with high-quality publicly funded preschool. preschool for all its voluntary. it builds on a federal state partnership in which the government takes the early investments lead and gradually the states take over the funding.

and we be the calculations show that this can be funded especially in the federal gears with no addition at all to the deficit. finally preschool for all promotes access to all day kindergarten and encourages the expansion of high-quality programs to include kids only in low income populations but middle-class as well. we also have a 250 million-dollar grant program for preschool development which will help save local agencies and governments build a fundamental component of that high-quality preschool program. you heard it hear first applicationhere firstapplicatioe at the end of july for that program. we will continue to work with you and states and communities to ensure that our youngest citizens have access to learning and pay paradigm for success in school and life.

let me turn to the teachers. the president's plan for 2015 continues and built upon a significant focus on teaching and learning from the administrations first term. several years ago the administration officially launched the recognizing educational success, but if teaching or respect project. throughout the year, 2012 the department staff and teachers held conversations across the country to develop a shared vision for transforming the teaching profession. as a result of that we released the blueprint that we hope is a tool for the district and community was for the vision statement for transforming the teaching profession and is cowritten by the leaders of the national annexations representing the teachers in the state superintendents, school boards, the department of education and teachers themselves.

the administration has proposed significant investment going forward that supports teachers and leaders doing the hard work in classrooms and communities and focus on one, technology. you heard yesterday the power of technology to transform the classroom. how is he doing? as a former board member i need to check in on him. that's good. i will let him know. the technology whether it is things that you are working on your own classrooms can empower the teachers to provide instructions and personalized learning at a level that we have never been able to imagine until now but right now fewer than 30% of american schools have the broadband they need to connect in today's technology. under the administration, connects education initiative, 99% of the american students will have access to next-generation broadband by 2017. [applause]

this is particularly important in america's rural communities that are too often afterthoughts in education reform. not anymore. that connectivity will help transform the classroom experience for all students regardless of income. and earlier this year the president announced the federal communications commission will invest $2 billion over the next two years to dramatically expand high-speed internet connectivity for both american schools and libraries. we are also working with the board for the teaching standards on a project that we are calling teach to lead. it's an initiative that aims to expand student outcomes by creating opportunities for teachers leadership in their local schools and districts. and it's aimed particularly at teachers that want to stay in the classroom, but also want to

find a broad scope for the work, leadership and ideas. too long the idea of leadership has been connected with leaving the classroom and we want to create opportunities for the leadership to be addressed through the classroom. [applause] >> teaching as you know it's veris veryhard work and learninh is a very complicated process. so, one of our other initiatives is to work to make teacher preparation programs as good as they can be and in particular to meet some of the new challenges the teachers are facing whether it is focusing on doubling down on the stem subjects and working hard to get the girls into students of color into the stem programs. we need to better prepare the teachers to exile in the diverse environments and help teachers learn how to incorporate technology into teaching and

classrooms. we need to challenge the teacher education institutions to do all of those things and more. that's why we are moving forward with the contents of plan to strengthen the teacher preparation starting this summer a nationwide conversation together to gather the broad-based influence for the new regulations that we aimed to propose later this summer. the ultimate aim is to build on the state and district hard work and developing systems that recognize excellence and identified programs on the other side that need improvement. we want to encourage the states to incorporate more meaningful outcome measures as they think that the quality of teacher preparation programs and we are thinking of things like placement in the high needs schools, satisfaction of program graduates, satisfaction of the district employee school and players and student learning outcomes. we also want to help the states and districts identified and

spotlight the programs that produce teachers who feel prepared and who are repaired to our creating the kind of learning environment that creates opportunity for students no matter where they come from. finally, let me talk about improving the heart of the quality and success in the postsecondary education. so now i'm actually getting to something that i'm responsible for instead of the other stuff that i just sort of say notes for. >> improving college access and completion is no longer a luxury for us in the nation or for individuals. when it comes to job of attainment and employment security and national security economic development we know we need to prepare more people to get to and through college successfully. but there are issues. rising costs, pricing the middle

class out of college, student debt levels whether individual student with devils or aggregation levels are rising alarmingly. despite the recent rise the percentage of students who enter college in the first year and who graduate has been stagnant. i know we can achieve president obama's goal of making america first in the world again but it's not going to be easy and we are going to have to do all that we can to make higher education more accessible and affordable into focus on increasing completion rates into the ultimate value of the degree. we have made some good progress. for instance, the number of students able to afford college with how grant ha programs has % to nearly 9 million program for sedans. we have published new tools on

the websites to help students and families make good choices about where to go to college. the colleg college scorecards ae financial aid shopping. in the college opportunity and access a wide range for small liberal arts college and giant state universities they made that commitment any place where you are always held accountable in the white house in front of the president for bringing them back in a couple of months to figure out how well they are making progress in file this away in the category. we've dramatically simplified the fafsa form that students

use. [applause] >> thank you. i wish i could take credit for that before i came on. but because now we can monitor these things just yesterday the director of the student financial aid told me that the average time that it takes someone to fill out the fafsa form online has gone down to 20 minutes which i will say again as i said before is 20 minutes too long as far as i'm concerned but we will work on it. but that is as you know a major barrier for students applying for financial aid and we are happy to have gotten down to the 20 minute mark. but we have to do more which is why we propose significant funding to increase affordability and access over the next several years. adjust anjust in may we announct competition, the first in the world 75 million-dollar

investment fund that hope helpso feed innovation in higher education that either increase access of low-income students that go over the cost and the price of education on the campuses by using technology or other means and that improve outcomes of higher completion rates or that measurably added to the value of a student's degree. we purposefully left it broad because we wanted t people's bet ideas. the grand in the application process closed on june 30 and as the computer system was regaining its breath we tallied them up and there were 595 applications under the first in the world program, which i think suggests that the higher education community is ready, willing and able to bring forward the great ideas.

we also propose $7 billion for the college opportunity graduation one which would provide annual grants to institutions based on the number of on-time graduates and programmed recipients directly rewarding institutions for doing what we know that we all need to do such is increase the graduation rates of the lower income students. as you may have read through the executive action the president has taken decisive steps that students and families are able to manage student debt by increasing access to income-based borrowing plans for most prominent of these where instant of a fixed dollar amount they pay a fixed percentage of their income no more than 10%, and this helps students who are having difficulties in this challenging economy, but it also helps students who are moving

into professions that are tragically and woefully underpaid but very necessary and very welcome in our society. overall the 2015 budget reflects this administration's commitment to the full grant program and will fully fund the maximum award of $5,830 per student in 2015. we are investing about over $150 billion in student aid with good reason because every one of those dollars goes to help promote a student success. we've also been investing resources to increase transparency and visibility and using data to better inform student choices, family choices and institutional action. we are investing in the creation of a sensible and constructive college rating system that will

help inform students and families about outcomes for the graduation rates, cost and simultaneously encourage institutions to improve by giving them easy way is to compare what they are doing with what the like-minded institutions are doing. and finally, it rewards schools that provide the best value for those most in need through recognition and we hope eventually financial rewards in programs like i just mentioned. alternately, our aim is to reward schools that provide the best value to those most in need so that those schools can continue to expand and the models for others. as the secretary has pointed out, we are very much aware of how much we will need the benefit of your guidance and wise counsel as we move through each of these programs over the next year.

positioning all of our students to succeed and positioning the nation to lead in the 21st century will require our best collective thinking. as the president has said, america has never come easy. our freedom, our democracy has never been easy. the america that we want for our kid where honest work is plentiful and communities are strong, where prosperity is shared and opportunity for all its us go as far as our dreams will take us. none of that is easy that if we worked together and summon what is best in each of us, i know it is within our reach. with that in min mind what theyl you that as i am dark on this

work i will always call on what is best to do this work and i hope you will also left me call on you as we do this work. what thewhat we thank you againr bringing such energy to this conference and at th the meetind allowing me to talk with you today and for working everyday to ensure every dayto ensure a a bright future for all of us. let's work together to make this year powerful, constructive breakthrough action. thanks a lot. [applause] >> the clock tells me that we have time for questions or comments if anybody has either a

question. >> looking at the budget and i haven't followed as closely as i should have put the mental health and first aid in the schools, is that still in the works of training their for the teachers? >> is still in the budget proposal. >> joe garcia i have so many questions i don't know where to start. let's start with fafsa. you said it's been simplified and there is a proposal that might takthatmight take it downs two or three questions or link it onto the tax reform. i wonder is there anything else on the horizon that you see that will further make it possible for the access? >> so you are now inviting me to geek out on that issue.

i will resist but not entirely. so yes, there are active proposals in the works to either eliminate the form altogether or reduce it to two or three questions. in either scenario, one of the other things and i'm sorry i'm going to geek out for just a moment. the length of the form is just one of them and another significant problem and those of you that work in high school notice well that the timing of the notification eligibility is all backwards. we really want students to know how much aid they are going to receive while we are making their choices and which college to apply to. and so you can solve that problem and a lot of the fafsa problems by using the irs data and not giving the asset list but the prior.

if we can get the prior tax year then we get close to solving both of those problems. the students of their eligibility is when they are shopping for colleges and reducing the burden on families. >> i want to thank you for your leadership on moving of our education system to new models of learning as is needed in your path and i'm curious to know as we have seen the senate about its proposal on the reauthorization and in the house preparing to do the same, what can we do in the higher education act to make sure that they are preparing teachers to teach in the new learning environment there seems to be a big disconnect between what they

are being prepared to do and in the new realities of the classroom. >> how many deans of education are there in the room? good. i can almost get away with it. [laughter] yes. and thanks for the question. i do think that we have a lot to do into teacher education and one of the things that we ought to be looking at is a competitive grant program and it's not in the president budget proposal. that would be interesting to see if it could be maneuvered in a different way. but i think that we need to do for the teacher colleges what we

have done for the colleges in the world which is to say here are some object is that we have. we are not going to waste our answers for the questions on the school education. we want you to wrestle with this problem. so, tackling how can we train teachers to be outed consumers and perhaps even producers of technology in their classrooms i think that would be one of the priorities. second we need to make it more possible for the states to be able to license nontraditional education program providers to be able to give teacher education institutions a bit of a race for their money but more importantly to create models that might be incorporated and appreciate and innovation sector and teachers education that is

perhaps a little less regulated than the current. third, and this is what we are working on in the department this summer. we and the states need to set up criteria for evaluating the teachers education programs that create metrics on some of the very things that we know we want the teachers to be able to know and be able to do. we need to ask them if they've earned that. we need to find evidence of them incorporating practices in the classroom and we need to see that those are having an effect and then feed that information back to the schools so that they can improve. >> i'm the oregon state teacher of the year and the first special education teacher to win this award is that this is probably a question that's for michael but he is not here so you will get it. it's been a is the under busy uy

for special education for those who don't know. we have had a recent change in the financial aid that graduates that have a modified diploma can now be eligible for federal financial aid which was not possible before. we have a lot of students that were not able to even access trade programs because they couldn't get financial aid. and the department of education is there any plan to make support for schools and the teacher is to be funneling students say a young man that has dyslexia and have t had to a modified diploma but once to go to trade school. are there plans on your end to make support for us to get those kids into the programs that are going to give them appointed? >> great question. i had lunch with michael just two days ago. and we are looking at ways of providing technical assistance in that domain.

but i also want to -- edits technical assistance, not specifically there but as you also know we need in addition to the financial aid change we have also made a major commitment to now begin to look at student outcomes quite seriously on a state-by-state into district by district basis. we are thrilled with that and so part of the technical assistance is really geared around about it as a part of it, helping the special ed teachers at the high school level think about the next step because it hasn't been a natural connection. so as we think about outcomes that is one of the outcomes that we hope to provide. >> good afternoon. i'd like to ask questions and i appreciate your reservation today. you have talked a lot about the

teaching development and the teachers in the room would agree with me that is very important. as an administrator it is something i feel is very important just for being here. do you have any plans or are there any plans in the works to systematically increase the ability for the administrators and teachers to get professional development? it's always something we have to struggle with and it isn't something that is easily put into your calendars. to think if this were an easy problem we would have solved a long time ago. we are looking at the title funds is being allocated into creating the flexibility. creating the dollars in new ways one of the challenges that we all have with professional

development is in the efficacy of the professional development program. so we would like to i think link those in the new experiments. thank you all so much. such a privilege to be with you today. [applause] thank you for joining us under secretary mitchell please be out draco fell out of the invitation forms. the issue that we put on the table for you the last three days come from those kind of evaluations. we would and hav wouldn't have t turnout for the longest period of time if we didn't have information that you desire on the national for him. before him wouldn't be the same without all of you and i want to thank you so much for coming

here and for asking the tough questions, for being open to learning new things and for networking with your peers across the country. i want to leave you with a couple of parting thoughts. ecs is here for all of you and we have a hotline that can answer within 24 hours and if not we can find information. we have technical assistance to the interim committees or scores. our website is unparalleled in the amount of resources it contains including up to 40,000 different educational policies you can't track and the numerous taxonomies. you'll find our statyou will fiy database and research studies database and you will find links to all of our reports, the ones i've mentioned in the self promotion and the ones that you've heard about in the conference sessions and once we haven't even talked about yet. you will find information on education issues all across the

education spectrum from early learning to k-12 and postsecondary to workforce to read as you are getting ready to leave the conference with a head full of ideas, briefcase full of papers i want to leave you with one more thought. think of ecs as your expert resource for all things education. the person who will give you facts but not an opinion we will meet you where you are at, get where you want to go. we are on your team. in fact everyone on this room is on the same team so let's work together to give our kids the best educational system in the world. we hope to see off a fe all of e 50th anniversary of the interstate compact that will take place in denver. i will be june 29 through july 12015 and also please don't forget the winter commissioner meeting that will take place in the great state of nevada and las vegas december 3 through 4th. thank you, safe travels and happy fourth of july.

we look forward to serving you in your state. [applause] just a reminder you can see the comments of education undersecretary ted mitchell anytime on the website c-span.org. in the close of the supreme court's term this week we have been asking your opinion of the supreme court and over 800 of you have left comments on our facebook page. and what the senate out this week it's booktv in primetime pe tonight we will look at the history of nuclear power.

booktv satsuma former secretary of state harry clinton in little rock to discuss her new book "hard choices." adding to the point that you can make peace is never easy because you don't make friends with your -- peace with your friends you make it with people who are your adversaries who have killed those you care about, your own people or those you are trying to protect and it's a psychological drama. you have to get into the heads of those on the other side because you have to change their calculation enough to get them to the table. i talk about what we did in iran we had a lot of economic pressure to try to get into the table and we will see what happens but that has to be the

first step. and i write abou about what we n afghanistan and pakistan trying to get the tablet into the table for a confidenc competence of dn with the government of afghanistan. while, in iraq today i think that's what we have to understand is that it is primarily a political problem that has to be addressed. the ascension of the sunni extremist group is taking advantage of the breakdown in political dialogue and the total lack of trust between the maliki government, the sunni leaders and the kurdish leaders.

as the 2008 financial crisis began to federal reserve chairman ben bernanke told a roomful of congressional leaders that a failure to act would seriously affect the u.s. into thandthe world economy. former senate banking committee chairman chris dot told that story and others during a discussion about the economic times. he is joined by the former house financial service chairman barney frank who along with senator dodd passed the reform bill. the comptroller of the agency in boston hosts the event.

>> we welcome our first panel i would like to introduce you to suzanne duncan the moderator of the panel. panel. suzanne is the head of global research at state street bank. she is the author of scores of white papers and manuscripts particularly in the area of the investment management you will see her commentary on almost every major media outlet throughout the globe but the thing that we are most proud of that she is a member of the board of advisers of our center for finance law and policy. suzanne will introduce sheila bear. >> thank you very much for the opportunity. i'm honorei am honored to be moa panel that really needs no introduction.

we have with us today jerry who is the chairman of goldman sachs bank usa and former president of the federal reserve bank of new york and federal reserve bank of minneapolis. we also have sheila bear who is a former chairman of the fdic and currently serves as a senior adviser to the charitable trust and finally we have a partner at the law firm and formerly served as the council of the occ. i would like to kick off the discussion by asking each of the panelists to provide ten minutes is a very brief amount of time, ten minutes for opening remarks and then the remainder will be devoted to the discussion followed by a few questions in the audience. the backdrop for this panel is the paper from 1982 titled our special. so we welcome your views.

>> thank you all for joining us today for a very full agenda over the course of the day. i will not succeed. first of all i want to say that i have made copies of the bank special available out here someplace and i also made available a follow-up paper that i wrote a succeeded as president and asked me to write a sequel in terms of how does the world look now compared to where i wrote the original piece in 1981 and 82.

i think i can summarize what the essential philosophy of the special asset was and what it basically came down to. first of all trying to come up with a coherent and tight definition of banking and i did that myself without any help from anybody but myself. and then essentially, the concept of course was straightforward and started out with the proposition that banks as part of their larger role of promoting those savings to the most that is directly tied to

the proposition into very tight narrow destination and what that implied in terms of the lending side into the investing side of the banking institutions. it seem seemed to me then and it still seems to me that if you follow the suggestions that are made in that context in terms of what the banks were and why they were special, it led me to the conclusion that banks because of the special functions should be in the largely are unique in the sense that they are subject to the so-called federal safety net

of the deposit insurance and very importantly access to the liquidity and payment facilities in the central banks. one of the things that irritates me to this day is people still pay very little attention to the informant he mad -- important al over the world and that was kind of the hypothesis and then i set out to try to put humpty dumpty together away and i quickly came to the conclusion that getting the definition of the philosophy gave rise to another set of questions that includes what

power should they have and how much emphasis should we put on the subsidiaries of the banks as opposed to the subsidiaries of the bank holding companies and the list goes on. i'm not going to go into any detail. an end to that when the thing was put together, i felt pretty good about it at the time. but i have to admit that quickly after the first version of the essay was put together the banking system went through a pretty rough patch in the 1980s. the fact of the matter is starting with the failure of the continental illinois and the thrift crisis, the southwest banking crisis and the new england banking crisis this was not a good time. and i began to ask myself the question what did i miss,

because certainly the experience of the 80s i thought was pretty lousy. a few of you may remember that in 81 and 82 we came pretty close to a really serious situation that involved not just banks that insurance companies, investment banks. this turned out to be close. one of the documents that i had in the original is still important today. getting ahead of the problems when they begin to emerge as opposed to wait until it is too

late and i began to feel a little bit better that if we did a good job in that situation. i was surprised as we went along that lots of people were still reading that essay as a matter of fact we are still reading it today which is really remarkable. so, what i try to do or get to very quickly is to revisit the question over the past three or four weeks. the banks as i suggested 30 years ago have the events simply outpaced us and as you look at.

the case could be made that banks being special had run its course. so much had changed and the changes were so radical in many respects that the specialness of the banks. but the more that i thought about that, the more i came to the conclusion that indeed i could make a case that the specialness of the banks today is more important, not less important.

it's time now to write the sequel to revisit the thought process that were tied up in 1982. it's difficult because while the principles are still essentially right, i also know that the experience of the last 30 years with particular emphasis in the last ten years is going to be extremely difficult to rationalize and the current setting and looking to the future by i believe the banks still are special. the challenges i have for the banking industry and the

financial industry are going to be a major subject of our discussion throughout the day today and i look forward to listening and learning what people have to say about that. what's the bottom line conclusion for the day with my 38 seconds left to finish is on a still very much believe banks are special and i think the functions that they perform in the context of the 1982 principles are still the century right that the world has changed and how you square the circle with 30-year-old principles and contemporary realities isn't going to be easy so thank you very much for your patience.

>> sheila let's hear your perspective. >> i would agree that banks are special for all of the reasons jerry articulated in his landmark paper. of the three functions that he identified were transaction accounts that can provide a liquidity as well as the transmission for the monetary policy. of those three i think the first two are the most important to have an effectively functioning economy. and with transaction accounts in particular households and businesses need to know they have a safe place they can keep the money that needs to be readily available but will have value and be there when they need it and banks are ill-equipped to provide data tht we have learned through many hard lessons that government intervention is necessary to provide stability in the form of the central bank lending as well as fdic insurance and with the

government support comes moral hazard so that is the basic framework and i think it is still highly relevant. the problem is we deviated from it and started putting the entities that were not in a safety net or subject for the supervision and things like the capital requirements to perform the banking functions. the 2008 crisis has been rightly called a run on the shadow sector and that is what is going on. but we do not have the clarity moving forward to try to define those functions that are essential to the economy and need to be part of the safety net from those that make sure that the entities or regulated appropriately with others who want in good times to provide the services and any time anything works. it's a prime example is began to

be unstable during the crisis but there's a tremendous resistance to making that kind of significant change and we have a model and i think we will end up with a model in the published reports with some type of reforms perhaps including money market investors having to pay more. that's an easy way to stop by to think that is very helpful to investors and that could be disruptive to the payment system if you have those fees going down. in the crisis there are also other areas that are traditional banking functions in the safety nets like the clearinghouses. they are able to access the facilities and at th the same

regulation to banks get and the oversight continues they are not traditional banking functions and they didn't perform that badly. ththe unfunded and underfunded regulators i fear where that may take us. the second function for the liquidity lets face it the banking system and did up being a disrupter of liquidity not a provider during the crisis and i think that was very unfortunate and the reason that occurred is we had too many banks as well as shadow banks relying on the short-term funding coming off traditional more stable sources. they went to the short-term funding and then they used that to fund a very risky and opaque investment. it was hard for the investors to

value the insolvency and they had a very thin capital level as most of the ended up going back. and that's why we have the recession. they withdrew the liquidity as opposed to performing the function of providing that liquidity in the times of economic stress so the regulators recognize this. courageous or they've proposed a tough ratio and we will see that finalized but in 2010 in the committee we also agreed to the capital surcharges to the largest institutions that hasn't even been proposed yet. most of the banks have increased the capital by one or 2%. a lot of that was through the merger acquisition activity and regulatory action in my view. we need this key to making sure that they are not liquidity disruptors. when the next downturn comes and

we know at some point it well. well. were the focus has been more wrong requiring the banks to help the so-called liquid assets on the balance sheet as opposed to getting significantly higher capital levels and i think that approach troubles me for a couple of reasons. one is you've obviously advantaged the banks and trading operation ones which are not liquid. that's counterintuitive to me because the financial institution is a trading operation i was seeing where they were likely to get in trouble and boosting the need of bailout assistance but regulators are also making the assumption that the assets are liquid when i don't think they are and so they are putting significant haircuts on them. will they be able to sell this in a crisis and absorb the losses? that isn't clear to me and no amount of so-called liquid assets on the balance is going to stanch them if it is insolvent. so i think that getting the capital level is important and

more transparency. it works on the balance sheet as well. well. stick they will know if it is insolvent. they can see what they've got on their books and have a better sense of what the values are that we didn't have that kind of transparency during the crisis. it was the same for the regulated banks like city. more focus on that next time will be liquidity and not just disruptors is extremely important. finally on the monetary policy on with teacher to others that are much more knowledgeable than i did it seems to me the banks have become less relevant as the transmission for the monetary policy and direct monetary interventions have become the tool of choice. whether that is a good or bad idea i have my concerns and i've addressed them before. i don't need to go through that again but i do think it is a significant switch in how the monetary policy is performed. and again i think history will tell if this is the right move or not and i have my own

concerns. in conclusion i think banks are special but i think the answer is to recognize that the backup providers in liquidity in terms of economic stress the payment system, those are the core functions that need to be in the safety net that the rest of it i don't think does. and if you give them that safety net access especially if you give it to them without the corresponding increased capital requirements we are asking for trouble. put the genie back in the bottle and don't gratify the bailout as each one of choice going forward. but i'm not sure that i see that in the reform efforts going on especially in the clearinghouses and again it doesn't look like they are going to get fixed. so i think that it is troubling and something people care about in a stable banking system should also be worried about. >> putput the bailout genie bacn the bottle. that's a good one. next on the related theme mainly

preemption in the wake of dodd frank. >> thank you very much. the subjects that are beginning discussed i will train them so that we can get onto the discussion of the policy issue which is fascinating and will make for lively discussion. let me begin by saying that i worked at the rotc and i'm very proud of the time i spend at spt that agency and i'm very proud of the otc and the work that is done by the controller they were terrific controllers and made wonderful policy decisions and they certainly contributed to the resolution of the problem

when the financial crisis hit and did not regard i also want to complement sheila and tim geithner and secretary paulson and any others that i think were extremely courageous taking actions that were needed to be diplomatic i think that we owe a great deal of gratitude to the leadership that we had in the administration and the regulatory agencies. one of the concerns or criticisms i would make up the era is the lack of the attempts to educate the american public

about what exactly was happening, what caused it and why we needed to take extraordinary steps as a result i think that there is a lot of popular misunderstanding about the functioning in the banking system and the role of the banking system and why we allow the collapse would have been a catastrophe for not only the united states but the whole world. and it's that type of educational effort should be made, could have been made and unless it has made i'm afraid it could have negative implications for the policy decisions going forward. now, i will speak briefly about preemption because this is an example of how sometimes the popular belief and understanding about accordance with the financial collapse and that line up with the facts and that speaking more broadly we really don't have all of the facts.

we don't have all of the studies and research done. a lot of the decisions that have been made and are being made are based on a common understanding or misunderstanding about them and without the actual information available that might take a while. there was a very good study recently by the federal reserve bank of boston which i highly recommend. chris cook was the primary author of that and there's a good paper coming out of nyu about larry. of the literature that is actually coming out now often disagrees with the perceptions that we had in 20 of eight and

2009. so preemption might be a good way of illustrating that because it was a concern into the conventional wisdom was preemption directly related to the housing crisis. and the national bank preemption allows things to be made. the facts are first of all the rotc took the lead in the first agency coming back in a year 2000 when he began to watch for the standards to tighten up on predatory practices to look for equity restricting and the loans being made that were not in the best interest of the consumers. and that's went forward in 2003, 2004 by regulations. they said national banks cannot make a loan based on the asset value of the collateral.

on the consumer loans based on the analysis and the ability of the borrower to repay. and when you look at the data, it shows the overwhelming majority all consider predatory outside of the national bank. the national banks had a very well presented. some reports said 15% of subprime loans were originated in the national banks. and those loans performed better and are less costly than the subprime loans originated by others. the proof and effectiveness -- and i want to add the other banks and regulators took similar steps so the fdic and the fed certainly have similar regulations. if you look at the bank holding

companies originating the subprime loans they were not being originated in the institution. prime example might be countrywide the largest originator of the subprime loans at the national thrift of loans were originated in a non-bank state regulated affiliate holding company. i'm not criticizing my good friends in the bank system because these were not banks that were being state regulated. at the time there was little authority for the state banking regulators to regulate these activities. now there is a lot of authority and we will see improvement but at the time the loans were being originated everything originated in state institutions and very little regulatory authority. now why is it important to have

the preemption? plea heard the control is a nationacontrollers andnational e effective, less costly and they are beneficial. but it's also an important factor involving safety and soundness. the individual states in the name of consumer protection had taken actions which are contrary to the safe and sound operations of the institutions. ..

>> from being called when the house was sold, transformed those loans thirty-year, being funded by high costs deposit, hundreds of millions which now would be billions of losses because of that. isn't this caching this is one example i. certainly give you many examples where you've got state laws designed to protect, secure consumers in particular states without a strong ability of national laws that seem to hurt a bunch of consumers that actually are necessary to protect national banks and national banking system. in my one minute that's left, i

would conclude by saying, consumer protection is important. we now have a cfpb, it's necessary. there certainly were preemption rules which people can disagree with, but the standard and the ability for state law is critical to national banking act and important to safe and sound operational. >> thank you. so you each listen to one another's remarks. what did you agree with and what do you disagree with? ray, i will put you on the spot and answer that one first. >> well, i'll be glad to respond to that. with respect to jerry's remarks, i agree very much on everything he said. i think banks are special. i think deserve a unique

function which there's no other financial or intermediated -- it's about some of the services banks provide including transferring long-term assets into short-term liabilities which is critical to our system. the one point and it's kind of an aside, we can disagree, was in reference to the benefits of corrective action. i think corrective action is certainly a worthwhile goal, but i don't think it's a realistic provision. i worked on the senate banking committee, and the way it was criticizing something i was partially and author of. the corrective action requires acquiring the bank when it's capital is 2%. when a bank fails, somewhere between 20, closer to 40% of its assets value is wiped out.

if you were to seize institution when it was has -- windows at 2% capital, it would be put on the fdic system. we are seeing in the crisis institutions that if her mark-to-market probably would not have met 2%. but they were not closed. it was to be revived. tremendous savings to the american economy. so the theory of the corrective action is great. i don't think it works in practice. with respect to sheila, i agreed with much of what she said and i respect her views tremendously. i agree that it was a bank, it was a run on the banks. i disagree with her solution, and i disagree with the philosophy that can make banks the source of liquidity we have to make them hold liquid assets.

in 1913, prior to 1913 there was a run on the banking system. we did not have the federal reserve. we had a bank called jpmorgan in your city which got together the other money center banks and said, we need to provide liquidity to the banks in this country to prevent a run, and they provided that liquidity. out of that experience we developed the federal reserve system. one of the primary purposes of the federal reserve system is to provide liquidity when you've got panic in the marketplace, and assets are good you have a panic causing a run. the federal reserve and the federal home loan bank system are there to provide liquidity. if you say that banks have to hold $2 trillion in government

bonds in order to provide the liquidity in case of an emergency, you are taking that fund out of the economy. and since there's leverage that $2 trillion could be five, $6 trillion of lending, and you're not really helping safety and soundness. because the wafer proposal is, you are going to be encouraging banks to holding long-term treasury bonds. and if there's a liquidity crisis and interest rates are up, those bonds are going to to take a big haircut. and your encouraging banks to acquire foreign debt, and under this proposal, italian debt, spanish debt and portuguese debt, all count to 100% towards liquidity into get a much bigger return.

the rational institution is going to say, rather than hosting short-term treasury debt to make this requirement, i'm going to go long on treasuries and the going to mix it in with some foreign debt and, therefore, you are creating the next crisis, in my view. >> great. so sheila, what did you agree with, what did you disagree with? >> so let me just make a few comments on raised comments. i think maybe was as understood what i was saying about the liquidity rules. i don't want the emphasis on the banks told a lot of liquid assets. we might agree on that. no, i think we need, i think capital, the best protection against a run on the bank is to make sure they stay solvent and he did wit it with higher capitl requirements. i think you need more transparency. so investors can get a better sense of whether the institution is solvent. and i then reducing, make them

reduce reliance on short-term debt and the market is down at a bit. using short-term financing come down significantly and that's a good trend but i think it does create some very funny incentives. again advantages banks with large trading books with a lot of loans. they are viewed as liquid assets. on that when i'm not sure we do disagree. on pca, you know, it's a perfect know. but i will tell you as former chair of the entity that was responsible for resolving these failed institutions, having some type of statutorily prescribed process to reach the trigger point was extremely helpful to us. it is never a happy thing to close a bank. there's a lot of pressure from politicians, from stakeholders, you know, sometimes from regulators. the primary regulator, they don't want to own up to the fact that the bank is in trouble. so having some sort of

statutorily prescribed process i thought was helpful. i don't think they were quite as hot as the numbers you are articulating but that's the problem when you does all the bank, my definition of times of market distress so you're not going to get very good pricing. i think something that could make pca work better is a better methodology around reserving and determining when you hit that 2% trigger point. examiners were saying perhaps month before we thought we got the 2%, that the capital had declined to that level. i think there are ways to improve pca but if you think you need some type of objective, method, especially the closing entity like the fdic can point to access our, our hands are tied by statute. the longer you wait, an that was certainly the lesson of the s&l crisis. like bankers say, your first loss is your best loss, and when they're cooked they're cooked,

you need to move ahead. on preemption which is going to disagree. preempting states is a matter of policy is ill advised. i don't think, i do think you're right, the occ did have an ability to repay supervisory standards. wasn't clear how that was applied to the adjustable-rate mortgages. i remember having robust discussion with i get -- other regulators, so the ability to repay just the two or three years of those hideous hybrid arms or whether we talk about the ability to pay throughout the life of the loan or lease perseveres ahead and through the reset page. also national banks are funding these loan objective. they apply to mortgage origination and not the loans that others are funny. so that was another i think hole in, approach we're trying to take.

just more importantly, there were some really ugly stuff going on. they were right. they were right to want to move forward. i think, you know, just more generally you shouldn't interfere with states desire to protect their own citizens. there are market factors that can temper the states ability to go too far. the states know that so they try to calibrate it. but state extreme edition can also be for helpful for financial regulars because if they are laboratories and important laboratories. so i don't agree with that decision. i regret the occ did the. i think it hurts its reputation but i think it did result in many states, consumers and having protection that they should have. we will have to agree to disagree on that. >> i agree. >> gerry, what are your thoughts on sheila and raised comments?

>> i guess two things i want to comment on briefly. first, i'm not prepared to accept the suggestion that preemptive correction cannot work. in fact, i would argue that based on the experience of 1980-1982 it worked quite well. and, indeed, because it worked quite well we were able to get through an extraordinarily difficult situation. banks, investment banks, insurance companies, domestically and internationally. and that was not an accident that we got through that without spending one nickel of taxpayer money. that's what it's all about. and if you contrast to that experience with the fall of 2007

where industry leaders, central banking leaders and other leaders were basically saying don't worry, and the mortgage thing is manageable. well, that was obviously quite wrong, to put it mildly. so beyond that, you know, if we really are committed to the proposition that we can fix the bank -- too big to fail to resolution authority and other related techniques, by definition, resolution authority orderly wind down of seriously troubled financial institutions seems to me to be bound together with a framework of much more

prompt corrective action. so i understand some of the nuances that you are referring to, and they are valid. the nature of the work is not going to be easy, but we've got to get there. the second thing, sheila, i would like to clarify a little bit if i can, and that is this liquidity concept. let me say first of all that i believe that on a very, very shortlist of enhancements to the regulatory agenda post crisis, that one of the most important steps in the process has been

putting into place through the basel committee side-by-side standards of capital adequacy and liquidity adequacy. and these two things, capital and liquidity, these are a single discipline. these are not opposite sides of the same coin. that's a unified approach. and when we think of that, we have to also keep in mind that the definitions of liquidity that are not being used in that context speak about unencumbered liquidity. it's not recovery. it's not -- it's an encumbered. and you look at the way the

framework for this single discipline of liquidity and capital adequacy is playing out, it is not unusual to find emerging situations for the amount of unencumbered liquidity is now often well up into the high teens as a percentage of total assets and liabilities of major banks. 17%, 18% is no longer unusual. and again it's unencumbered. so i think that your concern, sheila, about other aspects of the liquidity world remains very important. i do think we've also made progress in terms of reducing through a variety of devices the

absolute amount and the relative amount of other forms of liquidity, including we those -- read those and those things. -- repos. so i think we are making a lot of progress there, but that single discipline of capital adequacy and liquidity i think when we look back 10 years from now, or something, and less i'm dead wrong, which is possible, i think we may conclude that this is one of the best things we've done. keeping in mind that at the end of the day, all of us notice the straw that breaks the camels back with regard to failing institutions typically does not capital. it's liquidity. it's runs on banks and things like that, which now are just

pushing a button on a computer. so again, i think that if we get that right, and, frankly, if we get prompt corrective action, at least close to right, those two things alone i think could have a very, very beneficial effect. not just on special banks but on other financial intermediaries as well. >> i agree with the premise that prompt corrective action in the statute is a very useful supervisor to and very effective. i disagree that prompt corrective action is the method of protecting the banking system in times of financial collapse your so prompt corrective action was not a tool that was helpful in preventing or in dealing with the financial collapse. but more fundamentally on

liquidity, there's two ways one can look at the banking system. you could take it from the perspective of, i really want a system that is going to be 100% safe and not have failures. and taking that to you extreme, you have a system that is 100% liquid assets, you don't have to worry about runs. it has very high capital ratios. the trouble with that type of bank, which will never fail, is they will never lend money to anybody. so that for every -- it's a seesaw, a balance. if you want to absolute safe and sound banking system you're going to have a system that isn't working to provide credit to the economy. on the other hand, if you don't have enough safety and soundness and credential regulation you'll have risky institutions. but to banks by their nature are supposed to be risky. making a commercial loan, or as

we saw, a residential loan, can be a very risky endeavor. banks are designed to take risks, designed to leverage their capital base, designed to perform intermediation service. the liquidity rules that are being proposed not only are excessive, in my view, but are counterproductive. why would a rule say that you can't invest 100% -- you can invest 100% in just treasuries or italian debt but you can't invest and have liquidity credit for a money market mutual fund that can only invest in u.s. government? there's got to be some rationality, some balance to what we do. and the emphasis that saved and soundness is always going to be the predominate regulatory goal is not going to work in the long

run. >> i agree with gerry. i think, again i want to clarify what i was saying on liquidity. i think it's helpful that the basel committee look at them side by side. my only point is i think there should be more emphasis on capital and more emphasis on reducing their allies on short-term funding because the centerpiece seems to be putting more liquid assets -- why not just raise the reserve? someone would find to me what the reserve requirements but that's the thing that's most liquid is their excess reserves. so some of this stuff they're doing counterintuitive but i think it's very good we are moving toward liquidity rules. this emphasis on handling sovereign debt and other type of lipid acids which i don't think will be -- is what worries me. >> we may have a chance later to talk about, but just one footnote directly rather than

the point you were making. if you look at the balance sheet of the fed today, or yesterday or last week or whatever, what you find is there is something in the order of magnitude of two plus trillion dollars of bank deposits in the federal reserve banks. $2 trillion. sitting there with a return on the excess reserves of 12 basis points or something like that. that by the way is not wholly independent as my suggestion essay that come you know, banks are part of the transmission mechanism for monetary policy. and let me tell you, the day is going to come and you and i have talked about this on other

occasions, where we're going to forget what the hell we're going to do with that $2 trillion. that's not going to be easy. >> no. so on the topic of our banks still special permit a two-part question. have the role of the banks evolved over the last 30 years, and test bank supervision and risk management kept pace with this evolution? anyone can have a crack. >> i can't resist. [laughter] >> go for it. of course, gerry. >> first of all, by any standard that you can think of, including looking back at history, you know, multiple millennials, the last 30 years was pretty damn tough in terms of the incidents of serious if not systemic financial shock, both here in the united states and around the world. and if you do as i have, some

comparisons, you look for example, at the number of serious financial crises that occurred in the 30 years leading up to the panic of 1907, the fact of the matter is we've had more in the last 30 years than they had in 30 years leading up to the panic of 2007 which, by the way, it was that panic that ultimately created the federal reserve. so it's been a rough draft. one of the things that nags at me is the following. did we do such a good job of managing all of these crazies that we created a false sense of

security for market participants and others, that we would always be able to pull a rabbit out of a hat until 2007-2008? i guess i'm not smart enough to know the answer to that question, but it's something that nags at me a lot. and i think that as we continue to work to the future with enhancements to the regulatory policies and practices, getting too big to fail under control, and other things, we've got to have a much more creative framework of thinking. people love to talk about

contagion risk or systemic risk. well, the fact of the matter is that it is extremely difficult to anticipate in advance the specific events that those contagion risks and systemic risks. it's very hard to do that. in fact, our track record of achieving that is pretty damn well. -- low. so think about that. a lot of people say, well, they fill up a room with mathematicians and statisticians and models, and they start playing games with these things. my instinct tells me that if we want to understand more about systemic risk and contagion, we got to leave the models in the

closet. we've got to get some very smart people engaging in aggressive brainstorming sessions, not quantitative studies, not r squares and all that nonsense. how do these things happen? what are the triggers? why do we miss them? even when we get better at that, we're never going to be perfect. but i do think that those thoughts are extremely important in terms of our collective ability to come out of the mess of certainly the last five or six years, but even the last 30 years for the system that is safer and sounder, a system that is able to absorb adversity but manage adversity at the same

time. that's not going to be easy. >> yeah. industry loves a models. we don't like to put them in the closet. >> i think most of them belong in the closet. >> point taken. >> so anyway, that's a partial answer to your question. >> i am with you on models. i think it was an over reliance on a models prior to the crisis. it continues to be a lot of -- i'm sorry, advanced approaches which we are still in the making. we encourage that. i think models i one bit of your toolkit. >> i understand. >> but you've got huge judgment and the models are spewing that all these mortgages were low risk. are based on historical data that had nothing to do with the kinds of mortgages that were being originated in lead up to the crisis. so if you don't have human judgment in there, your system runs amok and that's what we

have prior to the crisis. obviously, the industry, technology has made markets more volatile reaction times quicker. that's reality. that's life. we just have to live with that but i think there were lots of things that we can still do and did new prior to the crisis to reduce the risk of stress and volatility in the banking system which we want to be stable. i do think increased concentration of the industry, the emergence of very, very large financial institutions was applied, ma too big to fail status as grated and did create part of the crisis and continues to create moral hazard. we will say it again, i wanted bondholders to take some of the risk as well. we were having these, i kept saying there's a interest program for bondholders and we are here cutting uninsured depositors. they are just fine. and no offense to them but that just wasn't right.

clearly the bondholders generally had or the regulated failed that there was their risk tolerance taken even, making taken%, make them taken%. we couldn't do that. what kind of system is that? but they are big, sophisticated. they can be people a lot of money to look at bank balance she, to exert market discipline over risk-taking, and regulars needed. regulators cannot do it all themselves. but again i fear we're going in the opposite direction, giving up on market has been. i think we can replace that discipline with more robust supervisor presence and i'm all for a robust supervisor presence but i just don't think that is going to do the trick. so, unit and we need more market discipline and when he bondholders declared understand they are on the hook as well. and if we could get to that stage i think actually the market would correct in terms of -- if they knew they were going to risk not the fed, not the

taxpayer, they would do the homework a little better and be a little cautious before investing in them. >> well, i basically agree with what i heard, that i slightly different aspect to it. when i began my remarks i say we really don't understand what caused the crisis. and the empirical data and information is just starting to come out. my concern is that the regulatory pendulum has swung to such an extent to being prescriptive, that we don't know if it's the right answer. we don't know what is going to be in terms of slowing the economy, preventing growth, and we don't know what it's going to be in terms of being the cause of the next crisis.

and let me use this as an example, the boss of risk-based capital place tremendous emphasis on and rewards for financial institutions to acquire mortgage-backed securities. it was much less capital standard. so there were financial institutions that originate mortgages, created mortgage-backed security and buy back the security, the same mortgages they originated. they get one-fifth the capital capital charge that a regular loan would have on their books, and depending on, or slightly lesser mortgages. secondly, any examiner who looked at a bank into gaza for-2005 and saw a concentration in aaa rated mortgage-backed securities was probably going to complement the management of that bank and say, this is a

very well-run organization. so you can go all the way to what you think is safe and sound operation today, but we don't know and you are correct, we have no idea knowing what the next bubble is going to be. is going to be stocks, is it going to be farmland in the midwest? is it going to be bitcoins? all three? we don't know, but if we tamper down investments in everything that could possibly be a bubble, first of all it's not going to be possible politically, and second about we will wind up hurting the country in the process. robust capital, sufficient liquidity, stress test all make sense. but there has to be a balance, too. spent let's talk about a topic for each of you briefly touched on, the shadow system. so three-part question year. given that some if not all are

moving into the shadow system and how special is the shadow system in and of itself? what steps can be taken to mitigate the effects of potential risk? and finally probably my favorite question in this section, are the segments of the shadow system for which the risks outweigh the benefits for the financial system? anyone who's interested in starting up a hedge fund, pay attention to that last question. >> let me respond first. first of all, some of you may know i recently put together a piece on the shadow banking system and presented that to a group of 30 a couple months ago. that think piece is available on the goldman sachs website for anybody who wants to take a look at it.

following observations. first, this was one of the most difficult things i set out to put together by myself, and i'm very old-fashioned. it's very, very complex. and i would just make two quick observations. first of all, one of the complexity which arises from the fact that the term that we all use about shadow banking is wrong. because most of what is in the shadows is not banking. but quite to the contrary. similarly, my experience in doing my work and my research was as follows. that the hypothesis that has a lot of support is that the problem with the shadow banking or shadow financial system,

whatever you call it, is a one way street. stuff going from the traditional banking or financial system to the shadow banking system. based on my work, that does not appear to me to be right. it's very much a two-way street, not a one way street. and if people get themselves seduced into thinking that they're going to get their arms around this with the hypothesis of a one way street, they are going to be very disappointed. but it is complex. it is big. and size, just to give you one example. it's very hard to put this together, but you can get access to some useful data and the fed is full of undead which compiled

liability levels for various classes of institutions, both the court system and the shadow system. and if you look at that data, one of the really kind of shocking things is that in 2008, based on those data, the size of the shadow system was 20 trillion, give or take, whereas the size of the core system was 14.7 trillion, $5 trillion difference from 2008. by the middle of last year, 2013, the thing has reversed itself. the size of the shadow system

had shrunk from 20 trillion back to 15 trillion, and the size of the core system was now 15.7 trillion. needless to say, you know, when we're talking about trillions, it's not small change. and i put together some ideas about ways in which we can better get our arms around this, and i would want to make it clear in the paper which can get on our website, the work that's being done by the financial stability board, which as you know is the cousin of the basel committee, and the work particularly i want to acknowledge that is being done by the fed, and especially my

old colleagues at 33 liberty street in new york, is really quite impressive. progress really is being made and then getting to better understand this, and there are specific initiatives of their risk management. one of the things that i made i thought was a pretty good argument for in this space was the financial infrastructure stuff, including settlement and all that. because right now when you move away from probably the five or six or eight or nine best managed clearing systems, there are now dozens of them around the world, and i suspect that in

many cases the discipline that is being applied to risk control and risk management for some of those clearing houses and related organizations probably is not what it should be. and i suggested, for example, for all of those mechanisms there should be, among other things, a minimal standards whereby using stress tests and related techniques you should have a standard that would say that any one of those organizations anyplace in the world should, among other things, have the capacity that on a given business day they could survive the simultaneous default of their two or three largest participants.

so that's pretty draconian stuff, but i think it's symptomatic of the fact that we've got a lot of work to do to get our arms thoroughly around the shadow system. keeping in mind above all else that it is in my judgment a two-way street. >> i would agree with that. i think dodd-frank tried to do with issues associated with basically two things. under title i it gave regulators the ability to regulate outside the traditional banking sector. vig type model problem, so-called title i designation, they are brought in and enhance supervision by the fed and and n under title eight is also a methodology for assad to make recommendations on systemic activities. that's principle money fund

reform. my view is a lot of this is more activity than institution -- institution it. if an institution is viewed as unable to fail without systemic disruptions, the best answer is to make them downsize until they can be. resolved in the bankruptcy process. i think that's the great work, a lot of great work on the put already and accept their this is an systemic verification and put them under fed supervision under title i is not the right solution. i also think a lot of the issues, for instance, the office of financial research recently in the report identified some issues, potential system problems with the asset management industry. there was a big overreaction i think to that report but i do

think the issues that they identified if they need to be addressed should be through activity regulation, and mostly by the sec but again that requires the agency of jurisdiction to move forward and get ahead of these types of problems. so there are mechanisms to deal with the shadow sector based on the last three months and dodd-frank but i think they can work if they use appropriate. the other thing i would say though about the shadow sector is the shadow sector works great in good times and in bad times it kind of goes away. and that's what a game we need that well-regulated banking system that has safety net programs that will keep it functioning and lending in the economy and the inevitable bugs occur. i do worry, peer-to-peer lending may be one small example of where you're having a separate mechanism now for making loans, consumer, and now eating into small business loans and is

quite widely regulate. certainly compared to a bank or a community bank. so the competition is nice and i like to know there's been a public credit availability and i like the fact they're getting more credit out there at lower cost but how much of that is because they've developed just regular arbitrage. they don't have restrictions as much as i'm happy for borrowers that had good experience with those platforms, we know in the downturn they will disappear. once investors start seeing them, they're not going to go to the platform. and hopefully you will have a robust banking sector, particularly community banking sector, which does more in the small business space, will still be there. so i do think not just systemic stability but also regulatory arbitrage has to pretty much be in the focus of regulators when they see these new types of mechanisms outside of the banking sector develop, and i think this is one area with the consumer of your i think,

ability to repay stands and others, better disclosures could be helpful. but we want to make sure that the shadow sector doesn't so cannibalize the rake sector and the good times, everything works in the good times but in the bad times we have a weakened banking sector. >> i am not sure the term shadow banking system means, and my concern is that it could mean everything that's not radiated by a federal banking agency, a shadow banking system. i think it would be a mistake to try and bring all of these institutions into that system. and, therefore, i can like very much what she said, identify those institutions that failure would cause a systemic problem rather than simply say we need to regulate shadow banking system. because i don't think that is necessary and they don't think we would be productive. so you have to be subjective

federal supervision even if your small or not systemically important. i also agree with sheila that there could be regular arbitrage which is unfortunate, right? i do think the solution is to impose the same regulatory regime on non-regulated institutions. there's certain advantages to being in the safety net which gives the banks and other regulated entities a competitive advantage. so it may even out. >> so let's shift gears. each of you have touched on this topic as well. asset bubbles. so over the last 50 years virtually every financial crisis has been associated with asset price bubbles as we all know. how can we distinct between asset bubbles that post systemic risk and those that do not such as the dot com bubble in the year 2000? >> well, you know, it's common

to say nobody knows when there's an asset bubble and i don't buy the. i think it's very hard to know when it's going to pop, but i think anybody who didn't think there was a housing bubble prior to the crisis was just, you, my mother saw. she would comment about it. for heaven's sake, let's have some common sense. i think there are some things regulated can and should do to make sure government actions don't further have bubbles. one is i think more robust regulation that requires loans to be based on ability to repay. if you're limited business or household, they've got in, where they can pay back the loan. they're not just making a loan based on the idea that the asset is going to appreciate. we got into that during the crisis where people were routinely getting loans, and credit this is being done by nonbanks, without having to dodge but that they could pay. of course, that's going to inflate prices if you disassociate the price of the

house from one when someone can afford it, you'll have a very increased demand and unsustainable prices building but that's exactly what we had. i think leverage is another way, to make sure that the bubbles don't get out of hand and not just capital requirements regulate banks but also look at the kind of leverage that the people they are lending to. i applaud the occ for his leadership on this leverage alone guidance. that's the type of thing the regulars need to do, especially in this very prolonged period of accommodative monetary policy and yes, i do think that monetary policy does contribute to asset bubbles. so i think it's very hard. i don't think it's hard to call. i think it's hard to know when it is going to turn. definition asset bubbles reflects think tanks but everybody thinks it's going to keep going. knowing what is going to turn this are difficult until people stop the madness, chuck prince's favorite statement come yet, when the news is still plenty of

got to keep dancing. that kind of groupthink dynamic is something regulators have to defend against. but i do think some of the things we're seeing now with tougher capital requirements, loan guidance will help constrain some of the silliness that i see and think of a lot of others see in emerging markets. >> a lot of people recognize that bubble, but i think the practical matter is that when you're in the middle of an asset bubble, it's almost impossible to stop it. and a few examples, in 2006 the regulars issued modest guidance to try and tamp down commercial real estate lending. and they got called before congress and were lambasted to the extent that one of the regulators disowned the guidance in that hearing.

there was attempts to rein in fannie mae, freddie mac, arguing that they were undercapitalized in 2004, which saw nobel prize winning economists and very prominent professors write papers saying it would be one chance and 500,000 if fannie mae could ever become undercapitalized or insolvent. you saw in comptroller clark when he tried to rein in commercial real estate, create a bubble. he became the regulator from hell. that is what he was called and he was not allowed his confirmation hearing. he was not allowed to have a second term as comptroller because he tried to tamp down spending. it happens over and over again.

when you're in the middle of a bubble, if you try and can't down credit, you're going to be accused of being the regulator from hell, accused of hurting the economy, you'll be accused of preventing disadvantaged people from obtaining the house, et cetera, et cetera. and right before the bubble the house passed legislation called no down payment mortgage loan bill. [laughter] okay, what would've happened in 2005 or 2006 if the agency said we're going to prevent, we're going to tell of thanks they can't buy mortgage-backed securities, because that's where the losses were. it wasn't from originating loans. it was in buying the loans that the banks lost the money. and if the regulars had come in and said banks can't buy mortgage-backed sector, i think reaction would have been very

harsh on the agency's. >> yeah, i would say, the argument is forget it because regulators have too much political pressure. i just don't buy that. that's what we have independent people, that's why they have term protection. that is their job and they need to do their job and just a thought or hands up and say we'll let the crazies go on again because congress is going to whack us if we do. i just don't buy that. it's, i agree political pressure is terrible but there was a lot of pushback on the leverage alone guidance by other people defended it and it died down. you guys are still implementing it, right? i think you can do it. again we've got much tougher leverage ratios, sort of the basel committees work. a lot of support for that. i hope you see that finalized soon. pushback on that but i think the regulars are going to have the courage to move ahead.

that's exactly can they do need to do because they're building again and the system. >> let me just respond briefly. first of all i didn't say throw up your hands and do nothing but and i think, i mean, i agree with you that regulars need to do something, and i think appropriate capitol steps, appropriate liquidity, appropriate supervision is part of the solution, but it's also -- i'm talking about in 2008, in 2008 when just about everybody knew we had a problem, congress passed legislation which regulators can't ignore directing federal housing finance agency to ensure fannie and freddie led the nation in providing home mortgages to very low low and moderate income people, created standards that they would have to meet with

guidelines, and directed federal housing finance agencies to encourage the use of innovative mortgage products. it's a statute. in the 80s, regulatory forbearance for agricultural loans, put into law. so there are other examples but regulatory capital for commercial real estate loans was directed to be given 50% risk weighting when the loans were securitized. it's in the law. you can't send they say that the regulators can put up a brave face and stared down congress and nothing will happen. and if they are wrong and if there wasn't a bubble, then they would be responsible for causing harm to the economy. it's not quite as easy as that. >> i was head of the fdic for

five years and it took a lot of that flag, but i find one thing the regulars need to do more of is the public. i'm sorry, i know people disagree with my engagement with the media, but get u up and it's been what you're doing and why you're doing it. because if you're quiet about it, the people who don't like it have a lot of political influence on deep pockets. you've got together in the public domain explain what you're doing and why you're doing it. if you can't it's been which are doing and the public benefit of it and maybe you should rethink it. but i do think there are tools that need to be used more aggressively. believe me, i quite sympathize and i wish congress would just stand down and get out of it because sometimes they are a positive influence but i'm sorry, most of the time they are not. they are a negative influence, so it's not the regulars are perfect and there's a legitimate role for congressional oversight but that should be structured oversight hearings. not let her summer tour members of congress telling them to stand down on the rule of

whatever. they are the people with the technical expertise, the ones that go through the comment letters and pass -- that's why they have these jobs, to make these kinds of decisions, and congress doesn't have the same expertise so i think it's incredible and i hear what you're saying i do think there are tools for pushback and they need to be used. >> it's hard to go to the public and say to people who are buying houses and pretending to flip them that we're going to take away your credit because we don't think buying a home is a good idea. >> the would've been a lot of political support which -- >> now there is but not back when -- spent what are your thoughts on asset bubbles? >> the public basically thinks, we all know people who speculated in houses in the middle of it, and found they were doing the right thing. and it made sense if you believe in the bubble, and i don't the get go to the press and say

we're going to take away this opportunity to have economic advancement. spent one more thing. there are other countries, canada and australia come to mind that did, they ratcheted up down payment requirements. there were things that could've been that work done. >> absolutely. those are two countries, probably half a dozen that i know of, that essentially did exactly that. and it worked. >> they avoided it and we didn't. >> so in the interest of time, a final closing question and then we can take questions from the audience. so based on what we discussed this morn, what is the one recommendation you would give to each of the following participants, the government, financial services providers, and consumers. givgives a short, snappy respone to the question if you can. >> do you want me to go first? >> sure. >> well, on the government, balance the budget. simple. >> there you go.

>> and one of the reasons why balancing the budget is so important, because that would give us more room to finance private investment. and if you want to get the economy back on track, one of the things that is going to have to happen is more private investment. so fast that one. financial service providers, which i kind of, i tend to put regulators in that same category because we're all in the same boat. i think that perhaps especially go for financial service providers, with all the things that are being done, we visited models, there's been revisiting models, cutting expenses, building new regulatory framers,

lots of stuff going on, all of that is very good. but what i would like to see on top of all that good stuff is more attention within financial institutions of all kinds, more attention placed on effective governance, values and culture. ultimately, those are the things that are going to provide the glue that really, really, really makes banks special. and, in fact, would make other forms of financial institutions also special. with regard to consumers, et cetera, one of the things i would love to see is for payday lenders to disappear off the face of the earth. ..

greater transparency in terms of things that really matter. and one of the things that's all over the place including in the mortgage space but it's not limited to that