differ from the poll particular on the street and i said that is what we want to achieve today, we want to show you can bring together people with different views and what their prescription is to fix the economy, but we can do in a way that raise s up lifts the discussion and does not tear it down. the notion of being provocative and constructive the important today. now i have the pleasure of introducing and bringing up the next panel, our next panel, come on up guys. we will not delay. we have ed loose who is the chief commentator of the financial times who will moderator and cohead of deutsche bank, and the former managing director of pim co.

and a senior fellow at the new america foundation and eve smith, publisher of naked capitalism. we not only have copies of the atlantic for you to pick up outside, it's a great issue to get as james said, but thanks to the financial times and i belief in magnanimity, we have the ft out there, ed is an author of a forthcoming book called "time to start thinking: america in the age of decent," that shows where his thinking is going no mat where are the nasdaq is, ed, the floor is yours. >> not sure this is working, thanks steve, amazing audience here, which amounts to about 1% of your friends on facebook, i think you are a world record

there a side from lady gaga. i'll not reintroduce our friends because steve just has and you have the bios we have an hour and a quarter to ask what caused this crisis in capitalism and how to fix it. i'm sure that it's too long. it's all very straight forward, but i will therefore get straight to the question and start with eve. a blogger well known to all of you, of naked capitalism with a well-known book that came out quickly after this crisis and ask you eve, from the perspective of today, looking back to the build up of 2008, you can almost indulge in a kind of murder on the orient express in trying to deal with who is responsible for the melt down and find that everyone has a different theory and eventually there's so many fingerprints on

the dagger that there's not one real culprit. what, from a slightly different perspective, what do you think would have happened or not happened in 2008, had dodd-frank already been in place? >> honestly, i'm not sure the outcomes would have been materially different. the big profile of what happened is that we had a growing level of consumer debt in the united states, the biggest culprit was, of course, the housing bubble. we had growth in all kinds of of consumer debt, and the housing bubble would have died an early death in 2005, because the fed started to tighten in two no202. what kept the party going was the introduction of credit default protocol. the protocol was developed to

deal with credit default swaps that allowed people to take short bets and the other side of the short bets wound up being cdos, that to a large degree wound up on bank balance sheets because banks could gain -- traders could gain the bonus systems. and there are complicated mechanisms that led those to drive demand to the worst sub prime debt, so it was not just a housing bubble, it was innovation gone bad. there are -- the volcker rule has ways to, how the triple acdos dealt with the balance sheets. those are going to be gutted and the other hope for dodd-frank was now we have these resolution

procedures that banks, when they get sick in theory, the fed, treasury and fdic can agree and put them down in a more orderly manner. no one has shut down a major bank trading operation cleanly. at some point you have to stop the music if you will resolve it and shut down the trading positions and value them and no one wants to be exposed to that. if you are a big hedge fund or trader, you do not want your positions frozen. so the notion that you can have a bank that is -- that people think is in trouble and say, we will have dodd-frank resolution and not have all the trading counter parties run, it's -- i am very concerned that it's -- we are not there. >> so the short answer is no. >> no. >> no. >> sorry, but this is the whole frustration, you have to get into the weeds to understand this. >> no, no, i was not being

fecicios at all. and you have a book coming out, from financial crisis to prosperity, 20% off as well. that might foreshadow what you'll say, do you agree with eve and the atlantic that it would not have prevented it and that the hero is ben better knack sni. >> that is two questions. >> dodd-frank would have had an effect, i'm reading it in the broader sense, aware of the fed of what is going on and not so much the wall street piece of it, but the lending piece of it, the originating piece. but what would have happened, we are trapped in stag nation now what would have happened is we would have tumbled into stagnation earlier, when the

historians look at this period, they will see the trouble coming with the bursts of the bubble in 2001, and what the fed managed to do was keep the thing rolling along by allowing the housing bubble and facilitating it, and it was the right thing to kdo a the time we were in. i would have been making the same decisions as a result of this, six years of let'sing the bubble go on, we accumulated extra debt that we are now burdened by and we have a tremendous destruction of credit worthiness which is a economic system. our stagnation would be milder. i hope we come back to this.

>> we will, and we will come back to whether it's a real recovery. paul, you used to work at pimco, and you now are a philanthropist, and a think tank you set up is looking at these. you coined the phrase, mensky moment, who is responsible for that? >> we the people are responsible for the mensky movement. mensky's contribution to economic thought is that capitalism is inherit antly not self stabilizes but self destabilizing that we move from boom to bust and that proper regulation can dampen that human nature. but can't eliminate it. so the contribution was that we should aassume boom and bust

tendancies to the economy, instead of self correcting tendencies therefore we are responsible for what happened in the mensky moment, i think we could have done things well before 2008 that, would have dampened it, so i do believe in the power of we the people through the regulatory structure to dampen our own pathology but we clearly didn't. if i have to point one finger, i actually have ten, just given one, it would be the federal reserve, not with monetary policy at all but with regulatory policy. note ably starting in 1994 when the fed was given the right to declare what was and was not an acceptable mortgage to be originated in our country. and mr. green span chose not to

use that legislated authority to define,fy may use the term, what is an acceptable mortgage. and capitalism run amuck as we find out how low it could go in the creation of mortgages. and then put them in cdos. so, actually, if there'd been one thing that could have been done different that would have changed history, it would have been if the fed defined what is a acceptable mortgage in our society and no money down, teaser rate, with no documentation and not strike me as an acceptable mortgage. >> so you're monthly cover would be the anti-hero? >> no, i'm a huge fan of mr. bernanke. i think he has learned from experience and i think he is a very, very smart man for a very long time. he is a very smart man.

so actually i take my hat off to mr. bernanke. both as governor and as chairman of the board of governors, in fact he is a hero of the piece i'm presenting in a couple weeks time for the gic. >> well get to that, peter, you are of course, an exofficial before you joined deutsche bank, 26 years in the fed and an economist in the open market for that time. could you give the case for the fed? nobody has yet mentioned what some would describe is the ultimate cause a opposed to the global financial imbalance, is that a factor? >> let's go back maybe a bit further and look at a slightly larger picture and go back maybe to the early 1980s where the fed was fighting a major inflation, the last time we had a near great recession, with

unemployment getting up well to the double digits and the volcker decision, that kicked off a bull market for bonds and stocks. inflation came down over time, the fed was successful with volcker and then green span taking the helm after him in bringing down the inflation and engineering the great moderation, lasted for 25 years. a period during which inflation not only came down but risk general came down as well. and at this time, we had a bull run in the housing market. wed policies put in place to encourage home ownership and there was affirm belief that home prices would never drop. they had never dropped at least over the period of history for which wed good data. and this was a factor that fed very much into both the financial engineering that you are talking about, and i think

fed some complacency at the fed, there was a philosophy at the top of the fed, that said markets do a better job of policing themselves than government regulators, and unfortunately that was a major fact -- one of the contributing factors. the success of the fed taking risk out of the system, bringing inflation down, allowing home prices to go up, etcetera was a fundamental -- green span was proclaimed a hero himself for the success. >> talking of the great moderation, craig, you are from canada, and td bank, chief economist, which i was surprised to find out is the eighth largest bank in u.s. and second

in canada have a good viewpoint to see what is going on in the united states in the last few years and what has not been doing on in canada. can you share some insight there is? is there more that we can learn from canada? >> well, let me start off with the comment about the great moderation and then work in the differences and experiences. because i think it's a really good point. you know, in actual fact, you the murder on the orient express works. i cannot find anybody who is not to blame for what happened. people took mortgages they never should have and less thnders ma mortgages they should not have loaned. it was facilitated by incentives like mortgage interest deductiblity which is something that we do no have which encourage s people to take out

bigger mortgages. and the regulatory oversight was not robust and financial innovation was not so quick, people could not keep pace with what was happening. so regulators fell behind. banks did not hold enough capit capital, so in fact, everyone was to blame. and part of the reason the interest rates were so low so long is because the global circulation of the reserves from china flowing into the treasury and when we think about the great moderation, it was falicy, all right? economics tell us, you go through business cycles, and during expansions, balances will build up and at some point a shock will hit you and it will cause an unwinding of the imbalances. as we had lower and stable interest rates and inflation,

there w there was a great willingness to extend credit and a push for yield, meaning people going up the risk curve and ultimately what was happening was, every time imbalances built up, every time they would have been unwound, the fed lowered the interest rates to get the economy going, which increased the credit bubble. what we had was a credit bubble throughout the entire advanced world. >> in terms of canada you had stronger regulation. >> when the housing bubble in the u.s. collapsed it was the catalyst for the unwinding of the excesses and in the -- in one of the core reasons why the canadian financial system weathered the storm well was first of all, the number of regulators is much smaller and they can coordinator with each other, there's only five stitutions in total that are really overseeing the canadian

financial system. when there was a problem, you can get all five people in the loom and say, what do we do? right? how do we keep, how do we deal with the problem? canadian financial stitutions carry more capital and were more leveraged. this is part of regulation and partly because of culture. >> so dare i say it, that canadian banks were more bore something. >> and criticized for it. in 2005, 2002006, you can find examples of stock analysts were that critical of canadian banks. and to be honest the canadian financial system doesn't do a lot of innovation first, what it tends to do is watch what goes on not united states and say, hey that seems to work pretty well so, you know, then canada

will start to do things. so, you know, as the risk appetite in the united states went up, and we saw increased numbers of sub prime loans being done, canada had far, far fewer sub prime loans, so at one point, i think it was 40% origination was sub prime and in canada, it got up to 4.5% to 5% was sub prime. so when the u.s. financial system ran into liquidity problems, the central bank stepped in and said, here is liquidity to get you through the crisis and once the global crisis settled down the central banks came back to life and worked well. >> the dodd-frank was not a qualified short yes no from you

craig? >> the dodd-frank bill provides greater oversight of the financial system, would it have stopped what happened? know. because there were too many other factors in play. >> pete sr? >> i agree with that, the crucial elements of the dodd-frank bill could have eased it in some part, but you may be looking at a higher cost of capital, which would not have been desireable. >> aagree. dodd-frank would have not stopped it. >> so, we have not even won the last war. ? >> no dodd-frank happened after we lost the last war. >> the perspective is, basl three is saying that banks should carry adequate capital to say that if something goes wrong, you remain solvent and

you need to make sure that when a shock hits it's not too big. we going on with dodd frank the basl 3 accord is a formal useful device for ensuring written reduced risk. >> fair enough. now, everybody knows that what happened between t.a.r.p. 1 and t.a.r.p. 2 and eventually it was passed. thankfully. and the system was saved. and banks are now back to where they were before the crisis. recovery is durable. during the housing market is absolutely critical and the health of the housing market, to the degree to which it has delevered. was it a mistake in 2008-2009 not to have a t.a.r.p. equivalent, some kind of really massive bazooka for main street, the kind of bazooka that was

there for wall street, for the u.s. housing market? i want to sort of go one, two, three. please just sort of plea pitch in, whoever wants to pitch in first. was it a mistake to have a big policy to address the housing market in '08-'09? >> yes. we've been edging towards it for three years now. unfortunately facts get created that can't be reversed once you start to go into foreclosure, once you lose your home, once the mortgage default, yes, huge mistake. and we're paying for it. >> absolutely it's why the economy is in a liquidity trap. it's not creating robust economic growth because it's not circulating the way it should be. part of the core reason it's not circulating is the impediments coming from where the housing market that is continuing to decline. >> there are even other elements which is that to have a good resolution in the u.s. you like to hold as a point of pride that

you have a resolution process for corporations. when a company gets in trouble there's a discipline process to when the company is viable to ride down in the debt, they can't be saved even by chapter 11 and have to bely question dated. we're having the reverse happen in housing. before the era of securitization, if a borrower got in trouble the first thing that would go through the bank's mind, and it was the bank that would own the mortgage, is he worth more to me dead or alive? in the vast majority of cases the bank would restructure the mortgage. they would do some kind of mortgage remodification. quiet, no social jealousy because no one would know the neighborhood got in a remodification. now we have servicers. they get paid to foreclosure, they don't get -- even with half and other incentives. payments to modify are inadequate. they make money by ten you waiting foreclosures, which is

basically what's happening now because they charge more servicing fees, more late fees. and it requires skills they don't have. you have to build significant new infrastructure in these servicers to have them do mods. as a consequence you've got a huge number of foreclosures in the pipeline. you look at housing inventories. that's not tell you the story. the best estimates of 3 million houses somewhere in the foreclosure process or that is real estate owned that they haven't put on the market. and there's another 5 million houses that are in defaulted or in serious delinquency. we had a big overhang here. and again, the servicers having bad incentives, this program, the new federal state ag settlement is not going to make any difference. it's too smalitl. doesn't solve problem which is the servicers and inability to structure it in a meaningful way.

>> to our hero on the "atlantic monthly" cover, i ask the question, why didn't we wait until the summer of 2011 to really go after the mortgage-backed security market and drive down mortgage rates. the questioned should have targeted that market in 2009. we could have gotten a huge windfall of refinancings that is not possible now because those people, once your credit is gone, you can't get a refinancing. this thing snowballed and snowballed. this is a black mark against our hero. i like him, too, but let's be balanced in our assessment of him, too. >> presumably, i'm assuming because i haven't asked each of you the same question, there is agreement there should have been more aggressive action on the housing market and iran? w had problem that was going to have to be resolved whether the policy input or not. the policy could have made things a little easier.

but home prices went way higher than they could sustainably maintained. home prices and rent ratio, some 30%, 40% above some long-term sustainable level. stock of rose several million units above a longer term trend. so we had a lot of excess inventory of homes that needed to be run down. housing investment had to drop. home building dropped sharply. home prices had to come down. that was going to create a lot of pain to the economy that was not going to be avoided to maintain. you can't manufacture -- unless we're going to put a lot more people into home ownership, continue along those lines, then was sustainable and long run, you weren't going to be able to avoid a major adjustment for the imbalances that had been created during the bubble. now, at the same time, certainly there is -- there are moves

going on in washington today to begin to work off the stock of distressed properties, the reos, the pilot project we have in place to begin to finance investors more in a bigger way than has been in the past. i mean, the housing market is now one where homeowners are no longer getting financed and let me just throw out that if you're going to have principle write-downs, if you're going to allow people to foreclosure, i mean, you're going to have to find some way of financing this. government bonds are going to have to be put into the picture. then you get into the fiscal problems. i agree that things can be done to ease the problem but there are costs. >> paul, why wasn't this done? >> because it smells incredibly

badly. we did what we did for the banking system, notably t.a.r.p. >> yeah. >> and it was a sorry spectacle to watch the political process actually do t.a.r.p. we got to see it voted down and then the stock market voted down and then we had congress holding its nose and passing it on the notion that hank was going to buyout it and change his mind to recapitalize the banking system, which was the right thing to do in the first instance. so essentially t.a.r.p. passed because it had to pass. it did not pass the smell test of democracy. uni'm b unam b unambiguously. ben essentially told them you pass it or we pass dodd 2, dodd 2.0, your call. t.a.r.p. passed because it had to pass.

it didn't pass the smell test of democracy. that's why we didn't do what should have been done at the time, which is to look at the household sector. and it's basic unfairness. t.a.r.p. was unfair. and it would have been unfair then and now to essentially reward with government assistance those who should have been called renters, not owners. i think that's why we've taken so long to deal with it. and the reason we're dealing with it now is because it's a permanent sort of drag, lead anchor on our economy, but it's the notion of fairness. democracy demands some notion of fairness. >> presumably also the fact that it is logistically more difficult to be fair to this administration -- any administration, it's far tougher to deal with millions of mortgage holders. >> that is true. that is true but it's not the fundamental reason whee haven't done it. we haven't done it because it rewards, from a moral perspective, those who

essentially did what we consider to be immoral, which is took debt that they could not afford. if you're a banker that was fine. if you're a homeowner on main street america, we want to punish you. >> talking to cnbc, rick santelli is a big part of your explanation as to why this happened? >> hi, rick. >> but i think there were also an underestimation of the ability of the market to actually process the foreclosures in a timely fashion and deal with the problem. i just think there was an underestimation of how difficult it was going to be and how big the stock would get. and, you know, we were in unchartered territory. you look at paulson's reaction at time and making it up as you go along because you truly didn't know all the moving parts. and i think there was a -- >> we had a lot of time to make up the story on housing, right? >> right. but after t.a.r.p.