decrease our competitiveness, that we could see the consumer not come back in strength and that could weigh on earnings going into the future. but that's more of a medium concern. but right now we're cautiously optimistic at least from evaluation standpoint and looking forward to opportunities and whatever carnage may occur elsewhere in the world. >> you mentioned consumer spending, which has been a strength, at least recently, but comes with a price, which is increased debt. and there already was a great deal of consumer debt overhang coming out of the recession. how big a risk factor do you see that as being? >> well, from the way i look at it, the decade leading up to the financial crisis, we ran a 4% or so current accoun deficit, we had tremendous rise in household debt, all of that fueled consumer spending in the u.s. we were the engine of the

world's growth. someone earlier, i think it was shean donovan, referred to housing as being the atm of the economy. and that is gone. we're not going to see that same kind of growth. and in fact, that 40% or so contribution to growth is -- it has disappeared and we have to make that up and pay that back. so that will have a negative overhang. i think that we're a resilient economy, dynamic, we can change, and we have great enterprises. the last two panels on business sort of i think point to the opportunity that we have. but it's something we have to be watchful of. in our portfolio we're tilted more towards large cap quality growth kinds of companies that have some exposure to emerging markets and some prospect sustainable growth, because growth is a risk. >> bruce, i know your firm has a very global perspective on your work, your investments. what kinds of global risk factors do you see that would impinge on the u.s. recovery? are there international risk

factors? >> significant risk factors. start with the obvious. global growth slowing, and the risk factor that that brings. and the $8 trillion the central banks around the world have printed by blowing up their balance sheets led by the u.s. fed, who started the cycle with the first point of easing in getting the cycles going globally and encouraging other central banks to do the same. the inflation that comes out of that is a risk factor. today i think there are four main risk factors that are worthy of front-page news and two that i think are not significant but people spend a lot of time talking about and two that are rather significant. the two that are not rather significant to me, representing small tell risk, because i think the low probability events, is china. you know, china growth of 6%, 7%.

that's a slowdown. still nice growth rates. they have immense economy. they're sitting on a $3 trillion cash war cleft to be able to fix banks or the economy when they need to given the type of surplus, you know, fiscal situation they've been running from for the last many years. and so they may not be at 9% or 10%, slowing down to 7%, people make that front page news. to me it's not a major risk factor. there are problems within its economy, potentially a housing market that's bubbling up. some company state-controlled banks with large levels of debt that need to probably work through at some point, but for the time being we're not too concerned with china. as it relates to the second risk factor, we don't think it's a significant risk factor, because although it's got a fat tail, it's only what we think is a 10% probability event, which is the

whole, you know, arab world, the spring rising that we talked about a year ago and potentially some flare-up in the middle east that might raise oil prices to $150 a barrel because of iran risk these days. that's certainly a risk factor, something to keep an eye on these days. certainly might want to have some tail risk hedges against that, but not major events for us. so it comes down to, i think for the second half of this year as we enter the end of the year number one, the fiscal cliff we're running into and how much of a drag it will be for gdp. will it be 1% or 2% or 3% as certain economists are projecting if all measures go through and they're not able to kick the can down the road. we think they will be able to kick the can down the road and defer those days again. so we're a little less concerned about the fiscal drag but very focused on it, what it means for corporate earnings, what it means for u.s. gdp and the consumer down the road. the biggest risk factor, globally, without a doubt in our mind -- and in reality we

believe -- is what's going on in europe. you have a sovereign debt crisis that's going on that is not yet over. there's still more to be done in the sovereign side, and what they're doing right now is pretty serious austerity. austerity is in the form of higher taxes and higher revenues of the government and reductions in spending. it's roughly a 37 rule, at 30% comes from higher revenues and 70% reduction spending that's contractionary. that in itself, you look at quarter over quarter, you see all the fiscal deficits come down country across country throughout the eurozone. but now they've slipped into recession. within the 17 emu countries, seven are in recession. out of the 27 european countries, we have ten now that are in recession. the gdp contraction is one thing in europe. the second thing is the banking system. completely overleveraged and

undercapitalized. $250 billion of capital led by spanish banks. $250 billion of capital raised for the european banking system and about $2 trillion of assets need to be shut. that's a rather significant problem that the banking system has, when shedding assets not in a position to be able to lend, austerity spills through to the corporate side, which is going through a recession. so we think, for instance, high yield companies, leverage loans and bonds of european companies, will see detault rates as high as 8% or 10% before the cycle's done and the recession gets deeper towards the second half of this year. europe, last year, grew and we grew about that same rate, and this year we're growing about 2.2% last quarter. 2.8% quarter prior. it was accelerated. and they've now fallen into recession. the risk last year was the length that we would fall into a double dip as they dragged, because about 25% of our trade is with the europeans.

the link is broken, but that link if europe gets much worse, the banking system and their economy will start to relink again, and that's a major risk. >> are u.s. policymakers doing everything that they can do to insulate our economy from that kind of risk factor that you're talking about? obviously limited to some degree, they don't -- u.s. policymakers don't have control of things, but are they doing what can be done to insulate? >> there's many policies. won't get into too many. but the two main policies that any government has is monetary policy and fiscal policy. last time i checked, keens is dead and milton freeman is dead. what i mean is, we all know that they pass aid way many years ago, but their policies are dead. fed funds are zero. the fed is in no position from a

monetary standpoint to do much monetary stimulus. yes, print money and do qe-3, rates down further, lose credibility as time goes on through printing money and inflating our way out of this. so the fed's hands are tied to a degree, especially with the restrictions you've put on the banks from a regulatory standpoint, which we think is prudent, which congress and the president think is prudent. right? the fiscal standpoint, we're running a deficit which is about an 8% fiscal deficit. our gdp is about $15 trillion and our debt now is $15.2 trillion. so we're slightly greater than 100% debt to gdp today. and that number will grow to $16.2 trillion with the $1 trillion-plus deficits we're now running. so it used to be the case that revenues, right which is taxes, accounted for 17%, 18% of gdp and debt counted for, excuse me, expenses counted for, you know, about the same thing and we were balanced or expenditures a little more.

we're spending 25% of gdp now. 8% fiscal deficit. it's out of control and we have to catch up to that, and that's why our hands are tied. >> richard, what -- >> great theory. the government is the problem, not the solution. and, you know, we spend way too much time worrying about whether the fed is going to have qe3, qe4, qe5 going back to the sum of the previous panels, that the economy will get going and will get out of the ditch if we have real businesses generating real profits, supporting growth in shares for investors and critically supporting growth in employment, which will be a positive circle that helps build the economy. so the single thing that government can do to best insulate us from problems anywhere else in the world is to pursue pro-growth policies that allow the u.s. economy to not only continue to grow but to grow at a better pace than it has been doing. >> can you be specific about what kinds of policies you'd

like to see? >> i'm very concerned when you look what's coming at the end of the year -- and i don't want to get into partisan things, but we are set, if things do not change, when you look at current tax on dividends at 15%, slated, the president's budget has its way and if the health care tax stays in place, having tax on dividends go from 15% to 43.4% or 44%. that's a tripling of the tax on investment, and, you know, at the same time we're proposing to raise capital gains rates not so much. and i'm saying, ultimately we have a fiscal situation that everybody in the country will have to participate in solving. but we need to be very, very careful not being to punitive how we treat capital investment. ultimately it's capital investment that can produce strong gdp growth per year

helping europe get out of the ditch and will help about source of strength around the world and certainly help us solve our own problems as well. >> uh-huh. kristen, we heard a discussion earlier today at an earlier event in this conference about the fed's policy of upholding interest rates to near zero for another two years and the view of one fed regional president that the fed should move off that policy sooner. from your perspective, is it wise to -- for the fed to be hold be interest rates to virtually zero for another two years and making that commitment to the market, to investors, to everyone else? >> well, long ago i learned i'm not a macroeconomist. i do think it's important that we continue to have accommodative policies at least in the short term. i do think we have to attack deeper issues in the medium term. i think by having the slow policy of rates it should be stimulative. i think it's less stimulative

than it could be because the banking sector is not necessarily able, for whatever reason, to lend and support business. i don't think there's as much new loan growth as there could be, and you're seeing this particularly in europe. i think it really is strangling europe, because banks are cutting off their smaller customers and that's paralyzing smaller enterprises. so i -- i don't have issues with the lower rates. it's forcing all of us to take on more risky assets, just to boost our returns, but when i look at what it's forcing me to do, again, get out cash and fixed income and go into equities, i like equity valuati valuations. dividend yields. i'm a little worried on tacks on dividend yields because it doesn't affect us as a nonprofit but from my own personal portfolio. >> it will affect you if it -- >> exactly. but -- but by having low rates it's forcing us into risk assets, all of us into risk assets, out of treasuries into

corporate debt, into high-yield debt, into all manner of assets and that's good for the inflation trade. i think that's -- that has been important. it's been critical to putting a very large band-aid on the patient and keeping us in critical care. where it is impacting businesses is the discount rates on pension liabilities. and you're seeing companies having to contribute. you're seeing plans being shut down. this year we're all due to have another whack to the discount rate, and i think that part of it is not being talked about so much. a little play on the state and local pension funds but it's affecting corporates, too, and affecting workers because it's going to ultimately impact the stability, the safety and the availability of benefit obligations. >> the single thing that would most help our economy, and it's something that where there's the highest level of agreement between republicans and immigrants, would be to get our corporate tax rates in the united states down in line with

the rest of oecd. we are at the high end of the spectrum. if we could bring the corporate level tax rate down 10%, wealthy, but if we brought the corporate lower rates down we would inject cash and expansionary power into -- all across the business sector in the united states that could have a far greater stimulative effect than a fed interest rate of 2% for, versus 1% versus 0%. >> do you think that can be done in isolation politically, or does it need to be part of a larger tax overhaul? realistically? >> dick gephardt over here, i won't hold myself out as an expert in what can be done politically. i worked for president reagan and president bush the first, and i think you can't make the perfect, the enemy of the good.

you can't sit around saying we're not going to get anything done until we solve every problem in the world. that's never going to happen. you have it pick out the things you think are the worst problems and where you can move forward and do it. and i don't know that corporate tax rates can be done in isolation, because if that reduces revenues it has got to be offset. but it doesn't mean we have to solve every -- if we can have comprehensive tax reform of both corporate and individual, that's to me would be ideal. but if you're talking purely about let's get the, as much power as we can behind the broader economy, then i think cutting corporate-level tax rates would be the way to do it. >> well, you anticipated my next question, which is, if you cut corporate tax rates in isolation, and do nothing else, you make the revenue side worse. you make the deficit and debt side worse. how do you address that in isolation? >> again, both parties have in theory embraced the idea. what we did back in 1986, which

was to eliminate on a massive scale corporate tax expenditures, the loopholes that build up like, well, the things in caves, the stalactites and stalagmites, and 20, 30 years goes by and you have 3 million words of the tax code worth of loopholes that benefit some people but not everyone. and what was done in tax reform once before and i think would be hugely stimulative if we could do it again would be to throw out the 3 million words, simplify the tax code and relentlessly go on a policy that says we're going to get rid of deductions that benefit only a few and use that to drive rates down for everyone. i leave to politicians to debating whether do you that in a revenue neutral way or a slightly revenue positive way. you could do it either way conceptually. but eliminating trillions of dollars of tax expenditures and focusing on lower rates and more simplicity for entrepreneurs would really add a tremendous

boost to the economy. >> we've been talking about what we think policymakers should do. i want to turn that around a little bit with the knowledge of what happened last year with the debt ceiling and the fiasco and the damage most people think that it did. what is the one thing policymakers should avoid doing to make things worse? bruce, do you have a view of that? >> yeah. you can start there. sure. with the debt ceiling, and policymakers freed to come together. and they need to be non-partisan and figure how to close this huge deficit that we have. and i think that closing a deficit is going to be good for our generation, good for our credit. there are problems around the world with solving credit. people come running to our credit. but at some point if we don't do something to fix this it's going to be rather significant. the problems we have.

first we have to address it. what we saw last year was the exact opposite of that. they didn't have a dialogue, very little dialogue, that resulted in nothing and kicked the can down the road for yet another year. and we'll see what that $1.2 trillion means, but just cutting health care and defense and not addressing really the bigger issue of, you know, what should be rationalized and what should be, you know, included in a budget and what shouldn't be is a rather comprehensive, you know, set of items that requires congress to come together with the, you know, both parties to come together and resolve. so i think it starts and stops there with what's required. >> kristin, richard, do you have a view on when policymakers should avoid going to make matters, should observe the hippocratic injunction to first do no harm? >> i do have a little concern more on the micro level but a little bit of concern about some of the proposed changes in the money market mutual funds. it is sort of the life blood, where most enterprises keep

their cash, where we keep cash, where the universities operate cashes. they have to some degree replaced banks. that's where our working capital is. and the threat to the money market mutual funds of those freezing up could be quite severe. it would be as severe as a banking crisis. and some of the proposed changes involved gating or restrictions on redemptions, which the university and the foundation community saw that we did not experience that at penn, but there were many institutions that did experience that because some of the money market vehicles that foundations and endowments use were not protected during the financial crisis, and they faced an inability to access their cash. and a mad scramble to make payroll. and i think the needs of retail investors and the needs of institutional investors are very different, and i would like to see policymakers recognize that

we need liquidity. for institutional investors we need liquidity, a floating nab is far better than gate because we need access to our money when we need access to our money. >> richard, any candidates for the not-to-do list? >> don't raise taxes. if you want a strong economy, don't start by raising taxes. that's pretty simple. i think the -- i think that we live in a dangerous and fragile world filled with a lot of risks, particularly to the financial system, and heading out of europe, but in the long run these threats will come from wherever you don't anticipate them coming from. we need a strong financial system here in the u.s. i'm very pleased that the u.s. financial system has made a lot of strides. i think the u.s. banks have done a far better job than their european counterparts have been able to do in rebuilding capital

levels. and there's always more to be done, and some institutions are in better shape than others, but strong capital, a strongly capitalized banking system is very important. you know, the money market funds is a very tricky issue. i think the broader policy question of -- of, you know, where does this too-big-to-fail policy lead us? it's very, very troubling to me. i think in the end, the idea that you can create massive amounts of moral hazard by having implicit federal underwriting and offset it by regulation and supervision will fail every time. there's no example in history, whether it's fannie mae and freddie mac, too-big-to-fail banks, there's just no example that you can offset too much subsidies with enough regulation to make it work. so i think you have to be careful. there should be some parts of the financial system that are

absolutely safe, that are bedrocks protected and understood as such and other parts maybe penn and other institutions need to be clear. if money market funds are outside the safety net, that that's where they are, and maybe some amount of payroll needs to be in the bank instead of a money market fund. >> right. i'm not saying we should be protected i'm arguing whatever the entity, strike that as the nav rather than pretending it's a buck and then aiding the buck. >> much better and very hard to start imposing capital rules start imposing capital rules, treat them as if they're banks sort of banks not really banks and then how to people understand and handle that going forward? the s.e.c. has tried to address a very real risk that we saw in '08 if money market funds lock up. but there isn't an easy solution to turn them into something that is guaranteed. they have historically been outside the safety net, although

hopefully well in the forefront of the minds of the people at the treasury and the fed in taking actions. but i think better clarity -- one of the things dodd/frank did not fix, in my view, is the whole issue of too big to fail. we've approached it, as one of the earlier panelists talked about, by having now living wills and more oversight of supposedly systemically important financial institutions. but we really -- i think we have not done the job we need to do of before -- and hopefully decades before -- a next crisis of establishing clearer lines of what's in the safety net, taxpayers are on the hook for and what's outside of it. the market will function much better if we're more clear of where those safety zones lie. >> uh-huh. peter some questions?

>> we do have a question, a europe-related question for our panelists to weigh in on globe outlook. $30 billion or more in imf lending sources help stabilize the global economy, european situation won't be the consequences of u.s. reluctance to commit any new funds of its own to that effort? >> bruce? or -- >> i think it's a great thing. obviously, $430 billion isn't enough to solve the problem and that would need to be leveraged. so i think it's a great thing. i find it interesting that the u.s. hasn't supported the expansion of the imf resources. and i wonder if that's not just a let europe deal with europe's problems. but it's fascinating to me we've gone from a decade of the '80s and '90s when the world bank and imf were focused on developing country problems and they're now focused on the developed country problems. and resource availability was the problem, is that much larger, and since it's affecting countries of reserve currency status, i think this is only a good sign.

>> they need to war chest, the going to get worse in europe before it gets better. you need the huge facility and the central bank of europe, ecb to play its part, which it has. certainly those funds are helpful led by japan with $60 billion. u.s. put in nothing. the leader. 17% of all imf funding is so much bigger than any other country. and to kristin's point i think it was their subtle way of saying, you know, we've put in enough already. let others contribute. we're running our own deficits too. let others contribute and let's start with, you know, some policy and some -- in europe, that brings some confidence back and so let's put the onus not on us to help bail out europe but for europe to put the discipline in place that they need to rectify some of their issues. >> i don't think it was very subtle, actually, and deservedly so. i mean, clearly, american

taxpayers are not going to be to want to be participants in refunding european sovereign debt. it really is a responsibility for europe, just as we have to solve our budget problems here. but what all of these facilities have helped do, and i think the european authorities should be really congratulated, they've done a wonderful job of building from a time where it looked like there could be a sudden collapse and really was affecting the u.s. market because of fears that we could be back in the post-type crisis. and the european leadership have built time. they've given enough liquidity into their banking system and they've helped give the political leadership time to have further fiscal integration or further attempts to solve the underlying problems. i agree with bruce, they're not solved, but not as close to the

edge in terms of how much time they have to work on those problems. >> peter, time for more or out of time? >> i'm told the trains need to leave the station on time. we're going to wrap it up here. thank you all very much. appreciate the discussion and the thoughts. ken fireman, thank you very much. ken, richard, kristin and bruce. thank you all. dong gavels in today at 2:00 p.m. eastern after a week-long break. the house will consider a number of bills allowing the capital grounds to be used for upcoming events and a measure to clear the way for the washington, d.c., water front. the senate will consider a bill to keep student loan rates from doubling in july. also a couple of judicial nominations. the house is live on our companion network c-span and the senate live on c-span2. and here on c-span3 at 2:00 eastern, the house budget committee. as part of last year's debt ceiling agreement, about $600 billion worth of pentagon spending cuts are slated to kick in next year. house republicans have introduced legislation to prevent those spending reductions.

instead, they would cut spending for food stamps, medicaid, the child tax credit, and other social programs. congressman paul ryan of wisconsin chairs the budget committee and vis van hollen of maryland is the ranking democrat. the house budget committee meets at 2:00 p.m. eastern, and you can see it live here on c-span3. if you're looking for more information on members of the budget committee and other congressmen, c-span's congressional directory is a complete guide to the 112th congress. inside you'll find each member of the house and senate, including contact information, district maps, and committee assignments. also information on cabinet members, supreme court justices, and the nation's governors. you can get a copy for $12.95 plus shipping and handling at c-span d c-span.org/shop. saturdays this morninth, mo of the nixon tapes from 1971 to 1973.

this saturday at 6:00 p.m. eastern, hear conversations with deputy national security adviser alexander haig. >> interest in the world? >> yes, sir. very significant. this "new york times" expose of the most highly classified documents of the war. >> oh, that. i see. i didn't read the story, but you mean that was leaked out of the pentagon? >> ir, it was a whole study that was done for mcnamara and then carried on after mcnamara left by clifford and the peacenikings over there. this is a devastating security breach. >> in washington, d.c., listen at 90.1 fm, and at c-spanradio.org. the british home affairs committee recently looked at the country's policies on illegal drug use. comedian and actor russell brand testified. he said drug use should be treated as a health issue, not a