we help with the technology of detecting and neutralizing improvised explosive devices, which have been really ruinous for american troops, certainly in iraq and afghanistan. but israel is providing -- american military aircraft land in issue. that's what that navy propeller jet was doing. everywhere, this is to come and visit have a wonderful time. the friendly support in the mediterranean. but israel is not just involved in advancing america's military prowess on the battlefield. we're also engaged in saving american lives and saving american lives. some of you may remember that at the outset of the iraq and afghanistan flicks there was a lot of criticism in this country that american military vehicles had gone into battle with insufficient armor. remember the vulnerable humvees? the whole kibbutz in northern

israel got about americans, and came up with an ingenious idea of making a do it yourself instant armoring kit. and as of today, this little kibbutz has armor about 20,000 american military vehicles serving in war areas, and we have saved countless lives to these armor kits. we get many thanks for this. from the husband, from the wise thinking for saving our kids. a direct hit but nothing happened to the people in them because of these kids. we also, there's a startup company in jerusalem which developed a high-tech bandage, internal pressure system that applies pressure to a fresh wound and stops bleeding. and unfortunately one of these bandages was in the medical kit of the swat team in tucson, arizona, on that terrible day when the congresswoman gabrielle giffords was shot.

and immunity apply this bandage your head wound and the stop the bleeding and saved her life. we have provided 1 million of these bandages to u.s. fighting forces. so far. we're saving lives. we are saving, we're engaged together with humanitarian missions around the world. israel is the first on the ground with a -- medical team in haiti. we got there because our team was flown in by the u.s. military, and our team slept in the u.s. embassy overnight for a couple days so they could set up their own tents. we have done the same earthquakes in turkey, in indonesia, muslim countries but we did have relations with them. we have been involved in famine relief in somalia. we have engaged with the united states in fighting famine. we're engaged with united states in agricultural develop the projects in south america.

women's empowerment and education programs in africa, it all comes under the rubric of the lines between the united states and israel. so as you see, multifaceted, very deep, and i more or less do a lot about this because i spent three years studying bit before coverage of the i found out i knew very little. this relationship was more deeply rooted in multifaceted and anything i had remembered for new because there was an entirely new area of u.s. relationship that was very quickly evolving, at a commercial relationship between the united states initial. today, israel is america's 20th largest customer in the world. it's getting bigger and bigger every day. the last decade americans have invested about $80 billion in

initial development. israelis have invested more than $55 billion in the united states, a time when american firms are outsourcing to asia. israeli firms are outsourcing to the united states. many thousands of americans are employed in israeli temperature, including many in this day, the greater maryland area. you know, you should never have to take pills but if you, one of every five pills you take in this country is made by an israeli company. and especially in the field of high-tech. every major american high-tech firm, aol, google, intel, soon to be apple, motorola, i'll have the r&d centers in israel. so if you have intel in your computer just israel in your computer. we make the microprocessor but if you're using a usb flash fact, that is an israeli invention but if you're typing something in your browser, that

is an israeli invention. israel has a 70% share of the market on all your screen, whether on your cell phone or on your computer. we are there in your high-tech part of your existence as students. if you're typing up her paper, you're typing of using israeli components as we'll. we're very much involved in the war front of the term for alternative energy. you may have heard of the other place project, first self-sufficient electric car system, and we hope through the better places and that is going on, on record now, on the road right now go president obama reaches goal of putting a million electric cars on american roads by 2017. now, with all this we agree on everything. there's a lot we don't. allies we disagree to some of you study his you, and member of the u.s. and britain in world war ii, how much they disagree? a great alliance.

we disagree. we are as agreed in recent years on tactical aspects of the peace process, israel's settlement policy, jerusalem's policy, i won't go into it now. but most of those tactical differences have been minimized. we both call for the immediate resumption of direct negotiations between israel and the palestinians. there is no brain to process by going to the human to we agree there's no room for tears at the negotiating table. but most important we agree on the in game, the strategy. strategy is a grecian two states for two peoples. the nationstate of the jewish people called issue, the nationstate of the palestinian people, palestine living side-by-side in mutual security. and mutual recognition and peace. those are our common goals. on the iranian issue, very complex current issue. again, we are communicating daily at the highs, the most intimate levels about iran. we both agree that we are

determined to prevent iran from acquiring military nuclear capabilities. we agree that the best way to do this is through a combination of crippling sanctions and incredible military threats. we agree that containment is not an option, that there has to be a military option, a viable military option, a credible military option. and we greatly appreciate president obama's recent remarks at the aipac conference we sat in front of 12,000 people, he said initial has a right to defend itself against any middle eastern threat to the iranian regime is threatening to wipe us off the map. and only israel as a sovereign nation knows best how to defend its citizens. we are living through historic times in the middle east but i don't have to tell you. and ellis will you're studying international affairs but you see what's going on in the middle east. it is a highly fluid and flammable situation.

everything is in flux to anybody who tells you they know his conduct in the middle east the next two months, two weeks, two hours, is kidding themselves, giving you. you could walk out of this room now, and things have changed. it's happened. there's one certainty, however, just one. and that certainty is that there will be a state, there will be a state that will remain economically and militarily, robust. it will remain un-alternately democratic. not going to change in that way. it will be capable of defending itself by itself. it is a country that will be shooting its innovation, its technology with the united states. and it is a country that will remain today, tomorrow, for any foreseeable future, as unequivocably pro-american. you will not find american flags

being burned in public there. how many countries are there, not just in the middle is, how many countries in the world are there like this? for that reason, historically because of the deep roots, because of the democratic convention, because of our great military alliance and now a growing commercial relationship, i say that israel is not just an ally of america. it's not even a great ally of america and israel is america's ultimate ally. thank you. [applause] >> ambassador, has graciously agreed to respond to questions. you have been given some cards

and i would ask you if you would write your question on the card for very straightforward and simple reason. if you write it on a piece of paper that's likely to be what you say when you get up. because i'm asking you to really be concise, and ask a question. i promise to under the advisers said he will answer any question, i know he will but i will tell you, i will interrupt if either you speak too long in a lecture, or if you don't ask a question, all right? so without further ado, mr. ambassador. >> thank you, ambassador. questions, please. you had your hand up very quickly. please. [inaudible] spent i'm sorry. do you have a microphone? >> if you could walk over to the microphone. i apologize. >> it will probably save time if you line up at a microphone if you have a question. you know how well versed i am at this.

[inaudible] >> you spoke a lot about israel's response to military situations. he spoke a lot about israel's support. one question i had -- [inaudible] the current state of israel, one question i had is -- [inaudible] i'd like to point out that a lot -- [inaudible] >> the settlement policy, first of all we refer to them as disputed territory.

and i will explain why we say disputed territories. the area called the west bank, which in hebrew expansionary, it's the is the cradle of jewish civilization. they are our tribal lands but if you look in the bible, you won't find. -is that they. you can find tel aviv but it's a town in babylon. what you do find is defined have grown and you find the time and, of course, you find jerusalem. many hundreds of time. so this is the cradle of our civilization. and it is virtually impossible for any israeli government, left, right, up, down, to channel a jewish people they can't live in their ancestral homeland. it goes to the very raison d'être of the creation of the jewish state of the jewish state in homeland. segue there was this strategic interest behind the settlement. and that is israel before 1967 at its most popular is area was only eight miles wide. that could significantly narrower than suburban

washington, d.c. we had to see to our backs we did have a defensible border that's why resolution 242 password up to the six-day war talked about secure and recognizable borders. that's the problem have with all 67 border notion. where these two very important component. one was spiritual and a struggle, the other was strategic and military. and yet you now have had a head of the party, benjamin netanyahu, giving both in front of the knesset and in front of the joint session of congress and making a two-state solution the official policy of his party, official policy of the state of issue. which is a great movie to i worked for yitzhak rabin in the '90s and he never came out for a two-state solution. never. it's going to be in these areas that we regard as sacred to the jewish people for the 3000 years, and file for our national

security. why are we doing this? were doing this because we know the same length of the homelands of other people and those people are a people who are endowed with in a noble right to self-determination, just as the jews are a people endowed with an inedible right to self-determination ago that we will ever in this conflict is by sharing it. and we have seen that settlements, remarkably have not been the obstacle of peace. we are able to negotiation with palestine's for a long time, under to peace offers made to the palestinians in 2002008 the settlement issue was not what are the palestinians to reject them. unfortunately it wasn't because of the sellers. in 2005, we ripped up 21 settlements and through 91 people out of their homes in gaza. as a reserve officer who served i want to there was nothing more dramatic to me than doing this. we get in the hope of advancing

the peace process. settlements are not the issue. we can create a palestinian state that would be conspicuous, territorial viable, and our hope is that no one will ever have to leave their home. the board will be drawn and such with that no one will ever have to leave their homes. don't think anyone should ever have to go through with the people in gaza pointer. so that's my answer to you. do we know that the settlements are an unknown and? we do big we think of the ultimate obstacle for peace? we don't. the ultimate -- going back to 1947 has been unwilling to pay the price for a palestinian state. the price for palestinians paying a palestinian state is recognizing the jewish state. [inaudible]

>> hi. i'm not going to address the issue of -- [inaudible] i'm also not going to talk about the adaptation -- but i do want to take issue with some things at the beginning of the talk which he said israel was born with democracy. a few years ago -- [inaudible] a professor what a very long topic about the declaration of independence. he looked at the drafting of the document -- >> israel's declaration of independence. >> correct. democracy doesn't exist anywhere in the declaration of independence.

[inaudible] >> the word democracy appears in the american declaration of independence -- >> i want to make one more point. >> a point or a question speak was a point. [inaudible] >> i'm sorry. spent i would just like to ask you how you can reconcile these facts, the fact that the chief lobbyist at the time referred to this as separate developments, invoking -- so as to prevent democracy -- >> thank you. no, thank you. spent i will try -- the fact that israel's declaration of independence doesn't mention

democracy, here i have to confess i don't know whether america's? waste of independence mentions the word democracy either. but i do know that america's? waste of independence with a model for israel's declaration of independence and the lawyers that worked on were experts on america's declaration of independence. some of the language in our declaration of independence directly invokes america's declaration of independence and what israel's independence does to its employees to lie which the bill of rights. and guarantees all of issues citizens equal rights without discrimination for you discriminate on the basis of religion, race, ethnicity or sex. it takes it a step further on the sexual issue. and it is true that between 1948-1964, parts of the every community in the north were under a military administration. at the time it was the essential because that part of the country had waged war against israel. this was not, in 1948 this was not a neutral population, and every democracy including this

democracy over the course of its history, during wartime has taken extraordinary, and at times controversial, measures to reserve itself as a democracy. and that is true of abraham lincoln who did things, including throwing journalists in jail like president truman did. we did not do. by putting people into concentration camps, and even under the patriot act we actually have a more liberal policy on issues related to torture. where the first country in the world to actually take up the legal aspects of torture, and we just had a policy. with that we're a country that has never been without the threat of destruction. i can think of any other country in all of modern history that has had to grapple with a type of daily threat but it's not just a threat. we are talking about attempts to destroy us, whether by conventional means, unconventional means, to de-

legitimizes. the fact that angel has remained democratic and that even in the first election held in 1949 when after over 1000 israelis were killed, after 6000, 1% of the population, after that the prime minister at the time specifically granted full voting rights to all of israel's arab population. and said we will not begin with that type of discrimination. and it has helped it is israel a perfect democracy? excuse me, is america a perfect democracy? is anybody willing to say that? is democracy not an oxymoron? we're a work in progress but we're also a work of progress. and today israel is more democratic, has more equal rights than at any time in this issue. and i'm very, very proud. to me, if you ask israel's singular achievement, is that

democracy. [applause] >> thank you. [inaudible] thank you so much for taking the time. you recently appeared on a "60 minutes" story. [inaudible] >> my interview was an hour and a half. >> and so obvious in the interview, you were defending the biases big so i'm wondering is israel doing anything i want to do anything -- [inaudible] >> one of the great problems in

the middle east is there was no mass exodus of christians from holding the whether is is a very rapidly growing muslim population, and so they were trying to make a case that because of the occupation, christians, the christian population were shrinking, but then how do you square with the fact of the muslim population is tripling? the same situation, vis-à-vis israel. and the fact what looks like a fleeing population is exactly the population which is shrinking in terms of its%. that's what's happened particularly and beth went to before 1995, israel -- no israeli forces there. before 1995 christians were majority after 19 and five we transfer to the plo and quickly the christian population went to 30%. the muslim population is growing very, very, very fast. and the points i made in the

interview that were not broadcast was first of all, they had, cbs the final event is basically the west bank anymore nearly as bethlehem to jerusalem. of course, the holy land is also israel. it also includes gaza. how can you not talk about hamas? how can you not talk about the total devastation? and in asia, israel has the middle east only growing christian population. in fact, christian population has grown by 1000%. actually more since 1948. arab christians in israel are better educated and more affluent per capita than israeli jews. dedicates do better on sat scores and jewish kids. there have been, i know, a big blow. [laughter] thousands have volunteered for service in our army. so much so that a couple of years ago the idf had to print

out new testaments in hebrew so the christian soldiers could swear into their in every branch of our government. that arab judge i mentioned earlier to pass judgment on the former president of israel is christian. they are in our parliament to their in our academic world. they are in our scientific community. they are valued, deeply cherished. and, of course, but that didn't make the cut in the "60 minutes." it was an important point we feel. >> what role do you think that the israeli -- [inaudible] >> that's been our position for well over figures. israel will not be the first country to introduce nuclear weapons into the middle east. and not only will i reiterate that as many times as you want

to hear it, but the important thing to remember is that israel is not threatening to wipe another country off the map. and the country that is trying to acquire nuclear nuclear weaponry, a country that's trying to destroy another people, nine holocaust were applauding to perpetrate a second holocaust. that is a very substantive difference, i think you will agree. [applause] >> thank you so much for sharing your knowledge. you discussed how -- [inaudible]

[inaudible] >> that's a very interesting question. there are several reasons. one, tradition israel going back to 1940 always defer to direct negotiations. by sitting with us you recognizes. that should cut two ways with the palestinians as well. there was a time when israel wouldn't sit with the plo. now reduce it with the plo. by that we can for recognition. functionally, practically, mediation has rarely worked. it has worked on occasion but the end of the day there's no substitute for to side sitting directly. henry kissinger could shuttle between egypt and israel in

1974, 1975 but by the end of day it took menachem begin and anwar sadat sitting together face-to-face to conclude can david accord. it helps to have an american presence at the table helping a lot but at the end of the day there's no substitute for the. and the last point for us, most poignantly, is that including a palestinian state in particular, the state will be adjacent to our most populated areas. we saw what happened in gaza when we pulled out. we saw what happened in lebanon when we pulled out. we got rockets there, too. we cannot create a situation where a vacuum ensues in a palestinian state and is filled by a grant the way the vacuum in gaza, in lebanon was filled by iran department, i mean 100,000 rockets pointed at our neighbor to so great a palestinian state, we are taking an incalculable risk, an incalculable risk. we are willing to take the extraordinary to think about israel.

still after everything we've been through in the last 10, 11 years with all the rockets, all the suicide bombings, majority of is ready population still support a two-state solution. unfortunately, the civil majority doubts the other side is willing of doing. i go to greece, if we did some on the other side it has to be direct talks. has to be direct talks because only through direct talks and rebuild the type of trust and build in the security precautions that will be necessary in case the peace unravels. that is essential to our survival, not just your sense of self. >> my question is regarding a two-state solution. a big sticking point between the palestinians and israelis is the refugees. so what is israel prepared to do for them and not willing to do

in order to achieve a two state solution? >> there are two refugee problems. actually more jews were expelled from arab lands after the 1940 or and after the six-day war than palestinian arabs left in the 1940 and 67 wars. so they also have claims. there's a lot of claims back and forth. according to one statistic, jews left arab lands. that were actually larger than the state of visual altogether. is going to be a lot that the table to discuss. what we are willing to do is look at ways in which arab refugees can be resettled the way our refugees would be resettled in our national homeland, and the land, in the nation state the jewish land of israel and the palestinian refugees should be resettled in the nationstate of the palestinians, palestine. otherwise to transform israel from a jewish state is called

israel into a palestinian state that called israel because today the sentence, tokamak rancho, great grandchildren of refugees of 1948 number anywhere between six and eight men to so the return to pre-67 israel would meet the end of the jewish state, another existential threat. but we feel that through the initiative many both of these refugee issues can be resolved in a way where the jews will be resettled in their state and the arabs we settled into a state and we can begin the process learning to live side-by-side with one another with mutual recognition and security. ..

>> really have a legitimate democratic mandate for the palestinian people. >> good questions here, i'll tell you that. smart kids. [laughter] you know how to stick it to somebody. the hard one, under the exchange of letters between arafat and rabin in is '93, israel recognid the palestinian people and recognized the plo. unfortunately, the plo didn't recognize the jewish people, it was a mistake. we're still working on that mistake. but that is the situation. we have committed to that. so the plo is the interlocutor, its representative is the palestinian authority. now, also according to the oslo courts, there was supposed to have been elections there, for two-and-a-half years the

palestinian authority has refrained from holding elections because they think they might lose. last time they held elections, they lost. they lost to hamas which is recognized as a terrorist organization, and it calls not only for the destruction of israel, but for the destruction of the jewish people worldwide. it's a genocidal organization. and they're not a partner for peace. there's three conditions laid down by the quartet for hamas participation. they have to recognize i israel, disavow terror, accept all previous agreements accepted by the palestinian authority, they will do none of the above. so they're not viable. we are willing to sit with the palestinian authority irrespective of whether they held elections, but, um, the palestinian authority for most of the last three years has balked at direct talks. for many reasons but, certainly, since the outbreak of the upheaval, the arab spring they've been increasingly

reluctant because the mainstay of the pa was mubarak's egypt. it is no more: islamic brotherhood is avenn cant there, and the ideological partners, extensions of hamas. so hamas has been greatly strengthed. and they're very reluctant to hold those elections. and it's going to be a problem because largely-secular, unelected regimes in the middle east have not fared well for the last year and a half. and, believe me, they're aware of it. and it helps to come to negotiating table from a sense of legitimacy and credibility and strength. and right now that's not particularly there. so that's one of the reasons they're not, they're balking. it was unfortunate, because we are committed to the two-state solution, we're committed to reaching a conclusion within one year. mr. netanyahu said himself he

could conclude it within one year. and we know the price. we know as netanyahu told congress that there'll be settlements beyond our borders. we know that there has to be a solution for jerusalem. he's said that too. all we need is the palestinians to sit down and negotiate with us very, very seriously. we had some, um, we had some preliminary talks in jordan recently, we hope they'll be renewed. we hope the palestinians will make a reconciliation with hamas, not all of which are dead ends, and on in the united states and israel agree completely. there's no daylight between us on any of those issues. we hope we can look forward to a time when the u.s./israel relationship can be much more about the spiritual ties, democratic ties, commercial ties and much less about the military ties and the value of what we do. thank you. thank you all. [applause]

>> i'd like to invite -- [applause] before you leave, i'd like -- thank you. i'm going to give you another chance to thank the ambassador, but i wanted to invite up to the podium here the rabbi, executive director of -- [inaudible] [applause] >> for everyone that had a part in tonight, i know everyone wants to get out of here, but tremendously appreciative, our gratitude for everything you do on a daily basis, and thank you so much for spending time. everyone in the background that helped make tonight a possibility, we thank you. thank you, guys. [applause] [inaudible conversations] >> so we wanted to present ambassador oren a gift and thank him for coming tonight.

i know for me personally my family is from tehran, iran, and for what you stand for and what israel stands for, it's a light of hope for jewish people and for tolerance in the middle east, so for me it's a great honor to present this gift to you. so thank you so much. [applause] [inaudible conversations] >> all right. you can give him another round of applause, okay? [applause] [inaudible conversations] >> i would ask you all if you would, please, stay in the room for one moment to let the ambassador leave. for security reasons, we need to let the ambassador and his party go out first. [inaudible conversations] >> sunday on q&a --

>> i don't regard this as just the biography of lyndon johnson. i want each book to examine a kind of political power in america, and i'm saying this is a kind of political power. seeing what a president can do in a moment of, in a time of great crisis, great crisis, how he gathers all around, what does he do to get legislation moving, to take command in washington, that's a way of examining power in a time of crisis. i said, i want to do this in full. i suppose it takes 300 pages. so i couldn't -- that's why i just said let's examine this. >> robert caro on the passage of power, volume four in the years of lyndon johnson, his multi-volume biography of the president. this sunday on q&a. and look for our second hour of comfort sunday, may 20th. between 1971 and 1973

president richard nixon secretly recorded nearly 4,000 hours of phone calls and meetings. >> always agree on the little things, and then you hold on the big one. i mean, hell, i've done this so often in conversations with people, i say, well, we'll concede that and make them all feel good, but then don't give them the big one. >> hear more of the nixon tapes including discussions with future presidents, key white house advisers and intelligence agency heads saturdays at 6 p.m. eastern. this week hear conversations with gerald ford, ronald reagan and george h.w. bush. in washington, d.c. listen at 90.1 fm, on xm channel 119, and at c-span radio.org. former congressman ben weber is an economic adviser to presidential candidate mitt romney. he debated economic policy with afl-cio president richard trumka yesterday at a conference hosted by bloomberg news. it also included the president of the richmond federal reserve

bank, jeffrey lacker. this is just under an hour. [applause] >> we do want to move on to our next panel as well. we're going to continue our focus on the economy, talk about the economic agenda with a slightly more political spin here with our next panelist. want to call up to the stage paula dwyer, the editor of bloomberg view, and she's going to be moderating our discussion. paula, if you want to head on up with your screw as the chairs get -- your crew as the chairs get set up. joining paula, a lot of us know him as the former chief economist at the international monetary fund, and he is the author of "white house burning: the founding fathers, our national debt and why it matters to you." joining simon johnson on stage, richard trumka, and right behind him is ben weber, a former member of congress, republican from minnesota. he is an adviser to the mitt romney campaign, although he is not here as a spokesman for the campaign i should point out, and

he is co-chairman and partner at mercury and weinstein here in washington. paula, the stage is yours. >> thank you, peter. thank you, simon, rich and ben, for agreeing to be on our panel. good morning, everybody. i am paula, and i'm an editor at bloomberg view, that's the opinion section of the bloomberg media family. we're one of the newest parts of the family, and everything we do is free on the web. come visit us. we have a lot of opinion. it was columnists, for example, simon is one of our regular columnists, and we have editorials, op-eds and blogs, so it's all free at bloomberg.com/view. so that's my commercial, and you we'll get to our regularly-scheduled show. um, i, 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 a little bit since then. the job picture's improving --

it's still terrible, but it's improving -- the economy does seem to be getting some momentum, although it does seem to be doing two steps forward, one step back still. so we're going to talk about the economy both from what the issues should be, but also how the candidates are going to try to frame the issue so that they will define it from their perspective and advantage. i want to start off with our economist, simon, and ask him, um, what he thinks the presidential election will be about. will it be more about jobs, will it be more about taxes, will it be more about the deficit? simon? >> i think, paula, first and foremost, it's going to be about jobs. this is the biggest loss of jobs, most sustained loss of jobs since the 1930s. it's an incredible shock on the back of the financial crisis, and people want to know when are the jobs going to come back. and if you're proposing a policy, for example, a particular approach to the budget, or if you're trying to abolish some part of dodd-frank,

for example, is that really going to give us jobs back, or is that going to store up problems for just around the corner so the too big to fail banks, for example, may blow up again and damage the economy again. those are going to be the big issues. >> all right. so then wearing your republican strategist hat, the economy is recovering, but not, you know, it's not knocking anybody's socks off. is so is this a plus for the republicans, or is this a plus for the democrats? how do you think it's going to play out? >> first of all, i hope the economy's recovering. regardless of how it impacts the election, because i've got two kids in college. i don't think the economy is recovering in a way that's going to be helpful to the president. the effective unemployment rate if we had the same labor participation rate as we did, you know, in october 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 that are more important politically.

hi to haveically, the -- historically, the connection to real dispose able income growth has had a greater correlation with political activity, so i think the election is about primarily jobs but in the context of disposable income, housing values and things like that, and it doesn't look very good right now. so probably on balance it will be somewhat helpful to the republicans. we'll see what a next couple of months of economic data show to find out how helpful. >> and, rich, as the national voice of the labor movement, um, 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 maybe the spotlight will come off of that and move more towards, say, budget balancing or tax cutting or the debt ceiling which could be hit right around the time of the election? in other words, the spotlight will come off of what you think should be the number one issue? >> it's not just me, i think it's what most americans believe, that the spotlight

should be on three issues: jobs, jobs and more jobs to be out there. be 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 a roof or all of those side issues that are sort of amusing but really don't solve the problems that we have. and then i hope that we will get out of the negative stuff and start talking about -- >> so what should the president be talking about, what should his program be for employment? >> well, i think he started it. i think there are five or six things, i think, that need to be done. one is i think we need to make a sustained investment in infrastructure. the country has a $2.2 trillion infrastructure deficit right thousand in old infrastructure and a $2 trillion deficit in new infrastructure, stuff that'll bring us into the 21st century. these are things that used to be

bipartisan. there was never a fight. they would come up, we would do them in a businesslike manner, did the faa, and all of a sudden they became catastrophes and major fights because of -- 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. >> not -- can i just make a point? first of all, i do agree with rich. those used to be bipartisan issues, and they still should be. i don't entirely agree with you, i understand the point about what senator mcconnell said, but there's another reason why we're focusing on expenditures that used to be bipartisan in nature, because we're not dealing with any of the long-term spending drivers of the deficit. when i talk to republicans and democrats alike, they do get the problems we face both economically short term and in terms of the budget long term. but we are, for a variety of reasons that the previous panels today have talked about, seemingly unable politically to

deal with the long-term drivers of the deficit, so the members of congress are focusing only on the short-term stuff, and that leads to taking money away from things that, you're right, we used to be in agreement about that -- and probably make sense. >> simon? >> i think one of the ways these topics may come together, of course, is by paul ryan and the budget he's put forward. remains to what extent that will be at issue in the house. now, mr. ryan does propose to fundamentally transform medicare, i think i would use a more negative word, eviscerate, medicare. if you do the numbers and if you assume he -- [inaudible] down below 3%gdp, his budget would, basically, eliminate almost all discretionary domestic spending.

that's a pretty radical transformation. and in addition, as part of the budget process coming from the house side right now, title ii of dodd-frank which is the liquidation authority allows the fdic and others to wind down a megabank without that causing disruption. republicans want to take that out. so that's a pretty broad agenda, and there's long-term stuff in there, too, stuff i don't think is a particularly good idea. >> i want to get back, rich, to talking about the bipartisan nature of asking for more structure, and i don't think anybody disagrees with that. it would be nice if we had better roads and bridges and schools and so forth -- >> not just better, necessary. >> well, but we don't have the money. we don't have the money for it. so what's the solution for that? where do we get the money? >> first of all, let me discuss agree with -- disagree with the fact that we don't have the pun money. corporate america has made two

years of record profits, they paid the lowest share of taxes in gdp that we had. the money is there, it's allocating the money and setting priorities. we're still the richest nation on the face of the earth at our most rich point in time. everybody else has figured out how to do it. i don't believe that we're the idiots of the world, and we can't figure out how to do it too if we sit down and decide to put the country first. >> ben, is the right answer higher corporate taxes? >> no, the answer is lower. i think we have the highest marginal tax rate in the world -- >> very low effective rate which is the only thing that matters. >> no, it's not the only thing that matters because that determines a lot of allocation of capital. i think that simpson-bowles got it about right. they did project an increase in revenues. not, you know, fairy stuff that you conjure up out of the

eithers but real revenue growth. but they did it in the context of a reform of a tax code that republicans and democrats alike on that commission agreed would 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 sort of has debunked that, and let me say this about it. i think everybody would agree here that the recovery is still precarious, that it is not a rooted recovery that we can put on autopilot and let it go forward. the worst thing we can do right now is do more austerity s to cut into that program to take away from the ability of the government to respond to all of that. and that's what you're talking about. if you look at where -- let me just go back to george bush for a second. george bush came into office, he had a great, he had a surplus, he had an economy that was booming. after eight years of doing exactly what you say, ben, cutting taxes and deregulating,

there were 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 destroy the economy? what we have to do, i think, is look at the deficit in the midterm and the long term because i don't want you to say that i don't understand that there's a deficit, and it can't go on forever. i do. but what i'm saying is it's not a short-term problem here. >> so -- >> the more that austerity program is shoved down the throats of countries in the europe, the less likely the recovery is to take root and expand. >> we're gonna, we're gonna get back to that, what lessons from europe, but i just want to ask simon to respond to this: when is the right time, then, to start attacking a deficit? >> well, i think, paula, we have a very special moment approaching us this year. i think a lot of investors -- >> very special? >> look at the disagreement between the left and the right, and they say, oh, my goodness,

this is going to drive us off some sort of fiscal cliff. for example, the bush era tax cuts don't get extended. i should think it's a great opportunity. if you don't extend those tax cuts and then if president obama's re-electioned, he were then to propose to congress a temporary payroll tax cut linked to employment relative to total population -- i've written about this in your pages, so has peter orszag, you would not have the immediate austerity effect, but you would have the fiscal consolidation over one or two decades. the problem with the bush tax cuts is people expect them to become permanent, and the markets are very worried about that. if you replace that with a rule of a temporary payroll tax cut, that is actually going to remove the keynesian stimulus issue and help politically unless you think the house republicans would vote against a tax cut. that seems pretty unlikely. >> ben, is it? >> i agree it's not likely. the one thing we can all agree on is we're going to extend the

payroll tax cut. the only thing i might disagree with is, can you make it temporary in i doubt that -- temporary? i doubt that. we're not anywhere near making the payroll tax cut a temporary issue. i'm almost ambivalent about whether we should except the nature of the social security program if, indeed, we're going to extend a payroll tax cut forever which we may be coming up to do. that just, to me, argues for dealing with all of this in the context of a broader-based tax reform. you're going to get something you like and some things you don't, and i'm going to get some things i like and some things i don't, but none of this can be dealt with an on individual policy-by-policy basis. it should be dealt with in overall reform. >> i agree with you, but would you go one step further and say we should have in an aging society more revenue as a

percent of gdp than we've had in recent decades where federal revenue's around no more than 18, 18.5% of gdp? if you had at that level, either social security, medicare or both are going to be out of -- >> definitely. my personal view is, yes. we can't adhere to the historic level of revenues as a percent of gdp and support the level of benefits that we are currently projecting, certainly. but i also don't think we can maintain, that we can support the level of benefits that are projected. i think there has to be a compromise. this is what bowles-simpson was all about. figure out how we can bend the curve on the entitlement programs that you're talking about, simon, and then figure out how we can increase revenues to get those two lines together and come up with a fiscally responsible approach that doesn't decimate people's retirement years and doesn't put a crushing tax burden on the private sector of this economy either. >> so here's the question that i have. will republicans after the election come to their senses and agree with you on that?

>> come to their senses -- [laughter] well, i appreciate the neutral phrasing of that question. [laughter] you know -- >> i was reading rich's mind. i was just channeling. [laughter] >> my own view is that if republicans see meaningful entitlement reform and meaningful pro-growth tax reform, that they can be brought to support revenue increases. but the first two parts of that are absolute preconditions, and it's not easy. >> so after the election, say -- >> i don't know why after the election. i'd do it -- i dispute the logic that we can't do anything until after the election. rather, i dispute the logic that it's going to be a lot easier -- >> i agree it won't be easier. >> that's about as specific as anybody on capitol hill gets. >> let's just assume that romney wins. what, if you were advising him, what would you say his approach should be to this fiscal cliff?

should we extend all the bush tax cuts or just the ones for the middle class? should we extend the payroll tax cut? i think you already said you'd be in favor -- >> well, it's going to happen. it should all, my advice is it should all be dealt with in the context of a large negotiation. i think the worst thing that's happened in the last couple of years was the president's, basically, stiffing his own fiscal commission. i think we could have changed the politics and perhaps the economics of the last couple of years if when the bowles-simpson commission had reported, the president had welcomed it and used it -- not embracing every detail, but using it as a jumping-off point to start negotiations with congressional republicans cans to prod congressional democrats. i think we could have done a lot 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 why we keep talking about it and about domenici-rivlin and about

the gang of six thing. the moving parts of this are not hard to identify, you know, long-term entitlement growth, revenue growth through tax reform and restraint on discretionary spending and defense consistent with the fact that a lot of that stuff we really would support if we had a longer-term solution in place that the markets could have confidence. >> you know, look, let's be a little more fair. you did a little bit of revisionist history there. let's remember that it was the president and john boehner who came pretty close to a deal, probably a deal that i wouldn't have liked, but a deal that they were about to have, and it was boehner who couldn't deliver. >> that's not true. >> that is true. >> no. >> that is very true. [inaudible conversations] >> both sides backed away from that, and we don't know who could deliver. >> that was boehner that backed away from the -- from it. >> that's not true. >> you can't rewrite history, ben. >> simon? >> well, i think some of the things ben is saying are quite

encouraging. but i want to press on, first, grover norquist. many norquist so opposed to anything that would involve any kind of tax increase. this that context, which tax expenditures would you regard as being on the table? which ones are you going to eliminate in order to boost revenue if you're also pushing for a lower tax rate? that's a hard combination, by the way, but tell us. >> it is a hard combination. i think that ryan, who's speaking for the committee -- not for the committee but for himself -- is starting all the individual income tax code deductions and means testing. now, i haven't done the math on that, you know, but you get to a point where you figure out how much revenue we can generate by state and local taxes, all that stuff, and you've got to figure out where you're going to draw the line so you don't hurt people who can't afford it.

that's what paul outlined. i think that's a sensible starting point. there may be other ways, but that seems to me to be a reasonable approach, and it ought to play to some of the democrats' concerns about tax fairness. >> and i want to point out -- >> many have said, well, the catholic church has said for one that that budget's imboth of us, i think, are catholic. it does a lot of what's been done in the past; it takes from the poor and gives to the rich. that's what that approach does. that's not going to fly. in an economy that's been benefiting the 1%, it's going to have to be a better deal for working people, and it's going to have to be a better deal for the economy in order for it to work. i hope we can get there, i really do. >> i do agree that we're both catholics. [laughter] >> practicing? >> oh, yeah. >> but i want to point out, though, the way you just described paul ryan's budget proposal is that he does envision tax increases for some people, so he stepped over that line.

>> right. >> the no-go line, yes? >> right. >> all right. 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 awful economic and financial crisis, and i wonder what are the most important lessons that we've learned from that, and i wonder if each of you could just give you what you think is the most important lesson, and i think i'll start off with ben, and you tell me what -- of all the things that happened to help us get away from a second great depression, what was the best thing that either bush or obama did. >> either bush or obama? well, i think probably the best thing was the response to the federal reserve which maybe was bush or obama or maybe just was the federal reserve. i do think that the t.a.r.p. program was helpful. it was not perfectly designed, but it was designed at sort of a

breakneck pace under emergency circumstances, so you can sort of forgive it for not being well designed. but i do think given the freezing of the credit markets at that particular point in time, something had to be done to liquify those credit markets, and i think it was not as helpful as what the fed did, but helpful. >> all right, rich. >> i think there's several things. i think the wall street reform was important to be done, i think the bailout and the t.a.r.p. was important. i think we learned that the stimulus program was, one, too small, and, two, it wasn't structured the right way. it prohibited any of the long-term construction projects from being considered because in order to get stimulus funds, you had to be done by 18 months or 24 months, and that meant that none of the big projects that really need to be done could be considered. they should be out there. i hope that we've learned lessons, but my experience has been dealing with the oecd, the g20 and different places that when you talk to different

countries, finance ministers from other countries, it's like the recession never occurred. in fact, when you talk to people in this country, many times it's like the recession didn't occur. so we need to say, you know, we can't have bubble economies, we've got to have an economy that works for everybody, that if you're going to create a demand, you do that by putting a little bit in everybody's pocket, not a lot in a few's pocket. and we have to change that structure. >> all right. simon? >> it's interesting, paula, how many people in the past two years have come to some version of the view that too big to fail is just too big. increasingly, i hear this from investors, increasingly, it's in the pages of "the wall street journal." richard fisher of the dallas fed, jon huntsman made an issue in his presidential campaign in the fall. there are also people on the left who are taking this view, that if you have these megabanks that confer very little value on the economy, on the rest of the private sector, they're able to take on huge risks, they can't be controlled by regulators

either because they capture the regulators or they're inherently unable to rein in that risk, why do we allow these structures to continue? we're taking a lot of risk with our fiscal accounts. the imfact on our budget and our national debt according to the congressional budget office will end up being 50% of gdp. so whatever you think about our long-term fiscal issues which are definitely out there, this doesn't help, and it's exactly, of course, a key part of how so many european economies -- not all, but so many have brought themselves to the brink of absolute disaster because they allowed their big banks to get too big, not to be careful with the risks they take, and bailout follows bailout. a year or two years later you see these things have just gotten bigger, and the fiscal risk, the job risks are enormous. >> all right. so banks are too big and the stimulus was 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? >> [inaudible] >> okay, peter. >> to what extent, ben weber, do you think mitt romney -- i know you're not his spokesman -- [inaudible] actually cut a deal before the election to, if nothing else, kick the can down the road? would that be good for the -- >> [inaudible] >> to, say, july of 2013, just to get into the next year so the next president, the next congress could handle the issues. would that be good for democrats and republicans to deal with that before the election? >> i was preparing to answer a different question. who would benefit if they cut a good deal which, i think, would benefit the president. a deal that kicks the can down the road? probably maybe benefits romney, probably doesn't benefit anybody much because everybody will say it kicks the can down the road. we've seen this happen once last

year on the debt ceiling issue, the failure of the supercommittee, and i don't think that really benefited anybody. the failures of last summer over the debt ceiling issue and the failure of the supercommittee ended up both hurting the republican party and the president. and i suspect that a deal that is perceived as kicking the can down the road, in other words, not dealing with these problems, has sort of the same impact. >> simon johnson, what do you think will be the economic impact, the market uncertainty if we have to wait for this lame duck session, what's going to happen in markets during that period of time? >> i think a lot depends on europe really. the european situation is so bad and so out of control that remarkable though it may seem, the suggestion is becom-- the u.s. is becoming a stronger safe haven in recent weeks. now, a lack of agreement or some sort of really messy politics, political spectacle in december would certainly not help us. how could that possibly help us in the eyes of investors? but we may be the safest port in

the some the. or -- in the storm. or we may be due for a round of market pressure ourselves. that's the danger of completely taking over the budget or saying, well, just cut taxes and worry about the consequences later. this is not a good time for that sort of approach to fiscal policy. the international markets are unsettled. we've caught a break on this. i wouldn't bet on it. you need to have a trajectory for fiscal policy over the next decade or two that's credible and can that brings debt under control, and there are ways to do it that are completely consistent with keeping the recovery and jobs and keeping sensible investment in the country's infrastructure and all the other activities, reasonable, responsible activities the federal government engages in. >> i think they've given us a great taste of the campaign season, market an sis of all this as well. thanks to all of you for participating. we're going the stick to our schedule, i promised i'd keep

the trains one on time. >> thank you. >> thank you very much. paula, thank you as well. appreciate it. [applause] and we're going to move right on to our next discussion again, an eagerly-awaited conversation i know for all of you here in our audience, those of you watching at home as well and on your bloomberg professional service. we're going to ask that matt winkler, the editor-in-chief of bloomberg news, step up to his stage with his guest. we had former chairman alan green. c-span: a short time ago -- greenspan a short time ago, and now we have jeffrey lacker a voting member of the fed. he has dissented at the last three meetings, and i have no doubt that will be part of the conversation about to unfold be. matt, take it away. >> thank you, peter. and president lacker, you're, as everybody, i think, is familiar with your record, your history, your bio. you've been with the fed longer than most, and you've seen a lot in the between, and we're at a,

i think in your opinion, a very critical moment for the fed and the economy. and earlier this month you said that you see growth accelerating to 3% next year, and we had a gdp report on friday somewhat mixed, showed consumer spending rose at the fastest pace in more than a year while inventories had a smaller contribution and business investment cooledded. cooled. so how does this very mixed evidence of the expansion shape your outlook, and why are you so, i would say, persistent in calling for a change? >> well, my outlook for growth to pick up to about 3% next year and beyond to maybe 3.5 the year after is based on a sense of labor markets are likely to continue to heal, the unemployment rate's likely to continue to fall, we're likely

to continue to add net jobs, jobs on net. i think that's going to lead to consumers' households having greater confidence over time, slowly, in their job market prospects, and i think that's what, um, i take from the first quarter data which is a heartening signal from consumers that not only are they willing to increase spending on a faster pace than previous quarters, but the composition. so much on big ticket items like automobiles suggests that their confidence of the sustainability of this recovery is growing. for sure it's not gang busters recovery by historical standards, but i think there's good reasons for that, and i think there's good reasons to think this is about all we ought to reasonably examine. expect. >> you've also said the fed should be raising interest rates next year, and you just provided, i think, a good backdrop why you think that's the case, assuming you're right.

how -- if you're right, how should the central bank go about preparing to back out of a pledge to keep interest rates where they are? >> well, you may know my view is that it's not a pledge, it's not a promise, it's certainly not non-contingent in the sense that, you know, the language is currently expects, so this is the committee's anticipation of how their behavior in the future is going to lead interest rates to unfold. that interest rate-setting behavior in the future on the part of the committee is going to depend on how the data comes in, how the outlook evolves, and the committee's broad sense of how that yacht look was going to -- outlook was going to evolve and how the data was going to come in led them to the assessment that late 2014 is the most likely time for rates to rise. my, i came to a different conclusion, mid-2013 is sort of the central tendency of my sense

of when we're likely to need to raise rates to keep inflation pressures from rising. i dissented on that basis. i figure if i don't agree with that statement, i should dissent. >> if things go as you have already anticipated, do you think it'll be a nice problem to have for the fed to announce that they will be raising interest rates sooner than advertised? >> um, i don't think it's going to be an easy transition. um, i think it'll be challenging. i think this is the most, um, challenging time of the business cycle for a lot of central banks. um, i think chairman greenspan, um, tom keene mentioned 1994, led the federal reserve in raising rates before inflation actually rose substantially, um, and i think that set a precedent of preemption of inflation pressures that if you look at the record has led inflation to average around 2% since that time.

a signal achievement. i think sort of the second chapter after the volcker disinflation in the early '80s that has given us 18 years of very good price stability all told, all things told. um, and i think that finding that time when interest rates need to prevent inflation pressures from emerging. before you see them emerge, before you see inflation move up steadily in a way that looks like it's, the trend rate is rising, i think that's really tricky. >> maybe you could give us some perspective on what appears to be sort of a polar or sides on this issue. paul krugman has recently said the fed is being much too restrictive and, in fact, singled out the chairman, and the chairman responded and said he's being entirely consistent with his own writings on inflation/deflation. what's your perspective on this? >> i think we're attributed with

entirely too much capacity to influence the course of real growth in labor market outcomes. this recession was not caused by monetary policy, it was caused by, um, collapse in residential construction and dramatic fall in the value of homes that came at the end of the housing market boom. we can debate the contributors to that boom and the end of the boom, but given that huge shock that rippled throughout the economy in building supply and furniture and other related industries, um, we're in the process -- this recovery has been a story of the process of our economy reallocating resources away from the industries that declined and towards the industries where growth is warranted. this is one of those expansions where the expansion is not and we should not expect it to be the mirror image of the contraction that preceded. that's all preceding in the real economy, and we need to get interest rates tracking the real, warranted, real interest

rate, but i think we were given too much credit in the '90s for the tech boom. i don't think that was our respondent or we contributed much to that besides a broad, noninflationary environment. and i think some people attribute us far too much capacity to increase growth beyond where it has been. >> so if i understand what you just said, the fed has done as much as it could possibly do and should do? >> i think for us to provide more monetary stimulus at this point would, um, likely raise inflation risks and not likely do much for growth. that's my assessment. >> coming back to the economy and what kind of an economy we had, you gave a very thoughtful speech on march 29th about sort of the state of the financial markets and the economy and what is necessary to go forward. and i just want to ask you about something that you said then. you said it's vitally important -- i think that was your expression -- to have competitive markets for the economy to be competitive.

we right now have an economy where six of the biggest banks in the united states have almost 60% of the mortgage outstanding. and i just wondered is that competitive? >> i think they compete fiercely for the businesses they're in. um, and i think if you look across the spectrum of the banking industry from the smallest community banks and credit unions up to the largest behemoths, megabanks we have, you see them competing fiercely. you see them fighting for margin, you see them scrapping for net income. i think we have a competitive banking shm, but i wouldn't describe them, our financial markets, as, as driven by competitive market discipline as they could be. by a reasonable estimate, about 60% of the liabilities 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 chasing that implicit safety net with more regulation, um, is not a healthy course. i think we ought to be focusing on restoring more market discipline and more of the resilience that comes from competitive markets. >> so if you you had the author, what would you do right now in. >> so i think we are playing a little bit of catch up, and there are some strengthening of regulatory oversight that we need to do and we are doing, and i think that's good. but to restore market discipline, i'd point to four things. first is living wills. this is one of the good things dodd-frank did. we would have done it in some form or another, but a statutory requirement thatbacks prepare, regulators approve plans for the orderly winddown of those institutions without taxpayer funds. second is bankruptcy reform. i think, um, for some reason over the years -- maybe

political, maybe otherwise -- policymakers have become frightened, timid, shy of using the bankruptcy code, um, to resolve fairly large financial institutions. i think the record shows it's not that infeasible, but there are some improvements that could be made that would give regulators and policy make ors more confidence about putting large firms through that. i think that there are regulatory impediments to resilience in the financial markets. i think there are impediments to steps that firms could take to make themselves less vulnerable to liquidity runs, and the main thing i have in mind here are the money market fund rules which, as you know, the sec is considering some rules to allow, perhaps, floating net asset value and the like. i think what we have now a system that is broken, provides artificial incentives to run fast for the exits if a fund gets in this trouble. and then finally, i don't think

that a commitment by policymakers to greater reliance on market discipline is going to be credible without further measures to tie policymakers, tie the government's hands and prevent rescues and bailouts going forward. we've done a little bit of that with dodd-frank, reining in the fed's lending powers, but i think there's still some anachronistic authorities in there that don't have a place, and we, our commitment would be more to market function would be more credible without -- >> 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 sort of go together. is there a reason why they don't come up? >> i think the most compelling narrative of what we went through, i think those are side shows. i think front and center is the incentives those institutions were under given the widespread view by their creditors that

official support would be forthcoming should those firms get into trouble. an expectation that was, in the end, sustained, but an expectation that was ambiguous and which led to financial market volatility as that, as that view, that expectation was called into question by the variety of ways that policymakers in 2008 handled various financial firms' distress. >> what i was referring to was earlier today chairman greenspan, in fact, described what was a really a global boom in housing not just in the u.s., and he said the u.s. was somewhere in the middle. and part of that boom there was this enormous appetite for higher-yielding debt instruments. and 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? >> so people are always going to want more yield with no more risk. you're not going to end the appetite for less risk. what you want to worry about, what you want to pay attention to are situations in which people are down playing the downside risk and are reaching for yield, willing to take the extra risk, undervaluing the risk because they view themselves or their creditors view themselves as government protected. large european institutions come to mind, some large government-sponsored enterprises in the united states come to mind. when they're making decisions on that basis, their choices about how much extra yield they want and are willing to reach for are distorted, and that's when you get overshooting of a kind that's beyond just a simple matter of sometimes people in financial markets make mistakes and they're too optimistic or too pessimistic about it. >> o how do you -- so how do you prevent these very big institutions from using

shareholders' money and depositors' money in a proprietary way? >> very carefully. you work very hard. it's a matter of their risk management systems, are they aware of all the risks they're taking, is the senior management, is the board of directors aware of it? are they running their liquidity management book? do they have enough capital on hand, is it enough they would survive very adverse outcomes in financial markets in the economy? you check all those things so that they have enough of a capital buffer, enough of a liquidity buffer so that they're playing with their own money at all times. >> if i can come back to these big banks again. you were, moments ago, very encouraging about what you're seeing financially, and i just wondered do you see these big banks that are still somewhat troubled lending aggressively where they're supposed to? >> if you talk to them, you look

at their balance sheets, you look at what they're doing, they're competing aggressively for every credit-worthy borrower they can find. they are pushing down spreads, they're complaining about the deals their competitors are getting from them. yes, i believe they're competing for credit-worthy borrowers. i think the demand 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 r adjusting -- readjusting their portfolios, reducing leverage, and i think you've seen it in the pullback and 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 wondered the forecasts that come out of the 17 policymakers, they're anonymous at the moment. >> [inaudible] >> should they be public? >> um, so we've made a lot of changes over the last nine months in the way we communicate about monetary policy. in august we introduced the sort of calendar-based forward

guidance. instead of extended period, we said mid '13, january, we changed that to late 2014. in january we did two other very consequential things. one was to reveal anonymously, but reveal the array of policy projections that went along with the other economic projections the committee participants submit. so you get this picture of where everyone expects the funds rate to go. the other thing was our framework, the long-run framework for just what our goals are, and we officially adopt add a 2% inflation goal for the committee. and it was a water shed event. we were creeping up to it. we got really close to it. but an important consensus statement for the committee. what i'd like to see us do is operate within the framework we have, practice using it in various circumstances and giving financial markets -- give financial market participants some practice at watching us use that, seeing the relationship

between the data, our choices, our communication, what we subsequently do before we make other dramatic changes to how we communicate. >> in your more than two decades working with the federal reserve, is there one thing that you've felt over that period remains unfinished, needed to be done? is there something that you keep coming back to? you think about? >> um, so i think central bank credit is a problem throughout the industrialized world. um, we've achieved tremendous success in 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 securities on our asset side. um, i think that, um, our lending authority is an anachronism, it's left over from 19th century central banking arrangements when the size of government debt was far smaller, and i think that's going to cause us trouble in the years ahead if we don't fix it. >> and what's the best way to go about fixing it, do you think? >> well, i've advocated we give serious consideration to tying our hands and limiting central banks' use of credit. make the use of public sector credit -- make credit allocation, which as chairman greenspan pointed out constitutes fiscal policy, no matter how you slice it -- make that subject to congressional appropriations policy.

if congress wants to do that, make it separate from the central banks' function. >> and how realistic do you think that is? >> well, there was a statement in, i think it was may of 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 be it belongs with the treasury. i think we should follow through on those principles and really fulfill our commitment to them. >> coming back to the fomc, it raised projection growth for this year but lowered for the next two years. did you also? >> i edged up a couple of tenths across the board. >> and do you feel good about that looking at the data this week? >> uh-huh. we got a good number this morning, manufacturing's been very healthy, exports are, i think, prospects there are very strong. you know, i think business investment has been just fantastic in this recovery. maybe it's slowed down a lit --

tle in the first quarter, but i see confidence there, balance sheets are coming back into line. >> and sort of as a follow-up on that, initial jobless claims, they bottomed in february, and it moved higher for more than two months. so does that suggest to you, it sounds like it does, that there's going to be continued improvement. labor market? >> yeah. i think, um, i think we're going to see continued net 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 were recessions that we caused, so the recovery was the mirror image of the contraction because the contraction budget really necessitated by some real shock. so those were recoveries where we didn't need much reallocation or resources between sectors. now the healing in the labor market's been limited by a very real sense of skill mismatch.

the mismatch of skills between workers and vacancies isn't, it's not an absolute thing. it doesn't mean it's impossible, it just means it's costly, involves training, time, search to connect workers with vacancies for which they're a good match. and we're seeing that going on. we're seeing a lot of investments in the kind of training programs you need for, say, advanced manufacturing corporations we have a lot of in the carolinas. but it's going to take time. gonna take time. >> so if fed does wind up following your prescription, where will unemployment be, the unemployment rate when the fed does raise interest rateses? where do you think it will be? >> so it could well be above 7%. and i think we have to prepare for that. i think it's a misconception to think we gotta get unemployment all the way down to five or some number like that or near it before we raise rates. i'm looking at the growth rate because when growth rates rise, the real interest rate needs to rise, and if we lag behind that, we're going to create too much

money, and it's going to lead to inflation pressures. >> i know we have some questions, and peter's brought them with us, so maybe you can share them with us. >> president lacker this is, again, from one of our attendees here, the latest economic projections show core expectations below the long-run target of 2% through 2014 but around 7% the committee expects unemployment to be well above the long-run target of about 5.6%. explain how your belief in monetary tightening sooner rather than later doesn't ignore the fed's dual mandate of prices and maximum employment. i know you sort of touched on that. >> yeah. this has to do with our phrase maximum employment that's in our mandate in the federal reserve act. so the thing about maximum employment, it's important to be clear on what time frame 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, and i don't --

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 measure inside that sense against that kind of standard. going forward, where unemployment converges in the long run, the consensus long-run policy statement i told you about that we released in january was very clear on this. we can't set a long-run target because that kind of thing is really governed by the real factors that push growth around one way or another and that influence labor market outcomes; demographics, productivity, things like that. and in addition, things like unemployment benefit policy and the like that can influence, um, 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 a low and stable inflation rate. we've announced that 2% is what we interpre