wondering whether it had done enough. but you know what a difference it can make. the stock market hit the highest levels since the dark days. good news on unemployment. just to lay the landscape, i'd like to ask you. have things gotten better? have we gotten past the biggest obstacles and 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. hopefully that turns out to be right. but my view would be that we also will continue to face very large head winds as we have strong head winds and have 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, possibilities on 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 and 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. let's take europe for the moment. 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 zone 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 need confidence in the markets. 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 failure of 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 underlying conditions 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-aid 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.

the reason is twofold. number one, i think there is the risk that if the euro zone leaders don't act, that at some point, the markets are simply going to say it's the inverse of moral hazard. the markets are going to say the people aren't acting because they're it being given this time by the ecb. they're not going to react. 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 variant of it. if the system is flooded with euros, that can cause a problem. it does raise the question of how committed the ecb is. 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 what they have done is very constructive. i think there are real limits as to how much time can be bought. i think the real question is will the euro zone leaders finally do what they need to do and establish this interim stability or will they continue to kick the ball down the road. if they do, i think they have less time than a lot of people think. >> i think when people say yes the ecb bought time but as political leaders have to create more permanent solution, you have two radical views about what that solution is. the german view is austerity. therefore, that takes the the form of really turning the screws down on spain and italy and saying cut your deficits now. it takes the form of fiscal

impacts. 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 not the budget debts that are that extraordinarily large. to, for example, the united states or great britain. the problem is that their bonds are treated like junk bonds. these are opposite precipitations for the problem. 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. some people say there has to be this massive austerity in order to retain the confidence of the bond market. but i think you have to fine a balance between enough austerity to support or 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. so i don't think either answer is right. that will undermine gdp and 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. you say italy did you want have large deficits, which is trurks but they have a to gdp 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. i think that's different than the question we now face, which is from where we are today, what do you do going forward? and i think if the economy slows down -- even though 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. having said that, i think there's a lot of discussion about a qe 3. i think it would probably establish very little or

virtually nothing. 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 forces that are affecting what businesses do and what consumers do. we remember this notion of pushing a wet noodle. monetary policy eases, but the actors in the the economy, business and consumers don't want to act. that's going to determine what happens and having slightly lower interest rates will be irrelevant.

>> when the fed, you know -- >> and there are risks. >> that's exactly what i wanted to ask you. why not do it? what are the risks? >> i think the principle risk is that, i think we are tremendously dependent as an economy on confidence that the fed ultimately will combat 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. if we continue to have these kinds of fiscal deficits. 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 have not only the unsound fiscal concerns, but if you add a heightened fear about modernization, i think you increase the probability of that happening. though when that might happen is absolutely inpredictable. >> that brings us -- >> so this tl are risks. that takes us neatly into the next question which is the fiscal side. the second week of november. you just had a very presidential election. and now you're called into the president-elect's office and he says, bob or mr. or 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. all of president bush's tax cuts 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. slow recovery no matter what. i think all of this should be watching this with an enormous interest. 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 the debt ceiling problem in '95, which really had the potential of being a crisis. we would go into the chief of staff's office and we would try to figure out how to negotiate. what are the issues? what are they going to do? what are we going to do? i think there is more intense because the stakes are so enormous. in a sense, i think there are three possible outcomes, greg.

i may not have gotten to all of them. i don't know the odds to put on that but there is a realistic chance. the parties will decide to work together in some fashion that then produces a constructive and serious response to our fiscal challenges. now i don't know what odds to put on that, but i think there's a realistic chance, especially that polls show there's an 84% disapproval rating of congress. there are some undecideds. that's the truth. 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.

undo 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. and you have the middle class tax cuts go up, which certainly is not what the democrats want. and the higher income tax cgo u. so i presume the probability of that happening is relatively low, but i suppose it's not inconceivable. >> does it matter who is president? of the three scenarios, let's say it's 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. i think very well of him. that's what i think. there are people who have a different view. i think a divide of government would offer a higher probability to a constructive solution than a government in which all three parts of the government are control controlled by the same party and the reason for that 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 that will happen without our acting, then they're going to be forced to work across party lines by definition. if all three are in the same party, then they might decide to work across party lines. i think there's a real chance they might because it might be that that party isn't going to want to take sole responsibility for the difficult decisions they are going to have to make.

that's also a possibility to do the reconciliation procedure which only takes 50 votes in the senate?issues. i think divided government has a higher chance of producing a constructive result. one party control the votes will also do so, but i think that party may decide we don't want to take sole responsibility for these decisions. but to use the reconciliation procedu procedure, where the senate, to adopt something as into the specter. >> we have i think about ten minutes left. i know they'll take maybe one, two questions, but if some folks want to go to the microphone, seven weeks is not a lot of time to like fix a physical problem that has been developing for decades. tax reform, as i recall, took

years. the final process was the result of something that had to be put in before election. what are the odds that even with the best of intentions, we can get what needs to be done before the sequester kicks in, before all that other stuff happens? >> i think actually, it could be done, but i think your point is well taken. you can't get a comprehensive tax reform in that time. but i think what you could do, i think bowls and simpson, even if you don't agree with the specifics, i think that they did the country a tremendous service by setting out a frame work. so that framework was years to g point where the debt, the gdpratio stabilizes and declines. you could, i think, put together a structure of changes that

would get you to a ten-year program that stabilizes debt to gdp, but with a few simple measures. and you probably want to defer theati implementation of that fa couple of years and you certainly want to have robust public investment within that conte context, we've got to have a whole host of other programs if we're going to be competitive. if it takes you a few months into 2011 to do it, then what you need is some kind of a bridging mechanism. i think there are various legislative strategies you could put in place that would bridge it to the point you did that. then the portion is always that the first bridge, then can't agree, then kick the ball down

the road. i think you could probably put in place a bridging mechanism, which would increase the probability. >> how do you go from building a bridge to kicking a can over it, right? >> you're mixing metaphors, but your point is never the less. >> get away with that one, but let's start over here. please state your name and affiliation? >> i'm bonnie, an economics reporter at the "huffington post." mentioned there may be a marketing crisis, butst treasury bond interest rates are very low right now, so why do you think we have to deal with it soon and do you think -- >> i'm sor ary, what -- >> yeah, soon, and also, do you think that we should have a public investment program right now that eventually could help stimulate the economy? maybe raise incomes and eventually help raise tax revenues? >> let me, right, i think i got your question right.

give you a short answers to both. within the context of reestablishing a sound system regime is absolutely essential, i said before, that would bust public investment. we need to be competitive with china, et cetera. we have to do the same thing. basic research, infrastructure and a whole host of other areas. i think we have to make room for that. now, i think the probability of a fiscal crisis in the short-term is very low. but i think the probability of a serious set of adverse affects, at some unpredictable time is extremely high and within that context, one of the kinds would be a severe bond and currency market crisis. and whether that's a year off in time or five years off in time or ten years, there's absolutely no predicting. one thing i can tell you for sure, markets can change

dramatical dramatically. almost instantaneously. i think it is imperative that we act and that probability increases as time goes on. why are rates so low right now? because there's very little private investment. even to some extent out of china. and also, there's a lot of risk aversion. not only do we have mobilized rates, to make our fiscal situation more serious, but i would not take one bit of comfort from that in terms of whether the probability is that at some point, that may be well off in time or near in time, that we will have extreme, we have a highlight of adverse affects of one kind of the other. and within that context, a serious risk of a severe crisis.

>> but would you prioritize it as investment or deficit reduction? >> i think that's a false choice. it's a good question. i just think it's a false choice. i would have, put it place, i think -- and i know president obama's did. he gave a speech in april, then gave a speech labor day and then the monday after, and they both did the same thing. i think erskine did the same thing, which is i would get back on track. increase revenues, discipline priorities and having discipline about priorities and reforming entitlement to sound financial footing, we have to create room for robust public investment if we're going to be competitive. he's actually right. we're going to deal what is a serious problem in this country. stagnant wages and increasing in

equality, it is unhealthy economically and it is an important problem to address. >> we are almost out of time, be but came up chairman volcker, there's an op-ed in today's "new york times" that i guess -- that you ran for a number of years before you held public service and he basically argued that the culture of his firm and wall street had changed dramatically. i just wondered if you had any thoughts on that whole notion and more broadly, we've been through, after the crisis, enormous change, financial reform of all sorts. do you think reforms put in place are adequate and do what is needed to avoid what we've been through? >> i didn't read, i've heard about it, i left by the way december of '92, but any way. no, that's not a comment about

anything. i'm just saying. i had been away for a little while. i had not read the article. good question. we just have been through a mega crisis that virtually nobody saw coming. function of a lot of forces operating at the same time. i lived my whole life in risk. department see it. the regulators didn't see it. analysts didn't see it. and that by the way, is one of the reasons it was so serious. if a larger number of people who have seen it coming, it would have been a more -- reaction, if you will. the financial system had far more -- i'm sorry, far more downside than -- we clearly needed to have serious financial reform to put in place. managers that would product us k onag the whole, what we've

done, is sound. absolutely was the right thing to do. i think the various provisions on derivatives r were the right thing to do. i wrote a book that came out in 2003. good book by the way. it's available in paperback. what i said was that the real solution -- did pose a lot of serious problems and i thought that the most effective approach and i still think this, and hasn't yet, could be margin of capital. but i think what was done was right. the volcker rule was much deb e debated. i think the big question is how is the distinction between the trading and market making going to be defined. i noticed the other day, the regulators have now deferred their decision on that. it's a very hard line to draw and immense support in terms of