the german and and and the chairman responded and said he is being entirely consistent with his own riding on inflation and deflation. what is your perspective on this? >> i think it was attributing too much capacity to the influence of course in the real growth in the labour market outcomes. this recession wasn't caused by monetary policy. it's caused by the collapse of the residential construction and the dramatic fall in the value of homes that came at the end of the housing market boom. we can contribute to those to the end of the boom, but again, the huge shock that rippled through the economy and building supply and furniture and other related industries were in the process. this recovery has been a story in the process of the economy reallocating resources away from the industries that have declined and towards the industries that where growth is warranted. this is one of those expansions

where the expansion is not and we shouldn't expect it to be the image of the contraction that preceded it. that is all preceding the economy coming and we need to get interest rates tracking the real interest rates but i think that we are given too much credit in the 90's for the boom and i don't think that was our responsibility. we contributed to much to that besides the non-inflationary environment, and i think some people attribute far too much capacity to increase growth beyond where it is now. >> fi understand what you just said, the fed has done as much as it can do and should do. >> i think for us to provide more monetary stimulus at this point would likely raise inflation risks, and not likely do much for the growth. that's my assessment. >> coming back to the economy and what economy we have. you gave a very thoughtful speech on march 29th about the sort of state of the financial markets and the economy and what

is necessary to go forward and i just want to ask about something that you said that's vitally important that was your expression to have competitive markets, and for the economy to be competitive. we've right now have an economy where six of the biggest banks in the united states have almost 60% of the mortgages outstanding and i just wonder is that competitive? >> i think that they compete for the businesses they are in and if you look across the spectrum of the banking industry for the smallest community banks and credit unions up to the largest mega banks that we have, you said you see that competing fiercely. you see them fighting for the margin and strapping for the net income. i feel we have a competitive banking system but i wouldn't describe them. our financial markets hasd