it is one of the stories that resonate for a good reason. he is available to autograph copies. we also invite you to visit our web site. so i will applaud everyone here. of it for review joining with us next time. [inaudible conversations]

[applause] it is a great to be here i will add my thanks to tyler and a new america and also

for your leadership and help with the projects to have your leadership this evening. so one of the things that has been said by the most important financial personalities of the day is it cannot be predicted 2007 / 2008 could not be predicted with they had won in the future it could not be predicted some folks refer to these as the black swan type of the event. we believe financial crisis could be predicted since we had that information to predict them we could

prevent them to focus on private dash at -- debt rather than public debt. and i start by giving a sense how big a factor private debt is in the economy verses' government kept -- debt what is the growth in these categories between 1997 and 2007 which is the decade leading to the crisis. as you can see private debt grew $14.4 trillion in the ten year period. that absolutely dwarfs the growth of government debt and a $3 trillion growth of money supply and it dwarfs

the 5.5 trillion of gdp itself. it is the biggest factor in the economy. as the taxes were increased in julienne exports are 1. 5 trillion so that increases about half a trillion. and in this 10 year period if we raise or lower taxes by 10% that would have impacted the economy by $2 trillion. lending created 14. $4 trillion during this period. is the 800-pound gorilla. private debt was the cause of the 2007 / 2008 crisis.

here we show mortgage debt as the percentage of gdp. from 1970 through 2000 it grew 17% per decade in those six years between 2001 and 2007 it grew 46%. that is what precipitated the crisis. and it was all forms of private debt. looking at the growth levels private debt and aggregate those grew by 20 percent of gdp. and frankly even though these lovell's had delivered a little bit private debt is

still near the all-time high both on the consumer side and the business side. we ask the question of private debt caused the 2007 / 2008 crisis was that a factor of other major crisis in our lifetime? with the get the depression and shirty enough you see up pattern of rapid increase of private debt in the five years leading up to the 1929 stock market crash. there were 1,000 or more skyscrapers under construction across the united states there was one being built in texas largest -- well -- larger than any skyscraper on the continent of europe. looking right here where

this black dot is, one of the major crisis of the post world war 2.and again we see a telltale pattern of rapid growth and a five-year period leading up to the crisis of 28%. but government debt is low and but nine. but in japan you have the same thing in the fiber eight years before the crisis is low and stable. it is not a factor in the period leading up to the crisis. then look at the asian crisis in the post world war 2.and those were carry and

indonesia. to tell the telltale pattern so in the five years prior to do the crisis 29 korea 43% indonesia both cases government debt is low and by nine in those cases. and of the major euros own economies as it continues to have the most egregious situation in the five years leading up to the crisis private debt grew by an astonishing 49%. public debt actually improved during that period to have a lending boom everybody feels like they are getting rich. they pay more taxes the government revenue flows it and it feels like it is a miracle.

that is the hallmark of that period leading up to the crisis. to go beyond these for crisis to look comprehensively in major economies in the world with a cut off of half a trillion dollars or more these countries collectively contribute 85 percent of world gdp looking at those countries we look at the world. small countries can have a crisis for a lot of reasons and that alone could cause them to have a crisis. but for major economies anytime you have private debt to gdp growth 18% or more with an overall level

of 150% or more you get a crisis. it happens almost without exception. >> [inaudible] >> i will. it is an interesting question. i will say one more thing first. it is not just mortgage debt. many say it is mortgage that phenomenon if we could prevent runaway mortgages we could prevent a crisis but other prices were more business debt that consumer debt japan 1991 it was more congressional real estate that was also true in korea 1997. the key is tracking ad forget private debt with consumer and business together.

why does run away private lending? i use the term runaway lending to describe it. why does it cause a crisis? two reasons. first of all, you built too much of something you beltway more of something van you need it was way too many houses that were built in excess of the actual demand. japan 91 korea 97 it was way too many commercial office buildings and industrial plants. if you look back in the book the phenomenon of the 1800's and the huge crisis in america it was way too many railroads. but when you do that, you make a lot of loans that

will be bad loans you built things nobody will use was no income to repay that creates the crisis. in the united states we created 2.5 trillion dollars of bad loans. the u.s. banking system only has 1.$5 trillion of capital. that alone should have alerted us that is a problem. once this has happened that the governments have relied almost exclusively they really cannot solve the problem. one is to recapitalize the banks the other is time it

will take time to absorb that. you cannot shrink the time that it takes for that excess capacity now triggering events are mistaken for the cause of the crisis of bank failure is thought of as the crisis. said kao is out of the barn by the time that happens with that five-year buildup you already had too many bad loans it is just a symptom that the problem is out of control. there are a lot of other explanations there is not a

week that goes by that somebody does not comment people blame that on government debt the we have seen that is not only not an indicator but to talk about things like current accounts we looked at 20 different factors over all the years we have data none of them are good predictors or indicators only one has the of runaway increases. step aside for a moment. apart from the rule to generate the crisis high levels of debt is a problem in and of itself. here is a startling statistic.

i had to recheck the data but in 1950 private debt to gdp was 55%. today is 156. private debt has tripled in the united states and a little over two generations. when you have so many people they have to spend a disproportionate amount that is what they could spend on vacation or restaurants or home-improvement and the things that power gdp. it is the issue and it is supported by a number of

studies of the imf. debt was accumulated ax as a suppressant to growth but here we look at the big says germany china france you k you can see that this group in 1970 was clustered private debt so is a global phenomenon. how do we prevent and how do we prepare? to prevent we monitor that aggregate if you are convinced of the theory it

is easy to see it. i was in the banking industry for a long time and i know regulators have a broad array or arsenal of ways to influence the behavior to increase capital requirements to jawbone are any number of things in recalled of behavior of 2005 for your 2007 were not ordinary behavior's people made loans to people who had no in, or no job and a regulator could have intervened. we think by monitoring of that aggregate regulators could see improvement to a crisis. but that leaves the more important issue of where we are today to repair the crisis. rehab accumulated a lot of private debt to drag down

the growth today. the way to a lot stronger economic growth is to reduce the ratio or private equity. a lot easier said than done. that paying that takes money of the economy to contract gdp and that is what happened. it has a contractive eve fact. papal talk about growing your way out of the problem with the years of economic history with tiny exception of italy exceeds gdp growth so there is no reason to think we could grow without a faster rate than economic

growth we could inflate our way out of this but even if that was possible with it takes 20 or 30 or 40 years to get back to a level that is appropriate. inflation does not hit you by process of elimination it is restructuring to go in and to those that are problematic to leave the lower debt level. for example, there are 9 million mortgages in the united states that are still under water 52 million total. these those intercurrent but are struggling and as a result cannot spend money on

vacation and/or cars are close to restaurants to power gdp now any time you bring up this idea it is like based on the concept of moral hazard. but we suspended our concern when we saved the banks we just didn't for the borrowers. but it is the thing that was supercharge economic growth. the other thing that is interesting is the high-level of debt in japan and europe there are endless

articles to read the wrist since the 91 crisis the 23 air 24 years concern of inflation could reach 220% and still a 170%? coming down and a painfully slow fashion that was the deflationary agent you want to carry the deflation in japan? restructured debt. starting those headlines in europe says recently as the last day or two. my god reface inflation is in europe and in the united states it will be 105b6% in spain it is 216 in portugal 255% if you want to reverse

things in europe this is where you go. we have just as a couple more slides with that behind us where are we concerned today? china where after you can see private debt to the gdp levels through the mid 2000 private debt is on a tear. 18 percent is the threshold china is almost 60 percent that is the source but we also read about the capacity you probably read about the coast cities so much capacity has been built upon the country that there are

cities and are virtually empty. by the way the absolute what private debt ratio is 180 banal looks like over 200%. run away lending again has yielded over capacity unused real estate, land, excess manufacturing and empty shopping malls. what is the future of china? rethink a crisis is possible but it has something true that was not true that china owes the banks so it is unlikely in our mind that china allows for that type of crisis in addition as low central government debt with ample net worth probably

$3 trillion of foreign currency. so with has the capacity to deal preemptively but even if it does it has a significant and increasing level of over capacity people rejoiced recently when china reaffirmed the gdp growth level everybody was concerned with a sigh of relief but is more a measure of the capacity being created and needed to lift china continues to grow at a high number it compounds the overcapacity problem and things could unravel. over the next five years we're doing and to project on this to come up with a

prediction how this will happen. but china has to see significantly decelerated growth. japan may be a foreshadowing event over the 23 years it has grown ears zero% it is what we call sideways' growth we think china will face a degeneration of sideways gross rethink china needs to act preemptively and if we think it needs to slow down gdp for what the world doesn't need better anyway thank you. [applause]

>> richer in someone who has spent following the market's with these surprises come to start with the matt how could you determine the cause a love relationship? is it because of private debt those corporations exist? >> with those instances where it has occurred and we have data. in 2002 that led to a crisis and there are none with those two instances with austria and south korea that are adjacent to china we

think they are still in the cross hairs. >> government wants consumers to use tax policy where the markets are focused on public debt so is everyone wrong? train wreck the two major schools of thought is that we need to stimulate the economy and the hawks think we should rein in spending. take both of those if we stimulate through government spending we still have too much private debt. but the hawks frankly on the

eve of the crisis they were concerned about inflation and they are still concerned. either side's dairy addresses the -- theory addresses the same cofactor in the market. they're both wrong. either of those issues are incorrect but they are secondary over tertiary. >> so it is public debt irrelevant? are they making a year to air right now? >> i think public debt is relevant i don't think the

concern we have is relevant readjust spending 100 percent of our time thinking about it but take japan as the illustration. the public debt to gdp in the '80s was 50%. effectively low. right now we have 100 percent. . .

and here in the u.s. focus on austerity good in the end make this scenario that you have knocked out worse. >> it would create two problems out of one. >> why has private debt increased so much? >> well is one of the most amazing things to look at when you really study economic history. we have taken this back to 1800 believe me finding data for the 1800's was not easy. in some cases we were calling the statehouse and the state directly from old muskie

archives in the statehouse building. it was not easy. but if you look at the 200 year trend that has really been an exercise where private debt and public debt frankly have both continually ground in gdp. so our conclusion is that private debt growth is necessary to fuel gdp growth. and that's fine as long as private debt is low. it's only when it grows too rapidly or it gets to levels that are too high where it's a problem. so at low levels private debt is a healthy and necessary part. if you are a business and you want to manufacture more widgets you borrow and build a new factory. if you are a small-business owner and you have one store and you want to build a second store you borrow money. that's a good thing and tell -- what's true in an individual and

the business is a little debt is great, too much debt is too much. that's also true for an economy. >> when you look though at the up -- growth opportunities is that it inevitable that private debt will continue to grow and is in its unstoppable you know, is in a certain respect but it is controllable by one very important tool which is a banker we know intimately but economists rarely referred to and that's the capital requirements of the banks themselves. so right now capital requirements and banks simplistically speaking are about 10%. if you want to make a billion dollars in loans you have to raise $100 billion in capital. if you want to make another billion dollars you have to raise another $100 billion. i have had to raise capital a few times in my career and it's hard. and that is a natural breaking

element to private debt growth. in instances we have seen where there have been runaway private debt growth banks learned how to sidestep capital growth limitations through securitizations, three credit default swaps and things like that. i was a banker. i did that too. i did that it always felt like a virtuous thing because i was trying to create the best return for shareholders that i could. so if you minimize capital needed, it's better in general but it creates the opportunity for runaway growth. if you want to change the mix and curtail runaway growth the way to do it is to increase capital requirements and to close the loopholes to circumvent capital requirements. in my opinion that is a sufficient mechanism for preventing the kind of crises we have seen. >> so post-crisis, finance

regulation has tried or has increase capital requirements. has it not interested enough? >> what was interesting. we just had dodd-frank and one aspect of that is increased capital requirements and i will get the number wrong but i think the increased aggregate capital in the system required in dodd-frank is $68 billion. but remember during the crisis we created $2.5 trillion worth of bad loans. $68 billion is a drop in the bucket so in my opinion the debate has been about whether to have 10% or 11% or 12% capital requirement. the debate really needs to be about whether we should have 15 or 20% capital requirement. frankly the banking industry is too effective in its lobbying capability for that to really be a consideration.

but if you are examining the system and looking for ways to systemically address the problem, that's the answer. >> so when you are talking about how to address it, there is regulation, there is consumer behavior. there is the banks and the credit card industry. how do you address each one? who needs to take responsibility here and who can act? >> you know, unlike a lot of people and the thousands and tens of thousands of articles that have been written about this crisis or written about the great depression are written about japan's crisis, there is always this desire to find a moral statehood. consumers shouldn't have gotten those loans. tanks were nefarious in making those loans. i would kind of end the mix and even though there are a lot of bad actors in any system, i'm i

am not a person who thinks there was a moral thing. i don't think the banks were nefarious. somewhere but not enough to have created this crisis. i don't think consumers active than ever sicily. a consumer got married and had a kid and wanted to buy a house and they did it. is consumer moved across the country and had to sell his home and buy a new one. if you happen to be in this runaway lending, i think the issue is not moral, its structural and the structural issues are the capital requirements. >> do consumers need to adjust their behaviors as well and do americans need to shift what they define as the american dream so mortgages are the root of all of the debt but homeownership leads a part of it. college loans make up a large part of why debt has increased.

is the american dream actually out of reach? >> let's just say if we had a magic wand, which we don't have but if we had a magic wand and could restructure large amounts of debt, i think things would adjust and people would be readily able to read re-participate in the mortgage market and it would be intact in that respect. do it over with higher capital requirements so the resulting growth is not as high. so again i think if you do this kind of thing, but we spent an enormous amount of time as part of this exercise going back to 1945 and looking at the financial wisdom of owning a home. there's just an assumption that we should own a home and we look at that, over about 16, 17 year

span to see what the difference would have been if folks had rented and put the down payment in the stock market instead versus owning a home. either with the massive tax advantages of mortgages and it's more or less both. we actually see globally and this has been reported by a lot of folks that typically in more developed countries you have more urban areas so the mortgage is somewhat of a myth that a mortgage has to be a central element. you could do just as well with another tight. >> so people need to start thinking that way? >> i don't think it hurts them to think that way. i think folks kind of bar. in a place like new york city is relatively high to des moines. i don't think it hurts new york.

>> is there an argument here that what this shows is that wages need to catch up to inflation, that the reason people have to live off of debt so much more is because things cost so much more and they're not making enough to make up that difference? >> clearly you're absolutely right. wages do need to catch up to other things including inflation. again i would late -- lay out a warning to you. i would say that one of the things, one of the things that suppressing wages is the absence of sufficient demand in our economy. if you had a lot more demand in the economy would have a lot more people employed and employers would have to pay them higher wages to do that. you i think the thing that suppresses demand itself is the high-level of debt. so think the system kind of resets infrastructure debt.

>> how would you go about restructuring? wanted damage banks and want to damage the private sector company's? what scenario do you see that working out? >> you are exactly right. that is the question and we have an entire section in the book that covers this. but paul volcker actually showed us the way to do this in the latin american debt crisis. and he did this very quietly. you can read in detail about it today but at that time in the age before twitter and everything else, this happened almost without notice. u.s. money center banks went far too much to latin american countries and there was almost no chance for them to repay. if those banks had written those loans now those banks capital would have failed or come close to failure.

volcker got them in a room inside guys identify the nonperformance american loans and write it off over 10 years. we as regulators will give you forbearance to that. we won't subtract it. we will use n. reserve calculations on essence it let time solve a problem. the government didn't have to bail the banks out. the banks were able to in effect recapitalized by putting this bad debt in a deferred expense account and a few years later nobody noticed it and everything was fine. frankly i think the exact same structure should be used here. for example we talk about these 9 million mortgages. you could take somebody who has a 400,000-dollar loan that's now for a home that's worth $300,000 you could restructure the 250,000-dollar loan. the bank would write off that 150,000 but instead of having to write it off in 2014, they would

write off one 30th of the in 2014 and use it for the next 29 years. i recommend 30 years by the way instead of 10 because the member state. you could let time solve it. the government doesn't have to recapitalized the banks. the banks don't have to dilute existing shareholders. the paradigm volcker established believe it or not everybody won. i think the same tool is available to us today. it was never mentioned. >> so restructuring would be half the solution and the capital requirements would be the other half because otherwise people would be mixing payments. >> that's right. >> so when interest rates go up as everyone expects that they will in the coming year, do you think that will have an adverse impact on credit and will we start to see the charge go down? >> it will absolutely have a suppressing effect on debt.

i don't don't know if it would cause the number to go down but it will definitely cause the members to stop going out. but what will also happen is and i can't remember the estimates, but 300 basis point rise in interest rates would increase the interest bill of u.s. consumers by somewhere between $300 million a half a trillion a year and a 17 trillion-dollar economy that's huge. not only will it have a suppressing effect on the growth of private death, it will have a major impact on gdp itself. you can actually theorize that the high levels of debt themselves are suppressive on growth, further growth of that debt and it's that suppressive effect that's holding interest rates down to begin with. i may be completely wrong on that but that's a reasonable thing to think about. >> so in the solution that you mapped out do you think there is appetite from washington to pursue that? >> nope, nope.

>> anyone disagree here? >> intact when it gets mentioned frankly we saw what happened. the real small programs the obama administration is put forward, tampa is one example of this. if they are successful they will address 50,000 mortgages. there are 9 million mortgages that are underwater. so they haven't begun to approach the problem and whenever they have tried it out certain elements of the political spectrum immediately begin developing them as moral hazard, un-american and i'm not making that up. that is what has happened in the past. so i could be optimistic and think that it's a message of my book and frankly other books. i'm not alone in putting this forward. there's a small but growing group of economists that are putting this idea forward. hopefully it will gain momentum and the general understanding of

the principles, then and only then. if you have spent a lot of time with politicians you know that if you present them an idea they immediately go to their staff and the staff checks with economists economist and if the idea doesn't resonate there they ignore it. so we kind of have to get the economic community to sign up to this idea before we get the political through. >> so in terms of the coming risk, how close are we to another crisis collects. >> the issue is china and we are starting to do a lot of detailed work trying to map out exactly how long china can differ its problems. we estimate there are two or $3 trillion in bad debt in china's banking system but china can keep the party going simply by ignoring the bad debt issues

in the banks of the banks it effectively owns in letting these bad debts rollover so that they are not recognized. we think to a large extent that is what is happening now. how long they can keep this going is the question. we frankly think they can keep it going for a while. i think on i think i'm a low and it's two or three years and on the high-end of maybe five or six years. we just had that debate today. if they keep it going longer than that, the amount of excess capacity that will occur globally will be staggering numbers. at some point in time the thing unravels. and here's the irony. for all of these countries and spain is a great example. we show the slide. the longer it keeps going the tougher the day of reckoning is. we think it will go on for a few years. we think that's bad news. >> and internal risk from the u.s. on private debt is that

further down the line? >> i think our risk to the united states is just that we have lackluster growth going forward. we have two or 3% growth at best whereas if you were calling the 50s or 60s our growth was five or 6%. two or three% debt per annum may be risky. we are not looking at a crisis risk in the u.s. that we are looking at sideways growth. one of the things we are looking at relative to the asian situation is where the linkages are. could a collapse in china or slower growth in china how much will that impact the united states and africa and europe and south america and frankly i think a disproportionate level of that risk is in and around china itself.

we think south korea and japan and australia and thailand and mongolia believe it or not. we are mapping this on a country by country basis. the amount of trading that's going on between china and the u.s. and europe as a% of the total activity is relatively small, single digits. the amount of lending that has been done by u.s. and european institutions to businesses in china is a small number relatively speaking. so we think that we will feel it in the form of slower global growth. we don't think it will precipitate a crisis for us. >> okay. any questions from the audience? just hold on for the microphone. >> thank you very much. it's been wonderfully interesting. i have two questions and we'll try to be very brief. the first one is, the debt

crisis is another way of saying capitalism failed in making unwise loans is it not? >> if you look at the history of crises in the united states from 1800 forward, we have a crisis of this type about every generation. 1819, 1837, 1853, 1873. >> i think one of the points we make in the book is it should bring to an end the meth that the invisible hand solves the problem. >> it seems to me that the chinese can be structured by your method. >> i think they could. >> why wouldn't they? >> you know they have a highly vested interest in keeping things going and we think they probably in some respects are already quietly behind the

scenes kind of re-capitalizing institutions so yes. we actually think china has the capacity to proactively deal with the crisis part of the problem. what they don't have a magic wand for is the fact that their growth overall needs to slow down, has to slow down. >> in the back. >> hi. this has been very interesting. this i just want to bring up an issue that is a concern for a lot of my peers but i haven't heard mentioned and given the exorbitant amount of debt that has been accrued by a generation of university students should regulators be doing anything to support a generation of consumers who will be unable to do so at a full capacity?

>> yeah am i think you're exactly right. he really put it in perspective. in the united states right now they are is about $26 trillion in private debt. about 14 trillion of that is corporate debt and about 12 trillion of that is consumer debt. of the $12 trillion in consumer debt and about $9 trillion of that is mortgage debt. student lending is only $1 trillion of that number. to me that suggests that the united states has the capacity to supplement the educational system in a way that it's not doing. so i would argue that the fact that it's debt is problematic and if it -- after world war ii one of the greatest things that ever happened to our country was education supported by the g.i. bill. it seems like a pretty good idea still.

>> a two-part question. you were pretty quick to dismiss inflation as a solution to large debt problems. i'm interested in why you don't think they can do that in particular with in gdp targeting and also you address dodd-frank but didn't touch on basel iii so i would be interested here your thoughts on all three. >> i didn't get into this but i think that one of the drivers of inflation is low and growth itself. private loan growth itself. the reason i think that, number one is we have looked at those correlations in all countries and you almost never have a situation where inflation doesn't at least somewhat correlate to loan growth and frankly high loan growth perceives inflation or some delta in inflation. so the idea to me that you could

have a generation of inflation without having commence or private debt growth kind of seems like -- because we can't observe it anywhere in history. even when we theoretically say that inflation could be higher than private loan growth for a generation that still doesn't put that big of a dent in your problem. the problem is we can't find in history examples were inflation exceeded private debt growth that significantly for that sustained at the period of time. we have more work to do on that one. but at any rate basel iii, basel i, basel ii and now basel iii kind of have created a situation where the banks still have a lot of latitude in grading their own homework.

so to speak. they get to say this type of loan is only this risky and therefore lending capital needs to be this much. so for that reason alone it's problematic to me and basel iii prescribes less than $100 billion in additional system capital for the united states. but there's another thing that basel iii and i lived with the stuff for a long time. there's another thing that basel iii and basel ii and all these others don't really recognize and that is if you make a good factory loan and it's a low risk loan you only attribute so much capital to it. but then your competitors financed 10 more industrial plants of exactly the same type. your loan just became a bad loan. you have overcapacity in that area. one way to think about it is, i spend a lot of time in south beach in miami.

at one point in time somebody built the first high-rise condominium south of fifth street and it was a speaker -- spectacular loan and investment a lot of money. then they built 10 more condominiums next to it in athens and said even the first loan became bad when all those extra loans were made. basel iii doesn't really allow folks or cause folks to go back in and say you assign this level to this risk category but you need to reevaluate that risk. so is like a rearview mirror rather than proactive. it just gives too much. it doesn't create enough in the capital system to give latitude to system participants. [inaudible]

>> again it's a rearview mirror. what they do is they look at history. they look at the performance of those loans in the past performance of those loans. but what the system does not recognize and i think what in theory we don't recognize is the category that's good today can become bad if we land too much into that category. [inaudible] >> let me tell you. it missed by $2.5 trillion. no stress exercise i have ever participated in, you know people going into a stress scenario that 10% stress on the system. no actual crisis had anywhere dear that stress. so people in the it bans of the

crisis never contemplate that. >> any other questions? >> thanks. i have got two questions. the first one is one of complication and you talked about a lot of data about the cyclical effect of different crises across generations. you showed growth in private debt and i would like clarification on what happened post-the debt crisis and those other situations and i got a sense that this crisis was different because private debt hasn't decreased significantly. that's number one. a the second one is more philosophical. really what we are facing our boom and bust and a repeat of essentially a natural economic phenomenon is a bad thing. if economists embrace your

philosophy wouldn't the natural human psyche find another method or phenomena and to create a boom-bust in another way regardless of private debt? >> let me take your second question first and then ask me to repeat your first one. but yeah its boom and bust and it would be fined if it was boom and bust and have the same high or low points. it's been boom and bust so every new boom is at a higher level than the height of the previous boom. >> isn't that the nature of economic growth? >> i think it's an unrecognized component of the treaty don't have any dialogue except by a small minority of economists that look of this phenomenon of a tripling of debt-to-gdp levels. what you have instead is the debate about that and almost no discussion.

what happened after the crisis? >> if you look at the crisis in the great depression and the other ones you cited did you see a drop off in private debt, significant drop off to return to the boom. back in if we haven't seen out why has that broken the cycle this time around? >> it's a very important question in the book goes into this in some detail. but in the great depression and in the depression that preceded the great depression in the 1970s and 1980s and so forth there was a material -- nominally from 1930 to 1933 bank loans declined by 25%. it's unthinkable in today's world. not only did bank loans declined 2% after the away crisis, that's a different between 25% to 2%. but the decline of 25% in the great depression led dollar-to-dollar to the 45%

decline in gdp itself, nominally. it was the issue. that's why we had such a profound adverse circumstance in the 1930s. the fact that we let things leverage so rapidly was the cause of the problem. in the third figure that out. bernanke and others that study that figured that out. he had to use liquidity and capital to prevent deleveraging. so this time around we didn't have that calamity because we effectively prevented the deleveraging. we had a little bit of deleveraging but not a lot. so yeah we didn't have a great depression a great depression but guess what? we still have high levels of debt. coming out of the great depression and world war ii gdp had gone from 150% down to 50%. that is how much deleveraging occurred over that 10 or 15 year

span. we haven't had that so we avoided -- it's a paradox. we avoided a great depression. we are still lugging around a large load of private debt. >> would have been better to do leverage? >> well it would not have been better to do leverage because every dollar you spend to pay down the aggregate private debt is a dollar you take out out of gdp sofa we have spent the money to pay down that $2.5 trillion we would have retracted gdp by $2.5 trillion. it would have been calamitous unless you did it through restructuring. restructuring is the one way you can fix that number without contracting the debt. that's why even though it's a lightning rod is the least bad choice. [inaudible]

>> i'm talking about the period before the war. >> it's arguably a relatively anemic growth. >> you are exactly right. starting in 39/40 government spending shoots up and government debt-to-gdp reaches almost 150%. and in fact it almost displaces private borrowing because the funding of the gm plans to build tanks instead of being the death of those corporations is federal government debt. in a circumstance is not only a big number but if you -- a displaces private lending and by the way i can contrast that with world war i where we did almost the same thing. the private sector did the borrowing. private-sector debt goes to

unprecedented highs that we flip-flopped but at the end of world war ii when we start the great deleveraging a public debt, the thing that makes it possible is rapid ascent of private debt. so private debt leveraging from 1945 to 1980 actually, there's a thing that happens at that trade-off doesn't end until 19 1980. private debt grows more than public debt shrinks as a% of gdp. and in fact it's what enables us to do leverage our private debt. >> thank you for coming here today. i have two questions for you. the first is about china. china's government as a major reason for this slowing down gdp is the economic transformation which prefers to decrease the percentage of investment and increase the percentage of.

>> the rebalancing. >> based on my own personal experience i think a lot of times people use more and more private debt to consume. will the control of the private debt have an adverse impact on the economic transformation? >> first of all will you join our study team? secondly i think you're exactly right. if you are rebalancing and asking consumers to take a bigger share of the economy one of the ways they do that is through debt. right now as a slideshow private debt-to-gdp has grown 60% in five years and is almost to 210% so yeah absolutely. it's the smaller part of it but it's part of it. >> do you think this is more important than the economic transformation?

>> i think if you are looking -- rebalancing needs to occur. i think it's a harder challenge. we were just talking about this today. just to say rebalance it it's easy to say an extraordinarily difficult to do. i think it has some impact but the real thing that has impact in china right now is the fact it got way too many unsold steel that hasn't been sold. everywhere you look in the economy there's overcapacity. that's the issue. >> my second question is about data analysis. you mentioned that private debt is important is the best predictor of the economic crisis so i want to know which approach do you use doing your research? do you put all the economic

indicators into a model and analyze it or do you have -- that is to say you pretend you don't have the last period of data and you used existing data to project the results and see which has the closest resulted in a data? >> our analysis is very simple. we look at the actual crisis of which there are 22 by p. laban definition of financial crisis in these major economies in the post-world war ii period and we look at what was true in the five years leading up to that crisis. we looked at private debt growth gdp and it creates 28 different factors. when you do that the results were overwhelming. it's almost always true that you have private debt growth and almost never true that you have a predominance of any other increase. that was our analysis. >> so you only examined the correlation between these

factors. >> that's right. >> thank you. >> do you have time for a few more questions? in the back and did you ask a question and? >> your work is fabulous. how do you see addressing credit and financial asset prices? there are some like steve king who have spent a lifetime talking about this and others as well that credit expansion up assess -- access crisis feeds on itself. you want to buy a house because prices are going up so you leverage the buy the house which in turn makes houses less affordable and ironically many of the affordable housing ngos you know don't really have a solution how to get out of that. their solution is easier credit and interestingly more capital requirements. they add these human shields to the financial industry. how do you have some type of systemic reform so you don't get

into this almost inevitable situation where you need a debt jubilee to get out or face years of stagnation or liquidity/solvency crisis? >> we knows the cane and we like his work and we think his work is spot on. there are another couple of -- me in and sukie who published a book called house of debt who did a really wonderful job of parsing to this very idea. but what you were getting at is the underrecognized fact that lending policy itself absent organic demand can cause asset price values to go up. this is easy to think about relative to homes. if you are selling homes in every lender changes their policy from 75% the number of eligible buyers increases and the demand for the houses

increases and prices go up. a simple change in lending policies absent any other thing causes housing prices to go up. market participants don't recognize that and they think it's some enduring crisis or some enduring trend so they jump on the bandwagon and exacerbate the problem. inevitably asset values collapse and you have loans that are now underwater. but that's true in every asset category. we do a lot of work with bank financing of acquisitions of small businesses. banks, let's say land to individuals and businesses at three times. guess what, it is all banks lend three times at ewa.it's about three times and just because they are trying to outdo the bank across the street or because they want more loans or

because they are feeling confident they change their policy to four times the valuation goes to four times so it's a self-fulfilling prophecy and its intrinsic to the problem. i hate to be a -- that capital requirements properly applied work. >> last question. >> thanks so much for your talk. i thought it was very interesting and it was interesting to hear your point about a good loan becoming bad because of the creation of overcapacity in any given area. my question is one thing that hasn't been talked about at all tonight is the environmental crisis, climate crisis which is pretty well recognized to be surrounding us and increasing severity.

i think the examples you gave up the creation of overcapacity is an interesting example of the bank lending, not being oriented in terms of creating a short-term or long-term profit but now being ordered -- oriented towards creating wealth to sustain human life. are there any ways that you can see that bank lending in the creation of our future for structure we will have to live with hopefully if we survive for the next centuries, that can be tied to something that will allow us to whether this increasing storm or is more government action required? thanks so much. >> thank you for that question. i am not an expert in that area and there is clearly a lot more important things that can be done to address that issue in lending policy. i think you are right