confidence in the always strong liquidity in the market and increasing liquidity. all i know is obviously -- he says yeah, some liquidity is good but at some point let's stop it or let's stop its growth. thousands of institutions are ready to do trading in hedge funds and private equity and there is not a shortage of people willing to do that stuff. the other part of your question? .

>> want to make a distinction between what banks can do and others can do. if all the other institutions can get bent licenses, it will be fair game for commercial banks to do that stuff. it will be at greater risk. that is what i want to avoid. >> a question on derivatives -- i used to head the chicago

mercantile exchange. derivatives traded on the exchanges as he their futures contracts or options contracts obviously have some protection because they are cleared every 24 hours and are marked to market now you have a lot of people in this legislation who would like to have exceptions from that so they can do a lot of customized products that will not be cleared anywhere, presumably. they have a preference that they not be transparent at all which is another danger. it seems to me that we have to be very, very careful in the handling of that particular issue. would you like to comment on that? >> i would totally agree with you. some of that stuff can be very highly profitable. there's an interest to keep as

much out of the clearing house as possible and we have to fight against that. as we push these more into the clearing house, we need to redo the strength of the clearing houses and the strength of the market to make sure that the next crisis that the market does not break down. that is part of the needed reform. >> i am formally from the sec and the world bank. assuming for a moment that proprietary trading is severely limited but not excluded from commercial banks as well as proprietary derivative trading

and is confined to non-banks, since virtually all proprietary trading and certain derivatives are highly leveraged, what is to prevent that non-bank, as it must, from leveraging and putting the risk right back to the commercial banks who will be at risk on lending rather than proprietary trading? if you can control lending by commercial banks to prevent that risk, why can't you control it also in those who do proprietary trading? >> you anticipated my answer with your last question. there would be an alert to the fact that the banks must lend to

these other institutions there are special programs of brokerage and through the brokerage in particular, a supervisor can review the practices to make sure that you are not comparing the liquidity of the bank by being overly liberal. if the traders are big enough, there is an assumption that there would be a regulatory authority more directly. they control a handful of the really big ones. that is harder to do if you are in the same organization. there are nfew ways of getting no rounded. all around it. i don't see any point in inviting trouble.

the universe you are talking about today is tiny. the number of institutions are less than the figures on my hands, as far as i know. there may be only two or three that do this in any kind of volume. you're not talking about a sweeping change. if there is no limit on it, there is a temptation to go into proprietary trading. >> i am here from the peterson institute and american university. i am sympathetic to your ball

court ruled. i want to ask you about the international dimension. in order for the ball court ruled to be effective -- volcker rule, do you need other countries to adopt the rule in order for it to bite. if so, what is the cost effective uc for europe and other jurisdictions to adopt it? >> the effectiveness and sustainability of this approach would be greatly enhanced by some coordination with other regulatory authorities. you have the two biggest natural markets in concert on this issue, you would have a big start. you don't want to run down to the cayman islands to do this kind of business.

if you get the european union to do something similar, then we are practically home. chinese banks are not doing this. correa's banks thai banks, they don't do it now but eventually they will. of course we want international consistency. there should be some commonality in the approach.

we have a number of politicians in the u.k. supporting it so we will see. >> i am from the world bank. something you have not addressed -- the entire system is supposed to be built on transparency. accountants, lawyers, credit rating agencies but the recent lehman brothers report tells us that we are down to 2.5 credit rating agencies, four firms from the big eight, in other words, the gatekeepers are now so few and shrinking every day that the

regulators cannot afford blunder to penalize them. -- afford to penalize them. a small number of credit rating agencies will find virtue in acting together wrongly as opposed to acting individually in a brave way. >> we should be much more alert to permitting more credit rating agencies to appear. if you could get more specialized credit rating

agencies, i think this would be an interesting development in that market. i hope we go in that direction. i think it is in coordination with plot block but a big deal has not been made of it. -- i think that is in coordination with the law but a big deal has not been made of it. >> when i see the ball kirk role described in the newspapers, -- the volcker rule describe the newspapers it talks about trading with commercial banks.

you are enthusiastic but i would submit that i think the size part is important. if you can imagine non-bank commercial banks that do not do proprietary trading, there will be pressure on the government. you do not have any evidence that economies to scale in these institutions exist beyond the $100 billion in assets. now we have a crisis, if this is the opportunity, why don't we envisage reducing them to something better than the size of the market. gdp is some indication of our ability to pay for these things and give them 10 years to come

down. why do we need the financial institutions that have trillion dollar balance sheet? i am disappointed to hear you say that that is unrealistic. i would like to think it is realistic i think that really is the key to doing something on too big to fail, resolution counts, wind down authority counts but the one that would deliver is some kind of size limit. >> i may be disappointed in myself. in not supporting a more drastic break up. my imagination is limited somehow. i think we are doing reasonably well to prevent it from being more consecrconcentrated.

i doubt something can be done because you have all kinds of claims. you can hold it in place now what size but how can you prevent secondary banks getting together and making another large bank? would be interested to see what you can do. >> you mentioned in passing excess liquidity and international imbalances. let me ask you a question that relates. you are one of the few people who has addressed the macro issues and the more precise regulatory issues.

how much of role do you assign in the creation of the crisis to international imbalance, the global flows of capital, the inflow to the united states, the fact that that generated lots of liquidity here and downward pressure on interest rates. therefore, some of the incentives to overland and so forth led to the crisis. how much weight do you put on that? >> i put substantial weight on it. it facilitated the excess is in the american economy which encouraged the lending process like the subprime mortgage and other stuff. i think they are inseparable. >> as one of the last academic defenders of glass stiegel

backeact in the early 1980's, ie some sympathy for the bolder role and what it seeks to accomplish. much of the discussion of too big to fail as emphasized one problem at the expense of recognizing a wider area problems. you had left the fed by october 19, 1987. alan greenspan was in charge and garry corrigan was at the new york fed. 20, jerry corrigan got on the phone and told the new york clearing banks to keep their credit lines to the broker- dealers open. he did not want to force a

massive sell-off in the stock market because the banks are withdrawing credit from these particular actors. that was not a matter of risking large firms. it was a matter of rescuing the financial system. we had many, many failures at that time of investment banking firms in the 1970's and into the 1980's. there are sometimes systemic crises where it is the task of the authorities to step in with public money and public commitment to stop the crisis before it spins out of control parts of it seems to me that on discussion of too big to fail, there is a loss of this notion that when the crisis become systemic, that is when we need to have public money potentially at risk and we should not lose sight of that.

this done, big institutions were involved in the development of the crisis. that has not always been the case. in the savings-and-loan debacle, we had hundreds of institutions that were doing odd things that got us into difficulty. in this instance, we had in the mac. -- indy mac. it was not too big to fail. the so-called motion of a proper corrective action, that is not entirely credible at this stage and we need to maintain the focus that the next crisis may not look exactly like the last one. it is not only big institutions that can get into difficulty. >> i basically agree.

as long as you continue to agree with me, i will continue to agree with you. there is not enough attention given to them. if you have the situation you are describing, the agencies and proper safeguards could be declared in an emergency where they would use devices to provide assistance to the market generally that would be necessary in the conditions you are describing. i think that is an important element. the fdic during the crisis extended guarantees to virtually all bank borrowing of less than five-year maturity. they were very sweeping

measures, as i recall. does not inconceivable that something like that would be necessary again -- it is not inconceivable that something like that would be necessary again. i think that the resolution authority is really meant for the big institutions, there is no doubt about that. it should act in a way that reduces the chance of spreading panic to the market's so that the smaller institutions are not affected. there is no fail-safe method for all of this stuff. i think something broadly defined is still necessary. >> earlier you passed by the

issue of going beyond europe and you did not say much about china. you also mentioned earlier that 30 years ago japanese banks were big and held up as a paradigm. you also said volcker role looks forward but is looking backward. even though chinese banks have not call into some of the practices that got us into trouble, if you look forward and you look at the enormous increase in size in chinese banks, isn't this actually an area that should get a lot of focus and how do the chinese

regulators look at the ball court ruled. volcker rule? >> their economy is expanding very rapidly. you have the united states and the u.k. and you have europe. if the chinese bank to a proprietary trading in a big way, if we had international law, we could stop them from doing that. that would take getting the cooperation of europe, the u.k., and the united states, at the very least.

my question -- >> my question is about the downside risk. what do you think the net a

cumulative impact of changes on the economy? and your proposal, as well. what will be the net impact of that on economic growth? >> my proposal should have no adverse impact on economic growth. the banks are not doing it now in any substantial way. even the ones that do it, the big ones, that is not a substantial part of their operation. there is no shortage of people out there in the market ready to take proprietary risk. somebody told me that j.p. morgan is buying prove their equity fund -- was the name of the thing? "american idol."

i don't think the growth of the united states will suffer long- term. if you can buy "american title." that is apart from the ordinary business that bothers me. you could have capital requirements so high and liquidity requirements so tough and leverage restrictions so great, you would affect growth. no question, you are talking about the whole banking system. you could tie the mop with so many regulations that would affect growth. the -- you could tied them up with so many regulations that it would affect growth. how high could you make the requirements and still have a viable commercial banking system? if you make them too high, they would delve into pyre

speculative things to recover the money. that is a very delicate area. they are very sophisticated and i wish them well. i think it will take some time to get a consensus. going back, when we first made them up, the political pressure was to go very easy on mortgages. everybody wants to go easy on mortgages, even the germans. they led the parade to have a very casual capital requirement. you see the result of the kind of political pressure in terms of getting capital requirements. >> you did not show your agent to you trashed the value of "american idol." [laughter] >> i wanted to take us back to

inflation. i want to ask you a question about moderate inflation which has picked up a little talk in the last few months. i do not want to caricature best. this. the one institution, it seems to me, so many institutions have lost credibility of government around the world and the one success we have had in those last 25 years is in getting a handle on controlling inflation. as you point out, people really don't remember things that happen before they were born. they can come flight thousands of years of history. it seems there is a certain abandoned now about being able to talk about moderate inflation as a response to

problems. even if the most careful economist does it, it is music to the ears of some politicians who do not want to face a fiscal crisis. could you speak to this notion of moderate inflation? >> you know the answer to that question. [laughter] >> i would like you to speak on the record. also may be embroider your remarks with some of the things that henry wallace used to talk about in terms of inflation. is not just a monetary concept goes from 2% to 4% but how corrosive it is as far as people's expectations. >> the director of research at

the imf issued a paper a few weeks ago saying that the anticipation of this crisis is 4% inflation. that startled me. i was in europe and had a short interview and they ask me about the proposal and i thought it was nonsense. i got a nice big headline in may german had -- newspaper that paul volcker thinks this is nonsense. i do think it's nonsense. 4% is quite something. i don't know what i can say other than once we lose sight of the ultimate stability, we have lost a lot and we need to sort our way through.

it does not surprise me that we have zero price inflation at the moment. that happens in the bill -- in the middle of a big recession. it comes close to zero all the time, that is ok with me. i think that is what should be in people's minds. as more than a monetary phenomenon. if we were in athens, how you deal with the situation as a practical matter in the context of the euro is a very tough question. >> the administration that mr. volcker served in 1971 applied wage and price controls and inflation hit a roaring 3.4%. >> that the was 4%.

-- i thought it was 4%. >> you begin with provocative remarks about the growth of the financial sector. you said measures have become larger than manufacturing. we have seen the compensation's come back strongly. do you have any proposals that you think would address this to get the scale of the financial sector back in better proportion with respect to the economy and put us on a sustainable path? >> the answer is no, i don't have any recommendations. there are strict laws saying that you cannot make up much money or you cannot have that big a bonus. it is a very deep cultural thing. when i was a younger man, this kind of behavior would be unbelievable people think they

are entitled to $20 million per year. they think they are worth it if somebody is willing to pay me. i don't know whether it is worth it or not. i think it loses perspective in terms of the kind of functions of our roussel for economic growth and stability. it makes a crapshoot. -- it makes it a crapshoot. >> goldman sachs got 100 cents on the dollar when it received $12.9 billion from the credit defaults swaps they held with a.i.g.. should they have taken a year "and if so, how much? >> i read that situation over and over again.

i will plead in capacity. i really don't know what i would have done. what was done did not strike me as unreasonable given the situation that existed. whether something different could have been done reasonably, i don't know. >> of the $787 billion stimulus package signed into law last year, $385 billion has been committed. that is of $2 billion from the previous week with a little over $200 billion not being paid out for those projects. you can learn more online at c- span.org/stimulus. president obama and french president sarkozy held a news conference yesterday.

the two leaders spoke about the middle east peace process and "washington journal" begins at the top of the hour. the topics include drug policy and the nature of the workplace. >> our public affairs content is available on television, radio, and online and you can also connect with us on twitter, facebook, youtube, and sign up for scheduled over e-mails at c- span.org. >> remarks from president obama and president sarkozy to talk about the relationship between their two countries. they discuss iran's nuclear program at this white house news conference. >> ladies and gentlemen, the president of united states and the president' of france.

>> please, everybody have a seat. good afternoon. then thi am delighted to welcomy dear friend president sarkozy to the white house. i also want to welcome to the united states, the first lady of france and michelle and i are looking forward to hosting our guests at dinner this evening. i have to point out that the french are properly famous for their cuisine and so the fact that nicolas went to ben's chili bowl for lunch shows is discriminating palate.

i understand he had a half- smoked. he was a sampling local wares and we appreciate that. this visit is an opportunity to return the hospitality that the for president and principal have shown to me during my visits to france. that includes our wonderful visit to paris last summer and michelle and i will not forget introducing our daughters for the first time to the city of lights. i don't think sasha will ever forget celebrating her eighth birthday at the palace with the president of france. that is a fancy way toward a to- year-old to spend her birthday. today, presidents are cozy and i reaffirmed the enduring ties between our countries. france's our oldest ally and one of our closest. we are two great republic's bound by common ideals and tested together for more than two centuries from yorktown to normandy to afghanistan. under president sarkozy's

leadership, france has for the secured its rightful place as a leader in europe and around the world. , recognizing that meeting global challenges needs a global partnerships. france took the step of returning to the nato military command and we are looking to revitalize our transatlantic bonds including a strong, capable european union which the united states firmly supports. a close transatlantic partnership is credible to progress. we met four years ago and i came to admire your legendary energy

and your enthusiasm for what our country's can achieve together. that was the spirit of your eloquent speech to congress three years ago which deeply moved many americans. over the past year, the president and i have worked closely on numerous occasions. we respect one another and understand one another and we share a belief that through bold yet pragmatic action, our generation can bend the ark of history toward justice and for progress. this shared commitment to solving problems allows us to advance our common interests today. we agree to continue working aggressively to sustain the global economic recovery and create jobs for our people. this includes replacing the old cycle of bubble and bust with growth that is balanced and sustained. this requires effective coordination by all nations. to that end, i updated the present on our efforts to pass

financial reform. i look forward to the senate taking action on this landmark legislation so we never repeat the mistakes that led to this crisis. we must provide sufficient oversized that reckless risk- taking by a few big players in the financial markets will never again threaten the global economy or burden taxpayers. we must assure that consumers of financial products have the information and safeguards they need so their life savings are not placed in needless jeopardy. that is why i press for the passage of these reforms through congress and i will continue to work with president sarkozy and other world leaders because we want to make sure that whatever steps we are taking, they are occurring on both sides of the atlantic. we agree that sustained and balanced growth includes rejecting protectionism. france is one of our largest trading partners and we need to expend glglobal commerce.

we need all interested parties to push for a more balanced agreement that opens international markets. to address climate change, we agreed that all nations aligned with the copenhagen accord and they must meet their responsibilities. presidents are closelyupcoming d nations and the economy's form will be an opportunity for nations to follow up their copenhagen commitments with concrete actions that reason -- reduce emissions. we talked about the spread of nuclear weapons. i updated president sarkozy on our new start treaty with russia. i welcome president sarkozy back to twwashington in two

weeks. we discuss our shared determination to prevent iran from acquiring nuclear weapons. on this, france and the united states are united and inseparable. with our partners, we offer a ran good faith proposals to resolve this through negotiation. iran has rejected those offers. the international community is more united than ever on the need for iran to uphold its obligations. we are pursuing strong sanctions to through the u.n. security council. in the middle east, we agree that all sides need to act now to create the atmosphere that gives the proximity talks the best chance to succeed. a shared my impressions with my discussions with president karzai for the need for good government and development in

afghanistan. as i told our troops, we salute our coalition partners and that includes france which is one of the largest contributors to the nato mission and they give their most precious resource, the lives of their young men and women. i think presidents are cozy for his visit and for the progress that our countries have made today in large part because of his extraordinary leadership. we are global partners facing global challenges together. i think that he will agree that when it comes to america's oldest ally, we have never been closer. i will close with words that one american leader expressed to his french partner more than 100 years ago -- more than 200 years ago. we are fellow laborers and the cause of liberty and we have lived together as brothers should do inharmonious friendship. in that spirit, i welcome

president nicolas sarkozy. >> thank you, mr. president. thank you for your invitation. i think we can say that rarely the history of our two countries has the community of views so identical between the united states of america and france. one example is that france would not have the united states not supporting france for their presidency. i will not repeat what president obama said so eloquently on afghanistan for a week support his strategy.

the people of afghanistan are entitled to live free. the road is difficult. of course, nothing can be anticipated and of course, we are sorrowful for loss of young lives but we have to have the courage to explain there is cold and stiff strategy. -- there is no alternative strategy. defeat would be too high a price for the security of americans, the french, and europeans. by fighting in afghanistan, what we are fighting for his world security, quite simply. on iran, i am very satisfied with what president barack obama has said. the time has come to make decisions. iran cannot continue its mad

race. we don't want to punish iran which deserves better than what it has by way of its leadership today. therefore, we want tougher sanctions at the security council and take the necessary decisions. with angela merkel and gordon brown, we will make necessary everest to ensure that europe as a whole engages in a sanction that regime. on the middle east, it is excellent news to hear that the united states is engaged. of course peace in the middle east is something that interests the israelis and palestinians. this is a problem for all of us because what it does is it keeps feeding terrorism all over the world. -i wish to express my solidarity with president obama in

condemning the settlement process break everybody knows how engaged and committed i am with israeli security. the settlement process achieves nothing and contributes in a way where you have to take initiatives in favor of peace on financial regulation. it is great news for the world to hear that the united states is availing itself of roles, adopting rules so we do not go back to what we have already experienced. the financial leaders will be working hand in hand at the g-20 to go further in regulating world financial markets and raising the issue of a new world international monetary policy. there is a much shared view. i want to say to president obama how glad we were for him and the u.s. to hear of the successful

passing of the health care reform. insofar as the president has revealed a secret as to where i had lunch today, i should say that i have a good friend in washington who actually recommended that restaurant. when i walked in, i saw a huge photograph of president obama and when you go back to that restaurant, you may see a smaller photograph of the french president. >> we have time for a couple of questions. >> thank you for your patience. president obama, you talked about the importance of the consequences for iran over its nuclear program but is there ever a real deadline? what is your specific time line

for u.n. sanctions on iran and is it one that the american people can believe them? presidents are cozy, you said yesterday in new york that the world needs an open america and one that listens. can you elaborate that if you think president obama is open to the world and is listening to you? >> let me answer the second question. i listened to president sarkozy all the time. i cannot stop listening to him. on iran, we came in with a very clear approach, a very clear strategy, and it was an open book to the world. we said we would engage iran and give them an opportunity to take the right path, a path that would lead to prosperity and opportunity for their people and in it -- and a peaceful region and one in which they would allow themselves to become a

full-fledged number -- member of the community of nations. before the alternative that was first -- further isolation we mobilize the international community around this approach, including pardners like russia that in the past might have been more hesitant to take a firmer stance on iran's nuclear program. what we said is that there would be a time limit and if we had not seen progress by the end of the year, it was time for us to move forward on the sanctions track. my hope is that we will get this done this spring. i am not interested in waiting months for a sanctions regime to be in place. i am interested in seeing that regime in place in weeks. we are working diligently with our international partners,

emphasizing to them that this is not simply an issue of trying to isolate iran. it has enormous implications for the safety and security of the entire region. we do not want to see a nuclear arms race in the middle east. a conflict in the middle east as a result of our runs actions could have a huge destabilizing effect in terms of the world economy when we are just coming out of a very deep recession. the long-term consequences of nuclear arms and renner unacceptable. president sarkozy and myself and others agree that we have engaged, the door remains open if the iranians choose to walk through it but they understand what the terms of a diplomatic solution would be. in the interim, we will move forcefully on eight u.n.

sanctions regime. -- on all u.n. sanctions regime. do we have unanimity? not yet. that is something we have to work on. we we think we are in a stronger position to get robust sanctions now than we were one year ago. it is still difficult partly because iran is an oil producer and are many countries around the world that regardless of their offenses, these countries are thinking that their commercial interests are more important to them than these long-term geopolitical interests. we have to continue to -- we have to continue to apply pressure on iran and make sure we are communicating clearly that this is very important to the united states. we think we can get sanctions passed v. >> i have heard many comments

and i have been quite amused on the relations between european leaders and the president of the united states. i am amused because i thought to myself that when we speak to one another, people must listen to our phone calls because i have seen reports on conversations and discussions which in no way resemble discussions between barack obama and myself. i speak on behalf of angela merkel, gordon brown and other leaders. when president obama says something, keeps his word. his word is his bond and that is important. we don't like surprises. there are no surprises. when i can, he delivers. when he can't, he says so.

furthermore, there have been some pretty tough talking like taxes on bonuses, financial regulation, pretty heavy stuff, copenhagen. i think that president obama is a step ahead of public opinion. when we talk about it, it is president obama who wanted us to have a conference call every month with angela merkel and gordon brown. this does not mean that we are absolutely in agreement on everything but we talk amongst ourselves. this is a novel tape. everything is put on the table and everything can be discussed. wha whatever divergence of views we have, we can talk amongst ourselves. this is what all the european

believe -- leaders believe and think. i have heard it said that europe was less interested in the united states. how many times do we have to come over to show that we were interested? very frankly and very honestly, not only is it not an issue, not a problem but is able -- it is wonderful to be able to work under these conditions. president obama and i are constantly having a dialogue. we might not agree on syria and france took an initiative. at no point has president obama turned his back on what we were doing. he is constantly watching and listening and we are constantly exchanging information even when there are more complex topics including our relations with the

russians. president obama knows exactly what we are going to do and when we are going to do. we are very transparent on both sides with confidence and trust. there is a lot of trust. trust always helps one overcome diverging interests. it may be that the united states has slightly different interests than france but the bedrock of trust between us is something that he has with all european leaders. this is true. i took two examples of two topics that could have led to a head-on collision but in this case it was the contrary. we are complementary on both sides of the atlantic.

maybe one dathat is the way we . go ahead. >> since you have just talked about the united -- the relationship between the united states and europe, didn't you get a surprise on the tanker planes which reversed the decision which was being taken with their boss? did you try to put together a new approach as to insure that the competition would be more fair t? would this be fair to share this contract with the europeans since they are now full members of nato and the share the price of the war?

>> what i just told you would be meaningless and sat) of course, we talked about it. president obama oh give his answer but we trust each other. if you say that the request for proposals will be fair and transparent, then we say we trust you. >> what i said to presidents are cozy as -- president sarkozy is the process will be fair and trust is justified. it is important for my european friends to understand that at least here, the secretary of defense makes procurement decisions.

the president is not in these decisions. that is a longstanding policy. i maintain an arms length approach but i have assurances from secretary of defense gates that in fact to the rebuilding process will be completely transparent and open and a fair competition. that is in our interests. it is in the interest of the american taxpayers and in the interest of our young men and women who rely on this equipment in order to protect this nation. it is important to note for those of you who do not know secretary gates, this is somebody who has taken on the military and weapons systems establishment. he initiated some very significant procurement reforms that nobody ever thought would happen in washington. he is somebody who is willing to tell it like it is and make difficult decisions and he will do so in this situation, as

well. ok? thank you very much, everybody. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010] [no audio] [no audio] >> "washington journal" is next where we will take your calls. this morning, president obama travels to enters air force base and will talk about energy security. live coverage is at 11:00 eastern. later