has to be tested, that what markets aren't paying attention to is those commitments by the ecb were made conditional upon the countries applying for economic programs. italy and spain aren't in a political position to apply for imf-style programs that would allow the ecb. and what we've also got to watch is the constitutional court in the germany is supposed to be delivering a ruling soon as to whether unlimited amount of purchasing by the ecb is consistent with the bank's obligations under the german constitution. and i think we could get a surprise in that the constitutional court could put limitations on what the ecb could do. ..

mauney view is that europe is going to continue to constitute the primary press to the global economic recovery in the year ahead and i simply don't -- i can understand the reasons why they want to be optimistic but i don't think that there is a real basis for being as optimistic as the europeans are on their economic outlook.

thank you. >> thank you, desmond. chris? >> thank you, alex for sponsoring this interesting session that we have been having for quite a few years. i think it is extremely important to note how much time has gone by since the break in the house in -- housing bubble. i'm going to comment on the housing side what is or is not happening in the banking sector and then finish up talking about the fed and some of the objectives of qualitative easing. the reason is one of the three criteria is in keeping interest rates so low is to encourage credit creation. the mortgage industry traditionally has been the primary, a year built for monetary policy. a drop rates, borrowing costs go

down and you fortunately in this cycle that hasn't happened so let me talk a bit about why that is. first to cover the obvious for the past year or more we have seen an improvement in home prices if you just look at the head lines you would conclude that we have had a reasonable recovery especially compared with some of the past few years losses by banks are down dramatically so much that they have been able to release their reserves back and help the earnings the past three years or more. but i would suggest you need to dig down a little bit below the surface to understand really happening. and now this is the composite home price index. if you take distressed properties out of the case schiller numbers we are only about 67% year over year.

that is to say the distressed by year is what was driving a lot of the price increases in the market early on and particularly in the areas of the country that had gone down a lot. as with the southeast, the southwest, nevada. all of the sand states particularly california. these markets were balanced and then they came back. you've also seen some of the secondary cities that didn't go up as much participate. there were two factors driving this recovery. one was the shortage of supply. there were not that many homes available going back to the earlier point and the other was the cash by year simply because there were buyers in the market who didn't need to go out and get a mortgage in the current regulatory environment. they were able to go out and act immediately. and we now have a direct connection between the equity

markets and the home price market simply because of all of the companies that have gone public in the last 12 months or more with an explicit strategy for purchasing family homes. this next chart tells part of a story in terms of the availability of houses. this shows you assets from banks, the blue line has gone down quite a lot. the other lines of the top of the chart are 90 days or more and more on the accruals. what that tells you is new desalts have been going down. this is why banks have been allowed by regulators to read these reservists and put the money back into in come up again helping their earnings. what we haven't seen is an improvement in the more difficult properties if he will the special lead the properties in the northeast that are still going through the foreclosure process.

they are still caught between the fault and when the note holder of the bank what have you gets control of the house and can sell it so as a result and steve like nevada which balanced from several years ago you still have an enormous percent of the population who are under water and they simply cannot sell their homes so even though you have seen a good improvement from the lows it is not nearly enough to get most of the homeowners to the point they can actually go out and voluntarily sell their house. , when prepayments extend the value of a mortgage servicing as it goes up as well and this has had a big influence on earnings

for banks for the past couple of quarters. the amount of cash transactions analysts think about. one of the things i always like to emphasize when we talk about home prices is one of the two main drivers. jobs and consumer income. in both cases we are seeing a fairly weak recovery in the housing market excluding investors, excluding cash by year's. what we talked about before that purchase, that first-time family. in part because we have a kind of schizophrenia right now in terms of policy. on the one hand, the fed is body of these treasuries and mortgage-backed securities keeping interest rates very low to encourage mortgage finance. particularly one would think in the agency market. but on the other hand we have dodd-frank, we have the foreclosure settlement and all

these new state laws that are discouraging lending. in fact what the fed is really saying with the new basel iii proposal is to not make any loans you cannot get a guarantee on and that is right now constraining the market terribly. something like a third of all of the prospective homeowners can't a mortgage from a bank today. so you have these two opposing policy positions, the bank regulator on the one hand, the monetary policy on the other hand and they are very much at odds and that is one of the reasons why this summer may be the peak in home prices in the united states. not in general if you'll see the average continues to move up at a decelerating rate improving month after month, i think they are going to dwindle and eventually you are going to see the hot markets as it was a couple years ago pulling most of the weight and save the 20 city

stops. this chart i think is the most important one in my presentation my friend provided this to me. this shows the change inlanders households verses printed households and if you look at the line that's the home ownership rate in the united states. it's down to about 65% right now it's actually a little lower than that. if you go back to the previous chart talking about distressed assets and real estate etc, once the banking industry works through all that, that home ownership rate is going to be down around 61 percent or perhaps even lower. again, the reason here is several fold. lack of income growth, lack of job opportunities in other words, the good employment market. and then also the inability of many borrowers to get a loan. most commercial banks won't touch you in terms of fico

scores. how many have a score of 700? not even half of the room. [inaudible] [laughter] the point i'm making is on the pendulum we have swung very dramatically from the period of say ten years ago when you could get a mortgage if you were breathing to today when getting a mortgage is extremely difficult. not only do you need to be employed by a third party in other words not self-employed, but you also have to have a number of the documentation points which frankly fries people out the market. the old days getting a loan based on your bank account records and all that is gone. you have to submit tax forms when you get a mortgage now and there are some americans who can't do that. this chart shows mortgage originations. what i like about this chart is

the blind and the green line it is total volume and the green line as refinancing. the red line is the purchase market. you can see what's coming on here. the purchase market really hasn't moved. it's not so much that we are seeing a poor housing recovery but we are kind of reverting back where you do indeed have very strict credit standards in relative terms. today alex was reminding us there was a time when the national banks were allowed to make real-estate loans at all. after world war ii we had a terrible fight in washington about making real-estate loans with. actually have. so, today we tolerate 20% down as the standard that's been set under the dodd-frank law. yet you can see that originations are not really very

strong when it comes to purchases. and more important become if you look operationally going back to the comment about layoffs with the banks are telling you is they are granted here back the resources that they have devoted to the mortgage finance in the future. the reason they are laying off people, transferring assets and getting rid of facilities is that they are having to make medium to long term plans about the businesses are going to be going forward and i don't think banks will get out of the mortgage business entirely. that's wrong but i do think over time it's going to become a much smaller piece of their own business. this is another striking chart that shows a couple of things with the portfolio holdings by the u.s. banks and then what they are selling into the securitization market. again you can see the top line that is the total portfolio is flat and slowly trending lower. it's been about 20% hysterically at the total bank balance sheet

mortgages -- >> what is that number on the right and? >> it's $4 trillion out of a 14 trillion-dollar industry balance sheet. but what you can also see is on the red wine is a little less than 2 trillion the sales, the purple line on the bottom are slowly trending lower they just don't have the volume to sell the mortgages and in fact they are keeping them. banks are actively bidding for non-agency loans come to, three come $4 million face amount because they typically have low loan-to-value ratios and credit scores and the will keep them on the balance sheet even though they will be penalized for doing so. let me just finish off by talking about the regulatory environment because going back again to the theme of the talk today when president obama

nominated him the road a piece about this because when i talked to my former colleagues, they really can't give me a straight answer in terms of explaining why they are doing what they are doing. all of the old rules firm monetary policy have been thrown out the window so the only thing they can think of is to keep interest rates low in an attempt to generate greater activity in the housing market and overall. so what have we accomplished by keeping the hungarian with rates low? corporations have been able to issue an awful lot of debt. maybe too much but they've also refinanced and they've lowered their credit costs. but we have an enormous amount of consumers, small business people etc who are pretty much locked out of this. now under the accord, the typical mortgage about 740 fico will have a 50% risk and other

words they have to put 4% of the face of the amount on the capitol. but once you start going up the risk curve down to 600 it is 100% to it and not only that because this is a long maturity asset 30 year mortgage it's going to get a capital charge, too so your typical bank treasurer when they are looking at taking on the mortgages to hold in their own portfolio is looking at 120, 130% risk in other words ten or $12 worth of capital. that's very expensive when you remember they could buy three times as many with the same amount of money. what we are saying is don't make real-estate loans. and given this policy, you have to go back and say to yourself why is the fed doing what they are doing? because ultimately by buying a lot of mortgage-backed securities the only thing you are doing is encouraging the banks to make agency loans and other words they get a mortgage

that they get a guarantee from the u.s. government. the of their final point i would make quoting the most famous part of the dodd-frank law, barney frank's favorite i think, is skin in the game. this is when they said if he wanted a private mortgage security outside of this agency market that's been defined for us, you have to keep extra skin in the game in other words you have to maintain more of the deal. the only problem with this is if you know anything about the subprimal market, the biggest buyer of the nonperforming loans in the country we also securitized many of these loans. we'll these more than 5%. it's the nature of the business. when you make a sub prime loan, you typically reserve most of your profit. you don't take the income the way that you would do as an agency loan so off the bat is a different business but when you look at the way the agencies have implemented dodd-frank, the qualified mortgage definition for the consumer side and then the qualified residential

mortgage for the purpose of securitization they have equated to two. they are the same. what does this mean? it means the least of the borrowers, the bottom furred if you will, they have to pay the tax because of their mortgages included one of those deals according to my colleagues it's somewhere between half to three-quarters of a point a year. the other group or all of the borrowers whose loans are too big to be sold under the agency market, they are going to pay the tax, too batt meanwhile we have enshrined government in this little playground called qualified mortgages, and they pay nothing. what is the policy purpose of that? and i will end my remarks. thank you. >> chris gave a slightly different version of viewing the government as a whole with the wing in the opposite direction,

the credit regulations severely constraining the mortgages at the same time the fed is buying up mortgages to expand them that is a curious contradiction i think. my own view is nobody knows all of the things happening in the financial system as a result of the fed's huge market innovation my guess is the interest rate of the whole system has probably been magnified in some extremely large fashion that we are going to find out later on when that comes back to bite us. john? >> thank you. a4a is coming back to bite us. it has each of the panelists was discussing the post bubble period we haven't really talked yet about the post bernanke fed

but i will do a little more of that in terms of the challenges that we will be facing. the big fema and i tried to explore this in one of the economic outlooks which is basically looking at the global financial crisis and the challenge of american wealth accumulation is that the fed has been put in a very difficult position. if i look at this broadly, i kind of see an oscillation of which american households that are trying to preserve well are running to the stock market, to the housing market and back to the equity market. if you think of the last almost 20 years, 15 years, the late nineties of course we were building a technical level and you can remember -- you can

recall how everyone thought stock prices would only go up into the tech revolution and of course we burst the tech bubble in 2000 and then in the aftermath of that, the fed was very accommodating and we bill build a house in kabul that burst in 2008 and now arguably in 2013, we may have created or at least started to create another bubble that in some areas and some real-estate markets is also turning into a bubble. new york city, toronto, other urban centers especially those attracted to the foreign buyers are seeing very rapid increases whereas the more rural areas that's not happening.

so, how do we respond to this and what does this tell us about the future? one of the things that has emerged is the financial and real estate markets have in the united states and elsewhere developed the kind of uncomfortable dependence with the central-bank that is if markets let's say equity markets in the last several years are very resilient in the face of threats. we saw this in recent weeks where all of the hand wringing and talking about we are going to default markets were pretty, about it and admitted there was a settlement.

stock prices rallied to the levels above where they had been a month ago and nobody thought we were going to -- or a month and a half ago nobody thought we were either going to shut the government down or have a debt ceiling crisis. and i think part of the reason is again disco dependence that the prospect of a problem that might cause problems for the goals of accumulation like the equity market or the real-estate markets doesn't bother most investors now. the fed won't let anything bad happen. and will be interesting. it's hard to gauge what part of

the level of the equity market and recovery in some of the real-estate markets that have been chronicled here are dependent on the notion that there's not a lot of risk in terms of accumulating assets that the fed will be there to rescue that bit of a wrinkle over the past quarter. you'll recall that prior to the fiscal crisis in the u.s., analysts could talk about nothing but the said the decision to taper that chairman bernanke hinted at in may that was a virtual certainty before september 17th and the fed decided not to and the observed

in the written statement on the web site or chairman bernanke's press conference one of the concerns was that interest rates had gone up over 100 basis points and so the affordability of housing had been sharply reduced. some people were rather calm about it. but a move in interest rates from 3% to 4% i think on a typical mortgage i did the math. let's say two and $50,000 mortgage or looking at a couple hundred dollars a month for many households that is a problem. so here was the fed is thinking about i think ending some of the co-defendants in a peery post bernanke world to use the title here. and i think wishing they could get out of this circle they were

in and wishing was a lot of dissension. and just probably they've taken a lot of heat and it's probably not doing a lot of good. it's controversial and difficult to do simulation experiments on the effect because we only have a few years of data. but it's clear that if we look at average growth rates for the past four or five years, they are about 1.9% in the u.s. with inflation drifting lower. so to whatever extent printing money to buy government bonds and mortgage-backed securities has been undertaken it hasn't really let the economy on fire

partly because the demand for cash remains quite high in a world of a lot of policy uncertainty in the event risk and companies hold a lot of cash. individuals hold a lot of cash partly because of two basic reasons. one is the option nullity that cash gives you and so companies like that if things go badly and opportunities arise if you've got cash, that's good. and then if you are a large corporation and you can afford to do that that is an attractive idea. so, against the background and just to put things in perspective i went back and looked at the net worth of household and non-profit organizations which is the real net worth that the series of the fed maintains just to try to scale the housing bill will

collapse -- bubble collapses essentially leading up to the trough, which would have been around the end of 2008. households lost 20% of their net worth which is substantial needless to say. and efforts to recover have been reasonably successful. i think now if we look at the wealth per capita in the u.s. it is measured by the fed which is as good a measure as any. the recovery has been about 92% of pre-2007 levels which is good. but i think most american households have developed the notion that they ought to be getting a little bit better off every year and to have gone seven years without real

obtaining the old level of net worth is obviously problematic. the result, there are two results. one in terms of consumption if you look at an adjusted consumption pattern and the charges -- the paper here on the wealth accumulation consumption is very weak. this isn't a macronumber obviously. some people are doing very well and others are not. but if you look at it on a macrobasis, consumption is running way behind a typical post war expansion on the order of over a standard deviation below the typical point at which we find consumption this far into the recovery. remember the recovery began in

june of 2009. and it's probably a reasonable date. things got so bad that they started to look a lot better by the middle of 2009. and now i think so that puts us into the -- sheeran just giving you a little bit of macrobackground. we are in month 54 of this recovery. so another thing that's happening here house we moved further and further past the crisis is that the clock is running. we are having a recovery. it is a tepid recovery and it's actually starting to reach the average length of recovery in the post war u.s.. a typical post war recovery in the u.s. and this is with a somewhat pro-active central bank in the last 58 months.

so one of the problems that we face here as we are raising questions about how the central bank, how aggressive the central bank can be in supporting real-estate values and equity values we have experts in the field suggesting that there may be some signs of overly stretched valuations and the role played by investors and cash by year's in the market paid by investors and cash buyers in the market probably the data suggest is getting less pronounced partly because the investors have driven up the price of the units they want to rent out. financing costs are a little higher and so that portion of the real-estate recovery which is really not a matter of everybody feeling better and

willing to spend more on a house it is more a matter of investors saying blackstone bought huge portfolios of existing real-estate and rented it out and securitized it. meanwhile the flow demanded drawn from the market set the pattern will be familiar that if if the housing sector needs more support the somewhat difficult decision because they have pretty much offered as much support as they can they have indicated this year in the second quarter that they were a little bit easier about the major instrument they are using which is quantitative easing

which entails who had the picture of the balance sheet. the fed owns a lot of treasurys and the unknown a tremendous portion of the mortgage market and they have to hold it at least and the problem that alex pointed out is yes they may not sell any of it but when they stop buying it and that is what tapering is all about, that may be a problem. so i think i go back to the theme that a number of the panelists have suggested it may be the as good as it gets stage of this modest bounce in the real-estate sector into the equity market leave it to the equity experts certainly the

valuation is based on the yardstick that is slightly high so it's not as if the stock market is a bargain. so again, five years plus into the post bubble period we found a great deal at least getting the wealth back to where it was and we are almost there. the vehicles have been the equity markets and the real-estate market and the implied code dependence has become underlined by the recent experiment with abandoning let's see when they meet in a couple weeks they have to revisit that issue but i expecting they won't want to go anywhere near a

discussion of changing the policy at this point because it is so sensitive. going forward -- >> i never run over. [laughter] i think that she does need to give a big speech after she is installed as the fed chairman and she needs to -- this isn't a forecast on just saying under current circumstances she needs to establish a out least two points. one in the very basic i don't think anyone would disagree the fed can't do everything and certainly they've been asked to do a great deal so she's going to have to somewhat lower expectations about what the fed can do. second, very uncomfortable and i

guess janet reinforced this with of the commitment to keep interest rates low until the unemployment goes down to 6.5% or lower. the problem i have with that is that there is no empirical relationship between interest rates and the unemployment rate and it's not clear that the fed can produce a long rate effect on unemployment so they're in this awkward position of having made a commitment but may not be fulfilled and yet they will be publicly held to continue to try to reach the goal without being able to do so. last, disinflation continues both in europe we are seeing more. there's an interesting piece today. the u.s. and japan is struggling to overcome that.

it hasn't gotten there yet. so we have monetary policy fading and then of course fiscal policy is being consolidated in most places and most aggressively in the united states notwithstanding the fiasco we have seen for the past several weeks. so, five years on i think that this post bubble recovery is getting a little long in the tooth and the role the central banks are playing is becoming problematic. so janet has a lot of challenges and i will leave it there. >> i want to give each member of the panel one to two minutes to review anything anybody else said or add something or clarify something. >> just want to make it plans to emphasize what john finished saying. when you look at the efficacy of

the actions what is the actual benefit in terms of the unemployment rate as opposed to the problems of withdrawing so we can't see that it's doing that much good but we know what the team is of withdrawing it. a sort of reminded me of an old joke coming upon somebody kidding themselves on the head with a hammer saying why are you doing that and the answer is it hurts too much when i stopped. i guess i think back to some of these sports teams are we supposed to be in a painless society or should we accept the fact that breaking the code dependency with the fed is going to pause caused some pain so that i think is the policy issue at the moment as opposed to what john said do we expect a further decrease in unemployment rates

mark? >> just wanted to ask you a question. do you remember the last time we had a market where the purchasers were gaining in the same year? >> not off the top of my head. >> sometime in the 90's to you think? i also wanted to ask and this might be too obvious that you didn't mention thus efp be. >> i was focused on lenders but i would say that is probably the single biggest obstacle to americans getting loans today. the intent was to protect consumers, it's protecting them from getting a loan is the

bottom line. >> good questions. >> desmond? >> i guess i would take a different view on the quantitative easing in that i think that one can't say that quantitative easing hasn't been effective because it hasn't got the economy to grow very rapidly. one way we have to look at with the counterfactual would have been that put out quantitative easing we could have go back into recession and i would have thought that if the quantitative easing brought down interest rates at the long end to the kind of level that we saw and it boosted the prices i would have thought that the quantitative easing would have some affect and maybe the problem was that there wasn't enough quantities of easing. >> i wanted to pick up on an important plan that's already

been mentioned which is there is no empirical connection between interest rates and jobs. one of the central policies of the policy mandate going back many years is this notion that they can manage both employment and pricing. up until bernanke year of that was called the tayler rule that had a trade-off between inflation and jobs was the operative model but that's now been thrown out the window. so today, again to repeat if you talk to people at the fed about why they are doing what they are doing, they cannot offer you a rational intellectual construct. there is none. and you look at what has happened in every one of the asset class is that have been discussed today you do see bubbles and investors buying family homes to essentially run them as rental properties for single-digit yields if you do

everything right. it's one of the biggest rental properties in the country and we are very good at it, but it's a very tough business. it's a business that you don't want to see a lot of leverage under me. that's why it's traditionally been a mom-and-pop cash business. so it's not to say you can't make money renting property but the fed has managed to convince wall street that this is something in and i think when you look a tough third world and another class's that have been affected by quantitative easing you have to ask yourself is this a good thing? and my answer would be no. i think we are living in an anomaly and when the policy changes a discount to be an extremely painful process for investors, consumers and others. last point, inflation. does anyone in this room think the cost of living is going down? i think the fed has already hit their target and the need to admit it. >> thank you we should have put

the last slide up again. >> quick response to two points. quantitative easing i should have distinguished between marginal and average impact. certainly the quality of easing has had a supportive impact on the economy and had it not even been attempted, i expect we would have been having slower growth. i'm really thinking about what's suppose the economy slows down for whatever reason. rescue e for granted to as much as que e3? i'm concerned it's not so i'm talking concern about the diminishing marginal impact. the bubbles question i guess i should add to the speech i think janet needs to be very clear that the fed will be watching asset prices on both sides.

that is if they're appears to be a bubble they will take that into account. that is a very delicate discussion. it's sort of the inverse of chairman greenspan's 1999 testimony and everybody said that's a great. here we go. but given the presence of the alternating bubbles in the stock market and the real-estate market the fed really us have to pay attention to that and they have to be explicit that they are watching it and they have to be sure that in reacting to a market response like some of the problems we've had in the past that they are not just inflating the bubble further. so that becomes a big challenge.

i think a bigger challenge. janet takes over at a time when the fed's neutrals have probably been pretty much used up in some cases or are beginning to be counterproductive. >> thank you. before we open the floor to your questions i see the first question is back there. before we get there i want to say that inspired by the focus on the aggregate in inflation-adjusted wealth of american households we just looked up the numbers again in a 60 year history, and it turns out that the trend line for this history is approximately the average growth rate of gdp, just what he would expect so 3.1 or

3.2% on average is the growth in aggregate household wealth. and that's the same as the growth rate in real gdp. but when you look at the chart of course there are two huge diversions from the trend. first, the equity stock bubble house john said and then the housing bauble and the danger is in both of those cases the wealth people thought they had was completely illusory. the introduced a kind of mass psychological illusion about what wealth we had that really isn't there. and if you look at it over the longer term you see it right back and it's reverting trend line that is what you can expect, not the bubble behavior but they are extremely or the asset price inflation are extremely insidious in that way. let me come to the questions and may i just remind you of the aei

rules. please tell us your name and affiliation and state your question. i will get you second. if you go for too long a preface to a question the chair will remind you to get to your question. first question back here, please. >> banking consultant. i think all of these conferences -- this is an excellent one as had been the prior ones. i have a two-part question for desmond. first of all, i keep reading a lot of articles in recent months about the fact that we still of a lot of catholics banks that need restructuring and there's more bank insolvency coming along and address to be a substantial of the tax payer money funded by government debt.

i wonder if you can comment about the magnitude of the bank restructuring that europe still faces and then related to that you talked about the public debt restructuring. can you give a little sense of what that might be in terms of where it is going to occur and how it might occur? if they have to spend more money this is going to further aggravate the public debt problem. >> you just described with the president called last week the disastrous government bank nexus. that gave you an extra ten seconds to think. >> there's absolutely no question that there's going to have to be quite a lot of money put into the banks particularly in the periphery basically what you're seeing is very large loan losses. we know the banks are undercapitalized and think about

places like italy, portugal, spain and greece where money is lent to have to be cut their. but something that is already very important that they are paying that much attention on is that, germans have made it rather clear that part of the restructuring of the bank's bond holders are going to be bailed them so that they will be tapping for taxpayers and we have a model of that for the case where koppel they went after the depositors of 100,000 euros. that is what we will see if money might be thrown at this by the various governments but also involve private money.

i think the german position seems to be that it should be done by the national governments which as you say would add to the debt burdens. just in terms of the debt structuring it would seem that the debt ratios 125, 140% and rising that is not sustainable in the low growth disinflation kind of environment. so you're going to get restructuring. i think it is just a matter of time. the country's your most likely to see i would think would be portugal would be very high up the list. but you can also get places like italy doing it. just in terms of greece there is somewhat of a dispute between the international monetary fund and the european governments and i think the european governments on the one side would like to see the debt write-down but that

would mean a tax payer would have to recognize that there were losses on the proposition the would probably work in the end is that they will turn out these official loans so the greek loans will be made into 50 or 100 year loans and ridiculously low interest rates so even though you might have a debt ratio that hasn't changed might be at 175% from the effective point of view that's the same thing as writing down the debt. >> the economic write-down by which you try to avoid an explicit right down. >> i think it is referred to triet >> the next question here and then i will come to you. >> documentary film maker. i was fascinated by chris's comment about the relationship between interest rates and

employment growth. in the economic theory there is such a relationship but my question is what does this mean? does it mean the fed is rethinking these neo-classical models they've been going through? what does this mean if in fact doud is being cast on the relationship cracks >> i guess classical and the neo keynesian sense. i wrote about this in my book back in 2010 since the 1980's when we first really confronted a drop-off in demand the fed has used interest-rate policy to boost consumption and this is how we've driven gdp in the nominal terms. but if you get the interest rate charged it's gone down and down and down. we have loosened credit criteria for housing particularly because housing was a great driver for employment and demand. and so i would say it's a distortion of the classical

rules because there is a price stability rule in their somewhere, too and then was thrown out the window. i would argue that we have always had a modest to a relatively high rate of inflation hitting consumers despite what the statistics say because that's what you see flat to down the income for consumers and that's why you see the weak job market because the same cost pressure that's heading families when they go to the grocery store. it also makes it difficult for employers to add new employees. it's the same environment and going back to the earlier comment what are we doing now to make up for the excess caused by the policy decision of the last ten, 20, 30 years? we are now going to penalize the savers and take all of their income and force them to be essentially taken below the real rates of return to subsidize the remediation. i think that pretty much

discredits what i would call the neo keynesian socialism and that's how i would characterize the fed policy going back half a century. it's like we lost the cold war. i wrote about this years ago for a white to -- right wing group in new york. we ask socialist policies as the core element of essentially keeping people out of the street. you give them a nominal growth but you are killing them in real terms. >> just a quick comment. a very stimulating point. about the relationship between interest rates. i think in that normal times if you can get interest rates down people invest more and if they demand more they make a lot and that's good. but we are in a situation where real interest rates are zero to - and we still have some

standard net investment and so that sort of is a classic textbook case where for some reason or another we are out of investment projects and even if we keep the the real interest rates we can't get companies who want to add to their capital stock and so they are also not eager to add to the labor stock so that's why i'm concerned about saying we're going to hold interest rates at these levels until the unemployment rate goes down to 6.5% that's going to be difficult. leaving aside the measurement issues. >> to is the most you get. >> if you look at a couple charts on the presentation, the thing that's missing in housing today -- and this goes back if you want to talk about classical economists, credit. despite the uptick in home prices the past few years you've

seen a essentially a diminished credit and housing. once the cash buyers are done, once the supply normalizes, so not many markets will still have tight supply coming you have adequate supply for home buyers i think we are glad to see flat home prices going out over the horizon simply because you have so many constraints on the new families etc and you also have come strings on credit creation. so if you lower interest rates and don't get the credit creation then obviously that relationship is broken. >> mark has a comment and then we are going to go on to the next question. >> i think probably the relationship the fed sees between the employment and the lower rates is the low rates on the mortgage markets, the mortgage housing is a great driver of employment. if you start building houses you get construction jobs and retail

jobs with costs and that this may be the relationship. >> thank you. question cracks we have the microphone. >> right up front here please. >> considering where interest rates are and the regulatory constraints that some of you have alluded to, is there any connection between the credit tightness and the payment of interest on the excess reserves clacks is that a further reason to hold back? >> let me give a background on that. we have a balance sheet now of which 2 trillion are excess reserves in previous would have

been on preserving given the banks a reason to try to employ them and invest loans that now there interest rates which is a quarter of a percentage isn't much but it's the same as you would get in the short-term money-market investment so how about this relationship. >> part of the problem is even though there are excess reserves, quote come excess reserves in the system, it's difficult for the implied high level of liquidity for the banks to turn in the loans because they are supposed to be lowering of the leverage and that makes it difficult for them to undertake. so you get a big drop in the so-called money multiplier

because you had a big increase in the excess reserves and not a big increase in the overall loans. the regulators are telling them they are supposed to be holding back. and i think the banks -- and chris knows this very well. they were largely traumatized not wanting to get back into the mortgage lending it's difficult for them to compete in other lending because companies can borrow so much in the open market. the banks aren't serving the financial intermediaries for some reasons that are related to the overall weakness of the economy and the reluctance of the fed to allow them to expand and the regulators to expand their lending activities. >> i want to insert a question here because we had a bold forecast of house prices from

chris which was in an intermediate term flat. is that flat or real? >> may be flat to down real. >> flat nominal and down in inflation-adjusted terms. that is one house price forecast. now i want to ask both jay and d'marko are experts on the house price forecast. >> i see things that are not going to continue the jumps we have because there are certain factors that are special in terms of the recovery and some of the worst markets as we get to more of a normal increase. but i think we are probably looking at the range of two and a half to four percentage increase on sort of a ongoing basis and foreseeable for many dozen at the moment but that we are going to see some -- i have

a somewhat different view of household formation and demand. .. >> kahonas on economics, hong kong. why is the economy growing so slowly? i think when you mentioned trim growth rate of 3% and consumption, we're not there. with record low interest rates, and we've had qb for five years

and we're five years into this recovery and yet we are going so slow. why? >> excellent question. chris? >> going back to what we said before, in the last 30 years housing has been one of the biggest drivers of employment and income growth in the country. if you think about what the fed is saying with today's policies, given that consumer income is flat to down, what they're really saying is go to home depot, get a credit card and spend less. because if you don't have growth in income and jobs, or else is the demand going to come from? it's a long-term issue. i think it's an issue that all countries around the world are facing, excess capacity. it's almost like 100 years ago prior to world war ii where you had a lot of innovation, the electrification of the united states, for example, before world war i had begun. and it made us more productive and put a lot of people out of work. so we're in the same place today for a different reason.

>> desmond? >> i don't think that's surprising that, in fact, was anticipated by many people like reinhardt, the after a financial crisis of the soviet in 2008-2009 with a lot of people highly indebted, wealth affected, the expectation was that one would grow very slowly. i think that when you look at the united states in 2013, part of the reason why we have grown so slowly is this massive amount of fiscal tightening round about two percentage points of gdp that have to do with the deal on the fiscal cliff, sequestration and so on, so that there's a really a strong head wind that is slowly what would otherwise be a recovery. once one goes into 2014, the hope is that with less fiscal restraint you could get somewhat more of a pickup.

>> john? >> yes. quickly, just to add, there is no single reason it keeps -- you know, depends on the year. right now i would just list four things. we're in a liquidity trap. so monetary policy doesn't do a lot of good, as desmond suggest we have a lot of fiscal drag in the united states. thirdly, we have a lot of policy uncertainty, which some recent research has suggested can slow growth. and, finally, the global economy is slowing as the imf has acknowledged. not a lot of good things happening. >> mark, and then we'll go to the next question. >> i think that one of the reasons is quantitative easing was supposed to produce the kind of results that jeld wen was referring to, kind of just hasn't. >> jay talked me into adding a

comment. >> thirty seconds. >> equity at some points john made. i go around and talk to bankers. i ask them what's only are customers back to the big issue is uncertainty, was economic uncertainty, tax uncertainty, regulatory uncertainty. when you look at all that do they want to have a big new investment at what might turn up at the peak of the cycle going into recession? that's what's holding them back. >> thank you. yes, please. >> i would like to hear the panel's views on the issue of whether high income inequality slows growth. >> anybody want to take that? john? >> that's obviously an interesting question in this current situation. i don't know of any good

empirical work in the area. and maybe some come and, obviously, someone can jump in. if anybody has done it, the world bank, imf to have done it. but i don't know if there's any reliable empirical relationship between the two, if he did a carefully controlled experiment. and then secondly, i can't think of a theoretical reason why rising income inequality would slow growth. i guess one argument would be, well, the marginal message to consume for hire individuals is lower, so you get a reduction in overall spending with rising incomes. i would say so far in this post bubble recovery, high income individuals are certainly pulling their weight when it comes to spending. you know, i think, and the

financial times has this biweekly section of how to spend it. you know, the new million and billionaires in emerging markets are big spenders. and so, you know, they are to some extent buying a lot of stuff that's employing a lot of people. it's a question that's interesting, but on an empirical and theoretical basis, i can't come up with a good, quick answer. >> chris? thanks, john. >> that is part of the narrative now. you hear that a lot in media, income disparity. but i always come back to our tendency to understate inflation with the statistics. so if almost half of total income in the country comes from transfer payments, and if there cola is less than what it should be we are not getting any growth, right?

if anything, it's a drag. same thing with the private sector. they have had to adjust the competition from outside the country to all sorts of other factors, and they also see the cost of living going up much faster than wages. this is what income growth is flat. i think we have to accept the fact that we have an invisible tax. we don't want to pay for all of the services provided by our government. we fund it through debt and to accommodate of monetary policy. and attacks, the cost is that we slowly erode real purchasing power. as i said before we also make it much harder for employers to add new employees because of costs. >> as you said before, we ask appropriate things. >> i would just like this i think the causation is the opposite direction. i think where we of low growth that causes greater income inequality. i think if we had festered growth, we would see income, across the board. >> thank you. other questions?

all right, seeing none, i want to thank you all for coming. and let's all o get our appreciation for this excellent panel. [applause] [inaudible conversations] >> and taking a look now at the white house where earlier today president obama talked about the problems with the federal health insurance exchanges that opened on the first of this month. we will take a look now at some of what he said. >> there's no sugar coating it. the website has been too slow, people are beginning stuck during the application process, and i think it's fair to say that nobody is more frustrated by that than i am. because precisely because the product is good.

i want a cash register to work. i want to check outlines to be smooth, so i want people to be able to get this great product. and there's no excuse for the problem. and these problems are getting fixed. but while we're working out the kinks of the system i want everybody to understand nature of the problem. first of all, even with all the problems at healthcare.gov, the website is to working for a lot of people. it's not as quick or efficient or consistent as we want. and although many of these folks have found they had to wait longer than they wanted, once they complete the process they are very happy with the deal that is available to them. second, i want everybody to remember that we are only three weeks into a six-month open enrollment period when you can buy these new plans. [applause]

>> keep in mind, the insurance doesn't start until january 1 to that's the earliest that the insurance can kick in. no one who decides to purchase a plan has to pay their first premium until december 15. and unlike the day after thanksgiving sales for the latest playstation or flatscreen tvs, the engines plans don't run out. they're not going to sell out. they will be available through the marketplace -- [applause] throughout the open enrollment period, but prices will not change. so everybody who wants insurance through the marketplace will get insurance, period. [applause] everybody who wants insurance through the marketplace will get insurance. >> you can watch all of the president's remarks from earlier on our website. just go to c-span.org and we

posted a poll on her facebook page. you can let us know about your experience is with health insurance exchanges. lock onto facebook.com/c. spend waiting to come thursday, life coach of hearing on health care law. politico reports although health and human services secretary kathleen sebelius is not expected to be at the hearing this week she is scheduled to testify as early as next week about the problems and challenges. again, live coverage of this weeks health care law hearing thursday at 9 a.m. eastern. right here on c-span2. >> i never ever asked a negative question. i think it's insulting to the person you want to tap talk to and it creates a bad impression about what you're doing. you're asking for someone's time because you need information that will lead you to a better understanding of your subject. sometimes you get negative information when you really don't want to come and you

haven't even asked for it. i know, i remember calling a woman to ask her about a senate wives luncheon in honor of the first lady. she said to me, i know why you are calling. you want me to repeat those nasty things that nancy reagan was telling us yesterday about barbara bush last night -- [laughter] all i wanted to find out was how much money the senate lives had raised for mrs. reagan's drug abuse fund. in that telephone call i got more than i asked for, and i used every single word. [laughter] >> presidential history, american culture, biographer kitty kelley will sit down with your calls and comments live for three hours beginning at noon eastern sunday november 3 on both tvs in depth. in the months ahead look for other index guests including christina sommers on december 1 and mark levine january 5.

right now online at a booktv bookclub join other view is reading walking with the wind by john lewis. see what others are saying and post your own comments. find out more at booktv.org/book club. >> about a week and have to perform a second estate hillary clinton was recognized by the chatham house in london for her contribution to international diplomacy and her work in furthering gender equality before you should receive the award she sat down with robin niblett and they talked about a range of international issues. their discussion and just over one hour. >> ladies and gentlemen, welcome to chatham house.

thank you very much for joining us today. before anything else, and they will be a little boring, please make sure you don't have your mobile phones on. it would be a real shame to besu beeping through this and it would be a shame also to have a catch the microphone.you have been switched off. the far exit is overwi there. >> please don't walk out only. ' [laughter] >> no one is stepping out. so now let me just say it is my great honor to welcome hillary rotten clinton to chatham house. welcome your door institute. it's a pleasure to welcome yourm here not just have achathahouse. conversation with us, but as the winner of the chatham house prize 2013. [applause] >> t >> thank you. thank you so very much.just want >> what i like about opera's i like about our price, even theh onboard sometimes gets a littlee nervous, is that it is from apre

selection of candidates at i nominated byt our research programs. n er rur presidents narrow it down toearc thhree people and or members vote. the members are here, they votes for you, so it midakes a very special price i think the agende it was given to you for your great significant contributions to international diplomacy but niso, i know this is important t to you as well, for your roleal promoting the rights of women and girls and equal opportunities for them in the world. this evening we're going toand celebrate the award of the prize at a formal event, which lets us have an informal conversationmal today. i'm just very glad that you would be so kind, on and off and on the record format at chatham house, to be able to have this conversation today.cord we could go anywhere so what i'm going to do is start off by jus. kicking off with a few questions that i will ask. hopefully i will leave a whole bunch of things -- people arevea putting their hands up. this this is a bad sign to hang on s up.

for 20 minutes or so because this is the way were going to d] it. fo we've got time. i pr sobably won't take more thn 20 minutes, hopefully i won'tim. take up all of your questions. out ofu a fair amount of filibustering so the cameras will get a little quieter in a minute as well.fair but we can go in many directions we can go in many directions not the least because they think you kind of played two very fundamental roles as secretary of state. strategically and i think the the rebalanced let's use that phrase for american foreign policy the middle east in particular to the asian-pacific was clearly one of the strategic calling cards of your tenure as secretary but you are also involved very much in the trenches and having to make last-minute calls, tough calls to the process which is the job of the secretary of state but to a blended those two things that we can therefore in our conversation talk about grand strategy with u.n. could end up talking about some of those tough calls you had to make as

we go along and i hope we we can drop the insights of your experience for the future and not just for how things went during that time. we will kick off their fur were the big question. when you took up your position as secretary of state and this is one of your calling cards that phrase you used that there were questions about the future of america's global leadership in you wanted to be able to renew the commitment to the tools of diplomacy and engage with allies etc.. today if i look at the world i would say america powerful country easily the most powerful shale gas military bases all over the world strong alliances and allies. at the same time we have shut down. we have got the nearly but not the serious vote. i would say fears outside of the u.s. of a near isolationist instinct creeping into the body politic and you feel america still plays by its own rules. the prism intelligence gathering

was in conferences keeps coming up in america's role. with that is the setup do you think america has the capacity and cannot play a leadership role when he took office four years ago? the first robin let me thank you and thank the members of chatham house for this very moving award. i am a fan of your work and i appreciate greatly the float of the membership on my behalf and i think the question is one that has a very simple answer can't go yes. america's leadership remains not only preeminent but necessary that the world in which we live poses new challenges to all of us on an ongoing basis. that requires a level of strategic thinking and execution that starts first and foremost

back in the democracies that we represent. so i would never criticize my country out of my country but let me say that it is distressing at any point to see a political system that has weathered so many crises over centuries now being caught up in what are very unfortunate partisan disputes. however underlying them are questions about america's direction at home and abroad and i am confident that we will work our way through this latest challenge as we did that during my husband's administration in 1995 and early 1996 but i think

there is an underlying concern and it's not only in our country because we didn't take a vote that you did that raises issues about what are our responsibilities? how do we project power in the 21st century century which is both traditional forms as well as new so-called soft or what i like to call smart power cliques those are the base of society says they have not just inside the government offices. i'm looking forward to talking and specifics with you but i think it's too fair -- fair to say that the concerns that we have to be aware of when we look at the international position of the united states has to really come from a wellspring of effective decision-making at home and that's economic and social growing inequality, the sense

that in the united states and in europe there is an ongoing debate about how we continue to provide the best services at the most affordable cost to our citizens because that after all is really the core of what we can do around the world. i am confident that i think the debate we are having is one that requires very serious analysis and thought. >> doesn't cramp the style of the secretary of state the fact that this domestic dimension is so powerful today. we have got publics being battered by a global financial crisis by at least not good handling of key crises in iraq and afghanistan how they are managed. therefore the room for scope for leadership is minimal. presidents or prime ministers

find that they want to take the lead. the role of the secretary of state has been quite a difficult one in terms of being able to follow through. how do you find that role as a secretary of state in particular? p. i didn't find it difficult. i found it very challenging because of course i took office with president obama -- when president obama was sworn in the myths of the economic crisis and i think it's easy for many to forget how close the world came to a much more serious long-lasting economic recession even depression. i think it was something that required american leadership. i'm certainly aware that some of the reasons for it lay in american financial decision-making and perhaps lack of regulatory oversight but the fact is that when i came into the position the president and i

talked very openly with each other about how important it was for me to get out around the world at that moment making it clear that we have confidence and we were going to recover while the president had to deal with the congress and the immediate effects of the economic crisis. that is basically what i did for much of of the first-year starting as you say by going to asia which was unusual if not unprecedented for the american secretary of state but it was an important message to send in part because china which to this day has heavily invested in american debt was raising questions and wondering about the decisions that would be made by the new administration. there was a feeling that because of the war in iraq and the aftermath of 9/11 and then of

course afghanistan the united states had shifted attention away from asia and that was of concern to a lot of our allies. and in europe there was also a worry that the contagion of the economic crisis plus what was felt to be a less than ongoing level of attention from the prior demonstration. i went to asia and i came to europe and came in part to consult and hear out what people had to say but also to convey a message that we were looking at the entire world. of course we will always be concerned about the middle east. we had a war in a wind-down and we had a war to try to resolve. that was very much on the forefront of the national security agenda. we wanted to get back into a

more cooperative consultative role with our allies and partners and partnering to send messages to others. >> is pointed out the trip to asia and the world that you played in the rebalancing of the foreign-policy in balance towards the asia-pacific. you mention china and pushing its strategic and economic dialogue and had a strategic partner that that which was important at the same time you were forceful advocate for your ac on allies in southeast asia and the philippines singapore etc. in and other countries there. how do you balance the positive message to ozzy on allies to china but who has seen the morrissey -- area. did you feel this with the chinese leader's? b. there were concerns on the

part of the chinese over what this meant. but when i planned that first trip and presented the strategy to the white house i wanted to integrate what were different strands of our environment. there is a very strong argument that a rising china has to be the central focus of american foreign policy in the asia-pacific and increasingly even globally. the hope being that do that kind of involvement as bob zoellick said we could move towards china becoming a responsible stakeholder. there were traditional allies. we have treaty alliances with japan and south korea and thailand south korea and australia and there was a feeling on their part that we needed to be much clearer about

what american interests will be in the 21st century that we were a resident specific power that we have obligations and we needed to more forcefully present those. and then there were the asean countries some of whom he had alliances with but which was a much larger group that was looking to try to figure out how to do their own balancing. what i said was i didn't think you could pick among those choices. you have a more comprehensive approach partly because we have existing obligations but also because it seemed to me as we charted our course forward with china we wanted china to realize that we were in the pacific to stay. the rate they are not as an interloper but as a participant. therefore we wanted to become more involved in the regional organizations on that first trip. i went to jakarta and signed a

memorandum saying that the united states would move toward the treaty of amity and cooperation, something we, something we have ever done but something that was very important to the asean nations and indeed in china began what was a very candid conversation and i think there were certainly some areas of disagreement. we know about china's historical interest taiwan and tibet which they race with the united states their sensitivity that human rights all of which were on the agenda. but then we were looking through this new vehicle that the strategic and economic dialogue to take what hank paulson had done on the economic side with tim guyton or and i working together to expand the discussion because i think the chinese would have been very happy to stay focused on the

economic issues and early 09. part of that was you were going to get your house in order argue to make sure our investments in your dad are good ones but also we wanted to bring investor t. chick. there's a long list claims of the south china sea and claims of the east china sea. the complex that have occurred over assets and potential resources with vietnam and with the philippines and the back-and-forth arguing with japan. the continuing threat posed by north korea which is a very much of a chinese problem. and potential -- potentially a solution so we wanted to broaden the aperture so we were just talking about current evaluation. we wanted to have a broader discussion and we wanted it made clear that the united states was was there to stay. >> there was a moment that you

must have wondered if this would hang together. it struck me as remarkable moments as secretary of state was china there was a few moments in 2012 when device may or gave himself up to the u.s. embassy in beijing which had to handle in a particular way in three or four months later cheng kuan shang had to be rescued and that was just before your next strategic economic dialogue. can you give us a feel if you can for how you managed to approach this? the well it's always a challenge when things that are totally unexpected happened. i like to have these virtual inboxes in my head. the immediate screaming crisis, the brewing crisis in the long-term crisis. i also try to keep a big box of opportunities.

it is a great example of the way i think the expanded strategic and economic dialogue helps us resolve to very difficult issues. because what i try to do in the dialogue was to really embed in the governments of both of our country's issues so that there was a lot more interchange. i came to believe that the chinese for their own reasons and because of there own way of governing believed that somewhere in washington there is a master plan about what we intend to do to try to control their rise. i see my friend kevin sitting in the front row. he and i have talked about that endlessly. they really do because they have plans and they have all kinds of processes and they have never understood that just like quality of american government

and democracy. [laughter] so you know what i try to do was begin to strip away some of the misconceptions. we do have views. we have interest and we have values that we are not opaque. we want to share with you and we want you to begin to share more with us. when as you say the right-hand police chief showed up in in the consulate conquered not in the embassy competition is up at the consulate asking for asylum because his story which was quite dramatic about him knowing that he had killed one of your countrymen, he did not fit any of the categories for the united states giving him asylum. he had a record of corruption of

thuggishness brutality. he was an enforcer for bushy live. they may have had a falling out and now he was trying to somehow get his way to a place of safety but on the other hand the consulate was quickly encircled by other police who were either subordinate to bushy live or are looking to curry favor. it was becoming a very dangerous situation. what we did was to tell him that we did not move into the consulate and there was no grounds on which we could offer that to him but he kept saying he wanted to give the truth to beijing. he wanted the government in beijing to know what was happening so we said we could arrange that. indeed that is what we did and we were very discreet about it and did not try to embarrass

anybody involved in it. but try to handle it in a very professional manner which i think we accomplished. fast-forward -- i get called late one night about chen who has escaped from house arrest quite remarkably since he is blind. had broken his foot in the escape had been picked up and was seeking asylum in our embassy in beijing and was on his way there. of course we knew of his courageous history of dissident activity and we knew he was a self-taught lawyer who had very bravely taken on the one-child policy of china suing local officials and others for their behavior. it was as you say a week before

annual strategic and economic dialogue meeting this time in beijing. i was very well aware that this would be an issue in the relationship but i also believe that this was an example of american values, that this was a man who yester served american support and attention and protection. so lots of back-and-forth as you can imagine and then i finally made the call and they said we are going to send their people out to go and pick him up. there was a rendezvous. we got him into the embassy got him medical treatment for some of his injuries and you know then had to tell the chinese government that you know we were offering hospitality to one of their citizens and would love to talk to them about it. campbell who was my assistant secretary for asian and pacific affairs immediately got on a

plane. we were fortunate that herald company the head of my legal department compound and incredible international lawyer with his own history of dissidents. his father was unable to return home from his position at the u.n. because of the coup in korea so he had a feel for this. we tracked him down. he was one of our strategic economic dialogue working group so we got people to the embassy and they began talking with mr. chen and then they began negotiating with their chinese counterparts. this is a long story and i don't want to take all of our time but it was a very touching touch and go situation. we were able to negotiate with the chinese. safe passage for his family. he hadn't seen one of those children in quite some time to beijing.

we were able to negotiate an agreement that he could attend college something he really wanted to do and he didn't want to leave china. he loves china and the also very much believes that if he could just get his story to the upper echelon of the chinese government they would agree with him because so much of the mistreatment he experienced was at the hands of local and regional officials. our team did a great job to go shooting this. he needed further treatment so he left her embassy totally voluntarily. he called me from the van on the way to the hospital and said if i were there and it would kiss you and i said i'm very happy you are so happy. >> that's a tactful answer. >> so we got into the hospital and his family showed up. rightfully they were saying are you sure you can trust the

chinese government and are you sure they are not going to throw you in prison? this was a man who had been under a lot of stress and he began saying i'm not sure, i'm not sure. he tells us i don't think that's a good deal make you negotiated. yes, i know. i said excuse me? i mean really. so what would you like? he said i like to go to america. okay. after saying no, no. so we worked out an arrangement that he could go to new york university to study assuming we could get a second agreement with the chinese. this is where i think all the work we put into this, all of the incredible planning and one-on-one meetings and very candid conversations that i gave jen with my counterparts and others did with tears because i had to go to the counselor and i

have to say this is in your interest in this is in our interest and there has to be a way we can work this out. his first responses we never want to talk about this man again with anybody and we can't go back into negotiations. i said we have to. we need to start now and we need to get this resolved by the end of our meetings. we did it in a way that really i think the allocated the kind of arrangement and they almost daily work that went into it. the final thing i would say about it which was very touching to me -- this was really touching. one of the things that i was asked to do because i still had meetings on my agenda agenda with president who gentile and premier wen jimbo and they said please don't mention this and we will try to work this out. so i did and then we had very formal predictable kinds of

meetings and then we were having an offense of our people-to-people exchanges. again i know a lot of foreign-policy experts say really? that's like frosting on the cake and what difference does it make? put on your formal to the meetings. i can tell you at at that the people-to-people you sent there was a young american man who was studying in china and a young chinese woman who was studying in the united states and we have picked them out to speak to the group she in english and he and mandarin about their experiences in each other's country. i am convinced that helps to convince the chinese government that we would do this deal. i said in my prepared remarks this is what the future should be about, young people like us working together understanding each other better visiting and finding common ground. that is what we should be

looking for. and so later that afternoon we were able to make the deal and mr. chen and his family were able to leave but i think it was part of a broader story not just a one-off. >> i think the story which is fascinating is as you said an absolute example of that thickening of relationships and what diplomacy is about. diplomacy is to get to them you have to go through such a process of confidence building. >> we are such an impatient people these days. this seems like it's just you know a comment about politics. but dole slow boring. it seems like it just goes on and on and the tenth meeting and the 18th dinner and in a way i think it's more important to show up today than it used to be because everybody knows you can communicate via technology

without showing up. people would say to me all the time what are you traveling all over the place for? part of it was we had repair work to do to be very blunt that part of it was we had some relationships to build and they are worth investing in because you never know what might come from them or what you might stop coming from them. yet i think in part because of the feeling and i will speak for my own country this is frosting on the cake. fine if you can do it but not necessary and i think it's baked into the cake so to speak. if you don't do it you will not really understand what is possible in such a complex fast changing world like the one we have. >> in the u.k. there has been a rediscovery of the importance of the human component of diplomacy alongside something you've pushed as well the social media and the connectivity. if you don't do some of that it

becomes difficult to deal with crises which is a core part of the job. i have the bunch of questions on the middle east which i'm not going to tackle right now. members will have a chance to ask questions. as i sat down i will have to take this question first but i will take hands and i will try to do my best. i will get to everyone. i will do my best but maybe we'll do one of the time and i would use my discretion. just a quick point. [inaudible] bleak face instability in the pre-election time. thanks to your huge efforts and president of, we managed to overcome these obstacles. since this time there have been

huge crimes in previous regime's highest officials. [inaudible] not to be blamed for the political persecution. >> question? >> the question is at the same time the government -- for the sake of democracy and rule of law those responsible need to be brought to justice. madam you are greatly appreciated and respected and i would be really grateful if you could tell us your views how we should tackle these obstacles that clearly are a way to building a healthier democracy or xp what you take that one

straight up if you wish. >> i think you have got a very challenging dilemma facing georgia and you have summarized it well because the progress that georgia has made in the last now nearly 20 years is quite remarkable and many of the people who contributed to that progress are currently out of office and you have a new government that understandably wants to continue the progress and figure out the best way to do that. i can't give you the kind of easy answer that would say x or wimax because there is so much writing on how you navigate through these next months in terms of your stability, in terms of whether or not you can

as you say protect the rule of law without undermining a lot of the progress that has been made. that takes a lot of very careful thought that has to be depersonalized. you have to think not of the people who you believe may have broken laws but think about the positions that are currently being held by the new government and whether pursuing prior officeholders is going to consolidate democracy or rip the country into a lot of pieces. you know what i would ask you to do is to try to avoid personalizing it and instead try

to in effect analyze what would be in the best interest of georgia in five years, 10 years, 15 years because for every person you say wants you to do something there is a person who thinks it would be very unfortunate if you did and you have to sort that out. there is truth and reconciliation commission models. there are other kinds of inquiries that could make things public so that it would serve the purpose of transparency but not create the kind of instability and maybe even complex that could undermine the democratic project in georgia. >> i've got about 12 people. >> hello madam secretary. hughes spoke nicely about the jazz quality of american foreign

policy and in syria one would think a bit more as a 12 tone scale. i wondered if you thought that the deal however it was reached on chemical weapons was irrelevant to the real problem which is the civil war or whether you think it actually can be a step towards resolving its? thank you. >> i think at this point it can be and should be a step forward in resolving it. and i do think it on its own has merits, or routing or at least fully a knowledge in and trying to contain serious -- syria's is important for the ongoing civil war but also the potential dangers to neighbors that can be put into the category of a positive outcome

of the ongoing negotiations. now series is in part such a dilemma because there have not yet been a willingness on the part of the russians to really push the saudi regime, that the iranians to reign in their own support for the syrian military, the opposition to organize itself sufficiently to present a united front that would provide negotiators on the syrian side so the fact that russia and the united states and the rest of the world have cooperated on this chemical weapons in denver i think is a plus for beating in the geneva ii negotiations. i negotiated geneva one and it was a roadmap for a transition.

sarah sarah j. laff ruff was there and he agreed to it. i know he left the room and made a secure phonecall to the authorized to agree to it and it was our understanding that he would take that inhabits somehow blessed by the security council so that it would have been an premature to start of the syrian groups which included members of the security council but the broader community. and that did not happen and it didn't happen in part because i think that the russians were not yet ready and assad was not ready to make that kind of commitment to a process and the process would be a transition process away from him. but you know time has passed. more terrible things have happened. the refugee numbers are skyrocketing. jordan is under tremendous pressure. turkey is doing an excellent but

strange job trying to deal with all of those refugees. you have iraq playing a role on the side of iran and assad that is quite troubling. lebanon has all kinds of challenges so you go around the region in d.c. that we are not in a stable situation. we are in a continually deteriorating situation. so i think that this level of cooperation actually just wanted nobel prize so obviously people see it as something worthwhile but it can lead to a better outcome at geneva ii which might lead to a political resolution. you have two big problems. problems. used alone have an opposition that controls very much and you have these increasingly well-armed militancy that answers to others of the syrian people which will be the

spoilers unless they are reined in. we are a long way from seeing some kind of positive outcome but i think the chemical weapons piece is a big step. >> can you have a credible part of your position which you will need for negotiation without that credible part continuing to be better armed? you that a year plus ago general dempsey. that was then and people are saying now is now. we have lost the momentum. can you actually have a credible positive situation without backing them? well look its public information that i pushed very hard to have a mission on the part of the united states and others to try to work with credible opposition

to help them gain some credibility with the other rebels and you know that did not happen. i still think there is an opportunity to do that and there is some work publicly known that this proceeding but what is missing is a leadership to rally around and then to really work in a concerted way to support both their political track and their military track. if i were in syria and leaving some small group from my village and three others i would want to follow someone who yet had a vision for a syria that would be appealing to me post assad but i wouldn't trust that leadership if there weren't some guys with weapons that would back it up

because there are a lot of other guys they are with those assets. i think you have to have an opposition that is not just talking but have some strength behind their position. >> okay. >> jeremy green stuck chairman of -- madam secretary. thank you for the frankness of which you are talking this afternoon. i wanted to ask you about the international institutions and whether you feel that strong enough for strategic purposes and global cooperation. do you worry that international diplomacy is becoming too ad hoc >> i do think part of the reason international diplomacy is ad hoc to a certain degree is

because the international institutions have difficulty moving quickly on a number of strategic fronts. and i am one who thinks that if we didn't have the united nations we would have to invent it. we need the role that the united nations place which is absolutely critically important for all the obvious reasons but it is difficult to get controversial action done quickly within the security council and that is why people go ad hoc. eventually they try to circle back and that's what happened with chemical weapons. couldn't get a security council resolution on tougher singh shuns, on the assad regime and possible article vii actions in the absence of pulling back and

from all the rest you know so well that that's in everybody's interest. if if you are russia or china or the united states you don't want syria to have a big chemical weapons stockpile. so you seize this opportunity and they agree and we go forward. i think that everyone that i have spoken to about the international organizations know there have to be reforms and know that there has to be kind of a new global social contract for the 21st century but it's difficult to actually put that into operation. so you have the imf and you have the chi 20. you have got the united nations and regional organizations so it looks like an alphabet soup but properly managed there are benefits to each of those but

nothing will replace a more global framework. it would be to everyone's benefit if we could put our heads together and go back to bretton woods to figure out what does it look like for the 21st century and go back to san francisco and say what does the u.n. look like for the 21st century? i don't think that's likely to happen anytime soon but it's something we should definitely consider. >> i'm trying to move around the room a little bit as well. >> thank you madam secretary for joining us. i want to take you back to leadership. there is a lot of conversations i have had -- our allies are nervous about a weaker america and perhaps take it vanish up what they see as a weaker america -- america.

perhaps to use the terminology a leading leaving from behind our meeting together more of a multilateral type of leadership. i'd be interested in your views on a new strategic vision? is this a new type of leadership that obama is trying to achieve? is it a little bit more of a haphazard ad hoc -- >> at deafness he thanked both president bomb and myself believe that there should be responsibility and more multilateral meeting on a range of issues. that is certainly been an approach that is deployed in several instances. but i don't think that means that we don't recognize and accept our primary responsibility in any of those settings.

libya is an example. europeans came to the united states and said we have to do something about this. the arab league came to the united states and said we have to do something about the seminar were sponsors while what he going to do about a? we are here to ask you what you are going to do in our responses we want to know what you are going to do. you know that sounds funny but the first time there has been any kind of partnership between nato and air countries. and it was the first time where the united states said we have certain assets that are uniquely ours and we will to play those. you have assets that you should deploy. i thought that was an appropriate way to respond to a problem that was certainly important to us but critically important to a lot of our

allies. i think we can look at the kind of leadership in a way that is described as network which i like for a lot of reasons including anne-marie slaughter it was my director of policy and planning wrote a very influential article about the move towards leadership in the world. it's one of the reasons i asked her to join me at the state department because it's not only round of the usual suspects. there are other organizations and entities that have responsibility and that's true not only in foreign policy but it's true and development policy where what we are doing now is trying to put together networks and partnerships to solve problems that government alone and even international organizations alone would not be as effective in doing so.