were compelled by the crass political instincts. i think not much. that became the habit. it woupreclem. but we had a genuine emergency. and i think the extraordinary actions that were taken were not to reward some political supporter or person or industry or whatever. they were taken and national interests. now what turned out and unplanned chaotic way was an approach that in some respects did resemble the old rotc. the uche treasury put capital, u.s. taxpayer put capital into weakened financial institutions which is what happened with the roc. it was done helicopterer xelter in an unplanned way. there was a fear during this

what may appear to be a more orderly way. and it was overdrawn that somehow in the emergency of this is warranted. i, frankly, think that here it was overdone. there is capital in the banks in an emergency. and they haven't ended up running the banks and the crisis is over, they withdraw the capital and hopefully leave the strength in the bank. actually, i wrote an op-ed piece or two before the crisis was up at the breaking point. something like the roc might abe good idea. i can say that writing an op-ed piece and the response and they

need congress to approve that. and the answer was probably proper answer is probably no. because you had enough trouble getting the congress to approve after the crisis. and the evidence was so parent. >> peter? >> your mike is not on. >> maybe that's better. >> it's an honor to ask a question for the last competent person to chair the federal reserve. but here's my question. it's a very simple one. you mentioned in your speech that you twhount of the biggest problems we have as a nation and i agree with you is that we borrow too much and we spend too much. then you went on to praise congress and the fed for the stimulus when the specific goal

of the stimulus is to get us to borrow and spend even more. so if the problem is too much borrowing and spending, how is the solution that we borrow and spend even more? >> thank you. well, sometimes -- i don't know. there is a word for this but i can't remember it. it's a complicated medical word. sometimes you have to take a little medicine to make the medicine better. in a sense, it's a buying of time. >> the problem is worse if we go deeper into debt. >> i appreciate it. i need to let him answer the question. i appreciate you asking it. we have to continue to move. >> we hope zint mait doesn't ma worse. for the time being, you need a band-aid for the economy. and i think a reasonable treatment was it would be worse without it. and even harder to recover from it. let me push on this issue. another analogy is using if you

skidding, you turn into the skid and then turn away. but after the '97-'98 crisis, i recommend larry summer worried that global growth would plummet. the deal was the u.s. economy had a few chugging away and keep the rest of the world moving. and thus that air are a of very low interest rates was not to america going but to keep the rest of the world moving. and then the question is when you create that climate, which means that others were part of, have you created a set of interests that are hard to turn out at that skid? and that is maybe a different way of asking peter's question. but are we in a system where we've become addicted to a narcotic of cheap rates, that is fundamentally creating a different set of incentives that is unhealthy in the economy. >> i don't think -- having interest rates where they are is a symptom of something

nomadic. it reflects the difficulties we've had. it's an extreme shock to the economy which comes along pretty rarely. but let me go back to the asian crisis. all they're doing is observing it. i was a little bit involved in some of the asian countries at the time. we were trying to address. but i'll give you a reading which larry will probably disagree with. but we've been through the mexican crisis. we put a lot of money into mexico. i used to run these agencies. i never thought they would have that kind of money. but somehow they developed it out of thin air. and in a sense it was successful. mexico had a good recovery. but there's a lot of political

criticism about the amount of money involved and why do we have to get so deeply involved? and then the asian crisis comes along. as i observed, the first reaction of the united states government was to stay away. they said this is an asian problem. we don't want to get involved in every crisis in the world. so thailand is a small country. that's all right. we don't need to jump in. and then it got to indonesia. indonesia and imf got involved. not as accurately as it might have. didn't like the japanese getting involved. that's obvious. then it got pretty bad. then it went to korea. now we got a bigger country. korea got in trouble. and so while that was going too far. so we jumped in.

we helped marshal the banks together and take care of the crisis. indeed, that was a good example of relatively small country but in trouble. but that country getting in trouble, very sharp fluctuation in the exchange rate. its neighbors got in trouble. because that happened in thailand. why can't it happen to indonesia? why can't it happen to malaysia? finally, what happened to korea? and at the end of the day, it was felt necessary, quite correctly, to say united states better become more active in this. you can say so what? korea went into default. there were other countries that went into default.

they're not easy. maybe they should have gone in earlier. >> we're going to take the two questions. i know bob rub sin here. we're going to move immediately to the next session. >> he can tell you all about what happened in the asian crisis. >> two quick questions. >> there's been a lot of quantitative easing, a lot of purchasing of debt. how do you see this unraveling? all the money that has been used to remove -- >> you're talking about the federal reserve. >> right. >> let me get the next question. so debt and unraveling. yes. >> mr. voelker, you said something to the effect that any financial innovation after atm doesn't do too much good for the

economic growth. so my question is that in your perspective does financial innovation and the financial engineering contributed to the widening income gap in this country? and frequent -- >> great. >> let me -- we don't have time. we're'going to solve the income gap in this country as some of our budgetary problems and priority problems like financial innovation. we got in trouble by thinking financial innovation can solve real problems. financial innovation cannot solve real problems. it's not going to reduce the amount of consumption or savings. just forget about financial innovation. if there is anything we had enough of, it's financial innovation. [ applause ] on the federal reserve -- this

is a very unusual situation. the federal reserve has done things unimaginable a few years ago. much bigger balance sheet. all sorts of run up. but they do not present a compatible problem. they reversed what otherwise was a money creation and so forth. the problem will be the ever lasting problem of central bankers. do you begin tightening up soon enough when the economy is launching itself on an expansion? the temptation is -- it's always unpopular. whoever wants to tighten up at all when unemployment is still whatever it is. it can always get better.

so leave it alone. and you begin taking tightening moves however mildly that are likely not to be widely welcomed in the political environment. but that's what central banks have to do. so i think it's a central bank policy problem. it's not a technical problem. >> one last question as i look at my team, i don't see bob rubin and gregory yet here. i'm not going to go off the stage and invite elizabeth baker up. but i know in my digging around in your work, you are deeply concerned about the state of public administration, those that are tasked with stewardship responsibilities in the government. and in the next robust phase of your life, you have committed yourself to doing something about it and trying to change the quality and support for those people who are serving in government. i'd like to get -- i'd like to share with the audience or have

you share with the audience what you're doing on this. >> this is a long-time concern of mine on how they will improve public management and private administration. i think part of the problem and the ideological problem we have on both sides. neither is true. what we need is efficient government that can be widely supported and trusted. but that's what we need. government has reason to be efficient and effective and widely trusted. that is not what we have. they have taken a lot of these things asked. one of the questions is do you trust your government to do the right thing most of the time? it doesn't seem like the most

strict task you could imagine. do you trust your government to do the right thing most of the time? recently the answer to that question most of time is 20%. i think the most recent survey shows a low 20%. you're not going have a very healthy democracy if 80% of the people don't trust the government to do the right thing most of the time. to a certain degree of skepticism is expected. we can't be so skeptical that we don't think the government can do anything right. we can't trust them. you have to be suspicious of everything they do. i don't think the government is totally incompetent or anything else. i think there are areas where it's not very competent and hasn't done a very good job. we need to concentrate on those and do a better job. and help restore one almost and restore trust in government.

let me give you two obvious examples that our recent events. hurricane katrina. we have a big -- spent a lot of money on the office of emergency management. it was considered a total flop in responding to a hurricane that had been predicted. with good reason, i think. then a few years later, we have this oil spill in the gulf of mexico. i didn't hear anything about it. i didn't even know we had an agency which the purpose is to protect the safety of reliability of off shore drilling. we have such an agency. they obviously haven't been doing the job. these are two very technical problems. nobody's going to argue it makes sense to protect against oil spills and need a little guardianship. no one is going to argue we don't need a capacity for emergency assistance.

can't we do that function a little more reliablebly. >> well, i appreciate you sharing that. i see bob rubin here. chairman voelker, i will tell you that we invited you here today to talk about stuff we wanted. but when your institute is set up, we would love to invite you back to talk about the things you want to talk about. >> good. >> let me have elizabeth baker to take the stage. thank you again, chairman voelker. >> thank you very much. we now have second in our all-star lineup this afternoon secretary robert rubin, chairman of the council on foreign relations in conversation with gregory gep. he is the correspondent for "the

economist." thank you. >> i'm going to resist asking you what that joke was you just shared with chairman voelkel. i said you ask who is the better fly fisherman, paul or me. >> and his answer? >> we each have a different answer. i said me and he said he. >> i think this is an interesting time to have a conversation about the economy. how much has changed in terms of the perception of the landscape in the last two months. if we've been having this conversation at the end of december, early january, the

euro is on the verge of breakup. the euro zone is headed into a recession. the severity is the only question. in the united states, they seem ton barely growing, possibly on the verge of another recession. the fiscal picture here is all screwed up. we had enormous question marks about extension of stimulus, tax cuts, sequesters. and, of course, federal reserve wondering whether it had done enough, should it do more easing? but, you know what? a difference a few months make. good news on employment, retail sales. so just to lay the landscape, i'd like to ask you, are things -- are thing berz than the behavior of the markets believe? have we gotten past the biggest obstacles, the biggest risks for the global economy? >> there have been good numbers over the last few months and clearly a lot of analysts raised

their estimates for 2012. we also continue to face very large headwinds as we have strong headwinds for quite some time. the consumer is still not back where the consumer should be in terms of their strength. we have issues around housing, foreclosures and oil prices, euro zone, issues around china, stagnant wages, very large fiscal deficits to create a lot of uncertainty in the business community. we have state governments contracting and the list goes on and on. so my view at least is while i hope that's right, i think a consensus forecast is 2.5% for 2012 and it can be anywhere in a very wide range of that number. that's the short -- that is the

short term perspective that i have at least. >> if the last year and a half, the single biggest risk has been europe. i mean in 2010 when the greek problems first blew up, that caused a soft patch in american economy. it happened again last year. but so far it looks like one of the reasons markets are feeling better is because europe at least by the looks of it seems to be getting a handle on these problems. greece has consummated the first restructuring of a developed country's debt in history so far without a hitch. and the european central bank seems to have saved the day with unprecedented amounts of liquidity. you know, used to be said that european policymakers never missed a chance to miss a chance. has that changed? have the europeans gotten past the crisis in is it more likely to be better than worse in europe this year? >> well, let me respond. two parts if i may. >> yeah. >> i think it is much more similar.

i have run trading operations for many, many decades. markets tend to look one way or the other. they look at the positives or disregard the negatives. markets tend to go in both directions. in terms of the crisis, the euro zone cannot, in my judgment at least, a broadly held view, cannot continue in this form. there has to be major structure reform. i think that's going to take an extended period of time to accomplish. so the more immediate, the more pressing question is will they reach some stage of interim stability from which they can then last them until they do or do not get to a long term reform? what the ecb did was to buy time, though there is enormously serious question about whether they bought as much time as people think. i think they probably did not. but they did absolutely nothing about the wide, the long list of problems that they got to resolve if they're going to reach interim stability. and i think it's clear that the

leaders, the euro zeen leaders are behind the curve in dealing with greece. they remain the curve the whole time and they remain behind the curve the whole time. this very to get the regimes in place. they also have to balance that. they have to balance that against -- not against too much austerity and undermine the effects of the story themselves. austerity, rather. there are other issues like capital for the banks and so forth. very, very importantly, they have got to have -- they have to have reform in labor laws' restrictive levels because they're noncompetitive and take whatever measures they can to promote growth. >> another interesting question -- >> so my answer is -- let me give you a conclusion to that. i think a failure of the euro zone over the next year could have effects that are between severe and extreme.

i think despite the leadership that they displayed since this crisis began, i think the probability is the extreme -- the extremity of the consequences of failure unbalanced probably create more likely than not scenario that they will ultimately -- that they will meet their challenges within this period of time. that still leaves a lot risk. if they do not, and they keep going right up to the edge of the abyss and pulling back, when you get to the edge of abyss with the markets and unlying constitutions are unsound, you're taking a lot of risk that the markets get out of control. i still think that while the probability is somewhat greater than not that they will reach this period -- this place of interim stability, i still think there is a lot of risk. >> now you said a moment ago you thought the european central bank had bought time but not as much time people think. central banks can put a lot of liquidity in the system. it has the effect of being a gigantic band-aid. but just a band ate.

how effective has this been. how much time has it bought the europeans? >> there is a prevailing -- my impression is -- i spend a lot of time who live the issues. my impression is that there is a view now that the ecb bought a rather considerable period of time. at some point the markets are going to say, the inverse of moral hazard. these people are not agenting because they're being given this time by the ecb. they're not going tookt. then you can have a real market, a serious market problem. and the other possibility is that ecb continues to drive liquidity. now they have two traunchs, right? they can provide additional

traunches or some var yaiant of. if the system is flooded withure yoe with euros, that can cause a problem. and that could create a market reaction of -- to get rid of in effect all euro denominated securities and that, too, could create undermining of the markets. i think there are real limits as to how much time can be bought. i think they have a lot less time than a lot of people think. >> i think when people say yes the ecb bought time but as political leads have to create

more permanent solution, you have two radical views about what that solution is. that takes the form of really turning the screws down on spain and italy and country deficit now irrespective of economic consequences. it takes the form of fiscal kpakts. every euro zone member must amend the constitution to balance the budget. they look at america's debt ceiling and say, yeah, we want that too. >> they haven't looked very carefully. >> apparently. that said that, is what is going on there. there is another view that austerity is the wrong thing right now. what they need is growth and the best path to growth is to take the risk out of sovereign bond markets. the real problem that spain and italy have, it's no the deficits that are that extraordinarily large relative to, for example, the united states or great britain. the problem is that their bonds are treated like junk bonds.

people do not trust them to pay the money back. what europe really needs is a lender of last row sort. these are opposite. what is your view? >> i think you covered a lot of ground. the mutualization issue -- i think mutualization, what you call mutualization is going to have to be almost surely has to be part of long term reform. but that's going to take a long time to get there along with euro bonds and whatever else. >> but does it have to be part of the solution? >> no, i don't think it has to be part of the solution. i don't think it can be done in the time you need to reach an interim stability. i think there hawes to be austerity but you have to find a balance between enough austerity

to support or to win the confidence of the markets but not so much as to undermine the economy to the point where you're actually losing the effect of the austerity because you had such an adverse impact on growth. that will jupd miundermine gdp you'll lose confidence in the market. you have to find an in between place. i think it's that balance that each of the countries has to define. they have a large debt to gd ratio. spain didn't have a large debt to gdp ratio, but they had large debts. both of them are uncompetitive. >> let's move to the -- >> it is true. >> let's talk about the federal

reserve now. you know this week's -- this month's issue of "atlantic" has ben bernanke on the cover calling him a hero. mr. voelker was asked what the fed was doing. he said it's his policy not to comment on what other fed chairman did. so let me ask you, how -- how is the fed doing? >> look, i think ben bernanke has done a good job. he came into an impossible and complex situation and took unprecedented actions which combined with abyss so i think he's done a good job. so where we are today, what do you do going forward? and i think if the economy slows down -- look, even those who have a buoyant view of the economy, greg, are projecting growth something like 3% of gdp for this year which is still a slow recovery and projecting

unemployment 8% or something like that that is very, very high unemployment. the consensus forecast is 2.5%. that is even slower recovery. so clearly we have a long way to go. i was at dinner last night with a group of -- i'm not a economist. but it was at a group with distinguished economists. aun one of them guessed that qe 2 had 20 basis point effect. even qe-2 is it had very little infect on interest rates. i think given the rates were already so low it had very little effect on interest rates. much, much more importantly, whatever effect it might accomplish and i think it would be limited, i think that effect on interest rates would have relatively little effect on business and consumer behavior as compared to all of these other force that's are affecting what businesses do and what