as they could be. by a reasonable estimate about 60% of the liability of the financial sector in the united states are guaranteed either implicitly or explicitly by the u.s. government. i think that's too much that's grown over the last several decades. and i think that chasing that implicit safety net with more regulation is not a healthy course. i feel we have to be focusing on restoring market discipline, and more resilience that comes from the competitive markets. >> succumb if you have the authority what would you do right now? >> so, i think that we are playing a little bit of catch up and there are some strengthening of the regulatory oversight that we need to do and are doing and that's good but to restore the market discipline i would point to four things. first is living wealth. this is one of the good things that dodd-frank did. the requirement in some form or

another the statutory requirement that banks. regulators approve plans for the orderly wind down of the institutions without the taxpayer funds. second is bankruptcy reform. i think for some reason over the years may be political, may be otherwise policy makers could become timid, shy of using the bankruptcy code to resolve a fairly large financial institutions. the record shows it isn't feasible but i think there are some improvements that can be made the would make it workable for the financial institutions and give regulators and policy makers more confidence about putting a large firms through that. i think there are regulatory impediments to resilience in the financial markets. i think there are impediments to the steps that the firms could take to make themselves less vulnerable to the liquidity runs. ..

>> i think they're still some end of the don't have a place. our commitment will be more to the market function, the more credible. >> you didn't mention two things. one, derivatives, and their link to what has been described as the shadow banking system, or shadow financial system.

and proprietary trading, both of which go together. is there a reason why they don't? >> the most compared, i think front and center is the incentives of those institutions were under, given the widespread view by the creditors that official support would be forthcoming sure those first get into trouble. an expectation that was in the end fulfilled but an expectation that was ambiguous. and which lead to financial market volatility as that you, that expedition was called into question by the variety of ways that policymakers in 2008 handled very financial firms of distress. >> earlier today, chairman greenspan in fact described what was a really global boom in housing, not just in the u.s. he said u.s. was somewhere in the middle. part of that boom there was this enormous appetite for higher-yielding, debt instruments.

those higher yielding debt instruments came out of subprime cocktails that were sold around the world. they were derivatives, and, unfortunately, they became toxic, and they infected the banking system. have we figured out a way to prevent that from happening again? >> people are always going to want more. more yield with no more risk. you're not going to in the appetite for more yield with less risk. what you want to worry about, what you want to pay attention to our situations in which people are downplaying the downside risk. and reaching for yield, willing to take the extra base, undervalued the sq -- the extra risk, larger institutions come to mind, some large government sponsored enterprise in the united states come to mind. when they're making decisions on that basis, their choices about how much extra yield they want, willing to reach for, are distorted and that's what you get overshooting of any kind that is beyond just a bold

matter of sometimes people in financial markets make mistakes that are too optimistic. >> so how do you today prevent these very big institutions from using shareholders money and depositors money, and in a proprietary way? how do you prevent that? >> very carefully. you work very hard. it's a matter of risk management systems, are they aware of all the risks they're taking and senior management and the board of directors aware of it? are they running their liquidity book, liquidity management sound? do they have enough capital on hand? isn't enough that they would survive reasonably possible but very adverse outcome in financial markets and for the economy? you check all those things. if they have enough capital buffer enough liquidity buffer so they're playing with their own money at all times. >> if i could come back to these big thanks again, you were moments ago very encouraging about what you're seeing financially.

i just wonder, do you see these big banks that are still somewhat troubled lending aggressively, where they're supposed to be? if you talk to them, look at their balance sheets, look at what they're doing, they are competing aggressively for every credit worthy borrowers they can find. they are pushing down spreads. they're complaining about the deals their competitors are getting from them. i believe they are competing for credit worthy borrowers. i think the demands from credit worthy borrowers, for borrowing is low, and i think that's a consequence of what we've gone through. i think it's a consequence of people readjusting their portfolios reducing leverage, and i think you've seen it in the pullback, the piling up of cash in the corporate sector. >> the fed has done a lot to improve communications over the past several years. and i just wonder, the forecasts

that come out of the 17 policymakers, they are anonymous at the moment, should they be public? >> so, we have made a lot of changes over the last nine months, and the way we communicated about monetary policy. in august, we introduced sort of calendar days forward guidance instead of extended period. we said in january we change that late 2014. in january we get to other very consequential things. one was to reveal anonymously but reveal the array of policy projections that went along with the other economic projections that committee participants submit. so you get this picture of where we expect the funds rate to go. the other thing was our framework, the long run framework for just what our goals are and how we dashed the we officially adopted a 2% inflation goal for the committee. it's a watershed event. we are creeping up to the. we got real close to but an important statement, and the

porton consensus statement for the committee. what i'd like to see us do is operate within the framework we have, a practice using it in various circumstances and getting, give financial market participants some practice at watching us use that, of seeing the relationship between the data, our choices, our communication, what we sounds going to be for make other dramatic changes and how we communicate. >> in your more than two decades working with the federal reserve, is there one thing that you felt over that period remains unfinished, needed to be done? is there something that you keep coming back to, think about? >> so, i think central bank credit is a problem throughout the industrialized world. we have achieved tremendous consensus of monetary policy, which is essentially the way in

which we manage the liability side of our balance sheet. the asset side of our balance sheet is a problem. it's an achilles' heel. as chairman greenspan said here, using the central bank's balance sheet is a very attractive end run around legislative constitutional processes for using public taxpayer funds. we can do a perfectly adequate job of pursuing our monetary policy goals without holding anything but u.s. treasury security's honor at says site. i think that our lending authority is anachronism. it's a leftover from 19th century century central banking arrangements when the debt was far smaller. and i think that's going to cause us trouble in the years ahead. >> and what's the best way to go about fixing it, do you think? >> well, i've advocated we give serious consideration to tie our

hands and leading central banks use of credit, make the use of public sector credit, may credit allocation which as chairman greenspan pointed out, constitutes fiscal policy the matter how you slice it. make that subject to congressional appropriations policy. if congress wants to do that, make it separate from the central bank's functions. >> and how realistic do you think that is? >> well, there's a statement and i think may 2009 in which the fed and the treasury agreed that credit allocation was not the central banks job, and that that's fiscal policy and it belongs with the treasury. i think we should follow through on the principles and really stick to that. >> coming back to the fomc, it raised its growth projections for this year but in lowered its forecast for the next two years. did you also? >> no. i sort of edged up a couple across the board. >> do you feel good about that, looking at the data this week?

>> we got a good number this morning, and manufacturing is very healthy. exports are i think, you know, prospects there are very strong. business investment has been just fantastic in this recovery, maybe it is slowed to a little the first quarter odyssey for the momentum there, and consumer confidence is gradually yielding as their balance sheets are coming back into line. >> and sort of as a follow up on the, initial jobless, they bottom in february and have moved higher more than two months. does that suggest to you, sounds like it is, that is going to be continued improvement in the labor market? >> yeah, i think we will see continued new job growth this year and next. you know, it's going to be as i said slow compared to some past recoveries, like after 81-82, and after 74-75 but those are recessions we cause. and so the recovery was the mirror image of the contraction because the contraction wasn't

really necessitated by some real shock. so those recoveries where we didn't need much reallocation of resources between sectors. now the labor market has been limited by very real sense of, you know, stillness is a challenge. the mismatch of skills between workers and vacancies, it's not an absolute thing. it doesn't mean it's impossible. it just means it is costly, and fostering, involves time, connect workers with vacancies. we are seeing that going on. we're seeing a lot of investment in the kind of training programs you need for manufacturing operations. but it's going to take time. >> so, if the fed does wind up following your prescription, we will unemployment be, the unemployment rate, when the fed does raise interest rates? where do you think it will be? >> it could well be above 7%, and i think we have to prepare for that.

i think it's a misconception to think we've got to get an up on all the way down to five or some number like that before, or near it before we raise rates. i'm looking at the grocery, because when growth rates rise the real interest rate rises but if we like guy that we will create too much money. >> i know we have some questions. maybe you can share them with us. >> president lacker, this is again from someone of our attendees you. the latest economic projections on fomc show expectations, 2% through 2014, but around 7% the committee expect unemployment to be well above the long run target of about 5.6% to explain how your belief sooner rather than later does ignore the second half of the feds to mandate a stable and maximum employment. >> so, this has to do with the maximum employment that is in our mandated of the federal reserve act. socom thing about maximum

employment, it's important to be clear on what timeframe you're talking about. so, maximum employment for the third quarter of this year probably doesn't correspond to 6% unemployment, or 7% unemployment. i don't think it's feasible for us to get there, so i don't think we should count as our goal getting unemployment to 6% in the third quarter. and i don't think we should be measured in that sense against that kind of standard. going forward, where unemployment converges in the long run, the consensus, long run policy statement told you about that we released in january is very clear on this, that we can't set a long run target because of that kind of thing is really governed by the real factors that push growth arrest one way another. and the influence labor market outcomes, demographics, productivity, things like that, and in addition things like unemployment, benefit policy and the like that can influence where unemployment heads in the long run.

i think our best contribution to growth, our best contribution to maximum employment is to provide for monetary stability, provide the lowest stable inflation rate. we have announced that 2% is what we interpret as price stability, a workable definition of the right kind of price stability we need. and i think that's the best way to keep unemployment on track. >> another question for you. to constrain the impact of excess reserves when the time comes, will the fed deployed high reserve requirements? >> so, high reserve requirements, you know, is something you might think about, but it's not high on our list. in june of, i think it was 2010, we released sort of an outline of how we would go about exiting. that's not one of the tools we identified as likely to be used. i think we will rely first on letting some of our security holdings mature and roll off, then on selling assets.

and we announced a program and a fairly predictable pace of rolling off of assets and we relied heavily on raising interest -- interest rates. that would be our primary tool for exiting from the situation at hand spent one more question with our audience and then i will have matt rapidly. do you agree with huge risk positioned using derivatives, do you see them of weapons of mass destruction as suggested by warren buffett? >> i'm not going to comment on private sector risk management practices except they be sound in any institution that we have supervisory responsibility for. [laughter] >> how about this? should public institutions, should state and local governments, which got into a lot of trouble with derivatives, be allowed to use these instruments? because after all, the taxpayer

is at risk. we're not talking about shareholders. >> it's hard to see a rationale for a blanket prohibition, because some simple things like plain vanilla interest rate swaps can be a viable. >> would you put jefferson county into bankruptcy? >> there's a lot of ways to go bankrupt, and there's a lot more than plain vanilla interest rate swaps out there and involved in bankruptcy. >> but who's looking after the taxpayer on that one? >> people -- >> there are all sorts of smart people selling derivatives to hayseeds and state and local government, and they unfortunately are taking advantage of. so she would just let it continue? >> we've got in place a system that has protection in terms of safely representing what product you're selling to to people. it's really the sec's bailiwick, and unit, i see, it's obvious that sort of better communicate

and is, and clear communications and lack of fraud, i think in the long run more healthy than just a blanketing, blanket prohibitions on a particular financial, broad principle. >> i know we could go on. >> we sure could. >> but thank you very much. >> my pleasure of. [laughter] >> president lacker, thank you very much. a great discussion. a great way to end our morning right now. lots of things to talk about over lunch. we hope not only from this conversation but from the earlier conversation. it is time for lunch. we will be back your sharp at 1:25 p.m. and have a conversation with the chief economist to watch in your seats before the is possible. a reminder again, this would not have been possible without our sponsors. i want to thank them again for their support, their help with this event today to the

bloomberg washington summit will continue to enjoy lunch down in the source but i hear the food is great to enjoy it, and we'll see back of your at 1:25 for another great round of discussion. [inaudible conversations] >> [inaudible conversations] >> so as you heard, the bloomberg conference on the

economy is taking a break for lunch right now. in just over an hour they will resume. will do for much of the president's council of economic advisers at about 1:30 p.m. eastern. after that republican congressman scott garrett, a well founder steve case, former house democratic leader richard gephardt and grover norquist of americans for tax reform. the conference will continue all day until 5 p.m. easy. we will have a live right here on c-span2 years again, the conference or wisdom in about an hour. in about 10 minutes from now we'll show you discussion with former white house budget director, and the top democrat on the house budget committee. but first the british house of commons parliamentary committee is looking into the phone-hacking scandal by british newspapers. they issued a report found that rupert murdoch, said at news corporation and international is quote not a fit person to write a major corporation. this is about 10 minutes of the news conference. >> it's been 10 years one month in nine days since "news of the

world" -- five days ago, rupert murdoch admitted it was a cover-up at news corporation. we found news corporation carried out an extensive cover-up of its rampant lawbreaking. its most senior executives repeatedly misled parliament, and the two men at the top, rupert and james murdoch, who were in charge of the company, must now answer for the. in the view of the majority of committee members, rupert murdoch is not fit to run an international company like bskyb. i personally am disappointed that some members didn't feel sufficiently convinced are confident to will the most powerful to account. they thought they could support sections 216-229 of the report. many hacking victims have still not been informed of what was done to them. and rupert murdoch has not said his last apology to the families

of murdered children. let us also remember that this scandal cost many hundreds of journalists, innocent journalists their jobs. they found hard to find work. i know this because i provided references for a number of them. parliament was misled. that we now know. but there were four issues we couldn't get to the bottom of because of time constraints, decisions of the committee not to proceed, or because they fall outside. former member of the scottish parliament tommy sheridan lost his liberty on a majority verdict of the jury that was not in full possession of the facts. he received a three-year prison sentence. i believe the judgment is unsound. is rupert murdoch really is sorry, he would order an urgent review of the information his company provided to the jury in the shared in case you're not a we know that the former first

minister in scotland was also a target of hacking, i am writing to alexander to have them set up an inquiry by the scottish part into how and why they were targeted. secondly, we asked the murdoch's about computer hacking, but we didn't get very far. i'm not certain but i have reason to believe that the serious organized crime agency is in possession of seized hard drives that may show a list of