our data which enabled you to embracing that particular vehicle right away because there construct the voting records and the individuals who were voting were very few initiatives which going all the way back to the have the wonderful capability of first congress. getting republicans and what it shows is that this distribution where you are democrats on board the exact getting the big lump in the legislative language interpreted republican caucus and then the differently. i mean, what's in the democrat caucus and nothing in between, that goes all the way bowles-simpson initiative is a back to 1850. that is not what the problem is. trillion dollars in tax the problem is despite the fact that we have had this bivariate expenditures. tax expenditures to republicans are subsidies. distribution up until very eliminating them is an excellent recently there was always a political maneuver. capacity to reach across the for democrats it's an increase aisle and come up with in taxes on the rich. compromises. because remember it's in the now, you can't get it better nature of the democratic society than that for getting some form in which we have all chosen to of legislature to compromise. live together that it must i think with the ryan amendment compromise. and the question is it is not to bowles-simpson which

compromising principles but addresses medicare where it tactical which enables change. wasn't addressed it's >> we found that capacity after november of 1963 we found that bipartisan. capacity in 1986 with various it's the ideal vehicle which commissions that you have been on. how do we get that capacity won't get us fully out of this. back? >> that to me is the fundamental it would have when it was question. i ink it's important to originally offered. >> you center on 2030 and you recognize what it is. the basic problem here is to show higher yields and lower bond prices on a path to 2030. recognize that compromise is you mention a bond crisis. implicit in the democratic somewhat of the tone i would society and that unless you are hear you would find a bond going to do that, assuming you crisis to be constructive for washington even as it could be don't have super majorities destructive for our retirement which will work -- plans and for new york. why haven't we seen it now? >> can we get an election prediction out of you right now? >> yeah, but it wouldn't be are they correct? interest rates are low. worth anything. >> when you look at the politics there isn't a crisis? i want to get you going this

let's bring it to this fiscal morning. >> interest rates are low before cliff that we have. do we face a fiscal cliff? they go up. >> well, legally, yeah. at the top of any speculative i mean, obviously one doesn't boom and i'm not saying the bond market is a speculative boom you have to look far to find out there is a huge fiscal cliff out there and it is basically a result of kicking the can down find just before the top bids the road. outrank offers of that people and this is part of what particular product very the current environment is, significantly. and all you have to do is don't wish to inflict pain on remember 1979. anybody under any circumstances. i remember it vividly. and the problem is we are not the treasury, the ten year note going to get out of this had gotten up to 10% yield and the general consensus at that political and economic mess without some pain. point was the united states is there is just no credible not an inflation prone economy. scenario which does that. this is as far as it can get. and the endeavor on the part of both republicans and democrats the next three months it went up as soon as an issue comes up 400 basis points. where somebody is against it you cannot anticipate changes. they back away. in other words, basically to say that was never how we functioned

in this country. that making a historical and unless we break that habit i statement namely the interest think we're in trouble. rates have been low that >> we had bowles-simpson. therefore they will stay low. >> critically here and it does we heard timothy geithner just link into fed policy and i know you don't speak of fed policy hesitate as he said we would get after 2006. back to bowles-simpson. do you envision giving your are you optimistic we could historical study that when we get higher interest rates it revisit the work of will be sudden, abrupt or will bowles-simpson after the election? >> i remember saying one of the it be a path that any institution including a central sunday morning shows, probably bank can get in front of? >> the general view of market "meet the press" the day after participants and investors and bowles-simpson came out. i said something of this nature. this was the case it wasn't the i was asked whether or not i thought it would pass the house and the senate. and i said the answer is yes it's only a question all it investors weren't aware of the fact that there was potential occurs before or after a bond market crisis. i still hold to that view. instability there but remember

i think the worst mistake that the president made was not citi group must keep dancing until the music stops. what the problem is that nobody could move their portfolios out for fear of losing competitive position. and they all thought that because of the huge liquidity in the market and you were getting huge liquidity on synthetic ceos you couldn't supply enough of them. so the general view amongst most was we will have time to get out when the music stops, so to speak. they were wrong because when liquidity disappears it doesn't disappear incrementally. it disappears suddenly. and this is what i think we have to confront. i don't have a clue when or in

fact if it is geeg happen. i grant there is a definite possibility. one thing i can say for certain that interest rates will rise over the next ten years. ten years from now it would be higher. i would say five years and i could move it closer. but markets don't behave in the simple way we would like them to behave. >> our viewers and listeners here in the audience are all buying bonds. there is no question the bond flow now. before we move on to another topic, are we on a bond bubble where we see the asset flows in extraordinary and we need to get an equity prediction from you. does that mean stocks are cheap? >> stocks are cheap just look at the equity premium.

the best estimate is j.p., morgan. that's at the highest level in 50 years. and that essentially means that with earnings still moving up at least they have until very, very recently, when you run up against very high equity premium or in the more simple configuration a very low price/earnings ratio there is no place for earnings to grow except -- the point that i have been making recently and expanding on it is i think we are under estimating the extent of equity stimulus as the fiscal stimulus in driving the economy. >> you wrote about the need for good equity markets. that's been more of an effect here than what we have seen from

capitol hill? >> i think we don't recognize how important the equity markets are in a market economy. we lost globally during the crash $35 trillion in listed corporation value. equity is the collateral of the financial system. it's not only the equity amounts but it's also the fact that where equity prices are essentially tells the bond holder how much buffer is there between what he holds and bankruptcy. and the bigger the market value increase in equity the greater the quality other things equal of what bonds are. so for example you could have a corporation with technically a bbb yield and then the equity

price doubles. and the equity buffer rises. what does it do? it improves, it raises the bbb to maybe a aa or something like that. so equities play a hugely important role which i think is grossly under estimated. one of the things that i'm working on is trying to estimate historically and do a little leak of the metrics on this as to what the relationship of basically equities and equity premiums are in the real economy. we do have this discussion with the so-called wealth effect but that relates mainly in most of the discussions to consumer expenditu expenditures. it's a far broader issue than that. i think what we will find is every time stock prices rise especially in the context of very high equity premiums you

see a fairly quick response not only in equity prices but in the economy. >> i want to get to your research but i want to squeeze this in because it is the debate of the moment. we see a need to reflate. we see others talking about one form of stimulus is to reflate the economy. what does reflation mean? >> it means somebody else is lending you money and your debt is rising. if you think in terms of the issue, for example, this big debate that is now going on in europe where they are now talking about pulling back the austerity issues i have no objection about doing that butd you have to remember that to the extent that you're pulling back on austerity somebody else has

to fund that which still exists. if you are pulling back from austerity it essentially means that the on going deficits pretty much across the whole spectrum opens up but that means somebody has to fund it. up until now what has essentially happened all the various alphabets and vehicles being used to fund this, it's essentially european central bank which is doing virtually all of it. and what that means is that the ecb asset levels are rising significantly and the fact that they are able to do that is that we have global economy which is partially stagnant and will continue to do so because i

think the degree of risk eversion in the system is so high that you cannot get a gross rate going more in the united states more than 2.5%. >> to our viewers and listeners that don't have the sophistication of the interdependencies. at some point as you mention mr. prince the dancing stops and you have to sit down and find the chair. if the ecb continues to provide liquidity where is their chair? how do we clear or finish off the crisis in europe without financial liquidation and massive consolidation? >> remember, the ecb is supplying the chairs. that's what it is doing. >> so we get endless chairs. >> so far. i must admit our friends at the bank are really unhappy about

what is going on. looking back at history you just do not get this type of very substantial expansion in monetary base without ultimately triggering inflation. the only problem basically in forecasting this is it can go on for years. in the end it happens and changes at the most inconvenient time. i don't see essentially how we are going to get through the european situation at this stage because right at the moment they are caught in very deep dilemma where they are fully aware of the fact. the people at the european central bank, the treaty is a very clear cut vision of what that bank is supposed to do and

not supposed to do. the language has got to get awfully fluid to reconcile what they are actually currently -- everyone is uncomfortable but they all have mr. prince's view of what can happen or hope. you know, everyone likes to say we should put off the actual tough adjustments until the economy can take it. there is a presumption in that statement that the markets will allow us to do that. and i'm fearful that the markets are going to say no at precisely the most inconvenient time. >> those markets, are they vigilantes? >> yeah. >> when you look at europe and you and i have talked about this in a number of times we have spoken and met, you continue to

go back to what i call cultural economics, not the purity of model making or behavioral economics, cultural economics in europe is different than in america. give us the nuance there not only of peripheral europe but eastern europe as they try to amend to the culture of germany. >> look at east and west germany. you had basically two countries starting at the end of world war ii essentially from scratch. same language, same culture, same history. and they grew up obviously when the berlin wall came down productivity level in east germany was 1/3 that of west germany. when the merger occurred there was the recognition that it was

going to take a significant transfer of funds to maintain the system. that flow is still going on. it hasn't fully come together. in europe it's even a broader more difficult problem. i did a piece for the financial times maybe six months ago. and i also done an analysis which i published several different places which really takes the issue of observing that when as i recall and i used to sit in on the meetings which formed the european central bank, i was part of the g-7 and i would be trying to keep my mouth shut. >> were you successful? >> no. the problem basically is that

there was a general expectation within the group before the euro began, a recognition that there are cultural differences. but the conventional wisdom was thatthe euro was impleme implemented the italians would behave like germans. as i recall it the ten-year note yielded 500 basis points two or three years before the euro went to place. by the time they actually moved into the euro that spread had gone down. so the markets believe that culture would be coalesced, enforced by the existence of a common currency. regretbly they are mistaken. what we found was it was a

global boom which kept theureo system together. >> we can talk on this for hours but because of time i'm going to move on. you and your nonretirement have been looking at elderly assets. what is an elderly asset? >> this is my explanation of why the american economy is stagn t stagnant. >> the things we talk about in the media right now are off the mark. >> i think so. >> thank you. >> you're welcome. >> what is wrong with the american economy. you can look at the gross domestic product and instead of looking at it as personal consumption expenditures, what kind of terms of how long the

asset which is spent will last? hair cut lasts a month. the software will last three to five years. structures, industrial structures 30 years. residential much longer than that. all of the weakness in the american economy from where you would expect it to be at this stage is in assets whose life expectancy or durability is greater than 20 years. and what that is if you think in terms of structures as 7 or 8% of the gdp and you cut it in half you have 3% to 4%. those 3% to 4% translated to the unemployment rate explains the whole difference in what the

weakness in jobs is. the problem here is that the assets under 20 years are behaving pretty much the way they always have in every recovery in a post world war ii. >> we need government policy to clear the market for those longer age assets or to incentivise the building of those assets. >> i think they tried to do too much and it has been counter productive. what you need is -- before i got into government i used to do a lot of work for major corporations and capital investment projects. what we used to do is we would get the product managers and they would give a forecast of the new product and finance people would estimate the average expected return. as a result of that we quickly threw out all potential projects which didn't earn the rate of return of a corporation.

but that then moved you to step two which is the big determinant which is what is the variance, the spread of range over expected outlookz. for example, if you are expecting an average rate of return of 20% but it varies between minus ten and plus 50 that project was invarably shallowed. the reason we are getting this in long term investment is if you look at the cash flow of american corporations and the proportion they choose to invest in long term iliquid assets that ratio is at the lowest level since 1935. >> is that investment going abroad? is the issue here with the studies from crisis we are

dealing with not only globalism but a reaffirmation of investment pushed abroad? >> very little. investment has been doing rather well in american affiliates abroad but it hasn't accelerated and you cannot very readily take the orders of magnitude that we are looking at changes in the united states and in any way ascribe them to being shifted abroad. >> if i look at the medical charts that are median duration of unemployed the spikes that we have seen they would tend towards less educated individuals. how would they fit into incentivising business to structures. we missed a lot of construction jobs. >> it's not only construction jobs which obviously are very substantial part of the job loss but it's all of those secondary and tertiary related issues.

remember when you bring the level of building down by half it had an impact on the hold multipliers. so it shows up as unemployment not only in construction but in the whole series of other industries whose general level had been brought down by the fact that constructions impact on income and then consumption and other investment has been so prevalent. >> how do you propose that we jump start this so we start building structure snz. >> i think we stop doing what we are doing. let the markets calm down and i think the endeavor to actually try to support markets is counter productive. when you have an unbalanced market anytime whether it's stocks, bonds, copper, zinc, whatever, that market will

readjust one way or the other. if you try to support it you will merely delay the adjustment process. i think it's intruktive one of the only areas in which we endeavor to support, we have not endeavored to try to support prices or values in one way or the other is the stock market. the stock market is the particular area of the economy which has been untouched and come back the most. it is not an accident. we have to learn sometimes leaving things alone and letting markets work is the way the system is supposed to function and the way it has and will. >> if we can tread delicately on monetary economics without asking you when the fed will raise the target rate, i was talking to steve roach the other day of yale university formally

with morgan stanley about the asymmetric challenges that any bank faces. you did not receive many phone calls from politicians or presidents looking for you to raise interest rates. it's a substantially asymmetric universe that any central bank works in. how do you fault the realities and the desire for inflation targeting? >> first of all, what i actually said was that in all of my years i got bushels full of mail. i cannot recall a single request from the congress or any other political figure which said raise rates. it was just zero. and that's still the case

basically because the political system seeks the short-term solution. and the fending off of any simblance of pain you cannot run a complex capitalist society in which the average age of assets is 20 to 25 years with everything being short term. and there are occasions when the wise thing to do is to allow markets to liquid ate. i think the best example i can give is the actual experience that we had in the resolution trust corporation. i was on the oversight board ex off officio. they did a good job which i don't think we can do today.