there are undoubtedly advancements challenges that could be brought into the extent to point to things such as public criteria and things like that. with respect to the public forum i don't think we have a position as to whether it is required but we do think that makes this case the much easier case because of that separation of the one part that is the strongest argument for the other side that there is an element of coercion and your application is being ruled on the separation of the town adopted makes that much less persuasive. the other elements the respondents pointed to for coercion are the ones that trouble us because they have analogs in our history so for example they point to the presence of children but of course on the senate they are

all high school juniors and children in the gallery and state legislatures a. some of those elements we think are not ones that the court should acknowledge -- >> is whether or not it advances religion. if you ask a chaplain for the state assembly i and sacrament f california who is going to the assembly are you going to advance your religion today? >> what this court said is the limit of the legislative prayer is a problem ties to example. we think with respect to the second circuit if got it just about right to the question is does it preach conversion or threaten and damnation to non- believers or -- >> you use the word advanced and proselytized.

>> it's not proselytized or advanced. >> that is the link which is the proselytized -- >> and whether or not it is in fact fair to ask the minister or the priest or the chaplain if he or she advances their religion. >> we don't -- whitmarsh says is advanced doesn't mean having a single chaplain of a denomination were looking at the content of the sectarian prayer in light of that history. >> thank you counsel.

>> mr. laycock. >> the petition is inserted justin kagan's opening question is entirely formalistic. there is no separation between the public hearing and be invocation. people appear before the town board to ask for personal and specific things. our clients put shows on the cable channel. they were concerned the cable channel is about to be abolished or less usable. people appear to ask for a group home, there are many petitions presented to this body -- >> it's not the same thing as the hearing. >> and that's the point, your honor. >> it's another part of the proceeding that is the hearing. that's when somebody has a specific proposal they want

something before the board and they won't release and they want bearings. >> the hearing is a particular kind of proposal. >> and that is separated in time. >> people made personal proposals. they ask for board action. >> is a legislative body. the difference is it is a town rather than congress or state legislature where you have more formalized procedures. this is a more direct democracy. >> when a citizen appears and says solve the traffic problem at my corner, solstice family that committed the crime in my blog that isn't asking for legislation or policymaking that is asking for administrative action. this board has administrative and executive function. >> if you were saying that you can never have prayer at a town meeting --

>> that's not what we are saying. it always comes up. >> we are saying the town should have a policy in the first place which it doesn't. the chaplains keep your prayer nonsectarian, do not address the points. >> give me an example of a prayer for christians, jews, muslims, buddhists and hindus. give me an example of a prayer. >> and atheist. >> the senator said that explicitly so the point on which the believers are known to disagree is in the civil religion -- >> it is a good point but it

excludes them from the present purposes and give me an example of the prayer that is acceptable to all the groups i mentioned. >> if a particular religion believes in more than one god thadogthat is acceptable for th. >> all the many gods are manifestations, but the true polytheist i think were also excluded from this. >> devil worshipers believe that was the almighty than they might be okay.

[laughter] >> who is making this determination? is it an ex ante for prayer? >> i'm flipping through a number of examples. page 74 in the appendix of prayer for august of 2003. there is about two thirds so there are plenty of them in here. >> heavenly father is acceptable to all religions. >> it is broadly acceptable and that tests cannot be unanimity because that is impossible. that's why the atheists are excluded. >> i'm sorry, justice scalia can you repeat your opinion? >> i will repeat mine. who is supposed to make these determinations? is it an officer of the town

council that would review? the prayers have to be reviewed for approval in advance quick. >> dot clergy makes this determination. there is a 200 year tradition of this kind of civic prayer. if the city has a policy and an occasional violation of the clergy is not the city's responsibility. so this is (-left-paren simply to the clergy by simply giving them instructions. they received no instructions of any kind about the purpose of the prayer. >> said there is an unofficial and a town council that is to instruct the clergy about what kind of prayer they can say? >> that's right. the legislative bodies, the house of representatives have these kind of guidelines and they issued into the guest clergy before they appear. >> i find that official and i think a prayer is over-the-top p for being proselytizing into sectarian you not come back next week and i will look for

somebody else? >> you might have a conversation with & in other words -- the government is now editing the content of prayer. >> editing the content of government-sponsored prayer. they can pretty anyway they want with their own audience but this is an unofficial government event into the part of the board meeting. sponsored by the government. they delegate the clergy and they can define the scope of that. >> id coerces. it's coerces the people that are about to stand up and ask for things in the board. if it is the test of the free exercise clause why do we need a free exercise clause? i'm sorry, the establishment clause. i would assume it would violate the free exercise, wouldn't it? >> i think that's right and that's why it seems very

unlikely that test for the establishment clause is identity identical. >> it seems unlikely it is one test for the establishment clause but there is a broad agreement that the sectarian endorsements are prohibited by the establishment clause. >> what exactly is coercive having to sit and listen to the prayer? >> of their many aspects varying degrees of importance. citizens are asked to participate. >> they are asked to participate but not in a tangible way and everybody is just sitting there? >> they are asked to physically participate to stand or bow their head. most of the citizens bow their heads whether they are asked to or not for people who are not participating are immediately

visible. the testers typically say please join me in prayer. they offer the prayer on behalf of everyone and talk about our christian faith and this is coercion? >> may we pray? so they stay seated. >> it's impossible not to participate without directing attention to your schools and moments later you stand up to ask for a group home for your down syndrome child or the public or whatever your petition is and having just so far as you can tell you rotated the people that you are trying to persuade. >> me give you an example of a practice that is a little bit different and maybe you will see it is a lot different from what the town of greece does. it starts out by proceeding in a more systematic and comprehensive way in recruiting the chaplains for the month or whatever it is. so instead of looking at all of the houses of worship in the

town, it identifies places of worship that may be outside of the town boundaries that people within the town adhere to a minority of religion and it makes it clear that it's open to chaplains of any religious -- any religion on a rotating basis and then, they structure their proceedings so you have a prayer and the legislative part of the town meeting and then there is a clear separation in time and access between that part of the preceding and the hearing where the answers and things of this nature are held. you would still say that is unconstitutional because you have to add onto that it is unacceptable. is there any problem with what i have just outlined? >> is a separation in time that is a part of the remedy that we have suggested is possible. are we still thinking the prayer should be nonsectarian?

>> this case was re- mirrored by the second circuit to work out an appropriate release. and if you could tell us what you think that would be because then that is a measure of the constitution in fraction. so, what would -- before the district judge and proposed the changes you think would be necessary to bring this practice within the constitutional boundary. >> we think the town has to have a policy. >> just to be clear are you talking about what would be satisfactory to the second circuit or satisfactory to you? cause you do not accept the second circuit approach. >> we have the circumstances to make it -- >> i'm talking about what would be -- >> in your theory you say

existing situations violate the constitution. so what changes do you think what needs to be made? within the constitutional boundaries? >> we think the town needs a policy. the policy should get guidelines to the chaplains and to stay away from the planes they are known to disagree. we think the town should do what it can to emulate great coercion and tell them do not ask people to physically participate. that's the most important thing. the government suggests this claimant might help. we think that's right. the government suggests separating the prayer. some states but the prayer before the call of order. the prayer can even be five minutes before the meeting. it cannot be entirely eliminated about the gratuitous coercion

that are done that don't have to be done in order to have a prayer could be eliminated. and we think that those two pieces are the components of the remedy. >> mr. laycock, it seems to me what you are missing and this is what distinguishes legislative prayer from other kinds, the people who are on the town board or the representatives who are in congress are citizens. they are there as citizens. we are not here as citizens. as citizens, they bring to their job of the predispositions that citizens have. and these people, perhaps invoke at meals. they shouldn't be able to invoke it before they undertake a serious governmental task such as enacting laws or ordinances.

there is a serious religious interest on the other side of this thing that people who have religious beliefs ought to be able to invoke the deity when they are acting as citizens and not as judges or as experts in the executive branch. and it seems to me that when they do that, so long as all groups are allowed to begin, there seems to me -- it seems to me an imposition upon them to stifle the manner in which they invoke their deity. >> they cannot invoke the deity and they can certainly pray in any way they want just before the meeting. ..

including those of no religion to live harmoniously together. now, given that basic purpose, what do we do about the problem of prayer in these kinds of legislative sessions? one possibility is say, you just can't do it, its secular. but that is not our tradition. >> that's correct spent the second possibility is the one that you are advocating. it has much to recommend it, try

to keep nondenominational, try to keep it as an offensive to others as possible. that's the upside. the downside is being supervised by a judge dozens of groups, and today there are 60 or 70 groups of different religions coming in and saying, no, that doesn't work for us, this doesn't work for us, and that's the nightmare they are afraid of. even in this town or in the area there are significant numbers as most christians of jews, of muslims, of hindus, and others. so there's a third approach and that is to say you can't have them if there's an aspect of coercion. we just saw people walking into this room got satanist states and you want to win your case. i didn't see people sitting down. in the fourth approach, which is the other that makes its appearance here, is to say let's try to be inclusive.

now, in other words, so you didn't get the right prayer today, but you -- and even with the nonreligious, you know many believe in "the better angels of our nature" and the spiritual side of humankind. it's not impossible to appeal to them. so you say, you'll have your chance. and that's the thing i would like you to explore. is there a way of doing that or is that preferable to the other ways or do we get into trouble? >> we think that rotation does not work. first of all, for several reasons, but most citizens come for a single issue to one or two meetings. they get the prayer they get that my. they don't benefit from the rotation scheme. any rotation scheme will be dominated by the local majority, and even disproportionate to its numbers. unfamiliar minorities give the prayer, there are often political protest, the often threats and hate mail. they don't want to give the prayer. a mini city councils won't stand up to the political pressure and

enables people to give the prayer. so there are multiple reasons why rotation does not solve the problem. we think non-sectarianism has a very long tradition. government is not a confident judge of religious truth, madison said. that is not a controversial proposition in the family. even in the first congress, there were no prayers their the violate our principal, invoking details in which believers disagree. because then, 98.5% of the populace was protestant, priceless not yet appointed the disbelievers disagreed. >> back it's exactly to the problem with your argument about nonsectarian prayer. at the beginning of the country, the population was 98% plus protestant. then it became predominantly christian. then it became almost exclusively christian and jewi jewish. and but now it's gone much further than that. we have a very religious diverse

country. to a lot of muslims and their a lot of hindus, buddhists, all sorts of other adherence to all sorts of other religions. they all should be treated equally and but i just don't see how it is possible to compose anything that you could call a prayer that is acceptable to all of these groups. you haven't given me an example. >> we cannot treat -- i'm not a pastor. we cannot treat everybody, literally everybody equally without eliminating prayer altogether. we can treat the great majority of people equally with the tradition of prayer to the almighty, the governor of the universe, the creator of the world speed do you want to pick the groups were going to exclude? >> i think you pick them, your honor. >> the baha'is, who else? these groups are too small. spin we've already excluded atheists, write a? >> yet, the atheists are

already. >> we've exclude the ages. i don't think the baha'is are excluded but i'm not certain. >> who else? >> i think the atheists are inevitably excluded. we can't help -- >> okay good. got that. no one, atheists. >> true polytheists don't understand their gods as manifestations of the one god are probably exclude. i'm not sure many others are. you of all these lawyerly hypotheticals but the fact is we've done this kind of prayer in this country for 200 years. it's a long tradition of civic prayer and the clergy not to do it. i would say the one time the country in a major way got involved in government sponsored sectarian prayers that people disagree about was when we imposed protestant religious exercises on catholic children in the 19th century. and that produced mob violence, church burnings and people dead in the streets spent we've

already separated out i thought their jurisprudence children and adults. >> lee versus weisman twice reserved the question of whether adults might be subject to similar pressures. >> need to accept the fact that children may be subject to subtle coercion in a way adults are not, write a? >> in some ways that adults are not but there's no doubt that before you stand up to ask for relief from a governing body you don't want to offend that body. adults are subject to coercion. and no competent attorney would tell his client doesn't matter whether you disagree to dissent from the prayer or not. tried every client make a good impression. >> i want to make sure your position. your position is that town councils i could greece can have prayers if they are non-provocative, modest, decent, quiet, non-proselytizing. that's your position? >> i wouldn't use all those

adjectives, but yes. we don't think that's difficult to do. >> congress has a set of guidelines which you've read and are here in the papers and so forth. are those satisfactory to you? >> we like to be a little more explicit, but those are vastly better than -- >> if those are satisfactory to you, then i wonder, are they satisfactory to everyone. and you will find all kinds of different beliefs and thoughts in this country, and there will be people who say, but i cannot give such a prayer if i am a priest in that particular -- were a minister or whatever in that particular religion. i must refer to god as i know that god by name. and what do we do with them? i mean, we can recommend it, but can we say that the constitution of the united states requires its? >> there are such people and respect that, and they should not be giving government prayers. they are taken on a government function when they agreed to

give the invocation for the town board spent mr. laycock -- >> that's really part of the issue, whether they are taking -- undertaking a government function of whether they're acting as citizens and the legislative body, representative of the people who bring to that their own personal beliefs. i think the average person who participates in a legislative prayer does not think that this is a governmental function. it's a personal function. and and that's why we separate out the legislative prayer from other kinds of prayers. >> they are not praying for the congregation. they are invited by the board, the caregiver is elected by the board, the board decides to have the prayer. the board gives this one person and only one person time on the agenda debris. this is clearly governmental as you held in santa fe -- >> if you had an atheist aboard, you would not have any prayer. i guarantee you because it's a personal per that the members of

the legislature desire to make. >> counsel, assuming that we don't -- >> mr. laycock, would you -- >> justice sotomayor. >> assuming you hear the resistance of some members of the court to city as arbiters of what sector in nonsectarian, and i joined some skepticism as to knowing exactly where to join that line. assuming you accept that, what would be the test that you would proffer, taking out your preferred announcement that this prayer has to be nonsectarian? >> well, the test that we have proffered is the test from the mccreary dissent, points on which believers are known to disagree. so you don't have to be a theologian. points on which people are commonly known to disagree, and the fourth circuit has had no difficulty administering israel. the cases that come to our

clergy sectarian or clearly not sectarian. >> it just seems to me that enforcing that standard and the standard i suggested and false the state very heavily in the censorship and the approval or disapproval of prayers. >> but it's not censorship when it's the governmental -- >> that may play ultimate in your position if we say that that's why there shouldn't be any prayer at all. but then you have the problem mentioned by justice scalia that we are misrepresenting who we really are. >> if you really believe the government can't draw lines here, then your alternatives are either prohibit their prayer and entirely or permit absolute anything, including the prayer at the end of our brief went to ask for a show fans how many of you believe in prayer? how many of you feel personally in need of prayer? there are no limits if you can't draw lines. >> that's not a prayer. >> well, it was -- >> how many of you have been saved? that's not a prayer. >> all hypothetical side, isn't the question mostly here in most

communities whether the kind of language that i begin with, which refers repeatedly to jesus christ, which is language that is accepted and admired an incredibly important to them at -- important to the majority members of a community, but is not accepted by a minority, whether that language will be allowed in a public town session like this one. that's with the question, is in its? >> that's the issue that out to arises in the case. >> i don't think that this is an easy question. i think it's hard because of this. i think it's hard because the court lays down these rules and everybody thinks that the court is being hostile to religion and people get unhappy and angry and agitated in various kinds of ways. this goes back to what justice breyer suggested. the part of what we're trying to do here is to maintain a multi-religious society in a peaceful and harmonious way.

and every time the court gets involved in things like this, it seems to make the problem worse rather than better. what do you think? >> i don't think that's true. there are people who distort your decisions. there are people who misunderstand your decisions on a sled and innocently. but keeping government neutral as between religions has not been a controversial proposition in this court. and i don't think the fourth circuit has made it worse. they've got a workable rule and of the prayers are no longer exclusively christian prayers in the fourth circuit and they have been able to mostly enforce that and there hasn't been litigation at the margins because all the prayers were clearly -- >> supposed you did this. you combined your two approaches. that the town has to, it must make a good-faith effort to appeal to other religions who are not -- who are in that area.

and then you have these words from the house, the chaplain should keep in mind that the house of representatives, or you would say whatever relative group, is comprised of members of many different faith traditions. treat, and of matter. is that sufficient, those to think? >> that would help immensely. we think some of the clergy need more detailed explanation of what that means, yes, that would help immensely. >> should we write that in a concurring opinion? [laughter] i mean, i'm serious about this. this involves government very heavily in religion. >> government became very heavily involved in religion when we decided there could be prayers to open legislative sessions. marsh is the source of government involvement in religion. now the question is how to manage the problems that arise spent marsh is not the source of government involvement in religion in this respect. the first congress is the source. >> there enough. their tradition to which marsh points.

>> the first congress also adopted the first amendment. >> that's correct. and it had prayers that did not address predestination or having to accept jesus as your savior r or any point on which listeners disagreed. >> many of them are very explicitly christian. >> that was not a point of disagreement at the time. they stayed away from any issue that protestants disagreed on. >> in the way it sounds quite elitist to say we can do this in washington, sacramento and austin, texas, but you people up in greece can't do that spent well, it's not that the people in greece can't do it. it's just that this board is functioning a fundamentally different way from what congress or the state legislature functions. and also -- >> my understanding is that the first job in of the senate was a episcopal bishop of new york, isn't that correct? he took his prayers from the book of common prayer. that was acceptable to baptists at the time, quakers? >> it wouldn't have been their choice but did he talk about the

choice between bishops and presbyterians and congregations as way of governing the church? they have not offered a single example of a prayer in the founding era that addressed points in which protestants were known to disagree. i don't think there is one. the founding generation kept government out of religious disagreements. and what is change is not the principal. what has changed is that we have a wide range of religious disagreements today. if there are no further questions, ask you to affirm. >> ninety, mr. laycock. mr. holder, you have three minutes remaining. >> thank you, mr. chief justice. first i would like to erect one factual misimpression, the assertion that only non-christian prayer givers deliver the prayer after 2008. it's not in the wreck but the official website of the town of greece shows that at least for non-christian prayer diverse delivered prisoner after in 2009, 1011 and 13. on the sectarian points, clearly -- >> counsel. >> i'm sorry?

>> once a year. >> i'm sorry? >> for additional people after this it was filed. >> yes. >> how often does the legislation meet? >> once a meet -- once a month. spent i just would like to point the court to disintegrate, the amicus brief filed by senders which shows the extensive history from the beginning of the republic until the day of prayer in congress. that would be sectarian and unconstitutional under respondents position. with respect to coercion, it's unquestionably true that there is less basis for claiming coercion here than it was in marsh. in march, senator chambers was required to be on the senate floor by rule. he had to be there to do his job and the practice was to stand every single time, which he did because he felt coerced to do it. were answered the records just there were three times when somebody requested people to stand at 121 occasions. the idea that this is more

coercive than marsh is absurd. in marsh the court rejected a coercion argument saying we expect adults to be able to deal with this. with respect to the history as well, i think the debate in the continental congress, when this issue was first raised, shows what the american tradition has been. that is americans are not bigots and we can stand here a prayer delivered in a legislative form by someone whose views we do not agree with. that is why doesn't violate the establishment clause. and, finally, with respect to the fact that this is a municipality rather than a state or federal government. that can't possibly make a difference as an establishment clause matter. it makes no sense to suggest that a prayer at the local level is more dangerous for establishment clause purposes than what congress is doing. only congress could establish a religion for the entire nation, which is the core prevented the purpose of the establishment clause. to suggest that the greater restrictions on municipalities makes no sense at all.

we think a dangerously overbroad theories advanced by respondents are at odds with our history and traditions, which we reflect this tradition of tolerance for religious views that we don't agree with in the legislative context. respondents there's also conflicts with the religion clauses mandate, that is not the basis of government to deregulate in the content of prayer and regulating theological orthodoxy. thank you. >> thank you, counsel. case is submitted. >> a look at the u.s. capitol. the house returns after more than a week long resisted both the house and senate meet today at 2 p.m. with the senate taking up a judicial nomination and a test vote on the judicial nomination later today. the house considers six noncontroversial bills today, suspension bills. later the house is eyeing measures that would allow people to keep their current health care plans, at least temporari temporarily. the hill reports that house republicans hope to keep the white house on the defensive over obamicons this week with a

vote on legislation allowing people to keep their existing plan, writing that you be has scheduled five health care related hearings over the next three days, each of which is designed to keep the administration on its back foot. the hearings include two panels focused on the botched rollout of healthcare.gov as well as the homeland security committee examination of the security users personal data. read more at thehill.com. also to mark the budget conference committee meets publicly for the second time looking at long-term fiscal issues and the 2014 budget process. the committee was formed as part of last month's agreement to end the government shut down. they are due to report back by december 13. live coverage of that tomorrow morning at 10 a.m. eastern on c-span3. also thursday on c-span3, janet yellen who is the nominee by president obama to have a federal reserve, she goes before the senate banking committee for her confirmation hearing. live coverage starting at 10 a.m. eastern.

>> with the war in europe turning hot, when the blitzkrieg took place, the u.s. is totally unprepared and george, chief of staff of the army came to president roosevelt and said we can't do things we've done in the past. we have to act now. we have to act decisively and have to do it today. so roosevelt went to congress the next week and said the u.s. must build 50,000 airplanes to protect itself. and all the other countries were getting projects to build engines and airplane parts. ford motor company was given at the 24 bomber which is a problem an airplane. it was the newest airplane we had. it was still in developing stages and they wanted to mass produce this airplane. so ford said in a just going to build part. i will build -- build complete airplanes. they took what had been done as individual pieces and they took

the engineering drawings and they decided to hold it and then a massive press would knock out thousands of these pieces that would then go on to the assembly line and basically unskilled assume the workers with just a little training could assemble these airplanes. in between january and june 1944, 35% of the bombers built in the united states were delivered here, and that was one of 11 factories building at the 24 bomber. >> saving the little piece of this planet that was so important to that story is just beyond words. i can't describe the feeling. we will all have with big smiles once we pull this off. we did something here in detroit that was not done anywhere else in the world, and it literally saved the world from the axis powers. we did that right here. >> michigan's yankee air museum is trying to save part of the willow run plant and defense to

turn the abandoned plant into its new home. find out more next weekend as a booktv and american history tv look at the history and literary life of ann arbor, saturday at noon on c-span2, and sunday at 5 p.m. on c-span3. >> federal reserve chairman ben bernanke was among the speakers addressing a conference of the international monetary fund last week. examining policy responses to the economic crises. he also commented on the current economic conditions including what he called a slack in the labor market and the impact of student loan debt. other speakers included former treasury secretary larry summers, former bank of england governor stanley fischer, and harvard economist kenneth rogoff. this is an hour and a half. >> can we start the session? this is a session of -- [inaudible] the panel discussion.

this is a case in which there's no need to introduce the speakers so i shall not do that. this is also a case in which i can think of all is the question which should be answered by the panel, but very little chance of having them take the duties as a. so i decided i would basically ask two questions. the first one is what are the lessons that one should draw from the crisis, of the crises. i suggested three, but the number can be negotiated. and then the second question is, are we ready for the next one? and with this in mind will proceed in order. the first round will be 15 minutes each of something like this. and the first is ben bernanke, please. >> thank you.

i'm very pleased to purchase but in this event in the honor of stanley fischer. stand was my teacher in graduate school and he's been both a role model and a frequent advisor ever since. an expert on financial crisis, he has written politically on the subject and i has also servd on the front lines so to speak. notably in his role as first deputy managing director of the imf, during the emerging market crises of the 1990s. stan also helped to fight hyperinflation israel in the 1980s and as governor of the nation central bank, he definitely managed monetary policy to mitigate the effects of the recent crisis on the israeli economy. subsequently, the israeli housing crisis moved upwards, stan became an advocate an early adopter of macroprudential policies to preserve financial stability. stan quickly counseled his students to take a historical perspective, which is good

advice in general, a technical for understanding financial crises, which have been around for a long time. indeed, as i've noted a for i think the recent global crisis is best understood as a classic financial panic transposed into a novel institutional context of the 20% to financial system. and appreciation of the parallels between reason and a cervical events greatly influenced how i and many of my colleagues around the world responded to the crisis. besides being the fifth anniversary of the most intense phase of the recent crisis, this year also marks the centennial of the founding of the federal reserve. it's particularly appropriate to recall, therefore, that the federal reserve was itself created in response to a severe financial panic. the panic of 1907. hispanic led to the creation of the national monetary commission, whose 1911 report was a major if it is to the federal reserve act, signed into law by president woodrow wilson on december 23, 1913. because the panic of 1907 that

the archetype of a classic financial panic in many ways, it's worth discussing the similarities and differences with the recent crisis. like many other financial panics, including the most recent one, the panic of 1907 took place while the economy was weakening, according to the nber, recession had begun in m may 1907. also, as was characteristic of the pre-federal reserve panics, money markets were tight when the panic struck in october, reflecting the strong seasonal demand for credit associated with the harvesting and shipment of crops. the immediate trigger of the panic was a failed effort by a group of speculators to corner the stock of the united copper company. the main perpetrators of the failed scheme, f. augustus heinze and c. f. morse, had extensive connections with a number of financial institutions in new york city. when the news of the failed speculation broke, depositors about the health of those institutions led to its is of runs on the banks, including a bank at which heinze served as

president. to try to sort confidence, the new klingons, a private consortium of banks, reviewed the books of the banks under pressure, declared insolvent and offered conditional support. one of those conditions being that heinze and his board step down. these steps were largely successful in stopping runs on the new york banks. but even as the banks stabilize, concerns intensified about the financial health of a number of so-called trust companies, financial institutions that were less heavily regulated. as the runs on the trust companies worsened, the companies needed cash to meet the demand for withdrawal. in the absence of a central bank, new york's leading financiers, led by j.p. morgan, consider providing liquidity. however, morgan and his colleagues decided that he did not have sufficient information to judge the solvency of the affected institutions, and so

they declined to lend. overwhelmed by a run, the knickerbocker trust company failed on october 22, undermining public confidence in the remaining trust companies. to satisfy their depositors demands for cash from the trust company's begin to sell or liquidate assets, including loans made to finance stock purchases. the snow off of shares and other assets in what today we'd call a fire sale precipitated a sharp decline in the stock market and widespread disruptions in other financial markets. increasingly concerned, morgan and other financiers including the future governor of the federal reserve bank of new york, benjamin strong, lead a coordinated response that included the provision of liquidity through the clearing house and the imposition of temporary limits on deposit withdrawals, including withdrawals by correspondent banks in the interior of the country. these efforts eventually called the panic. i then, however, the u.s. financial system had been severely disrupted and the

economy contracted through the middle of 1908. the recent crisis at goodman aspects of the 1907 panic. like most crises, the recent episode had identified a trigger, in this case the growing weatherization by market participants that subprime mortgages and certain other credits were seriously deficient in their underwriting and disclosures. as the economy slowed and housing prices declined, diverse financial institutions, including many of the largest and most internationally active firms, suffered credit losses that were clearly large but also hard for outsiders to assess. pervasive uncertainty by the size and incidence of losses in turn led to sharp withdrawals of short-term funding from a wide range of institutions. the something precious precipitated fire sales which contributed to sharp declines in asset prices and further losses. institutional changes over the past century were reflected in

the differences in the types of funding that ran. in 1907, in the absence of deposit insurance, retail deposits were much more prone to run, whereas in 2008, most withdrawals were of uninsured wholesale funding in the form of commercial paper, read those and securities lending. interestingly, a steep decline in interbank lenny, a form of wholesale funding, was important in both episodes. also, the 1907 panic involved institutions, trust companies, but this relatively less regulation which probably contributed to the rapid growth in the years leading up to the panic. in analogous fashion in the recent crisis much of the panic occurred outside the permitted or a traditional bank regulation, in the so-called shadow banking sector. the responses to the panic of 1907 and 2008 also provide instructive comparisons. in both cases the provision of liquidity in the early stages was critical.

in 1907 the united states had no central bank so the availability of liquidity depended on the discretion of firms and private individuals, like a j.p. morgan in a more recent crisis, him the federal reserve fulfill the role of liquidity provider consistent with the classic prescriptions of walter. the fed led not only to banks by seeking to stem the panic and wholesale funding markets. it also extended its lender of last resort facilities to support not because addition such as investment banks and money market funds and key financial markets such as those for commercial paper and asset-backed securities. in both episodes of the liquidity provision was only the first step. full stabilization requires the restoration of public confidence. three basic tools for storing confidence our temporary public or private guarantees, measures to strengthen financial -- balance sheets of financial institutions and public disclosure of the conditions of

financial firms. at least to some extent morgan and the new york clearinghouse use these tools, giving assistance to troubled firms and providing assurances to the public about the conditions of individual banks. all these tools were you successfully in the recent crisis. in the united states, guarantees include the fdic's guarantee of bank debt, the treasury department guarantees of money market funds, and the private guarantees offered by stronger firms that acquired weaker ones. public and private capital injection strengthened bank balance sheets. and, finally, the bank stress test that the federal reserve lead in the spring 2009 and the publication of the stress test findings helped restore confidence in the u.s. banking system. electively, these measures help in the acute phase of the financial crisis, although five years later the economic consequences are still with us. once the fire is out, the public turns to the question of how to better fireproof the system.

here, the context and responsese responses differ between 1907 and the recent crisis. as i mentioned, following the 1907 crisis, reform efforts led to the founding of the federal reserve which was charged both with preventing panics and with providing an elastic currency to smooth seasonal interest rate fluctuations. in contrast, reforms since 2000 that focus on critical regulatory gaps revealed by the crisis. notably, oversight of the shadow banking system is being strengthened through the designation by the financial stability oversight council, of non-bank, cities, for consolidated supervision by the fed and measures are being taken to address the potential incident of wholesale funding including reforms to money market funds and the tripartite repo market. as we try to make the financial system safer we must ineptly confront the problem of moral hazard. the actions taken by central

banks and other authorities stabilize the panic in the short run but can work against to build in the long run, if investors and firms in further that they will never bear the full consequences of excessive risk-taking. as stan fischer reminded us following the international crises of the late 1990s, the problem of moral hazard has no perfect solution, but steps can be taken to limit it. first, regulatory and supervisory reforms such as higher capital and liquidity standards or restriction on certain activities can directly limit risk taking. second, through the use of appropriate carrots and sticks, regulars can enlist the private sector in monitoring risk taking. for example, the federal reserve's seek our process, the descent of the bank stress test of 2009 requires that on a large financial institutions have sufficient capital to whether extreme shock, but also that they demonstrate that they're into risk management system are

effective. in addition the results of the stress test portion of ccar are publicly disclosed providing investors and analysts the information they need to assess banks financial strength. of course market discipline can only limit moral hazard to the extent that debt and equity holders believe that an that ine event of distress they will their cause. in the crisis, the absence of an adequate resolution process for dealing with a failing sifi left policymakers with only the terrible choices of a bailout or allowing a potentially destabilizing collapse. the dodd-frank act, under the orderly liquidation authority in title ii, created an alternative resolution mechanism for sifis that takes into account the need for moral hazard reasons, to impose costs on the creditors a failing firms, and the need to protect financial stability. the fdic with the cooperation of the federal reserve has been hard at work fleshing out this authority. a credible resolution mechanism

for system of important firms will be important for reducing uncertainty, enhancing market discipline, and reducing moral hazard. are continuing challenge is to make financial crises far less likely, and if they happen, far less costly. the task is complicated by the reality that every financial panic has its own unique features that depend on a particular historical context and the details of the institutional setting. but as stan fischer has done with unusual skill throughout his career, one can, by stripping away the idiosyncratic aspects of individual crises, hope to reveal the common elements. in 1907, no one had ever heard of an asset backed security, and a single private individuals could command the resources needed to bail out the banking system. and yet fundamentally the panic of 1907 and the panic of 2008 were instances of the same phenomenon, as i've discussed today. the challenge for policymakers is identified and isolated the

common factors of crises, allowing us to prevent crises when possible and to respond effectively when not. thank you. [applause] >> thank you, ben. next speaker is patricia. >> -- is stanley fischer. i would like to thank the imf for organizing this conference and for giving me the privilege to have a conference named in honor of me, and it's actually been a great conference, both practical papers on lessons we've learned from recent crises, and from earlier crises, particularly comparison of the

difference between the asian crisis of the late 90s and the crisis that began in 2008. and i commend the papers on this conference to those of you who haven't, who were not able to be here to listen to them. i'd also like to thank ben bernanke for everything he's done as chairman of the fed. i believe that when the history books get written, the innovations that were made in this crisis will direct a nice as changing the way in which central banks deal with financial crises. and i'll have to -- and olivier has asked us to speak about some of those, some of those ways, and he told us three. so i'll talk about three

features of the change, changes that will occur i think in our thinking. if we remember them. there is this line that those who do not learn history are condemned to repeat it. frank knight, the inventor of risk, as opposed -- of uncertainty as opposed to risk, have a lot of one-liners which is used on everything. this one-liner, that line was, and those who do number history also are condemned to repeat it. [laughter] so i hope we are not. one of the three things i'm going to talk about, the first, that what the textbooks say, what the textbooks say when they write about the keynesian model is fundamentally right, but what we have learned this time is

that monetary policy does not, in fact, a necessary lose its effectiveness at the zero lower bound. and that there's a lot of that the central bank can do to continue to support the economy, even when the central bank interest rate is effectively zero. that we know from what the fed has done in this crisis, the quantitative easing programs in particular. there is controversy about how effective those programs are. there's also been a large amount of empirical work done on the effectiveness of those programs. ben in his 2011 kansas city speech, actually gave a list of the ethical work that had been done on these issues, and is very hard to reach a conclusion

that the unorthodox measures are ineffective. they appear to be effective and they essentially do that by working of either the provision of liquidity in markets of liquidity has dried up, or by changing interest rates other than the central bank interest rate moving, for instance, in markets where longer-term interest rates are determined. so in addition in this context, the fed tried to invent the concept -- to name the concept called credit easing. i'm not sure what credit easing was meant to be, but it is very close to the concept of the central bank as market maker of

last resort, as opposed to the central bank as lender of last resort. and we saw the fed acting in thain therole in, for instance,e commercial paper market very early in the crisis when the market dried up, and a very important source of financing, short-term financing, for corporations appeared to be unavailable, and the fed went in and revived that market effectively by buying commercial paper in an appropriately large quantities. and there have been other examples of the fed as market maker of last resort, or at least contributor to making markets in, for instance, its current quantitative easing, emphasis on mortgage-backed securities. so i think the textbooks will have to say something other than what they used to say, and this

is to tell you the 12 addition will appear shortly, and we'll note that the previous sentence, when the central bank interest rate reaches zero you have to switch to fiscal policy, is not entirely correct, that you can keep going with both monetary and fiscal policy but if you don't want to call it monetary you can call the central bank. ..

>> that was really remarkably quick that those actions were undertaken. i had thought when i read about it from a distance that the fed was possibly taking a significant risk in undertaking those tests and being willing to publish the results, because if the results had been bad, i thought the consequences would be serious. but this, in fact, was not the case as explained to me by someone else because of the t.a.r.p.. the system had the capital to recapitalize the banks if that had been what was needed and what was revealed by the stress

tests. and that illustrates a problem with or the contrast between what was done in the banking system in the united states and what was done in the banking system in europe in which at this stage the dealing with the problems of the banking systems has been left to national regulators, and they're only now moving into the banking union, and they're doing an asset quality review, that is to say an examination of the quality of the assets that the banks hold which is to say an assessment of the quality of the capital that they hold. and then will move into the banking union. i think before we all roll our eyes and say how very slow, we need to realize that making a

massive structural change like setting up a european banking union at the same time as you're dealing with a massive crisis in the banking system is not a trivial enterprise, and i'm, i don't believe that the schedule they're on is particularly slow given the situation. but i do believe that the minimum slowness that we're seeing now is holding back european recovery and that the quicker that can be done, the better that would be. i think the third lesson we've learned is that the financial system is a system, and it needs to be regulated on that basis which is the underlying rationale for macroprudential

supervision and for the concept of macroprudential supervisioning. that is that the system, the regulatory system needs to ask itself what are the interactions within the financial system that could lead to problems over and beyond those that would arise for individual banks that got into trouble and, of course, the quintessential example is the lehman brothers crisis, a bank which was thought of being of moderate size and possibly not quite, possibly not being quite comprehended just how extensive its interactions, how that event led to a very widespread global, what was followed by a widespread global financial crisis.

and there is no question but that in every country the emphasis has shifted now who has been an addition of a discussion of how to do macroprudential supervision. now, this is very hard because in almost every country there are multiple regulators, and in israel there are three. and getting the three to cooperate was very hard. in fact, it hasn't been quite achieved yet. the united states has many more regulators, and a framework has been set up to get them to cooperate. and one very much hopes that that will be possible. now, in the end the central bank has a central role to play in most of these, in that type of

supervision because in the end it is likely, though not impossible, that you will end up looking to the central bank to act as lender of last resort where that is legally possible. and so the central bank has to be one of the central elements in building the macroprudential supervision in and the system of macroprudential supervision. treasuries always are because when banks are insolvent, you begin to deal with calls on the public purse, and those typically require treasury, treasury participation. so those are two essential elements. the rest of the institutions also need to be supervised, and then the rest of this system which is called the shadow banking system, but there'll always be a shadow banking system even if we succeed in pulling the current unregulated

institutions into a regulated network, something else will emerge outside that system as a way of avoiding the regulations and taking advantage of the avoidance of those regulations. so it's going to take a lot more work to get the macroprudential systems working. i believe that the way the bank of england has done this is promising, and we'll just have to watch how well that works. the bank of england has a financial policy committee as well as a monetary policy committee, and the financial policy committee has a slightly different membership than the monetary policy committee. the chairman -- the governor of the central bank is the chairman of both, of both committees. and the financial policy committee has the responsibility by law for supervising the entire financial system.

and we're going to have to watch how that works. that takes me over to the second set of questions that olivier asked which is are we better equipped to deal with the next crisis. and the answer is we are better equipped if the areas we've dealt with and helped set up improved systems. but the harder answer is that it's very hard to know until you do a lot of stress tests and that the ultimate stress test is, in fact, what reality throws your way. it's hard to be sure. i think, for example, of the fact that the financial authority set up by the british in 1997 -- which was very elegantly done -- convinced many people that this was the way to

go. that was what you should do, a financial supervisory authority outside the central bank charged with responsibility -- i mean, they weren't thinking macroprudential, but the idea was the same. charged with that responsibility would be the right answer. well, it was not subjected to a test of reality until 2007 or '8 with the northern rock crisis, and it didn't succeed. it was followed by the first banking bank runs this britain in 140 -- in britain in 140 years. and so we will not know for sure whether systems that have been set up are, in fact, capable of dealing with the tests they may face. but what we certainly can do is stress test those systems and set up a variety of exercises in

which they are examined under circumstances which they can think up, outside experts can be asked to think up or others can be asked to think up and to ask how would we deal with this crisis, how would we deal with that crisis, what powers do we have that we need, what powers do we not have that we need. and i think we will have to stress test the regulatory systems as well as the financial systems. so that is one concern, that in that area and in others the measures we have undertaken, we won't know how effective they are until they're actually stress tested by experience. and there is, of course, another problem which is as has been emphasized today, crises have many different sources. and generals prepare for the

last war, economists prepare for the last crisis. and sometimes the lost war is very similar to the current, to the next war. and sometimes it isn't. and i spent a lot of my time as governor looking in the direction my eyes could see and being sure that something was coming up right behind me, and there was going to be some crisis which none of us had thought about and which would hit us with considerable force. the 2008 crisis was not like that except in one sense. if you'd asked me in 1997 -- and i know this because i wrote about it -- do i expect to have a major global crisis, financial crisis start in the advanced countries, i would have probably said, no. and so in that sense, it was a surprise. of course, as time wore on and

we got to 2007, 2008, the presence of that crisis became less, less implausible, and it eventually became a fact. but we will need to keep asking ourselves -- and, again, we have to do this by actually sitting down and asking how we would deal with a variety of problems if they should occur -- we'll have to do those things and keep on doing them because financial crises originate in different places, economic crises originate in even more different places s. we need to keep asking ourselves what else is it that we need to think about and deal with to make the economy operate with fewer crises and with greater stability? thank you. [applause] >> our next speaker is ken

rogoff. >> thank you very much. an extraordinary pleasure to speak at this event in honor of stan fischer and his many contributions as a scholar, as a policymaker. i think all of us here who have worked with stan, you know, would recognize him both as an economist's economist, and then he became a policymaker's policymaker. and commenting on the first, when i was a graduate student and maybe just a bit after, there was sort of like a war going on in macroeconomics between the new neoclassicals and what i guess greg matthew termed the new neokeynesians, and we needn't get into the details, but they just completely disagree with each other. and it felt like the only person that both sides respected was stan fischer. [laughter] he would sit there in the middle. i must say maybe john taylor also was there.

but -- and i was just, you know, aghast at that, of how he managed this. i should say this was resolved by both sides deciding they were right and continuing to believe they were right, but that's another story. [laughter] and then we've heard a lot of talk, of course, of stan as a policymaker's policymaker. i've had a lifelong, professional lifelong experiences with stan, and many people have spoken. i will say, you know, one thing i learned from him was -- and also, i think, not both as on the staff, i was chief economist and also as a student -- is he has, he's very engaged which was said at lunch, but also he has a very good way of balancing praise and constructive criticism which is a very hard thing to do both as a boss and as a professor. and really shows his class this doing that. i will go on to take up the topic. i'm on the podium with four men who have had extraordinary experience in dealing with

financial crises. they're all going to be historic figures. and rather than go on to a couple narrow lessons about that which i think maybe would be for another occasion and maybe other people have said, i want to pick a couple of points. and i would say number one, if you think that you're dealing with a liquidity crisis -- and i'll come to that, but if you really think that is and it might be systemic, this might be something that's really going to, you know, bring down a region, bring down the economy, you need to react very forcefully and very creatively. and i think all of these gentlemen have showed extraordinary creativity. early on in this policy career, larry summers dealt with the mexican crisis, and, stan, i think you had just arrived at the fund when that happened. and one of the things that was

done was they came up with money out of nowhere. the exchange rate stabilization fund in the u.s. was somehow used to bail out mexico. congress at that time didn't realize they could do that and hadn't stopped them, and they even generated some faux loans from across the street. and larry, i was talking with him about it, really we're probably still in the late '90s. he was, i think, visiting us at princeton, and maybe he was, you know, sitting with me talking, and he said, well, you would have done that, right this and i go -- right? and i go, yeah. [laughter] it was very creative. [laughter] and certainly, you can look at some of the things that stan did during the asian crisis, more recently with policies with israel where, you know, it isn't just a question of courage, it's a question of thinking of it that you might do it. and, of course, you know, it would be hard sitting here with

ben bernanke who all of his former academic colleagues have commented on just the extraordinary creativity the fed did during the crisis just doing things just nobody imagined. stan talked about some of them. i have to remember waking up one day and finding out that they'd made the investment banks into banks so they could bail them out. and i thought i was living in an alternate universe or something. [laughter] it was, you know, really this is way out of the box thinking. [laughter] and olivier, i won't pick on you so much because you're still in the thick of it, but the 4% inflation target, people said you were crazy, and now maybe not so much. [laughter] so i guess one of the problems that you have practically as a policymaker that all of them have faced is that when it's a liquidity crisis and you just know it's a liquidity crisis, okay, you print money, you

generate money, you bail them out, the fact is there are very few crises that fit the diamond mold. we teach that model because it's so simple and nothing else is going on. but actually, there are other models, and i think of the alan gale model. it's much more complicated, so people don't teach it so much. but, of course, in the real world they are. it's a question of how much as a solvency crisis, how much is a liquidity crisis. and i know when i was in the fund here from 2001 to 2003 as chief economist and involved in some of these, you'd go around the table, it's a liquidity table, it's a solvency crisis. [laughter] and, of course, you reach completely different conclusions on what you're going to do. and these are, you know, things where very difficult judgments are made. and coming back to something jeff saks said earlier, which is very, very important, you have to have the diagnosis. you need some information. and i must say, you know, there

are cases where the patient arrives in the emergency room and hasn't seen a doctor, you know, for some chronic condition which has now become severe, it's a lot harder to treat the patient, and there's certainly been cases like that. so extraordinary creativity is one lesson. i would say, certainly, another one is the if it's a liquidity crisis overwhelming force, you don't stop to wonder what's going to work. you do everything, and i think we saw that particularly in the 2008 crisis. you throw the kitchen sink. if that doesn't work, the cabinets, the chair -- [laughter] the, tear up the tiles, try to save your family. but you, you know, you do everything that's possible. now, as olivier framed the question, it was something what do you do after the crisis, and i think that hits on one of the problems. chen is after the crisis? -- when is after the crisis? you don't know when there are going to be aftershocks. in the case of the recent

crisis, there were many things early on, and then the euro popped up where it was very hard to know what was going to happen next. i think that some of the, you know, perhaps policy corrections that should have been made were based perhaps on overly rosy forecasts of when it would be over. there was certainly a triumphalism early on that it was all okay, and some of the forecasts were too rosy. and i would say concretely it's not just about austerity, it's also about what you spend on. i think as it evolved, if you had accepted that a it was going to take a long time, that final crises have a long, slow aftermath -- something carmen reinhart and i have written about -- you might have thought more about doing long-term investment projects because, you know what? if it's still going on in five years, that's okay. you're not necessarily trying to spend it all at once, but this is very difficult. and i think a very difficult decision and one that worries me

the most when we look at the history books and try to draw lessons from this is, um, how much do you just bail everything out, and how much do you have some write-downs? i think that really needs to be looked at, and i -- for example, i think two of the more concrete things were in the case of mortgages, should the government have just writ large bailed out some of the subprime mortgages with, you know, maybe some kind of equity sharing? marty feldstein has a proposal, many others around about that. and, of course, i think in the case of europe there's some solvency -- there's some liquidity, a lot of liquidity, but there's definitely some solvency in some places, and i think looking at debt write-downs would have made a lot of sense. let me just move on to sort of say post-crisis -- and this is a huge issue -- but i think at the end of the day, evolving to a world where we have less plain

vanilla debt is clearly what you want to do, because that's how you get debt crises. so there are a series of papers and a book now saying that banks ought to have to raise more of their money with equity. it's called capital, but they really mean how you fund banks. i think the spirit of that makes a lot of sense. my former co-author jeremy bouloute who is also a student of stan's and paul klemper describe banks printing their own money, but you basically get paid in equity when things go sour, and i think these are very good ideas. also in terms of having richer forms of debt, bob shiller's been evangelistic about having newer forms of debt linked to gdp. probably not necessarily the greatest advertisement that argentina was the first to try it -- [laughter] but i think it is a good idea

and linked to housing prices, linked to commodities. and these involve legal changes, they involve a lot of changes in order to be able to do this, but i think the general spirit of trying to have less plain vanilla debt is where you want to head. and that may involve some regulation. we have regulation about having, the government having a monopoly over currency, but we allow these very close substitutes, we think it's good. but maybe in their ways it's not so good. maybe we want to have a future where we all have an atm at the fed instead of intermediated through a bank. there can be some service contracts there. and if you want a better deal, if you want more interest on your money, then you can buy what is basically a bond fund that may be very liquid, but you are not guaranteed that you're going to get paid back in full. and i would think it would be a wonderful future where our

grandchild look at these plain vanilla bond -- bank deposits like our own children look at dvds, that that's just, what? you used to do that? that's so crazy. we don't do that anymore, and i think there really is scope to do that. i do clearly think we need more public education about the financial sector, about finance in general, and i speak certainly of public tv, radio, internet but much more broadly, hopefully providing balanced analysis and then maybe helping them understand some of these complicated contracts that they now have to buy because we don't have anything except an atm at the bank. and then finally, of course, the political system is at the core of all really deep financial crises, and we need reform here. can we ever not have financial crises? depending on how you look at it,

let me just say i think the imf will always be in business. [laughter] we have a human element, i think, that will be with us for a long time. but i do think that we really can evolve the system more ambitiously and maybe do better. thank you. [applause] >> the last speaker is larry summers. >> i am very glad for the opportunity to be here. i had an occasion to speak some years ago about stan's remarkable accomplishments at the imf when he left the imf, and i had an occasion some months ago to speak about his remarkable accomplishments at the israeli central bank when he left the israeli central bank. [laughter] so i will not speak about either of those accomplishments this

afternoon. instead, the number that is in my mind is a number that i would guess is entirely unfamiliar to most of the people in this room but is familiar to all of the people on this stage, and that is 14,462. that is the course number that stan fischer's course monetary economics at mit for graduate students was. it was an important part of why i chose to spend my life as i have, as a macroeconomist, and i strongly suspect that the same is true for olivier and for ben and for ken. it was a remarkable intellectual

experience, and it was remarkable also because stan never lost sight of the fact that this was not just an intellectual game. getting these questions right made a profound difference in the lives of nations and their peoples. so i will leave it to others to talk about the imf and israel, and i will say to you, stan, thank you on behalf of all of us for 14.462 and all you have taught us ever since. [applause] i agree with the vast majority of what has just been said. the importance of moving rapidly, the importance of providing liquidity decisively,

the importance of not allowing financial problems to languish, the importance of erecting sound and comprehensive frameworks to prevent future crises. were i a pen of the -- a member of the official sector, i would discourse at some length on each of those themes in a sound way, or what i would hope to be a sound way. but i'm not part of the official sector, so i'm not going to talk about that. i'm going to talk about something else that seems to me to be profoundly connected. and that is the nagging concern that finance is too important to leave entirely to financeiers. we have all agreed, and i think

our agreement is warranted, that a remarkable job was done in containing the 2007-2008 crisis. that an event in the fall of 2008 was by most of the statistics -- gdp, industrial production, employment, world trade, the stock market -- worse than the fall of 2000 -- 1929 and the winter of 1930. ended up in a way that bears very little resemblance to the great depression. that is a huge achievement for which we rightly celebrate ben and many others, and that playbook will be a hugely important one the next time there is a panic, and that time will surely come somewhere and

someplace. but there is, i think, another aspect of the situation that warrants our close attention and tends to receive insufficient reflection. and it is this: the share of men or women or adults in the united states who are working today is essentially the same as it was four years ago. tour years ago the -- four years ago the financial panic had been arrested. the t.a.r.p. money had been paid back, credit spreads had substantially normalized, there was no panic in the air.

we engaged in a set of long-run today is about half of what we believed it would be, what the imf believed it would be at that time and the world bank believed it would be. it is a central pillar of both

classical models and keynesian models. it is all about fluctuations. fluctuations you need to have less volatility. i wonder if a set of older ideas that i have to say were pretty firmly rejected in 462 stand -- a set of older ideas that went under the phrase secular stagnation are not profoundly important understanding japan's experience and may not be without relevance with america's experience. to think in those terms if you go back and you study the

economy prior to the crisis, there's something a little bit awed. many people believe monetary policy was too easy. everybody agrees there was a vast amount of imprudent lending going on. almost everybody believed that wealth as it was experienced by households was in excess of its reality. to easy money, too much borrowing, too much wealth. was there a great boom, capacity utilization wasn't under any great pressure. unemployment wasn't under any remarkably low level. installation was entirely quiescent. so somehow even a great bubble wasn't enough to produce any

access in aggregate demand. now, think about the perco after the financial crisis. i always liked to think of these crises as an analogous to recover failure or an analogous to what would happen if all the telephones were shut off for a time. the connections were to go away and output would of course drop very rapidly. there would be a set of economists but sit around explaining electricity is 4% of the economy and you couldn't have lost more than 3% and there would be people in minnesota and chicago writing that paper but it would be stupid. and we would understand that somehow even if we didn't exactly understand the model but

when there was a electricity there wasn't going to be much economy as something similar was true with respect to the financial flow and interconnection and that's why it's so important to get the lights back on and to contain the financial system. but, imagine my experiment where for three months or two months 80% of the atrocity wealth better than what would happen to the gdp afterwards. you expected it would be a lot of catch-up. so you expect one thing is normalized. not for four years later he would still be having substantially less then you had

before. so there's something odd about financial normalization if that was what the whole problem was and then continues slow growth. so what's the explanation that would fit both of these observations? suppose that the short-term real interest rate that was consistent with full employment has fallen to negative two or negative 3% sometime in the middle of the last decade than what would have been? even with artificial steny less to demand coming from all this financial improvements, you

wouldn't see any excess demand. and even with a relative resumption of credit conditions getting back to full employment. it has been demonstrated that absolutely conclusively that panics are terrible and monetary policy can contain them when the interest rate is zero. that has been demonstrated conclusively. it has been demonstrated last conclusively that presumptively that's when the short-term interest rates are zero, monetary policy can affect a constellation of other asset prices in ways that support demand even when the short-term interest rate can't be lowered.

just how large that impact is on the demand is less clear, but it is there clear. but imagine the equal the preeminent trust rates have fallen significantly below zero. then conventional macroeconomic thinking leaves us in a very serious problem because we all seem to agree that whereas you can keep the federal fund rate afunds rateat a low level forevs much order to direct ordinary measures beyond that forever, but the underlining problem may be there forever it's much more difficult to say we only needed deficits during the short and

trouble of the crisis if aggregate demand and equilibrium interest rates can't be achieved given the prevailing rate of inflation and most of what would be done under the auspices of this view is at all correct would be done under the aegis of preventing a future crisis would be counterproductive because it would in one way or another raise the cost of financial intermediation, and therefore operate to lower the collaborative interest rates but was necessary. now i need not have this right at all, but it seems to me that four years after the successful combating of crisis, no evidence

of growth that is restoring equilibrium one has to be concerned about a policy agenda that is doing less with monetary policy than has been done befo before, doing less with fiscal policy than has been done befo before. and taking steps whose basic purpose is to cause less lending, borrowing and inflated asset prices than there was before. so my lesson from this crisis is i have to say the world has under internalized is that it is not over until it is over, and

that is surely not right now and cannot be judged relative to the extent of financial panic and that we may need in the years ahead to think about how we manage and economy in which the zero nominal interest rate is a chronic and systemic inhibitor of economic activity. thank you very much. [applause]

>> we now turn to questions for the other panel. first come is there anything that you want to take up for what the others said? >> i remember another course we have at mit with mr. samuelson where he explains why the real interest rate would be negative because there was always the possibility of lending the hell so that the locomotive could get to a certain destination with less fuel which meant that there was always a positive great return available in the medium to th long term. and it seems that the real return is negative, first of all the modern-day policy can't get negative interest rates with positive inflation. that's one thing. but on the fiscal side, the return to public investment, as

long as it is real, as long as it is about zero, it would always be an approach, right clicks it would always be profitable with a negative interest rate. >> the occasion did not permit by discussing every aspect of what i have talked about. i do know about leveling out. if you think about it as a private investment that requires it to be perfect property rights that you can get the benefit of that through all of time which is reasonable to suppose that you don't come if you think of it as a public investment, it is sort of the point to have that there may be a case for that would be a permanent fiscal

expansion which were constantly undertaking projects of that ths kind and i think it is precisely the question of how one should think about medium-term and long-term -- medium and long-term fiscal policy that the kind of argument that i made goes to a very -- goes to a very substantial extent. and i think that what i was attempting to raise a question about what is almost -- i don't know whether you really have it at all all six that all of the papers at the imf after they say what they are going to say they have the paragraph where they say and of course in the long run fiscal consolidation will be profoundly important. [laughter]

the increased soundness of what takes place. the most recent fiscal report, some question is precisely how it should be read. but it basically says every industrialized country in the world is in a massive long-run problem with respect to its fiscal situation and maybe that's right, but if everybody tries to solve it at once i don't think it would be very good for the people that are unemployed. maybe then it will be all be okay. but i look at the record of the last four years and i think that is much less clear. you said something which i think is worth thinking about. you said well if you just get a -- he made the point which is obviously if you generate inflation, then you could have a negative interest rate as you want.

it's also assumed from that with monetary policy can necessarily solve the problem alone. that depends upon the ability as you well know, it depends upon the ability of the pure monetary policy to achieve any desired inflation. there is no question that to you as milton friedman's famous line you contributed to the popularization of if you drop enough dollar bills from enough helicopters -- [laughter] there is no question that you can get as much inflation as you want. but in the classic economic lexicon, that is of course an expansionary fiscal policy because you are making a transfer and we have a lot of quantitative easing and the inflation rate in the united states is not conspicuously higher than it was before we started. and so the question of what ways that thi as you go interest raty

find over the long-term is i think an important one. the kind of thing i'm talking about isn't a purely hypothetical possibility. painted with the broad brush the economic history of japan for the 22 years to 2012 has some substantial elements of what i am talking about. >> i'm going to ask a question to all four of you. i was struck by the next crisis is grea good to be a financial . whether this is intentional or not it seems to me that there are some fiscal forms and be not on the scale of forecasting that potential natural disasters and

i think that one of the lessons of the crisis is how globalized the world is. talking to the supply chains of the flooding thailand has an effect on the world. just wondering whether india and its financial crisis which are the rather nasty ones would suggest the ones we got. any reaction? any of you? >> they are entirely human made. they represent books or electronics or readings or pieces of paper. this is a very important proposition from a natural disaster, for example in a different set of tools and responses. that is the ironic thing about the financial crisis and it seems to be coming from some sense nowhere. remember i told the story about asking my grandmother about the

great depression and her telling me how children didn't have shoes because their fathers didn't have jobs in the shoe factory and it had been shut down into the natural response from a six-year-old is why didn't they just open up the shoe factory clicks and of course it has to do with the coordination of individuals in the competitive financial and economic system. these are evidently very important phenomenon that we have seen in emerging markets and advanced economies, but they seem to be a different type of problem than the climate crisis. you can certainly have a fiscal crisis. we are looking at the european situation and i think everybody is impressed and worried by the fact that awful costs of the political instability that is made at the beginning of the crisis seem not to have resulted in major political changes or political crisis in europe at

this stage. the question is how long it is world is in itself way how long the political situation can continue without coming to power the 20 do things which create financial crisis which are more based on the fiscal policy of the state -- this takes than monetary policy. they may lead to financial crisis because they are not quite sure how you define the debt crisis in which they have the finances and inflation results from something like that. but there are others sources which almost always as you think about them will get link linkedo some political developments and we would be very much tied up in our world of the economy to say

how the citizens interact with what is going on in the economy and what impact they would have on the political system and the government to. >> we agree on the public investment that would make sense right now to do more because of course it pays for itself and is sort of nonissue that gets done in a sensible way that is incredibly true in the united states but a number of other countries. talking about a pure financial crisis which stands a better degree is an interaction between the fiscal and financial, but in actually incredibly worried about the environment. i favor having a carbon tax and you can cut out other taxes and such, but i think a financial crisis that will be first. >> trying to reach a judgment about whether there is going to be more in the middle east

before or after there is going to be pervasive bank failures. so in some sense i took the question to be all about financial crisis, but i would relate to the spirit of the question which is it seems to me if you sort of read kindleberger the impression you come away with is that there was some sort of combination of the reasons he -- complacency and it seems like we are away from complacency and euphoria. so i don't think it in is an accident that there are very few financial crisis in the 35 years after the second world war. i think it has something to do with the fact that people are still careful in a way that the aftermath of the depression.

and if you sort of asked me today in the global economy are there more problems under confidence i think that's easy. there are many more problems. i would point to some problems of overconfidence but it seems to me that there are many more problems under confidence than there are of over. so i think it is going to be a while, quite a while before we have another financial crisis that will fit in the 2008 and in the early '90s in japan at the end of the 1980s, the depression, 1907. i think those types of crises are a long time off. and i think that in the world of the near zero interest rate there is a kind of borrowing that can go on for a fairly long

time so i'm not sure that i see just what other crisis in this panel will happen. this is thinking another point of my remarks unless you think the fact that of a global economy is producing two to $3 trillion less output of mit regarded as its capacity every single year and that there are more kids living at home because they can't get jobs after they've graduated from school in the industrialized world than there have been in decades. you can regard that as a kind of continuing crisis with us today and i guess it seems to me to be the crisis that a lot of these are preoccupation in.

>> there are enough people in the room that there should be a question. [laughter] >> i'm going to be greedy. what is the shock that has given an equilibrium in the interest rate below zero and number two, why is that it's just that we've been doing fiscal austerity and still have such a output? for the others, there is a lot of talk about liquidity and solvency and the importance of acting quickly so when you act quickly and do the stress test does it really matter if you sort out what is liquidity and what is solvency and what is the important thing to divide the banks and divide them into two piles that should keep you occupied. [laughter]

>> i don't think it was thought that it was conspicuously austere in the period prior to 2,007 at 2,008 and it is hard to construct a counterfactual through the period 2003 to 2007 with no bubbles and reasonably rapid growth. since the bubbles are now seen as having been the cause of a significant fraction of the growth that there was, what a shock could drive the equilibrium below the interest rates down a variety of candidates but let me mention two of them. the first in your sphere of expertise wrote about some years

ago when he spoke about the savings does substantial flow of capital from trade surplus and current account surplus nations that desire to accumulate reserves on a substantial scale. that is one answer. a second answer, which i am inclined to think is more important is the capital good is the computer and that is information technology. the relative price of information technology relative to everything else goes down 20% a year. and so, whatever the right savings investment balance was before you need a different savings investment balance now precisely because the capital goods are becoming substantially

cheaper. another way to view, another way of looking at what i have said is to look at the balance of private sector or the balance of corporate sector what you see is a substantial deterioration in investment relative to savings and without the monetary policy for that would be true to an even greater extent and part of the reason for that is that capital goods are cheaper. the most important reason of the stress test they were convinced that something was going to be done and no banks were going to fail in a disorderly way. and there wasn't going to be any generalized regime of creditor and people didn't know how that was going to play out but they

knew it was going to play out, therefore they felt better and things got better. stomach is there a distinction between the insolvency because in a panic, the fire sales results and depressed after prices which means some firms are insolvent at some places it's a liquidity is the first step if you restore stability in the fire sales prices find them a more sustainable level that has to be addressed by private or public capital injections which of course are beyond the scope of the central bank which is why the central link alone cannot be responsible for anything of a crisis. >> the liquidity problems and i see that there are banks which have better assets and banks that have worse assets and if

they have worse assets and are supposed to do the tests as well which makes it completely than you are supposed to do these evaluations in the normal conditions and other crisis conditions and i see many banks that are broken it would be better to close them and the other ones. >> it's not what they be in the united states but in fact this kind of thing happens extremely infrequently but if you look at the whole world that is another matter the memories sometimes fade faster.