independence, bear upon the threat of global warming and the environment. so all of that is a tall order, and i could go on obviously much longer. is it impossible to do? all i can say is i hope not. better to set out a large framework than settle for inadequacy before the debate even starts. consider whether there are not, in fact, areas of common concern and possible consensus upon which to build. most important we need to understand how much is at stake. united states is not and cannot be an isolated island. we live in a world of swirling concerns, economic, political,

security that poses large opportunities but also, this is perfectly obvious, grave threats. one part of the problem is the united states can no longer claim almost unchallenged leadership of the world economy. for decades after world war ii it was the american vision and american strength that shaped the world economy. an economy increasingly market driven, open to international trade and investment, with unprecedented standards of living and hauled nations rising from poverty. in relative terms we have lost economic position, but we are still the largest, richest, most

integratetive economy able to develop and attract the best talent so we can still bring our influence to bear. for that we have to do better. there is no way the united states can thrive in isolation. we want to help shape those incohort forces loose in the world. we want to shape them in a direction of democracy and prosperity. we can't do that with military force or political influence alone. indeed, only, only a strong and open economy can support and assure our national security, maintain a sense of global leadership, and provide a bull

work against opposing systems. a strong, attractive economy is worth the efforts that it will take to rebuild some sense of common interest and to undertake economic reforms we need. that's a big challenge. it's a challenge that may seem at odds with the electrical -- electro reality, but when we sit back and the election is over, then we had better be prepared. as was said not so long ago by those in the new administration, let's not let the lessons of economic crises go to waste. let's hope that that can be a slogan for the next administration as well. thank you very much. [ applause ]

>> paul, thank you very much. for those of you who don't know, i'm steve clemons, washington editor-at-large of "the atlantic." you'll see that when we do events it's sort of like flying on united airlines. we usually don't let people leave their seats and go in the hall. we do it all at your seats. and we're going to do that. as we're discussing we're going to have staff at the hotel quietly clear your plate. we're not taking a break after this. we're going to proceed. thank you very much. paul, first question. today "the atlantic" issued what i like to call our money issue. ben bernanke is on the front. i was talking to peter schiff and other people out of the room who were basically ones who see bernanke as a villain as opposed to a hero. they see bernanke as a villain for keeping interest rates so low that either inflation or other bubbles are being created.

and so if you were fed chairman today, would you have inflation rate -- the fed rate where bernanke does? >> i'm not there so i don't have to make that great judgment. and i have a regular practice of refraining. >> we just wanted to see if you had given up that practice. >> when i saw that bernanke is a hero, bernanke is a villain, it's out there in public, it reminded me even today i occasionally in the streets, somebody comes up to me and says, you're the s.o.b. that presented my poor mother and father from buying a house in the early 1980s because interest rates were 15%. then i go on a block or two and somebody else says, oh, you're paul volcker. thank you. my father bought government securities at 15% which put me through college. thank you very much.

>> david bradley got his house. that's good. let me provoke you for a moment and ask you about your view about what happened during the financial crisis and the creation of financial instruments derivatives which you have said created a lot of confusion and opaqueness and distance, essentially, between regulators and those playing in the markets. >> right. >> some might say, mr. volcker, you're well meaning but you don't understand the new math and that just like steel getting tauter and stronger, that you have a generation of people that despite what happened with the financial crisis, nonetheless there is strength in the kind of leveraging that's out there and that there's been an overreaction to financial innovation. >> i think the answer is evident. i heard all those songs about the benefits of all this very complex financial engineering

and how it was diffusing risk and risk kind of -- compression, risk kind of disappeared. and if we can only sell new gadgets, derivatives to people that have some use for them, that's fine, but we'll sell them to people who just want to gamble with them as well and you have a situation, you know, some of these numbers are kind of enlightening. before the crisis credit default swaps did not exist. they were only invented in 1997 or something like that. they just didn't exist earlier. by 2007, 2008, ten years later there were $60 trillion worth of credit default swaps outstanding. credit default swaps are supposed to provide a kind of insurance policy. you get one of these swaps to protect yourself when you hold a

security against default. case in point right now. but how do you have $60 trillion in credit default swaps outstanding to ensure $6 trillion of the total debt outstanding? it suggests that something's going on here that didn't have a very close connection with the real economy. it was elements of a casino, a very complex casino with all sorts of interdependencies, and when that came under pressure, not just from credit default swaps but otherwise, when the system came under pressure, it collapsed. and, you know, i'd like to use a kinder word than collapsed. i suppose most bankers would not say collapsed, but i think collapsed is a pretty good description when it took hundreds of billions of dollars of government support in the united states, in the u.k., in

europe, in japan to support the system. that is not a viable, dynamic, thriving enterprise system if it's relying on that kind of government support when it came under pressure. that doesn't say the financial system is responsible for everything that happened, but what you do know is that it fell apart when it came under pressure. >> there is today a remarkable op ed in "the new york times" by a gentleman who just quit goldman sachs apparently today, may have been last night, and orchestrated his resignation letter along with the lines that essentially it was an inindictment of this person of goldman sachs for playing in that casino economy in what he considered to be irresponsible ways or ways that really did undermine the interests of the country. do you have any thoughts on this piece? >> well, it's a radical, strong

piece. it is a reflection of a change in market mentality over let's say the past 20 years or the past 15 years. goldman sachs, for instance, has long been the most respected of the investment banks, very sensitive to avoiding conflicts of interest and focusing on their client needs. two things to take an example of that firm, i don't want to pick on them, but they went public. it used to be their partners were at risk earlier. in the mid '90s they went public and they bought a big trading operation. and that, like other investment banks, became a trading operation rather than a largely customer oriented underwriting mna kind of operation. and that changed the mentality and i'm afraid it's a business

that leads to a lot of conflicts of interest. it leads to enormous compensation when you're doing well and that's obviously very attractive to very young people. all these firms that attract the best of american graduates, whether they were philosophy majors or financial engineers. doesn't make any difference. if they were good, the rewards were so great that a lot of that talent was siphoned off into wall street. but now we have the question of how much of that activity is really constructive in terms of improving productivity and the gdp. these were brilliant years for wall street. were they brilliant years for the economy? there's no evidence of that. the rate of economic growth did not pick up. the rate of productivity did not pick up. as i noted earlier, the average

household had no increase in real income during this period or virtually no increase. so we had an unbalanced economy and since you've given me the opening to have a few advertisements, the so-called volcker rule which was aimed at proprietary trading, aimed at speculative trading, not in general but speculative trading by commercial banks that by their nature are protected by the government and indirectly subsidized by the government and should the government be subsidizing, protecting institutions that are engaged in essentially speculative activity often at the expense of customer relationships? and does it lead to a culture, does it lead to conflicts of interest that we would just as soon do without? so i hope the reform, we're making a little progress and getting a little rebalancing of

incentives in the financial system, more full-throated return to old-fashioned concerns about lending to small, medium sized businesses and doing responsibility and taking care of your deposits and a critically important function of the banking system is making payments rapidly, accurately all over the world and all kinds of contortio contortions. that's a job for commercial banks. that's not a job, in my opinion, for speculative institutions. hedge funds can go out and speculate or people can speculate individually in whatever they want to do, but they shouldn't be protected by the government. i can give you my long lecture which i'm going to give on financial reform. the difference is those firms are going to be speculating and doing proprietary trading should not be rescued by the government when they get in trouble. that's their own responsibility. [ applause ]

and most of them, take the hedge funds, they are largely in the past financed by partners, limited partners. they're financed basically by equity, which is as it should be. banks are basically financed by borrowing. >> let me ask you a question about the volcker rule. as i read the volcker rule you were hoping for a morrow bust version of this than we ended up. is that inaccurate? >> no, i don't think it's a question of robustness. in fact, all this fighting about response from banks and so forth that are all is it's too robust. they're complaining that it's been interpreted -- >> they want to make it a little b and not a big b. >> they say you've gotten too detailed. you have a he gotten into all of our detail. you're not giving us any room to breathe, so to speak. so it's really a reaction that, no, you're interpreting it too

strictly. this gets into, you know, a recurrent philosophical question about financial or other regulation. can you put out some broad principles, try to make sure that the banks or whatever understand the principles, and then you check up on them later without trying to master mind all the particular transactions? that sounds sensible, but it goes against the grain of the regulatory philosophies in the united states, and particularly the philosophy of those regulated. they have all droves of lawyers coming down saying exactly what do you mean by this? exactly what do you mean by that? if we hold the security for three days is that okay but four days is not? is that what you're telling us that? if you're not telling us that, tell us that. i don't want to do that. you don't want to get into that degree of detail, but that's what this argument is all about. >> in a little while we'll have

larry somers up here, bob reuben will be here. one of the people who's coming up is the one that has the key job now, which is jean sperling. jean was profiled in the post the other day and looking at the jobs and infrastructure proposal that they put forward, and as i dug into it, it looked like a lot of those pieces were things that you and austin goolsbee had worked on, thought about sometime earlier. my question is do you think the president is three years too late with his jobs and infrastructure proposal? would you have sequenced some of what the obama administration put forward differently? would you have done more in jobs and infrastructure on the front end and less resuscitation? >> i would like to say if i was president of the united states i would have figured this all out and would have had a sophisticated program. we haven't got that kind of a problem.

what we have is the backlash. it's like a tsunami hit us in the financial system. it did a lot of damage. we've now got to recover from that. the tsunami was debt. debt in this economy relative to the size of the economy doubled, increased by 2.5 times i think. just relevant in the size of the economy over a 15 or 20-year period. at the end of the day, it strangled us. for a while it financed a great boom in home building, but as soon as the crisis that's inevitably going to happen, home building prices went down, we couldn't handle the debt. and people hadn't saved during this period because it was so nice to borrow money. you know, you could borrow on the mortgage and took out the mortgage and you got a home equity loan, then you got another borrowing, and your credit card, and it was all great until the music stopped.

so we have been living, i understand it, we've been living in a situation where, as i said, some people said this morning, there is no magic bullet that somebody is going to restore prosperity. we obviously want to give what support we can. we're doing that through fiscal policy. we're doing that with extreme fiscal policy, extreme monetary policy, but there aren't many buttons to push. take infrastructure. i would say where are you going to concentrate? it takes years to develop infrastructure projects and do it efficiently and effectively. we've got a great bridge over in new york that needs to be replaced. we've known this needs to be replaced for years, but is the federal government suddenly said, here's $10 billion to replace that bridge, it's going to take six months to make the designs for that bridge much

less hire anybody. >> right. >> so that ought to be a big component of the program moving ahead, but it's not going to rescue things before the election. >> paul, you wrote an op ed recently warning again about the dangers of inflation because i think you began to see and it's talked about a lot the chinese are worried saying the united states has so much debt that one way out of this trap is to inflate one's way out and sort of over time shrink that and then the chinese end up with a lot less than we have. you said that is really, really dangerous thinking. >> yes. >> i'd like to understand why, what you're really scared about. >> what i was concerned about when i wrote that is in the front -- in the natural frustration about the economy moving rapidly, there's some people, one or two voices, happily one or two voices in the federal reserve that said, well, maybe we ought to think about having a little inflation. have a little inflation, then

people will spend money more freely. it's hard to think how they can spend it much more freely than they were spending. anyway, thae a little inflation and that will prop everything up. i think that is a doomsday scenario. these days people really think that's the policy, then interest rates are not going to remain at 2.5% over ten years. people are going to say why am i lending at 2.5% if the federal reserve itself is aiming for 4% inflation. that's a game. you're not going to get any stimulus. you're going to make it a lot hard to restore a sense of price stability which i think is crucial. the federal reserve's done a good job at saying, no, we don't forget this. and they ought to stick to that.

>> i'm going to take questions from the floor. i'm going to ask our servers, we're very grateful for you helping today. i'm going to ask you to keep it as quiet as you can. it sounds like crickets up here. we want a little quieter crickets. paul, george soros said, we were at the summit last year, describe the financial crisis as the burst of a bubble but of a super bubble. and he often said, and it was interesting because you know larry was up there that responding to a super bubble that has burst requires a very different kind of orientation that the typical tools that you use to respond to a recession won't work. and he would often say if larry summers is right, then he will succeed. but if larry summers is wrong, and i'm right, then what the application of tools that they did in this recession will funneledmentally not solve things. where do you come out? was it a super bubble that burst? and have we failed to really

remedy the problem? or has larry summers, while he was in his position using more conventional tools and responding to recession succeeded? >> forget about the personalities, george soros, larry summers, whatever. the question is -- >> we have cnbc here. they like names. the question is, was this a super bubble? yes. it qualifies. did it have a character that was not ameanable to a quick fix? the normal -- the garden variety of business cycles that we talk of and got rid of in the 1960s but didn't, you had some excesses and business investment. you may have had some excesses in housing and you had some build up in inventories. but it was not an enormous

scale. when the economy went down, it didn't take very long for the adjustments to be made. and particularly what happened was, because home building and the interest rates went down, you quickly get a rebound in housing. but you didn't start out with enormous excess of housing. there are still a million or two million hoemgz either in foreclosure or in foreclosure. big supply over hanging the market. so you get no rebound in housing. forget about the mini sessions. but we're v shaped. it is not v shaped after this one. all things considered, i think we're doing pretty well. we have had a couple years of

expansion. it looks a little better now. unemployment rates going but we can't ask for more than the economy is able to produce in the short run because we haven't eliminated all the excesses the overhang of houses, the overhang of debt is still there. >> great. let me take this first question. if you'll identify yourself please. >> i'm norman kirland with the center for economic and social justice. i -- one of the major points that were made this morning was that there need to be a challenge to the existing economic paradigm. and, doctor, you confirmed that. that there's a need for change. but there's also a need for the big picture. now there is one big hole in the economic paradigm. it's reflected in our -- >> i'm going to ask you to frame it in a question. we just don't have time for

statements. >> the question is why in the existing economic paradigms of all schools of economic thought do they only focus on labor and there is a potential additional way of achieving shared prosperity? that is changing the tax system, changing the federal reserve policies? changing -- adding back glass stiegel so there is more regulation, separation of powers within the financial industry so that capital credit is different than consumer credit. there's all these things fit in to a way in which you can expand capital ownership as we have done under the laws for

employees. why can't we do this universally for every man, woman and child in america? >> thank you, norm. >> i don't know how to answer that question. one of the things that you are suggesting might be desirable to good back to i think at least people talk about going back. they are worried about how you support investment as opposed to consumption. that is a key issue which i was elaborating earlier. there is a push back against the paradigm of efficient markets. and rational expectations is pretty much gone. but that -- there is a lot of regulatory and market thinking in the past decade or so. so i think -- if you were trying to sort out the kind of thing that you're talking about, where we need the debate and that does

come down substantially to questions of fiscal policy and tax policies. spending policy and tax policies. and my hope is as more agreement can develop more -- you could argue that we can find elements of agreement. >> keep the cricket noise down. yes, if you'll identify yourself. >> my name is mark nadel. the question, is you mentioned that the country needs something even more substantial than simpson bowls and that's going to include policies that are unpopular with republicans and democrats. i question is what do you think is the most important economic policy that obama needs to

convince the democrats to support and what do you think is the most important economic unpopular economic policy the republican candidate is going to need to convince the republicans to support? >> good question. >> what i would like to see, frankly, is both sides for now and the republicans settle on one candidate and sketch out a kind of basic vision that they see particularly for budget policy, fiscal policy, taxes and see upon which points they converge, which points they do not converge upon. is there any possibility of reckon sireconciling. i think the answer, is no, they won't reconcile. but will there be enough sense of convergence that whoever wins the election has some basis for a strong and comprehensive

program? and i would say in some respects going, for instance, beyond simpson/bowles on both the taxation and the spending si i thought they thought a big distance of setting out a set of possibilities. can we build on it? yourself, please. >> i'm a private investor. my question is about crony capitalism. do you think the concept of too big to fail might be more like too welcome connected to fail? why can't we have an rtc concept like after we had in the s&l crisis in texas and the southern states? >> well, you know, the question is to how much the rescues involving in too big to fail