consumers do. business even consumers are going to determine what happens. >> when the fed, you know -- >> and there are risks. >> that's exactly what i wanted to ask you. i think we're dependent on confidence that the economy will combat bad inflation as paul voelker did when he became fed chairman. i think the risk if you keep monetizing, i think the risk is

that the global markets lose confidence in the commitment to combatting inflation and become concerned that you're going to monetize the debt. and that creates two problems. one is -- not from inflation right now. probably inflation right now is extremely low. but that is two problems, greg. one is it feeds inflationary expectations over the long run. and number two, if we don't deal with our fiscal situation at some unpredictable point, i think we're going to have severe adverse effects and within that context, the real possibility of a severe market crisis. if you add a heightened fear about modernization, i think you increase the probability of that happening. when that happens is unpredictable. >> that brings us --

>> so this tl are risks. that takes us neatly into the fiscal side. the second week of november. you just had a very presidential election. and now you called into the president-elect's office and he says, bob or mr. sector whatever position is. >> sir. >> sir. that's not what president clinton used to call me. >> in seven weeks time, a number of things are going to happen. payroll tax cut will expire. and there is another 4% of gdp. there are a couple of other dogs and cats in there. by the way, we're about to hit the debt ceiling. you know, and your former colleagues at treasury tell us we only have four or five weeks. that takes us to january first.

what do we do? >> greg, i think -- adding a few numbers. i'm not sure we got to the same place. i think if all these things happen that you describe, you have a 4% or 5% of gdp hit already and gdp is already probably more like in the more four or five. and gdp is -- growth is already going to be in a situation when grows already moderate at best. i think the post election period and the lame duck or the first couple months of january are enormous importance to the country in terms of policy. i also think that it is a period that is going to be a period of intense political strategizing and negotiation. i remember during the what are

the issues? what are we going to do? i think there is more intense because the stakes are so enormous n a brad sense, i think there are three possible outcomes, greg. i may not have got tone all of them. i don't know the odds to put on that tlut bubut there is a real chance. there are some undecideds. that's the truthment maybe if we

have enough incumbents lose, maybe a whole bunch of effected officials will recalculate their calculus and decide maybe it will be better to be more serious about governance. so i think that is a realistic possibility. another possibility is just kick the ball down the road. take the tax cuts, extend them for x period of time, whatever it is. undue the sequester in one way or another. i think that will be a most unfortunate outcome but certainly possible. and the third possibility, though i think this is a relatively low probability, is that they do absolutely nothing. they need to kick the ball down the road nor have a constructive response in which case all the things you said happen and we have a 4% or 5% negative impact on gdp.

>> does it matter who is president? of the three scenarios, let's say president obama? by the way, that will probably be with at least one if not both of the houses, chambers of congress in control by the republicans. >> okay. i would like to see president obama re-elected. that's what i think. there are people who have a different view. all three parts of the government are controlled by the same party and the reason nor is this. if you have a divided government and you face the scenario that you outlined before and if each party looks at it and says we really do not want the outcomes th our

acting, then they're going to be forced to work at cross party lines by definition. that party is not going to take responsibility for the extraordinarily difficult decisions they have to make. there is a possibility they'll use the reconciliation procedure which only takes 50 votes in the senate? n. which case they can do something that is tilted very much toward their side of the issues. so i think a divided government probably has a higher chance of producing a constructive result. we don't want to take sole responsibility of making these decisions. but it is using a procedure where you don't simply go to the senate to adopt something that is more toward one end or the other of the spectrum.

>> i have one or two more questions and then folks can go to the microphone. seven weeks is not a long time to fix a fiscal problem that is developing for decades. tax reform took years, you know, the fim process was the result of something that had begun before the elections. what can we do before all that other stuff happens? >> i think it could be done, greg. i think your point is extremely well taken. you can't get a comprehensive tax reform in that amount of time or entitlement reform in that time. but what you could do, i think erskine bowles and allen simpson did an enormous service by setting out the framework even if you don't agree with the specifics, but even if you don't

agree with the specifics, i think they did the country a tremendous service by setting out a framework. so that framework, as you all will remember, was ten years to get to a point where the debt to gdp ratio stabilizes and then slightly begins to decline. you could put together a set of structures that would get you to a ten-year program that would stanlize debt to gdp with a few simple measures and probably want to defer the implementation of that program for a couple of years to give the recovery more time to get traction and you certainly, i at least think, you want to have robust public investment within that context. because as bernie schwartz and others can tell you, we have got to have infrastructure. earch. we have to have a whole host of other programs if we're going to be competitive. and i think you could do that.

there are legislative strategies that could put in place that would bridge you to the point that you did that. the dafrpg we are bridges is they first bridge and then they can't agree and then you get to the point where they kick the ball down the road instead of acting. i think you can put in place a bridging mechanism that has real teeth that would increase the probability that they have to act. >> how do you prevent them from building a bridge and then kicking a can over it? >> you're mixing metaphors. >> you mentioned there could be a market crisis if we don't deal with our fiscal problem soon. but u.s. treasury bond interest rates are very low right now. so why do you think we have to

deal with them soon? and do you think we should have a public investment program that could help stimulate the economy, maybe raise incomes and help raise tax revenues? i think within the context of re-estabilshing a sound system is absolutely essential to have -- i said this before actually, to have robust public investment. we need to be competitive with an emerging market world, china and et cetera. and they're investing heavily in these areas to increase productivity. we have to do the same thing. i think the probability of a fiscal crisis in the short term is very low. i think the probability of a serious set of adverse effects as a result of our fiscal situation, at some unpredictable

time is extremely high. and within that context, one of the kinds of adverse effects you could have would be a severe bond and currency market crisis. whether that is a year or five years or ten years that is uncertain. one thing i can tell you for sure is markets can change dramatically. and almost instantaneously with no notice. and so i think it is imperative that we act. and that probability of a crisis increases as time goes on. why are rates so low right now? because very little private investment. a lot of money flowing into this country from all over the place, because the problems in europe and even to some extent to china and concerns in china. and also because there's a lot of risk aversion. so there's been a desire to have treasuries. but i think not only do we not normalize rates, i think we return to normalize rates which makes our fiscal situation more serious, but i would not take

one bit of comfort from that in terms wlf the probability is that at some point though that point may be well off in time or nearer in time we have a high likelihood of adverse effects and we can go into that in a different time and in that context, a serious risk of a severe crisis. >> would you prioritize deficit reduction? >> i think that is a false choice. it's a good question. i'm not being critical of the question. i think it's a false choice. i would have -- i would put in place -- i think erskine did this. i know president obama's did. he gave a peaspeech labor day a then after labor day. they both did the same thing. i think both these -- i think erskine did the same thing. ch which is i would get ourselves back on track fiscally. we have to significantly increase revenues and have discipline about priorities and

by significantly increasing revenues and having discipline about priorities and reforming entitlements that on sound financial footing, we have to create room for robust public investment if we're going to be competitive and also if we're going to deal -- you're right f we're going to deal with what is a very serious distribution problem in this country. stagnant, medium wages and increasing equality, it is unhealthy economically and certainly unhealthy in terms of social cohesion. i think it's an important problem to address. >> we are almost out of time. i want to sort of take a prerogative of asking the last question. it came up with the chairman. there is an op-ed in today's "new york times" by former executive from goldman sachs, a firm you ran for a number of years before you entered public service. and he basically argued that the culture of his firm and wall street had changed dramatically from being client focused to firm focused. i wonder if you have any sort of thoughts on that whole notion and more broadly we've been through a period of enormous -- after the crisis, of enormous,

you know, change financial reform of all sorts, of all, you know, the voelker rule and so on. do you think the reforms put in place are adequate and do what is needed to avoid what we've been through again? >> basically we had -- i didn't read the -- i've heard about it. i haven't read it yet. i left, by the way, december of '92. but any event -- no, that's not a comment about anything. i'm just saying i've been away for a little while. i don't have a lot of feel for it. but i had not read the article. let me comment more generally. think it's a good question. all your questions are good questions. but it's a good question. we just been through a mega crisis that virtually nobody saw coming. there was a tail risk and it was a function, in my view, a function of a lot of forces all operating at the same time. the big institutions didn't see it. i left my whole life with tail risk, i didn't see it. the analysts didn't see it even congressional oversight committees didn't see it. virtually nobody saw it. that is one of the reasons why it was so serious. because a larger number of people had seen it coming, we

would have had more of a preparatory reaction, if you will. you wind up with a financial system that had far more down side -- financial markets, i'm sorry, far more down side than virtually anybody anticipated. we clearly had to have serious financial reform to put in place measures that would protect us against the level of systemic risk virtually nobody thought we had. and i think on the whole it's been done is sound. i think the consumer protection agency absolutely was the right thing to do. not only protect consumers but protect the systemic risk. having said that, i would do something different. i wrote a book that came out in 2003. it's a good book, by the way. and it's available in paper back. what i said and i thought the real -- i said i think derivatives did pose a lot of serious problems. i thought the most effective approach, and i still think this, hasn't been done yet, the most effective approach is marginal requirements and capital requirements.

i think what was done was right. the rule is a very complicated issue much it's much debated. the big question is that the voelker is the distinction between the market making and they deferred their decision on that. and it's not surprising to me. it's a very hard line to draw. immense support in terms of how our markets work and what the structure of the financial system will be. >> thanks very much. that's all the time we havement really appreciate your time. >> thank you. >> thank you. that was terrific. thanks so much. so straight on to our next interview which will be between larry lindsey and kevin delaney. it is my great pleasure to introduce for the first time kevin delany who is a brand new colleague at at lalantic media

company. he was managing editor of "the wall street journal" online. he was responsible for all of the editorial content on the journal's website and oversaw the site during a period of very rapid expansion and readership and in revenue and also to migration and new platforms such as the ipad. earlier in his career at the journal, kevin spent about ten years reporting including in san francisco covering internet companies such as google and yahoo and facebook and five years in the paris bureau. he was a staff reporter for smart "money" magazine before that. he is a graduate of yale university with a degree in history. delighted to welcome up here kevin delany and larry lindsey. thank you. >> thank you everybody. former director of the national economic council. we're going to dive right in. >> that's great glch. >> there's been a lot of discussion about how difficult the last decade has been in

global markets, global economies. we don't need to belabor it. what is your diagnosis of what we have just gone through, the problems that we've been facing? >> well, you know, i think the guilt that we should all have for a little bit of hubris is in order. i started talking about how the economy had changed, how we were in a new normal, how, you know, we conquered variation. and all that tends to do, you have a long period where everything is moving up. people tend to take more and more risks because the longer it goes on, the more they think things will keep going up. and the risks bumeilt up. we had a huge crash in early 2000. it had a bad economic effect. we pulled the textbooks off the shelf. they said fiscal monetary stimulus. we didn't. we started up again. and wow, everything worked. and then only built our

confidence further. that near death experience, having survived it, made us even braver. we all took braver. we all took more risks. and i thought it was very interesting in rob rubin's estimation, nobody saw it comes. we all the bought into it. we're all in the establishment. people in this room center left establishment. i tend to hang out with the center right establishment, but we're all the establishment and we blew it. we're the ones supposed to be keeping an eye on it and we didn't. in fact, we enjoyed it. we enjoyed it in the '90s. we enjoyed it in the 2000s. we weren't being skeptical. my message for today is if t public out there is mad at us. because they hold us collectively responsible. you know, the usual line in washington is to sort of tpoopo it. they don't know what they're talking about. they actually do. if i could leave you with a thought today is that we all in the establishment need a little

bit more introspection because we did a lousy job and we better start focusing on the quality of job we do rather than saying, oh, it was the other guy's fault. >> so that's a very -- a very laudable goal. what is the key to actually making that happen, what you're talking about? >> what did the shrink say? the first way to solve a problem is to recognize it? so simply talking about it is important. and i think each side has to start holding its own office holders accountable. publicly and privately. you know, if you don't know my history, there's a reason i'm in the private sector. and the -- i think we have to do it. we each have to hold our own sides accountable. because they're the only ones that will listen. i can tick off a bunch of examples of how we've neglected the quality of policy. these aren't hard.

i don't need a calculator. we can talk about 30 seconds of mental math will give you an example of just how bad it is. let's start with obamacare. i'll pick on the left and then i'll pick on my side. every private sector estimate of what's going to happen on january 1, 2014, has the costs of obamacare way, way higher. it's very simple. i as a firm have a choice of buying my employer $6,000 worth of coverage myself. that's sort of a low bound. or paying the government $2,000 to take my employee off my hands. in fact, i could take the $4,000 savings and split it. give the employee a $2,000 raise, but $2,000 more to my bottom line and shove the rest on the taxpayer. this is very simple. private sector estimates are that 30% of private sector plans

will fold. this is -- may not be "new york times" but it's commonly known. okay. so we're going to lose $4,000 on each of 30% of workers in the workforce. okay? that's 140 million workers times $4,000 each. this is real money. right? that's mental math. obama care is going to fail on january 1, 2014, or shortly thereafter. why aren't we holding him accountable for that fact? or one aspect that i guess this would be more bipartisan, although the guy i work for pushed it. immigration reform. we're all for immigration reform. we all want a path to citizenship. i'm for it. i've got three kids that were adopted from overseas. i'm very much for immigration. part of my family. i went through the naturalization process with them. if you want to go to arlington to where i had to go to go through it, doors open at 8:30.

you better be there at 6:30 and get in line or you don't get a number that's sufficient to fwet you to the head of the cue for the rest of the day. that's what's going on in the ims. we now process 800,000 people a year. let's say we double the capacity of the ins so we can do another 800,000. if we built a fence, no more illegal immigrants, just to process the 11 million who are there, no new additions, it would take us 14 years. how is it that we in a bipartisan way in the establishment are putting forward an immigration proposal that in 30 seconds i've described as mathematically impossible to carry out? we should be ashamed of ourselves. we should get our math right. it's really no different than estimating the cost of the iraq war or what have you. on each and every grounds, unless we start holding our own people accountable for simple, basic math, we are going to be

digging our hole deeper. i don't care how you solve the deficit problem. i know we're headed there next. but we will not solve the deficit problem unless we start making smart decisions, getting quality out of our money and not just worrying about a few hundred billion there and a few hundred billion here. >> before we talk about deficits i want to talk about the ability to reach clarity on some of these issues in a presidential election year. you were an economic adviser to george w. bush during his campaign. you've studied the dynamics of campaign promises. and then actual administration follow-through on them. what's your analysis of the current climate for -- for realistic economic policy as part of the campaign? >> well, right now neither side has a campaign in place that is realistic. on the republican side, they're preoccupied fighting each other and aren't devoting the

resources there, though i think they should. the president has all the resources in the world plus the whole government and he's not doing it either. so you don't, for example, put forward a budget that has a print for one year's economic growth of 4.5%. that's la la land. no president should do that in a credible way. and the media, especially the sympathetic media, should be calling him on it. because that's who he's going to pay attention to. so i think both sides can do better than what they're doing. in 2000 -- and i'm not sure why it was true in that case. we had an internal forecast. that forecast actually turned out to be closer to the mark than the one that the cbo was using at the time for the economy. we had a budget. we had to spend money. we actually imposed it on ourselves. i'm not saying everything was perfect about the campaign. but i think that at least we gave it a good faith effort. and we were ready with -- we

predicted the slowdown. the slowdown was worse when we came to office than what we had thought. but we had a policy in place to deal with it that fit within the budget constraint. you know, i don't think it's that hard for a campaign to do it. particularly if it's insisted that we do it. now, one -- one way suggested to me that the reason we had to do it was that there was a lot of skepticism about president -- then governor bush's mathematical skills. so maybe we were being held to a higher standard by the media and sort of had to counter that. and i think that proves to me why each side should start holding its own accountable. if the basically sympathetic media started holding this president accountable for the kind of numbers he's putting out, those numbers would improve, i guarantee you. if fox news started expecting the same thing of romney and santorum, their numbers would improve as well. so i really think that, you know, we in the collective

establishment, if you will, the blame is on us. we're not holding our own guys accountable right now. >> so in a perfect world, what are -- what are a few of the key issues that you would want addressed during this election year, brought to a national discussion, voted on, ultimately? >> well, i do think that the key question we face is how to get our fiscal house in order without wrecking the economy. >> mm-hmm. >> if you take out the loony a rit me tick and you assume we basically keep doing the same policy that we have been doing, we will have greek level deficits for the rest of the decade. we're running about 10% of gdp. maybe it dips down to 8%. but basically that's where we are. that's the numbers.

that's not sustainable. we often say that, you know, if greece could have only printed its way out, it would have been fine. well, we have the printing press already committed. i don't know if anyone's noticed, but the fed has committed to holding down long-term interest rates as well as short-term rates. they're already doing everything they can. let me put the size of the problem into perspective. last year uncle sam borrowed an average cost of 2.5 percentage points. the average in the last 20 years, which was sort of, you know, after the new normal came in, low, basically low historically, was 5.7 percentage points. that 320 basis point difference times the size of the deficit at the end of the decade, debt at the endt