intervention, especially unprecedented intervention by the fed, kept the crisis from being far worse. this is about an hour. [applause] >> thank you very much, david. it's a pleasure to be here at washington's greatest book store. you know, i live near new york, and there's no agreement about what the greatest book store is in new york, but in washington there's very clear agreement, and this is it. i sort of feel badly people aren't shopping and buying books right now. [laughter] but, hopefully, that will happen after. david suggested that i start, as most authors do and it's a sensible place to start -- by the way, it sounds like i'm winding up for 45 minutes. i'm not. don't worry about that. [laughter] with why i wrote this book. and i thought quoting one's self of is horrible, but i'd like to quote an e-mail that was sent to

me by a reader. i won't name him because it was of just a letter to me, a perfect stranger sent this on friday morning to me. and this is what it says. dear mr. blinder -- sorry, i'm reading this because this is the answer to why i wrote the book. i wrote back to this gentleman, you are the person i wrote this book for. this is exactly why i wrote this book. i'd like to start off by saying thank you. i thank you for being the one who wrote a comprehensible book on the financial crisis. i also want to thank you because i've been waiting for a book like this to be released. i'm only on page 9. [laughter] he made a snap -- [laughter] he made a nap judgment, but -- [laughter] you'll see, you'll like it by page 9. [laughter] but have a clear picture as to how this fiasco began. this is at the beginning. my wife was on the train with me this miles an hour, and she even -- this morning, and she even began to read on with me.

i'll spread the message via social media. i think it's important for the citizenry of the united states to read this book to understand that blame without understanding proves futile to moving toward were bettering our nation. he just has it 100% right. the sad truth is, and it's very understandable because the whole mess was so complicated that people don't understand. and what we've gotten in america is anger. the anger is very easy to understand. people should be angry. they have the perfect right to be angry. but as this gentleman said, there's some understanding and when the anger is focused, then you have a better chance of changing things for the better. and it is meant, again, as this gentleman said to be a comprehensive look. there was a reason why i did a foolish thing for my own book royalties which is wait til 2013 to publish a book. i had publishers coming to me in

2008-'9 saying would you write a book on the financial crisis, and i said, no. i have no idea how this thing's going to end, and i can't write a book yet. i would have sold more then, i'm sure. but the question you do get now which this gentleman answered is why now, why a book on the financial crisis, and that really is the reason. to take the point further to an important level, again, implied by this gentleman's letter, my biggest fear is that what amounts to a gross misunderstanding of what happened and in particular what the government did in response, and i'm coming back to that. it's liable to hamstring us as a society the next time anything remotely like this happens. just imagine if europe had blown up financially as looked possible six months ago but doesn't look very likely at all right now. so we got what the markets were

calling the lehman ii scenario. what would have been the chances of getting true the congress -- think the congress another stimulus, another t.a.r.p. or anything like that? as a lot of people in this room know, you can damn any piece of legislation now by saying it's like t.a.r.p.. people have this view that t.a.r.p. was a failure, that it robbed taxpayers of $700 billion to dole out cash to undeserving bankers. the only part of that sentence that is accurate is the adverb "undeserving." [laughter] they were undeserving. they didn't deserve it. but when the ship is sinking, you don't quite worry about just desserts until you make sure the ship doesn't sic. but, in fact, the tarp was a tremendous success. the financial parts of t.a.r.p., you may recall t.a.r.p. then started getting used for everything, including the automobile bailout. but the financial parts of t.a.r.p. have turned to profit for the taxpayer.

so it worked, turned a profit for the taxpayer, made sure that we didn't go into the kind of depression scenario that many people were fearing at the end of 2008-2009, and yet it's vilified. it's a code word for an awful government program. that's just a misreading of history. it's not to say it couldn't have been done better, and you read the chapter on the t.a.r.p. in this book, i have a number of criticisms where i think it could have and should have been done better. that withstanding, the best baseball player hits about .330. that means they're out 67% of the time. so it is not a -- i don't take it to be a damnation of t.a.r.p. to say they made these mistakes, and it could have been better. it was a tremendously successful. the other thing i worry about is that the whole country but especially the financial system is drifting back to business as

usual a bit too quickly. there's a good part of that which is the banks look nice and solvent, and nobody's worried about them. that's great. we needed that, we want that. but you're starting to see risky behaviors of the or the that people were too scared of in the days after the crisis. they're becoming braver now. and there are places where we like bravery. that may not necessarily be one of them. so just briefly, the way i organize the book is it starts with an interpretive history, the first number of chapters. this is not journalism, so those looking to find out who was eating at an italian restaurant when he was interrupted by a cell phone conversation from somebody, i don't do that. [laughter] a number -- and i don't like to get interrupted while i'm eating in an italian restaurant either. [laughter] a number of people have done that quite well. i don't mean to denigrate.

i've read these things, and i've gotten things out of them. a number of very good journalists have written very nice books about pieces of the crisis. i'm trying to be much more holistic and interpretive and explain to people what happened. the -- quoting yourself is terrible, i'm only going to read one sentence. this is the first sentence of the book. did anyone get the license plate of that truck? is. [laughter] this is the way a lot of americans feel. we got run over by some big truck. we don't quite know why the driver was there at the time and why he wasn't punished, by the way, for running us over. and a bunch of things like that. those are the kinds of things that i try to deal with. and especially, as i was saying just a few moments ago, especially with the policy responses which were manifold, complex, often counterintuitive and left many americans feeling that, to me ironically, feeling that their government turned

against them. when, in fact, the government was doing a lot of good things to make sure we didn't have a second great depression. mark zandi and i, another economist with moody's -- not the, well, the same parent company that does the ratings, but this is moody's analytics. mark zandi had nothing to do with ratings. we wrote a paper on this where we estimated that without these policy responses, we might have been looking at 16, 17% unemployment in the united states. a rate that we have not seen since the 1930s. now, nobody can know for sure, but it would have been a lot worse. and i think it's important that people, you know, develop not a detailed understanding, but a vague understanding of why the federal reserve did what it did, why we had this stimulus package at the beginning of the obama administration which did, in

fact, raise the deficit. we all know that deaf of sits are bad things -- deficits are bad things. bigger deficits are bad, but other things were not completely close, and there was a very cogent rationale for a stimulus package, and i think even for a bigger one. the biggest message of the book, to me as the author, is this paradox that this were massive government interventions ip deuced and -- induced and caused by the fact that the private markets ran amok. the private markets that went off the track, the government came in -- not perfectly, but pretty effectively -- to try to put things back on track. and yet at the end of the day, we witnessed, and you've all witnessed it as i have, this quite sharp backlash against, quote, big government in the united states.

now, americans have never liked big government. you call anything big government, and americans will be against it reflexively. but there was a reason for the government interventions. it was a, it was a market failure in the financial world the likes of which we've not seen since the 1930s. and if we had done nothing about it, the 1930s probably would have been a preview of what was to happen. nonetheless, you did have this backlash against the government in general, against president obama -- because president bush left office shortly after all this started, but if he was armed, it would have been against him -- against the democratic party more generally, against the federal reserve, against keynesian economics which i'm here prepared to defend if anybody wants to ask about that. [laughter] this was encapsulated, to me, by two events that kind of book

bookended the backlash period. one, my favorite cartoon from the crisis appeared in the new yorker around march 2009, i think. and it showed a page, i guess -- this is set in a medieval castle courtyard, and the king's head is on the chopping block, and the executioner in's like that. and he says, wait, stop, government's part of the solution, not part of problem. [laughter] that lasted about two, three months. and after that people started thinking that the government was part of the problem, and when i say bookend, i think it then bookended with the 2010 midterm elections which was just the electorate really angry at incumbents. angry at people that voted for t.a.r.p., which was the right vote though a difficult vote, and it result inside the biggest -- resulted in the biggest turn in the house of

representatives towards the republican party i think ever. not ever for a very, very long time. you had an angry electorate in 2010, and it was this anger that i was talking about. very briefly, i might take a few more minutes -- >> [inaudible] >> why? very briefly, why was this tremendous anger directed at the government? well, first of all, i think there was a terrible slump itself. people are upset when people, when they or their friends or their family members lose jobs, and many, many people lost jobs. secondly, um, the vast number of innocent victims that got dragged down. i don't know how many people you could actually point to, human beings that did things that deserved, that led them to deserve their fate, but it can't be more than a few thousand,

maybe a few tens of thousands. we have 315 million people in this country, and virtually everybody was a victim of the events that followed the collapse. despite this you can count on the fingers of one hand, and you don't need all five, count up the number of people that went to jail as a result of this. this is in stark contrast to the savings and loan debacle of the late '80s and early '90s where something around 750 to 1,000 miscreants wound up in the jail for what they did. now, am i sure that a thousand people should have gone to jail? no, of course not. and fraud, something you go to jail, it's a high bar to prove. but five or three? i could actually think of only one well known name, and it's not, he's not even that well known. of he's named in the book. here's a test. this is a very educated

audience. who ever heard of lee farkas? that's what i thought. oh, somebody said yes. two, this is a good audience. [laughter] three. this is way, way bo the national average. -- above the national average. he was the most prominent guy in the financial markets that actually went to jail for this. bernie madoff is a whole different thing. this is not about -- that was a whole different issue. and people are upset about that, and they still are. you're hearing this now in 2013. we're a little bit late. fourthly, a bank bailout is going to be hated no matter what. if the government does everything perfectly including explain it perfectly, which is my next point, it's still going to be hated. but to my mind there are degrees of hatred, right? this could be a 10, an 8, a 6, and so the next point, if the government had explained better what it was doing and why, this includes the obama administration, i think the american people still would have been upset by the bank bailout.

but as i said, there were degrees. and i think they could have a more accurate perception of what really happened than they do such as, proximate, the t.a.r.p. that i mentioned -- for example, the t.a.r.p. that i mentioned before. sixth, as those of you who have been paying attention -- now you do have to have been paying attention -- there was quite a backlash against the federal reserve, as if it came out of nowhere and started grabbing power everywhere. i can remember sarah palin attacking ben bernanke and then attacking me when in "the wall street journal" i defended ben bernanke for printing money. wow. the federal reserve prints money? who knew? [laughter] this is why we have the federal reserve. this is what it's been doing since 1914 when it first came. but to a number of americans, this was kind of a revelation, it was big government, and you had these unelected people like bernanke and his colleagues doing all sorts of things that they didn't know they could do, all of which were perfectly

legal, by the way. you had, as i mentioned earlier, the explosion of the deficit. americans have always at the lip service level -- b so when i say "always," i mean as long as we have polling data. this goes back at least to the '30s, and i'm sure it was true earlier than that -- thought deficit's evil, bad thing. it's bad to have a deficit. franklin roosevelt railed against the budget deficits of herbert hoover, for example. but if you look one level lower at the polling data, you also see that with a single exception of spending on international affairs, foreign aid, single exception, americans oppose every single thing that might reduce the deficit. any tax you name, any piece of spending other than fortune aid. foreign aid. and the plurality of americans and typically the majority of americans is against it.

so it's a strong lip service aversion to deficit, and the response to this crisis did blow up the deficit to levels that we never imagined possible. and that certainly didn't do it any good. and then, finally, most controversially -- and i'm sure the president of the united states doesn't agree with this -- but in my view, it wasn't just that he didn't focus like a laser beam on the economy. remember the old bill clinton strategy, saying in 1992 when the economy was nowhere near as bad as the one barack obama inherited, he was doing so many things at once. i mean, give him credit. he accomplished an incredible amount of stuff. but one result of that is it was very hard for the american electorate to see the with all these trees popping up. to see the forest with all these trees popping up.

what did health care reform have to do with people getting back to work? the answer is not anything really. although it was a good thing to do in its own right, in my view, not in everybody's view. and so you had people watching this was of of activity -- this burst of activity in 27 directions at once and not really perceiving the really excellent job that the obama team did in preventing a much worse fate that we could have had. so i think i've talked too long already. let me stop there and see what sort of questions are on people's minds. if this is an audience where five people heard of lee farkas, i'm in trawl here. [laughter] [applause] >> thank you. you'll take the questions. um, this is a bit of a town meeting, so if you're comfortable saying your name, please do. and line up at the microphone,

and everyone will get a chance. so, please, have a brief question as opposed to a long speech. >> i'm dr. caroline poplin, i'm an attorney. my question is, should the banks have been forced to write down mortgages? people were blamed for lack of, quote-unquote, personal responsibility, but the banks were the ones in a position to see whether people could pay for those loans or not. >> yep. >> and if they didn't, if they chose not to look, that was their problem, and that would have put more money in people's pockets, and we wouldn't have these hundreds of thousands of people underwater. >> you're -- could you hear the question? okay. you've just posed one of the hard questions about this whole crisis. i, i tend not to equivocate, but i'm going to equivocate on this one, and i'll tell you why. in order to get this behind us and to face up to reality, the

answer to your question is clearly, yes, banks should have been, should have written down more mortgages. that would have -- once they were written down, that would have enabled them to be sold more freely, and you could sort of break the logjam. here's the problem. given the volume of bad mortgages, had that been done on a large scale throughout the country, a very large fraction of the banking system would have been insolvent. and then we would have had gigantic claims on the fdic to make good on depositors, on need for even more money for the bank bailout than the t.a.r.p. provided, and it seems to me unwilling -- unlikely that the taxpayer via their elected representatives would have been willing to come up with that much cash. loans, there were equity infusions. it wasn't giving away money, but it had the aura to a lot of

voters of giving away money, and you just wouldn't have had the public support. so now you have the bank regulators with the choice of we could force these banks to write down more mortgages, more more good evenings to more realistic values, and now we'll have -- i make up a number -- 5,000 bankrupt banks on our hands. what do we do then? that's why i equivocated on your, on your answer. >> thank you. my name is dick smith, just an ordinary citizen. [laughter] >> the best kind. >> i just -- >> i think you need to talk closer to the mic. they won't hear you. >> i'm wondering if you could say something, and i'm sure the book does but i haven't really looked at it yet, about where we stand now in your opinion with respect to regulation of financial institutions? >> yep. so the question where we stand now on regulation of finance. i think we stand, um, what's the best way to put this?

i think we stand in in the fifth of sixth inning of what could be a good ball game when it's over, but it's not over. so what do i mean by that more specifically? i think the dodd-frank legislation which is the main reform legislation that passed in is the summer of 2010 is a pretty good bill. now, nothing that is 2,319 pages long is going to be flawless. [laughter] this is not flawless, so many people have criticized dodd-frank for a number of things including, including myself. but though i'm an admirer, actually, of the whole package. but in the united states of america the legislation that congress passes is just the beginning. the regulatory agencies then have to flesh out many, many details. you know, this gets ridiculeed as if it's silly. it's not silly. congress writes typically legislation that's skeletal. if you just read some of the

things that are in the law, in any law including dodd-frank, you come away scratching your head like what does that actually mean speakicalliesome so that's why if it's a regulatory bill which this is, the regulators have to flesh it out, and the 2,319 pages become god knows how many pages. it'll be tens of thousands by the time it's over. it's not over yet. many of those things are still on the drawing board, and many of them are being fought tooth and nail by the industry. i'll just give you one example which is one of my pet peeves. dodd-frank goes some way, and i applaud dodd and frank and others for this very much, towards forcing derivatives to be standardized and traded on organized exchanges like stock options. well, stock options are a derivative. that is a very familiar derivative that's been standardized and traded on organized exchanges for decades. and it works really well.

one upshot of that is that if you decide you'd like to buy apple call options with a strike price of $419.27 that expire on your birthday, you can't do that. you go to the market, and there are standardized commodities. you pick the one that's closest to what you want to do. the over-the-counter derivatives markets was just the opposite. it was, yes, on your birth day, it's this and so on. that means, first of all, nobody's paying attention, there's no standardization, there's no market trading. if the counterparty, the one on the other side, gets in trouble, then you're in trouble because there's no exchange sitting between you, and these were the dangerous ones. these were the ones that got us into big troubles. dodd-frank takes some of that on and pushes things towards organized exchanges. the industry is fighting back ferociously. i don't think it's gone or far enough. but in the right direction. so that's just one example of

the volcker rule, making it specific, is another example. things are yet to be dope, and so we don't yet know what this ball game is going to look like when we get to the ninth inning. >> thank you. >> you're welcome. >> what is the likelihood of an even more dangerous fiscal cliff lying ahead as a result of the cumulative effects of the fed's policies, in particular that of maintaining interest rates artificially lower, what you call quantitative easing? i ask especially because recently bloomberg economic journalist william cohen had an article on this on the front page of "the washington post," and this is what he said: quantitative easing not only hurts old or or americans -- older americans on fixed incomes

and those who have dutifully saved for retirement, it also frustrates younger people who can't afford to take advantage of historically low mortgage interest rates. mainly, bernanke's quantitative easing helps wall street's banks and traders, a dynamic that could be setting us up for another financial crisis as investors again seek out higher-yielding, lower quality investments that wall street is only too happy to provide. >> right. i don't want agree with that last part -- i don't agree with that last part. i don't think there are a lot of people on wall street that are just delighted that interest rates are zero. there's a lot of lenders there, and they like to get more than zero when they lend. that said, what you said or mr. cohen, i'm not sure if -- >> i was reading it, yes. >> -- said about low interest

rates hurting people in general who live on interest, and that's largely older americans -- i'm an older american myself these days -- is true. and they are a victim of the medicine. medicines have side effects. and this is one of the side effects of the medicine. nonetheless, we still need the medicine because those very low interest rates are helping bring the housing market back to life. it took a long time, but now it's definitely coming back to life. they are, they have been except for this last quarter, i hope it was an ab abhorrent, have been doing a lot of good, and that's necessary to pull us out of this muck. so there's a reason for the very low interest rates x it's unfortunate that they're bad for some people, but they're good for other, for other people. as to a crisis in the future, my

guess is that it's, there's a problem for the future that won't be a crisis. so let me be more specific. when interest rates are so low that they basically can only go up and we're pretty much there, that that means that eventually they will go up. the keyword in that sentence is "eventually." this does not look around the corner, to me, or more importantly to ben bernanke and his friends at the federal reserve, because they're sitting with substantial control over that. but when they do go up, there are going to be capital losses all over the place. because when interest rates go up, bond prices go down. and lots of us that own government bonds -- that includes my wife and i -- are going to suffer capital losses. and if, if, crucial, the risk management systems of financial

institutions fail anywhere like what they fail, how they failed in 2008---- 2008-'9, if they do, there are going to be serious losses to a lot of financial institutions. if that happens, we should hit them over the head with a sledge hammer. it's one thing they screwed up badly in 2007, '8, '9, they should have learned something from that and be hedging away a lot of this risk. if they're not, then they're going to suffer significant losses. that is inevitable. the only question is the timing including the speed. it doesn't seem to me likely, although you never know for sure with markets, that this unwinds fast like the housing bubble. housing bubble collapsed pretty fast. this bond bubble, if you want to call it that and some people are, ought to collapse slowly and with ample warning. there's one thing i'm sure of, i don't know the timing, but one

thing i'm sure of is that the federal reserve will be shouting from the rooftops months before it raises interest rates. it's coming, it's coming, it's coming. the question, of course, will be people listening. they should be listening. and if they are, this ought to unwind -- i don't want to say painlessly. it will not be painless, because people will lose money on this. but should not cause a financial cataclysm. ..

one of the result of this, you know, like the previous speaker had mentioned, the rounds of easing that resulted in one through four and also the increased, you know, buying of government debt. as result the fed's balance sheet has ballooned significantly. so do you see this as a macroeconomic threats if it is not wound down soon enough? and if so, what do you think a good timeline is all a good way to min wind these efforts down? >> so most of the question, mostly about the size of the balance sheet and how do we get out of it, which is exactly what chapter 14 i think, i'll have to look, of the book is about. here's a short answer. the fed came into this crisis with a balance sheet of roughly

900 billion, called it 1 trillion, among friends. what's another billion? now it has about 3 trillion. the fed wants to go back to something much closer to 1 trillion eventually. probably not all the way to 1 trillion, let's just say one and have coded him i don't know. they haven't enunciated the specific target. if it's one and a half trillion, have to unload have other assets. is this difficult? no not technically. i mean, when people ask me how was the fed going to get out of this, they usually say, the same way they got into this. by going into the market place in buying a lot of stuff. mortgage-backed security and treasuries mostly. it will get out of it by going to the marketplace and selling a lot of stuff. timing is crucial. they will not, here i'm confident, dump it all at once. they're not going to do that. this is not a bunch of bozos. they have responsibility for the

financial system and they will sell it out gradually. here's the question, maybe the net of your question. it is conceptually and absolutely ideal perfect rate of selling down the fed's assets. nobody knows what the district that includes ben bernanke, who is a very smart man. the fed will have to try to find that rate by trial and error. if it is selling to festival see the market react. it is not selling fast enough it will see the market react. this is the principal reason why i'm not so worried. the fed will have hundreds and hundreds of opportunities to adjust. so fast or sell slower if it doesn't look like it is getting the rate exactly. now, will they get it exactly correct? no. the fed inflation target is 2%. it is the -- it is easy to imagine we come out of this with

your 3% are 1% because the fed misti. they can missing either direction. the inflation hawks only talk about one direction, that the fed was still too slowly and we will get too much inflation. i think pretty symmetric danger on the other side. i can even imagine a range from four to two, two percentage point error. i have hard time imagining much more than that because of the need back that the fed will constantly be getting. so to think as you here sometime that we will come out of this with double-digit inflation because of all this money that's been created and won't be destroyed, that's a bet on the degree of incompetence by the federal reserve that i just don't see any evidence for. >> [inaudible] >> i appeal to the judge. >> my name is justin and am also an ordinary citizen. i have a question for you about something that you touched on earlier, i think also the new

book, about the lack of prosecution towards offenders as around the crisis. this is kind of a two-part question. my first question is why do you think we, the government did not prosecute more people involved with the crisis? and also, are we now past the point where we will see prosecution for potential offenders? >> so the second question looks to me easier to answer which is i don't think the. it looks like it's been a frustration of mine, and of millions of americans, that the government is so slow to get to this, i don't know, this is not a party, to get to this job, to get to this task. it was put off and put all. you can see the administration gearing up to do more about it now, quite late. so i think there will be more. why not? i've been asking myself this question for years. here's the best i can do.

i don't pull this off as a good answer because i've been scratching my head about it, why aren't they doing something about it? i think the main reasons are too. one, i alluded to before, to actually prove fraud is a high bar to jump. and in many of these cases, it may not have been a fraud. misleading people is not quite a fraud, though if you do it enough it is a fraud. and so the government has actually lost a few cases taking the people to court and lost because they couldn't cross a high enough bar. by think the other reason, which bothers me frankly, is there was a feeling in some parts of the government that taking too many of these financial executives to court was going to upset the market, and we've had more cracks and disruptions in the market.

i hope that it was more the first reason than the second. it's hard to get inside the head, what they are thinking. >> i, mark. thank you for your years of service and for writing this book. we are paying a big price with a polarized politics in america. we have this gerrymandered districts. we have on the left and on the right we have extremes going against even more extremes at times and a lack of compromise. as you, bob woodward wrote an interesting book to recently, the price of politics, to making meaningful compromise on the budget, and i'm just wondering, how do you see the interaction of politics with what should be a more rational policy coming out of both on fiscal side and

on the monetary side? >> now, it's going to be hard for me to answer that very good question without sounding a little partisan. [laughter] probably a lot of you know that i'm a democrat. and so if you don't, i have now revealed it. i think along with norm ornstein and tom mann, a lot of you may be for me with that book, that it's not really symmetric. there is blame in both parties so it's not 100% 0% either. but it's very far from icky sticky. and i think you would have had to republican party in the united states move very far right. so far right that if you abstracted from the man whose very a people person and just imagine ronald reagan's views on everything's being embodied in a corrupt politician, i don't think the republican party would accept this. way to left.

that makes compromise difficult. as i said it's not 100-zero. there's a wing of the democratic party but also doesn't want to face up to the reality that, unicom it's often said we have to curb entitlements. this is not true. we have to curb health care spending. if we could get health care spending under control and fix social security, which is really easy, and wouldn't have to do anything horrible, social security, forget about the rest of entitlements. first of all there's hardly any money there, and they don't matter. during the long run budget problem, i'm talking about look out over a decade, cheering the long run budget problem is the terminus with been in the health care cost curve downward. that's the whole thing. now, there are some democrats that had just dug in about that, about not doing anything about

medicare and medicaid but it's not the majority. and it's certain that the president. you may remember when it looked like it might be a post grand bargain, a lot of democrats are angry at president obama because he was willing to compromise some things on medicaid. we are going to have to do that. having said that, i'm a democrat. i guess, to point. the first one will show i'm a democrat and the second one would be for the other side. it is not politically realistic that we're going to fix this budget problem without more revenue. the revenues in the last compromise were like 60 billion a year. there's a deficit of a trillion a year. the numbers don't really compute and it's unrealistic to think that, but too many republicans are holding to that. on the other hand, if you look at the harbor the long run projections of the congressional budget office or anybody else, long run projections, it is ludicrous, completely impossible to think that we're going to close that hole gap on the tax side. impossible.

americans would have to accept taxation rates that we accept. we are not swedes. americans will not allow 52% of their gdp to be represented by taxes. we won't. and so is this going to be a realistic long run solution, it is going to have to be curbing health care spending, one way or another. i wish i could now tell you here are the three magic things that will solve the whole problem. i can't. >> hello. my name is renée matthew. i wonder if you would like to respond to steve pearlstein's otherwise favorable review where he asked why you hadn't put the financial crisis in the context of global trade imbalance or? >> could you th hear the questi? okay. steve pearlstein in the "washington post," finishes

review as i recall, i think was the end, chiding me for not basically blamed the global trade imbalance is for the crisis. the answer is because that's not what caused it. [laughter] we have had trade imbalance is, which means we've been borrowing from the rest of the world for decades. there are people in this room, i can see some of them, if their entire lifetime, not my entire lifetime, mine is pretty long, but it's decades and we didn't have anything like what happened over the mortgage blowup and the derivatives, all of that stuff. the world is interconnected and causations always running in both or many directions at once. but this is very clearly a case where shenanigans in the united states, and also some other countries. ireland, iceland, england,

et cetera, emanated out to the rest of the world. it wasn't the rest of the world doing it to us. it was us doing it to the rest of the world, and that is my answer. if steve meyer, to why i didn't blame these international trade imbalance is for the crisis. >> good evening. i'm an economist. >> as opposed to an ordinary person, right. [laughter] >> that's what i'm sometimes told. let me offer a hypothesis for your comments. the time that the obama administration was trying to determine the size for the deficit for the stimulus package, there was an expectation that if they didn't we think the amount of gdp decline would be at a certain level. in fact, however, the trajectory was far, far steeper and, therefore, the primary criticism of the stimulus package is not that it was too large but it was perhaps woefully to small. your comments, please.

>> i have to agree with, and let me explain. the greater part is, let me just put on my economist have because that's what i am. if you look at the peril facing us, indeed what had happened already and what was likely to happen, a larger fiscal stimulus was called for in the sense -- if you view it as a big gap, and we ought to fill a large hunk of it by fiscal stimulus to sa save the economy, that would've taken much more than $800 billion. if i take off my economist at and put on my ordinary citizens had, which is much more important in this content, the notion that to say, pick a number, a $1.2 trillion stem this bill could've gotten through the united states congress was totally fanciful. i don't know what was the exact maximum amount of stimulus that could've passed the congress by think the obama administration came really close. the votes sure looked like it was real close.

so rather than see them being stubborn and saying, you know, 1.2 trillion or bust, we would have got bussed. i'm very glad they compromise at 800 billion. i don't criticize them at all. >> my name is tony. i'm an ordinary citizen but i pay taxes last night. >> that's the important part. >> i want to say they are not wasted. i'm not sure i agree with your assessment that it was too big, this crisis. i think in future the student will say this crisis didn't need to happen. >> right. >> u.s. mortgage debt was about 10 trillion, if i remember, of which about 1 trillion was in the subprime and all day. they were not destroyed by war. they are all still staying. so if you mark them down to 50 cents on the dollar, people holding those bonds lost about

500 billion. on half of which were held by banks. the banks were taking losses, not a huge amount of money. the reason why the crisis happened was because banks didn't know which of their colleagues was holding this stuff. so they stop lending to each other which dried up the inter- banking market, dried up liquidity and so no trading was in these things. the price fell below the value of the underlying houses were worth. the regular then insisted the financial institutions mark-to-market, which is sort of began to threaten their liquidity. so this thing mushroomed completely out of control as a result of lack of transparency between the banks and the regulators on insisting on mark-to-market. back to the real, debt to real household was only slightly worried again. everybody looked at the debt to

income ratio. that's not the real thing to look at. it's a disservice to income ratio. so i fear that this crisis did not need to happen if banks were being transparent and regulators had shown some forbearance. that being said, you know, the guys who make the big mistakes in the banks are still there. the guys who ran goldman sachs bet the bank on aig are still there. if this had been indonesia or korea or new mexico -- or mexico they would've been removed. >> i agree with almost everything you said. let me take the parts that i don't agree with. first of all, as a previous questioner asked, the mortgages that the banks were holding, the mortgages were not mark-to-market. were not mark-to-market. basically everything else you said was correct, and the thing that i would like to add, however, and essentially the fact that this crisis could've

been avoided. but he don't think it's because the regulators -- i don't think it's because the regulators forced them to be mark-to-market. it was because of some of the of the things. and this trust, the lack of transparency, who could you trust to deal with. the inconsistency of the treatment of bear stearns and lehman brothers really through the market for a loop. what are the rules for this game? and the important part that you omitted but it don't think you will disagree with this, is that on top of that trillion or so of dubious mortgages, and even probably less than a trillion, was built by wall street and in great pyramid of cdos and cds and synthetic this and make believe that and complicated stuff that hardly anybody, including wall street banks understood. and all of it, however, was

predicated on, and this is where my title comes from, the music continuing to play. the music being house prices keep going up. if house prices kept going up 10% a year from 2006 right to this very day, now imagine where they would be. but if that had happened none of his collapse would have happened. it would be waiting for us, even bigger way. but it was this imported pyramid of securities and -- inverted pyramid, that when they took say $500 billion of mortgage losses, and turned it into trillions and trillions of dollars of financials, losses, and that was crucial to make the crisis as big as it was. that is what in the early days of the crisis, people like hank paulson who was then secretary of treasury an and ben bernankeo was even then head of the fed was saying, well, this is not that big of a problem.

and if it was only the mortgages, only the subprime mortgages, they would have been right, but it wasn't. it was a lot more. >> richard, interested citizen. i'm on page 18 of your book. [laughter] >> i figure if i get through it our public it the answer to my question. >> i will answer it any a. >> it has to do with the troubled assets. starting with their sterns, we heard $30 billion had to be extracted from the books, and then when the other banks were helped out, all these assets were taken off and adored by the government. by the it anymore discussion. i'm wondering where are they? with a repackaged? are they going to be repackaged and go out to the private sector? are they still not performing? how big is that and what are the? >> i don't think it's very beginning more. first of all, the government did not acquire all that many of the data as it. they acquired some.

the big, big purchases, huge volume, were by the federal reserve of mortgage-backed securities, not mortgages themselves but the securities based on the mortgages. and the federal reserve was, somewhat picky about what it would buy. they would not buy the worst stuff. it was basically buying only the fannie or freddie guaranteed paper. not all of which was fabulous, but fannie and freddie had within this pool of junk, fannie and freddie had the best junk, and that's what coming in, some criteria -- [laughter] but that's what the fed bought. since then, since the worst of the crisis, those assets have appreciated in value very substantially. you know the old buy low sell high, that's what the treasury was doing with aig. lie low, sell high. so the answer is, first of all

the fed is still holding that stuff. but it's now, if the fed was -- the fate is marking that stuff to market. it's showing a huge profit on the. it doesn't want to sell yet for the reasons we spoke of earlier, but if the fed was going to sell it, it would be making a profit. here is a fact that is barely believable i have it on good authority that it is true. that it's not only the case that the federal reserves total portfolio issuing a big profit on these purchases, but it hasn't at one single loser. man, i compare that to my portfolio. [laughter] imagine if i did have a single loser in my portfolio? the fed doesn't have one single loser in the portfolio, and what's the reason? it bought at the bottom when nobody else would buy, that's why today. it came in about the stuff, in

some cases at ludicrously low value. >> this will be our last question. >> hello. i'm eleanor bach rock, and i describe myself as a fiscally responsible democrat. >> good. >> and it's been a knowing the hell out of me year after year that republicans -- it's left to the democrats, virtually all of the bush administration we have guns and butter and more guns and butter. didn't go to the first day of economics 101. so we now, the democrats, have to try to work out stuff on the deficit. somehow the republicans overlook

that. but my specific question is going back to the issue of the interest rates. as you say, they have got to rise at some point, and i'm concerned that the increase in debt service on the government bonds may wipe out or severely hamper the measures they are trying to take. >> yes, you are right to be concerned. the interest rate now on u.s. government debt held by the public, that's the part that matters, what's inside the trust funds doesn't matter because one government pot paying another government pot. but the part held by the public is extraordinarily low, by historical standards. i guess i said before it can only go up. it could go get a little more but you wouldn't expect it. it's basically at some point going to go up. and that event, which i believe will happen slowly, i said this

before, but there's always a chance it can happen rapidly, is going to add hundreds of millions of dollars to the federal budget deficit. and it's not a question will this ever happen. it will happen. the question is only about the timing. and as you suggest, that event or that series of events as it takes place will wipe out a significant amount of deficit reduction that the congress, that's fighting so hard and comes so grudgingly to achieve. ..

>> in the tax cuts -- the bush tax cuts. >> how could i forget that? [applause] >> this will be the last question. the job and was moving in the land before he finished speaking. he got in under the wire. >> i consider myself an ordinary citizen. i should disclose the person who oversees chocolate asset relief program. an first of all i want to thank you. now, i haven't read the book yet. i lived forward having lived this for four years, it's been

very welcome. it's been very difficult to explain this and i'm glad you're doing a. i also would agree there are undoubtedly things you could do better. those will be clear with time. it's still a little too close to analyze that. the one i've seen you mention in interviews i would appreciate your thoughts on is the issue of good the program and designed to encourage redlining? but there's obvious issues they are asked to review you them to chat lending us to the demand side of the equation as to what the u.k. tried to do because they are covenants to do that. so i'd appreciate hearing about that. >> the question has to do what i do mention in the book that when the original t.a.r.p. rules were written in the bush

administration, there was no requirement that as a condition of getting the money the banks did anything in particular with the money portfolio or almost anything else. the public purpose conditions on the original thought for buckley negligible. so i thought there should have been found. for example, the taxpayer could've gotten more at the improbable upset at having. if you think what might have been the commercial terms of bank stocks, we could've done better. the hard question is landing because the part that would have done the most good for the economy as banks had some kind of funding condition. i think while in normal times that is exactly what you don't want the government to do. you don't want the government's time thinks they should spend more, less, dissect there, that sector. but when the government is becoming a shareholder and when

public money is put at risk, it all turned out great, but it was put at risk. the public has a right to send public purpose conditionality. and the one i think we've done the most good for was the hardest to get done with the lending. i think it would have been a reasonable thing to do sunday night maintenance of effort. just don't cut it. start your period but that you think we could pushed further that the danger is nobody wanted to go back to the lending standards of 2005 and we shouldn't be pushing that. but i think there is room. you're quite right to call attention. but there is room between nothing and create the lending standards. we just didn't explore that back