volatility in the currency market because the middle class has en taking it for the last 20 years. if anything can happen that will cause us to get away -- get away from nafta and i.m.f., bring backobs, bring back industry to the united states, i'm all for it. if that means that there's volatility in the currency markets, china is upset with what's happening with their investments in the united states and we in the united states are taking it in, we're buying everything from everybody else, there's no jobs here -- look, i'm a lawyer, and i have a management degree and i work for myself. the avere working man out here is catching it. i understand what the professor is coming from.

if currency fluctuations will help the united states and there is quote-unquote some form of trade war then all for it. have a nice day. host: desmond lachman. guest: i can understand your we go live to the national press club. monetary policy and the state of the global economy. we expect to hear from christina romer who recently resigned as the chair of the president's council of economic advisers and paul volcker. this is live coverage just getting under way. >> today we gather here in the historic ballroom of the national press club in washington, d.c. for what promises to be a stimulating discussion of the ever evolving role of central banking and the global economy. most of us remember where we were some three years ago when the federal government stepped into the breach to rescue fannie

mae and freddie mac from imminent collapse. and from there, things changed rapidly and unpredictably. congress passed the tarp and two stimulus bills and the federal reserve lowered interest rates to historically low levels. the nine states federal reserve and at the central banks around the world continued -- the nun states federal reserve and the central banks around the world continued and still continue that three years ago would have been unthinkable. to discuss the range, effectiveness and a proper is of these measures, we have convened to the distinguished panels of scholars and policymakers. before we proceed with these panels, three words of thanks are due. first, we thank our friend at been a factor more kaplan arrested as a provided funding for the organizing conferences on the global economy each year. we also in knowledge as well

kaplan undressed a chartered in the 2010 capt. conference host committee, chaired by gene lockhart, for their additional support of the conference, the luncheon and a reception that follows. in 2008, the inaugural kaplan conference assembled a dozen former finance ministers from around the world to discuss and recommend a blueprint for a new international financial architecture. last year, 2009, we convened a leading representatives from the academy and the public and private sectors to deliberate over how we govern in a time of debt and deficits. we set the bar high in the first two years, but i'm confident we have pushed that are higher yet again this year. second, we think our friend and

visiting fellow and former treasury secretary who was instrumental in reaching out to his contacts in the central banking world. john played a key role in the 2008 kaplan conference, serving as the conference director. we are glad to have his participation this year. finally, we thank the corporate secretary and our events and special programs coordinator for the many months of work in putting together today's event. to get us started, let me introduce our conference director. david is the general sentiment professor of governments at the mall center, prof. and chair of the university of virginia's department of politics, and professor of public policy at the school of leadership and public policy. he will introduce our good friend alan murray and the panel about which you will hear much

in just a moment. take it away, david. [applause] >> thank you. let me add my words of welcome. we are delighted to have taken time off from your busy schedules to join us what promises to be intellectually stimulating discussion of the evolving role of central banks. let me extend a special word of thanks to steven cohen, professor of economics for writing a background paper for our conference and copies along with white papers authored by charles goodhart and john taylor are available both here and online. we first started thinking about this conference in june 2009 while gearing up for the second capt. conference focusing on debt and deficits. at that time, the framework of a road focused on this, when, and how governments and central

banks around the world would begin the process of exiting from their involvement in part of it -- private market. we thought that topic would provide for rigorous, but vincent -- rigorous debate. if we had held as, and six months ago, we would have had a conversation about monetary policy and a zero interest rate environment. three months ago, the focus may have been on macroeconomic policy, the coronation of cross- country's and perhaps on policies of quantitative easing. this one opens up the financial pages today or the front page, the airlines declare we are at war, albeit a war waged -- the headlines to clear we are at war. we're fortunate enough to happen in a group of scholar practice to that is to this mine field. we're delighted to welcome charles goodhart, john taylor, there will be joined momentarily by alice rivlin of the brookings

institution and christina romer of the university of california at berkeley. we're privileged to have alan murray from the wall street journal to moderate the first panel. >> thank you very much, david. [applause] thank you. i wonder if anyone in this room knows some central bankers it takes to screw in a light bulb? [laughter] so it only takes one to put the libel, and the world revolves around it. -- so it only takes one to put up the light bulb, and the world revolves around it. i congratulate you on putting together this program. i am excited to be here and be a part of it. the gentleman sitting before you right now are the perfect people to have kicked off this discussion. they come at it from someone different perspectives. john taylor is that standard --

stanford university. he was undersecretary of treasury. he is known as the author of something called "taylor's role" which provides a guide to policy makers to setting interest rates based on the inflation rate. seated next to him is charles goodhart, at the london school of economics and has been there for quite some time. before that, he worked on monetary policy for the bank of england. he is the author of something known as "goodhart's loss of any time a texas social and economic indicator and make it the target of policy, it is musically loses the value they got there the first place. we want to see if goodhart law applies to a tailorrule. i look for to this discussion and i will say as the moderator

i have spent time in residence on but the campus of the london school of economics in stamford university, so i can be absolutely impartial in this debate. you get five minutes. >> thank you. thank you for inviting me to this wonderful opportunity. i have been doing research on the financial crisis and the role of central banks since before the crisis began. my approach has been to look at the data, the numbers, particular events, timing, try to be non-partisan, be objective as possible. what i have found, i think it's a pretty straightforward story. that was that before this all began, going back maybe into the 1980's and 1990's, pretty good framework for monetary policy. i call it the framework that worked. it was based on some pretty sound economic principles. some of these embodied in the models that are still in existence in most central banks

around the world. it led to a policy when which the interest rate was the focus of the policy and interest rate would be increased when inflation began to pick up by a certain amount and cut when the economy slowed down or when into recession by a certain amount. when that kind of framework of policy was used, things worked very well. ben bernanke wrote a very important paper referring to this time of good economic performance in most of the 1980's and 1990's until the crisis that going showed how during this time, the monetary policy was predictable and stable and based on these principles that i am referring to. what is more striking is if you go back to the time where policy was not so good, did not follow these principles, we had terrible performance. the stagflation of the 1970's. we look at different countries, the general idea applies pretty well.

it seems to me what happened going into this crisis is we got off track. that is the basic set of principles. it is pretty clear to look at the federal reserve interest rates got very low in a time when the economy was recovering, reflation was picking up, and where there was incredible housing boom. interest rates stayed at 1% for extended period of time and were raised slowly. i think that led to this housing boom. moreover, it led to excessive risk-taking. it led to the boom and ultimately the bust. the toxic assets and ultimately what became the crisis. i think on the side it was masked by a failure to enforce existing regulations. a lot of risk taking was taken by some of the most heavily regulated institutions in the u.s., the commercial banks. the message i get from this is the lesson to be to get back to what was working. do not try new exotic types of

things. just get back to what was working, which means rules based policy, a policy which enforces the rules on the books. briefly if i could take one more minute, if you look during the time of the crisis, looking at the time of the crisis from august 2007 through the present , i think there was a panic in the fall of 2008 and we had a time of about one year before that, the pre-panic in the post- panic. i think monetary policy had a lot of problems in the pre-panic time. i fault the ad hoc that led to the panic. i think policy worked effectively during the panic. a lot of leadership to rest the panic. but the policy caused the panic and i think get to put that into perspective. post-panic, the quantitative

easing, massive injections of funds, my research has not been constructive. when you look at it carefully, there are good and bad things, but the main lesson i can see is to get back to what was working and lay out an exit strategy to do so. thank you. >> professor goodhart? >> the central bank has to them and objectives. maintain price stability but also to maintain financial stability. currently, central banks really only have one instrument. that is to adjust the official interest rate. it is like a golfer with just one club in his golf bag. the lesson that virtually everyone has learned in this crisis, there were to the objectives you need two instruments. my friend and colleague will be here later saying, in this crisis, central banks were restricted to composing sermons and conducting burials. even then, the burials were not

conducted very decorously. the lehman brothers, were a mess, to put it simply. unlike my colleague, i take it as my maintained assumption in the future, central banks will need to have much more in the way of powers to maintain financial stability in the form of my credential systemic mechanisms. should it be the central bank that wields this power? another governor of the bank of england once said, a central bank is a bank, not a study group. what i take it that he met from that is the key function of a central bank is actually to control his balance sheet and to adjust liquidity and not essentially to change interest rates. after all, major central banks, the interest-rate changes are undertaking e by thecb.

the bank of england has been a central bank for centuries. between 1932-1997, the interest rate was adjusted by -- in my paper, i say you could have interest rates adjusted by a coven of druids, looking at the entrails of a chicken. what matters is not who actually sets the interest rate, but how it is said. i do think that john's reaction was a mess of intellectual step in the right direction. nevertheless, it is the control of liquidity that is at the core of central banking. and that lies at the center of any mechanism managing financial stability. so my conclusion is the central bank has really got to play a central role in any procedures for achieving financial stability. it would be possible to

delegate powers to completely separate the group of eminent economists, if you like, to set the interest rate and allow the central bank to actually put it into operation. but you cannot take a liquidity management at a central banks. in the aftermath of the crisis and with the 0 nominal down, liquidity management has become more and more important as we go on. certainly, the management of preventive measures and resolution measures ought to be undertaken by a central bank as far as possible independent of government, but it is extremely difficult to do because macro provincial policy effectively means taking away the punch bowl just when the party gets going. that is very unpopular with markets and with politicians. how do you justify doing it?

macroeconomic policy setting interest rates is a great deal easier. you can quantify your objective, the inflation target. the mechanism of moving between the interest rate and the objective inflation rate is reasonably well known. when you're dealing with financial stability, it is far more difficult. the objective is hard to quantify. for testing financial stability is in its infancy. -- forecasting financial stability is in its infancy. there are a variety of ways to try and protect the independence of the interest-rate setting function. by far the greater challenge to me is to establish the capacity of the central bank to achieve independence in using its macro provincial cyclical instruments. i am not confident that it will actually be able to do that as

effectively as we should all wish. >> interesting different perspectives. charles, you seem perfectly happy to let john taylor said the interest rate according to his rule, but you seem to say that would not have prevented the crisis, nor would prevent future crises and have to use other tools to deal with those problems. am i correct? >> yes. >> and you're saying opposite. if we had interest-rate right to begin with, we would not have the crisis? >> there are financial markets out there with booms and busts and times of exuberance, so to speak, but the main thing is i think we want to prevent those from being caused by monetary policy. it is a powerful instrument. it can be a tremendous instrument for good, but sometimes it can be harmful. >> but what is the problem with what charles goodhart talks about as macro provincial

policy, countercyclical capital? >> what i would say is if you look at what happened, it seems to me there are cases, big commercial banks, most heavily regulated financial institution we have, they took a lot of risk and it seems to me that was the problem. not that it needed to be more systemic. systemic risk is always there, but there was a failure, in my view, at the basics of regulation. get that right first and then -- would is systemic risk? what is the policy going to be to move -- >> your skeptical about central banks getting into that. >> that has been part of their function for years, systemic risk. >> they did not have many tools. they did not have any benefit really to do anything. there are many financial stability reviews written

around 2006 and 2007 s a risk is being massively underpriced. they did not do anything about it. it is possible they could not do anything because they did not have the instruments to do it. >> the one instrument they had come they did not use the meat which was getting the levels they should have chosen -- >> but they were trying to hit an inflation target. one of the most unfortunate features of the crisis years was the commodity and oil prices were going up rapidly. that was summer 2008. some central banks like the ecb and the banks in sweden were raising interest rates in order to try to control inflation at the time the underlying fragility or the banking and financial system was being to least. >> that was much later in the process. >> are you saying highest interest rates would have

worsened the crisis? >> the central banks have come in my view, and entirely correct objective, which was to try to control inflation. there were varying interest rates for that end on the basis of the forecast there were making of what was likely to happen. >> fundamentally, yours and interest-rate policy is not a good way to deal with questions of financial stability? >> under certain circumstances, it cannot by itself. there were two separate objectives and you need -- at times when they are not aligned come in need to have separate instruments. >> john, it is true during this time when you say interest rates are being held too low for too long, aside from the commodities that charles talked about, you were not sing a lot of inflation. >> it was picking up one year after another. but when you're setting policy,

there is legs in policy. looking at current inflation is one sign, but you also have the economy recovering. unemployment was high. i would say -- put it this way, based on what worked well in the united states and other countries during particular periods of time, they were too low. i think that is an important way to assess this. what worked in the past based on theory and experience, in my view, and i think the view of many who have looked at it, is that they were too low. >> i will bring the responded to appear in a moment, but you continue to believe they're too low. what are the consequences going for the of the kind of monetary policy that we have right now? >> the role seems to me to show a pretty close to where they are. i am concerned about the talk about massive additional quantitative easing, trillions

of dollars or more purchases of assets by the fed. it seems to me that has not been effective and raises huge questions about future inflation. moreover, how do you and do that? what is the process by which to get out of say doubling the amount of reserves from $1 trillion to $2 trillion? we are in a serious high unemployment period. inflation is low. i think it is more on these new kinds of policies, these new massive injections of funds -- >> you are saying, do not mess with the balance sheet. the balance sheet is one of the central tools for dealing with financial stability? >> in my country in the u.k., our deficit and debt are far too high. we are trying to cut that back. in doing so, the rate of growth might go down too far. i think is very likely we will

restart quantitative easing and if we should start going to negative territory, which i hope we want, i would have thought quantitative easing. fiscal policy is much harder and slower to reverse. relatively flexible. you can adjust relatively quickly. i think within the u.k. context, fiscal austerity. balance is necessary by more monetary expansion in the form of quantitative easing is what we should get and what i hope is what we will get. >> what is wrong with that argument? >> i agree 100% the fiscal part of this is big time right now. huge uncertainty by the stimulus packages come increase in the debt, and that is another big part of the negative picture i think we have in the economy. i would like to find ways to reduce the uncertainty, which

seems to be held in business is back from hiring. i think monetary policy can made clearer and more certain, not guessing about how much quantitative easing can do because we do not have good numbers on the impact. i think the more certainty that can be put into the system, the more likely we will take off out of this dismal period. rivlins bring in alice and christina romer. alice rivlin, talking about fiscal policy, she is a member of not one but two commissions to deal with the deficit problem. that must mean you really have the answer. also, a visiting professor of georgetown university and a senior fellow at the brookings institution, former vice chairman of the federal reserve, former head of the office of management and budget and former head of the congressional budget office and many other things. christina romer, just recently

stepped down as the head of the president's council of economic advisers. and for some reason, she's decided to head back to berkeley, california and the university of california where she is teaching once again. we're fortunate to have you both here. christina, 5 minutes to respond to the discussion you have just heard. >> all right. the first thing to say is it is lovely to be here discussing monetary policy. as a monetary economist, one of the hardest parts of being chair of the council of economic advisor is was the unspoken rule that the ministration officials do not comment on monetary policy. >> let it all is today. [laughter] >> i will let her rip. the taylor and goodhart papers at think are a good jumping off point. let me give a few observations. the first and most important i think is to say any discussion of the future of central banking i think has to both think about

the short run and the long run. that figuring out how we're going to conduct monetary policy when we are back to full employment, when the output growth is where it needs to be a certainly important and useful, but i think we would all agree that is a problem that is still a long way in the future. with the unemployment rate still at 9.6%, i think thinking about any recovery and what role central banks will play in that will remain important. i was stuck to the degree to which both papers ignored that short run issue. i would say and charles paper, incredibly sensible and was discussion of central banking, what was striking is central bank's control inflation come until the financial crises. i think most economists would say, there is a third thing, which is macroeconomic stability. i think central banks are our first line of defense against recessions and that role has to be absolutely equal to that of inflation control.

i think john argues that the -- that he probably would not do anything more on monetary policy at this point, that the taylor will says interest rates are right where they should be and does not agree quantitative easing or any of those measures will do much. to my mind, if the taylor rule says in the current situation where the unemployment rate is pushing 10%, where inflation continues to slow, you would not take interest rates down if you were not found by the zero lower bound and i think that is a sign there is something wrong with the specification of the reaction function. my only -- owned reid is like quantitative easing, like an aggressive communications policy, like lowering interest rates near pain on reserves, could absolutely be helpful and should be tried. that we remain in a terrible recession and fiscal policy

makers will not act, the monetary policy makers must act. in general, i think both john and i'm guessing when we listen to the next panel, i think the number of people that are still focusing on the fear that central banks will lose their credibility as inflation fighters fail to realize how much the world has changed. i do not think anyone doubts the central banks have the will and the ability to fight inflation. i think the real question is whether they have the will and ability to flight deflationary. i think we risk finding the last war rather than the one we are currently in. now that have that off my chest, just a few words to talk briefly about the longer run picture. at a broad level, i agree with john that in thinking about how to conduct monetary policy going forward, a rules based reaction function makes sense, that incorporates the fed doorman date of controlling inflation

and dealing with the overall state of the economy. but i do think we need to remain humble about what the right specifications of that rule or reaction function is. i think the idea that john got the parameters just right when he sketched them down in 1993 is implausible. the basic idea was brilliant, but the question of what the bright parameters are is still up for debate. -- question of what the broad parameters are is still up for debate. the original will put too little on the output gap. other researchers say if we could come we would have the federal funds rate at - 5% rather than at 0 where it is. unlike john, i think 0 nominal down on interest rates is a very big problem, that now twice in

the last decade we have hit the 0 nominal bound and i think it is something that deserves serious consideration. if we decide that what we want is a program to keep the inflation rate target where it is right now, we need to think how we're going to do with the short run macro civilization. do we need to do a lot more research to figure out how quantitative easing works? or if we have other monetary tools? to we need to change our fiscal institutions? or some kind of situation where we can get a fiscal policy response quickly the way we can get it with moving interest rates? on the issue that i think was really motivating the whole conference, this idea of the blurring between fiscal and monetary policy, what is true is in the crisis, the federal reserve and other central and banks did have to blur that line and take actions that put

taxpayer dollars at stake. that was a shame. in an ideal world, the fiscal would have done it. it was a good thing and to the circumstances. had they not done it, this would have been infinitely worse. as we think about -- i am almost done -- >> ok. >> it would be a shame if one of the lessons that we took from this is under no circumstances, should central banks ever blur that line because i think it is incredibly important. the last thing i want to say, one thing that charles said that worried me on the blurring of the lines is in a world where debt burdens are getting larger, whether the central banks may have to play a bigger role in debt management in making sure the fiscal authority can get their debt purchased, i think that is a line i would not be comfortable in blurring. that our fiscal troubles are not caused by wars, natural

disasters, one time crises as they were in the past. countries are having big budget deficits because we just do not have the will to match our revenue to spending. i do not think there's anything a central bank will be able to do that will deal with that. >> thank you. >> alice, now you only have to the minutes because christine oto cures. >> on reading these very provocative papers, i was struck that john taylor and charles goodhart appeared to been living in quite different worlds. [laughter] i would much rather live in john's world if i have a choice. in john's world, commercial banks are essential to economic activity. economic factors are generally recessionary, inflation is a principal destabilizing force, and central bank's main job is to keep inflation under control and economies on a fairly even keel by influencing the lending

and deposit creation activity of commercial banks. they do this by raising and lowering interest rates according to a rule that reflects the deviation of economic activity from the desired trajectory. central banks did this remarkably successfully for a couple of decades, then the perversely, for some reason, abandon their successful role, kept short-term rates too low for too long, and aggressive housing bubble developed. when it burst, we were in serious trouble. i would not argue with taylor's pieces the fed's low interest rate policy contributed to the housing demand in the early years of the past decade, indeed, that was the point. but even in taylor's framer, there are at least three problems with attributing the whole catastrophe to low short- term interest rates. first, there were plenty of other contributors.

the effective securitization on the incentives of loan originators, the veracious capitate for dubious quality created by the action of both private and publicly sponsored traders in the mortgage-backed securities, and responsible rating -- irresponsible rating agencies and the list goes on. it is not clear whose fault that was in a fragmented regulatory system, but micro provincial regulation demonstratively failed. second, and my brief career as a central banker, we never thought the short term interest rate was inappropriate to for controlling asset price buffalo bubble. once it was convinced the housing prices would keep rising, irrational and the prince took over. it would probably have taken increases in short-term rates that were way beyond the taylor

rule to turn the tide. third, while bursting housing bubble by itself would have had negative impacts on the real economy, it would not have brought the world financial system to its knees. the scale of the catastrophe was tied to the higher superstructure of complex derivatives built on top of shaky u.s. mortgages and the short-sighted high-risk behavior of the institutions that were trading and investing these complex instruments, most of which were not ordinary commercial banks. so none of this i think had a lot to do with monetary policy. it would be nice to think the whole problem could be blamed on central banks abandoning their proven rule because that would be so easy to fix. but the real problem was that the world to which the rule had been appropriate had ceased to exist. a huge new shadow banking system had dwarfed the ordinary activities of commercial banks,

neither central more commercial or financial system regulators had kept up with the new developments are focused on the risk and perverse incentives they entailed. so when the crash came, they were improvised damage control was helter-skelter and it took awhile to settle into a more productive approach. charles goodhart lives in a more complicated world. banks are not heavily depended on deposits, capital markets overshadow banking commercial banking activity, capital moves easily across borders, and the complexity and speed of transactions can easily hide risk from regulators as well as from traders and investors themselves. in this world, monetary policy can still be successful in curbing inflation and stabilizing the real economy, but that does not care into financial stability. goodhart, i think he is wrong

about the central banks, by in his world, the primary role of the central bank is to avoid systemic collapse by keeping the financial system liquid. this involves actively using their balance sheet and in the lender of last resort. this will not work unless there are effective rules about capital and liquidity for all financial institutions, especially systemically important ones, ideally fairly uniform across borders. these may have to carry over the cycle in a way that liens against excessive risk-taking in a financial frenzy. moreover, nothing will work unless micro provincial regulators are enforcing the rule in ways that everyone can count on and procedures are in place to minimize the cost of the public is this is typically import institutions still has to be taken down. -- if the systemically

importance institutions still has to be taken down. still get the effect of coronations among banks, the government and regulatory authorities. in the u.s., we just lived through a contentious process of drawing these lines of responsibility and coordination. i am not sure we got it right. i would have preferred to reduce the fragmentation of my provincial regulation, which contributed to the last crisis by getting it all in one agency outside both the fed and the treasury. i would have given the financial stability and systemic risk spotting responsibilities more clearly to the central bank, although was stated obligations to court now with both treasury and micro provincial regulators. time will tell when we get it right, if there is such a thing as "right." but unless the major financial

powers are working well together, it will not much matter how many individual country draw the lines in the boxes. >> a lot there to talk about. we have about 15 minutes to discuss this among ourselves. i urge all four the to abandon the quorum in jump in when the filly of something to say. john, i do feel like giving gang up on and you should have an opportunity to respond to what you have heard. >> i want to say how much i appreciated the agreement of what i have said. [laughter] allison indicating clearly the low rates were a factor in the housing boom and the search for yield, but arguing there were other factors. i certainly agree there were other factors. i always say these come to the top of the list. if we're talking about monetary policy, that should be first. the second thing was [inaudible] one thing about christie's remarks about rules.

i do think originally it nearly 20 years ago, we have more information that they work, not the other way around. it seems people are doing research that shows, for example, in the period when i just referred to when rates were too low, which you get when he is a higher coefficient, it did not work. if you look at other periods, is used to be evident those lower coefficients actually more stabilizing than raising the coefficient. i read the statistics a little bit different on that issue. current events are important. i think christina is important to raise that. what i feel is the most constructive thing policy can do now is an uncertainty. it was a certain -- and certain environment. i think part of that is the debate about quantitative easing. there is not a lot of agreement on the committee or in profession.

macroeconomic adviser in favor of this says we to get 3 basis points for an extra -- each extra $100 billion. there is a cost and benefit issue here that we have to be cognizant of. i do not think it is that big, but i think that is the kind of evidence that we have the shows these are really not going to do much good and perhaps could be harmful because of the uncertainty. i want to get the economy going again. doing something means having certainty and predictability, a strategy to policy. >> could i jump in on the uncertainty? it is an argument we hear all the time. nobody that i talked to -- it is not policy uncertainty, but uncertainty about what is going to happen in the economy. the reason businesses are afraid to hire or invest as they do not know if the economy is one to keep growing, or if it will

stall out, so the whole idea that just by saying we absolutely are not going to do anything that that will give you something -- treeline >> i spent a lot of time talking to business people and i hear a lot about policy. i hear about, how are we going to do with these massive deficits and what is the impact going to be on me? what is when happen to the tax rate over the course of the next five years and what will be the impact on me? why does the president beat up on business people and what is going to be the impact on me? i agree there's a lot of uncertainty about the economy, but policy direction? >> there always is. when i was in the bank of england come every single forecast began with the words "the currentperiod that is uniquely -- [laughter] absolutely always. christina said i somehow got it

wrong that the central bank should not be involved in funding. when you have a debt ratio that is significantly over 100%, and in the u.k. we have lived with that for a long time after the war, the flood of repayment that are required as debt reaches its maturity are huge. in order to prevent the economy becoming excessively liquid and inflationary, you've got to manage that debt very carefully. the management of the debt, making sure the maturity structure is right, making sure that you do not have too many repayments coming due in a flood at a particular time for going known as underfunding and over funding, it is of great importance. that used to be handled very successfully and carefully by the bank of england. when their debt ratio fell to

under 50%, you could just run everything in the automatic basis -- on an automatic basis. when their debt rate increases, it will be much more difficult. it does involve the into of linkages between monetary and fiscal policy and we need to regard them with much greater care than many of our countries have had the fortune. we've been able not to worry about it. you'll find a becoming increasingly important. >> alice, could you talk about that because you're so involved in the fiscal effort? are we headed to a time when fiscal policy and monetary policy will become inextricably linked? >> yes. but i think we have always been in one. this is not unique. the uncertainty problem is seems to me is great.

it is partly because we're all so uncertain that anything will work right now. and i think that uncertainty is justified. we got into this mess because of over borrowing, overspending and consumers are cautious and business people are cautious, should not be surprising and it will take a while to get out. i shared john's skepticism that the additional quantitative easing will make much difference and i think christine alluded to this possibility as a fallback position in a way if we cannot get more fiscal stimulus, and in this country looks as though the politics are against it, then at least the central bank should do something. but the final point, the real way to have reduced uncertainty,

i think, what had been to a acknowledge sooner that we needed fiscal stimulus in the short run and serious deficit reduction in the long run and to have acted on both simultaneously. you can do that. you can take measures that will reduce -- >> is there still time to do that? stimulus in the next year? >> i think so, but i think the obama administration should have done it sooner, maybe even two years ago, to have gotten a bigger stimulus at the same time that they were -- >> would it have had more impact? >> i think it might have. cracks in retrospect, more stimulus would have inappropriate. -- >> in retrospect, more stimulus would have been appropriate. stimulus now in dealing with the deficit later. i think there is still a lot of

range to do that, that we could -- >> why didn't that happen? >> when you think where you are in january 2009, losing millions of jobs, you have to get that out there. just the timing of figuring out what the long run deficits plans should be i think was unrealistic. i think in a crisis, it was right to just hit it with everything you've got, but that does not take away from the idea we should absolutely be doing this two-part strategy now and it is something the president has been trying to do. >> but are we kidding -- i will try to put too much on monetary policy? -- but are we trying to put too much on monetary policy? any of you? i thought it was a reasonable

question to ask. [laughter] >> we are in a crisis and you use every tool you have. one argument i disagree with is, setting quantitative easing will not do much. the same thing happens when you talk about another $100 billion in stimulus. you say that is not enough to get the unemployed rate down to where it was. but all of these things together help to movie and the right direction. just because it does not solve the whole problem -- >> it does. it difficult position in a political world as they get the interest rate right and keep your hands off. >> the hardest thing in my experience with public policy is to say we have a strategy in place. it will work. maybe it will take awhile to explain to the american people what the problem is we are addressing. i agree with alice very much about in the early 2009, late 2008, laying out a package that had the long run part of it i

think that would have been far better. this has been very disappointing. is it too late? with the debt where it is going, to me there priority now is to get some certainty about what the future is. >> you said earlier during the crisis, serious mistakes were made. give us your top 3. >> one, early as august 2007, should have been clear there was a problem in the banking sector in terms of risk and toxic assets, but it was addressed more which is providing more liquidity. that delay it. we also have the stimulus package in 2008, which i do not think it any good. you sent checks to people and they did not spend it. the probably the most damaging, i call it at hot on-again/off- again bailout policy where we rescued the creditors of bear stearns, give every impression they would do the same with lehman brothers, which helped

fannie mae and freddie mac with bridge loans, promises, the lehman brothers came in surprised everybody without the rescue. the next day they went in and arrested a.i.g. and came back, no more rescue, we will do the tarp. i think panic for the next three week with tarp was very devastating and harmful around the world. i want to emphasize mid october, the commercial paper facility and mutual-fund assistance, the great court nation around the world with the swap agreements, with other central banks was very beneficial. going into it, that is the one i have the most problems with. >> let me take exception. i think, john, the clamming the first or second stimulus did not do anything is just truly irresponsible. let me defend the february 2008. this is george bush and the congress's fiscal stimulus.

i was a congressional budget office -- and number of people who have looked at this carefully say that it absolutely was helpful. it is always a question of counterfactual. things were deteriorating and we had an incredible decline in housing prices. the fact that they're spending did not drop is precisely a trip to the fact that we did send those checks. i think to go out there and claim these things did not work when there's a lot of evidence it did, when there is a lot of scientific and professional consensus it did come it is very damaging and preventing us from taking the kind of actions that would help to move us forward. >> what i think is not responsible is not to recognize there are scientific studies out there which showed it did not work. a lot of the -- i think it is important and economists disagree, to try to explain the reasons for the disagreement. i know some of you mentioned mark azande. he has a model to show it works.

i have a model that shows it does not work. there are many models out there. there are different economists with different views and to just use this or that one and ignore the others -- in addition, the specifics of the stimulus -- sending checks to people, you can see the way they were sent out. there are several studies on this. the counterfactual i find -- he always had counterfactuals. >> quickly, i do not want to get too far from central banking. >> counterfactuals. people always say things could have been worse. i say, well i'm tried to take that into account with my analysis. i like to play golf. i'm not that great, but my wife got new clubs a few years ago for my birthday. with us again to drivers, you cannot help but get a decent drive. my game -- it was supposed to be a stimulus to my game.

[laughter] it did not get any better. but i wanted to make my wife still better and i said, without these clubs, my game would have gotten a lot worse. [laughter] >> you have a golf comment? [laughter] >> i just want to get into what is an internal american fight by st. -- [laughter] >> if you look at output changes, effectively, the reduction in output of the u.s. turned out to be less than the reduction of output in the u.k. and most intercontinental europe. your unemployment was much worse than ours. for some reason during the recent debt crisis, productivity in the u.s. rose sharply where productivity in the u.k. and cut to the to europe actually

declined. -- and continental europe actual decline. >> that is a fascinating question we're not going to talk about this afternoon. [laughter] perhaps there is another conference similar center can do on that. all of the have made some reference to this question of central bank independence. charles, you talked about how the new era may inevitably cause less independence for central banks, although you said you could make the druids independent when they're sitting interest-rate policy. christine, he said he hoped we do not reflexively go back to the same central banks must be independent. i wanted you to comment on how important central bank independence is and what you think the events of the last three years protecting them ford implemented that principal, john? >> i think it is very important.

i think it is threatened with a central banks to fiscal policy, which has happened, at least in the u.s. and when they do credit allocation policy. democracy, we have good reason to take action. there is no good rationale for an independent agency of government to be taking these kinds of steps. stick to monetary policy as defined and have that independence will work better and do not mix fiscal policy and monetary policy this way. >> charles? >> independence is very important and central banks because it maintains their credibility. it is the credibility that central banks will do what they claim to be doing that is so important. i do worry about pressures on central banks that may force them from the straight and

narrow. >> central bank independence is certainly important. as i tried to argue, i think the blurring of the line in a crisis was absolutely the appropriate thing to do and i would never sacrifice the welfare of 300 million people to hold to the principle that you never cross that line. the one thing i wanted to come back on the debt management. i do not disagree they may have to be more careful in funding and what ever. i want to come down on alice's site, the far better way is not for the central banks to get really good at debt management, but to get the debt down. an aggressive fiscal consolidation in the economy is healthy is a far better way to prevent that line from being blurred. >> i think independents is important for the reason that charles said, the central bank in several different roles have to do very unpopular things

whether it is raising interest rates or raising liquidity requirements. i think they need to do both or somebody needs to do both. i worry that giving us a troubling to many jobs because i think that is a threat to independence -- i worry that giving the central bank to many jobs i think is a threat to independence. >> ok, good. let's open up to the audience. we have microphones. raise your hand if you have a question and we will get the microphone to you as quickly as we can. phenomenal, yet answered all questions this morning. sorry, right over here. then there is one in the back. >> good afternoon. this is for professor taylor. if the system of lending were

changed so that the payments were made in the form of a share of revenues as opposed to a fixed rate, wouldn't that automatically have a built-in stabilizer affect and prevent the need of having to change interest rates and inflation rates on a yearly basis to control the economy? >> it is the equivalent of islamic banking. everything is on a mutual fund equity basis. it will not work because of informational problems. the problem is a debt contract where everything is ok as long as the debt is repaid, but if the debt is not repaid, the person who cannot repay is going to go bankrupt, is so much easier contract that does that

require a huge amount of information. if everything is equity based as larry wanted -- what is the book come to ted jimmy stewart does not live here any more"? -- "jimmy stewart does not live here anymore? are the images that are very major. we're not going to get away from a. and while i sometimes toyed with the idea, it will not actually work and should not work. >> there was a question right back here and then we will, of this way. >> would you address the relationship of the u.s. central banks to the chinese central banks as they take on the question of trade imbalances in this part of the discussion?

>> you have to identify yourself. >> i am with barron's magazine. >> trade imbalances which are still a global issue is an investment. we always say that to get it straight down. those savings countries should raise their savings rate. that is the key here. it has proved to be a great value with having monetary policy in each country focusing on the main draw. i think this is ultimately in the interest of china. ultimately, it seems to mean, and we did not touch on this in our discussion, but what one

central bank does and does affect what other central banks do. we also did not mention how successful many emerging market countries were bouncing back from this crisis. they have had much better monetary policy than they have had in the past. your question raises a lot of important issues. >> let's stick with that for a moment. we just had this weekend of meetings where the issue of exchange rate regimes and the differences between countries has been very much at the forefront. how does that affect the picture? >> let me jump in. we are seeing more of an international forum like the imf and the g 20. we do need to coordinate our macro policy, fiscal policy. as long as exchange rates move with market forces, which is a

problem with the chinese exchange rate, those issues take care of themselves if you do the sensible monetary and fiscal problems. i do think that a discussion of the currencies and exchange rates have gone somewhat overblown. in terms of the imbalances, there are multiple ways to deal with them balances. china could let their currencies appreciate what they could do more to stimulate domestic demand. that is not just a chinese problem. a germany could do more. thinking about the whole picture is important. >> he made a reference to this earlier. how well does this work? >> at the game works remarkably well. the finance ministry's coordinate all the time and the

fact that they've had relationships that knew each other were probably a very useful thing. one important point on the chinese is that it is one more reason for getting our debt under control. we do not want to be under pressure to have to sell around the world which puts us in a very vulnerable position these of the the chinese and other countries. -- vis-a-vis the chinese. >> now we have had the crisis, i think the imbalance is much more dangerous. the point is that when you get a crisis of this kind, the deficit countries are bound to come back. sooner or later they will go into a regime of austerity. and makes life easier if the deficit countries can run a surplus. they cannot if the countries

which has have -- which have had this policy is maintained on keeping them. that would put deflationary pressures around the world. i do see a danger at the moment with the imbalances that are potentially capable of keeping deflationary pressures for quite a period of time. >> you agree that the chinese issue is quite serious? >> it is also japan and germany and the periphery of europe depends very much on the germans expanding domestic demand. it is as much japan, germany, and china of but the all need to expand their internal domestic demand. it will be just that much harder for the deficit countries including the u.k. as well as

the u.s. to come out of this. >> another question over here. someone on this side? >> this may be directed toward ms. rivlin. the fact that we are in a global world, there is no fact about that. the key thing we're facing here is doing what you said, getting this settled out. as thomas jefferson said, we need to pay in each generation for the mess that we are in. even though i am a fiscal conservative, it looks like to me that the u.s. and congress needs to get things moving for this country to not depend too much on, like you said, mr. roemer, on the stimulus. i am in favor of paying and a

bit more taxes but on a limited basis. maybe the cdo can get together with congress and say over a period of eight-teniers the campaign this thing off to get this back into a normal position. does that seem vital? >> alice has a plan. maybe you can give us the details. >> i could not agree more. it is important, as i said earlier, to do two things at once. we have to get out of this recession. that means come i think, we cannot raise taxes or cut spending rapidly right now. that would be disastrous. at the same time, we have to take action to make those things happen over the long run. the two commissions that i am on are trying to put together plans to do that. i am hopeful that they will succeed. then it takes political will. >> i want to make sure i am clear on what you are saying

even though this gets us away from central banking. use a do not raise taxes right now. does that mean you would not be in favor of allowing the upper- income tax increase to take effect on january 1? that it should best be delayed for one year? >> it does not mean that. [laughter] nice try. >> that? greece would be okay? >> i believe that tax increase would be ok. i would be in favor of extending the tax cuts for most of the population, but not for long. >> one year? >> one-year, two years. not because i think we need this particular taxes, but we need a bargaining chip to get revenues out and spending down. >> questions on this side? yes?

>> i am from "the wall street journal." >> i could not tell it was you. i am not favoring "the wall street journal." >> i would be interested in what everyone has to say about that and more generally what the fed stance should be with regards to inflation right now. >> i will start with the price starting free market. what it has in its favor, and it is complicated which is why i think a lot of times it does not work as well, but the simple idea of price level targeting is that if you go through a time like we went through with abnormally low inflation, what price level targeting does is that the central bank will been aiming for a time of the above

normal, higher inflation, so you are back on the price level path. that is the way of saying like if you had gone three-time like we have gone through, it is ok to have 4% inflation for a while. it is a way of over correcting previous mistakes. it has a lot to recommend it. i think a lot of professional monetary economists think it is a pretty good idea. >> if you stimulate in the models it works fine. you mentioned the complexity. i think it is hard for people to grasp the fixed price level. >> it sounds good now, but what happens when inflation is higher for a while. will we have to have zero inflation for a while? then people will think we do not need price level targeting any more so we will go back.

there is a lack of credibility to the concept which worries me, but in principle it works. >> this may be heresy in this room, but christie alluded to this earlier. i think it is a mistake to put too much emphasis on inflation when it is very low. it is very hard to explain to people the central bank is worried that pricing will not go up fast enough. it is much easier to be frank about what you are trying to do which is to get the economy moving again. if you say you are trying to avoid deflation, that is ok, but it is not very understandable. >> we have had inflation in the u.k. and our target is 2%. we ought to try and have a time in which inflation was less than 1%.

the price level targeting is one of those things that works in theory and does not work in practice. >> a question right here. wait for the microphone. identify yourself. >> i am from duke university. at the jackson hole conference and manage from indiana university wrote a paper called "a monetary science, fiscal alchemy." we know more about monetary policy than me know about fiscal policy. i must say that i find the level of discussion of fiscal policy in this country is pretty dismal. mr. taylor wrote a paper 15 years ago or so, which was one of the few i could find, about a role for fiscal policy in which

he downgraded it, as i recall, relative to monetary policy. now we find we are in a set to ration where we have a sound ourselves in a situation where fiscal policy is something where we need to consider. here is how i make this into a question. do you any knowledge the understanding of the fiscal policy and how it works is way behind our understanding of monetary policy and how it works? if so, what kinds of steps could be taken to put them on a more even footing? >> i do not think that is necessarily true.

monetary policy seems simple because a lot of people in the monetary policy realm body could be solved easily. there was later the taylor rule. i do not know if we really know if those things work. i think we know about this policy, when it works, and when it does not. there is enormous uncertainty about everything. neither of these things deal with the issue of this meeting, namely financial instability. >> there is an element of truth to what you are saying, but the professional consensus has been that monetary policy is your first line of defense in a short run stabilization. we did a lot more research on how to use monetary policy to

keep us on a pretty even keel. i think there has been less research in recent years. the debate ended with a widespread consensus that this policy matter. there has been a resurgence, and i can say this, i am part of the resurgence on doing research in the effective tax changes. measured correctly, the facts are hard. there was a study at university of california san diego saying that these the in had the facts. there is a professional literature here that i think is very large, very empirical, and says it matters. >> one final word? >> on the consensus before this was not so useful, it referred mainly to discretionary policy

like automatic stabilizers and the long-term effects of tax cuts. there is a lot of research and agreement on that. the idea that discretionary packages have come back, i think, before things got bad. there was the bush stimulus package in february 2008. i think that was mistaken, flight -- quite frankly, as i explained before. we do need more research and understanding. the crash -- the profession just went like that. that reflect to me that we did not have a basis for what we were doing. one specific example that i think eric leaper would promote is a model comparison program. in the monetary policy, we have people look at all the models. i would find -- not myself

personally -- but research that compares different models of we could have a more robust analysis. >> so we have not resolved whether fiscal policy can be stimulative, but we have shown that discussing monetary policy, contrary to expectations, can be very stimulative. i would like to thank you for your discussions and i turn the floor over to david. [applause] >> thank you to the panel again. that was terrific. we are going to take a 10 minute break and get the next panel in here. we will start promptly at 1:30 p.m.

>> as you heard, a 10 minute break in this conference examining the role of central bank -- banks. the next panel assembled at 1:30 p.m. among the speakers will be paul volcker and a number of governors from international banks. we will have live coverage here on c-span when that gets under way. >> c-span's local content vehicles are traveling the country as we look at some of the most closely contested house races 80 a to this november's midterm election. -- the leading up to at this november's midterm election. ♪ ♪ >> how are you doing -- good,

good. i lvoe this. thank you. i need your help in november. i appreciate you. i will listen to you. i will come back adn keep -- and keep talking. >> sometimes "no" is a good thing. the party of "know" is knowing what's in a bill before you vote. we have 26 counties made up of the delta and the ozarks. it is a very stark contrast in geography. culturally, there is a similar contrast. this is one of the poorest districts says economically. the people here are good, hard- working citizens.

>> their balance their budgets and provide a good living for their family. these are good people. >> voters in the first congressional district typically vote very conservative at the national level but when elected democrats pretty solidly minus a few pockets at the local level. that has been pretty historical. there has not been a republican elected to the first congressional district since reconstruction. the two primary candidates are rick crawford who is a radio broadcaster and a chad causey who is the retiring rep's chief of staff. you have the quintessential guide that understands washington and how it works and understand what is going on in the district vs. a first term

republican candidate in the crawford new definitely understand the bread-and-butter issues of the district which are primarily agricultural. if you ask for some up and down votes that have been dominating the american political agenda this last year -- health care, the stimulus, cap and trade, some of those issues, i think you will find them in total agreement on those issues. how they truly feel about the issues is debatable. >> of this race is about the people of arkansas. it is not about me, not about the opponent or the national parties. it is about the values that the people here in the arkansas have and what they want to see and who will fight for them regardless of party. in is about sending someone to washington use -- who shares their common sense. i share those values.

>> chad causey has a deeper working knowledge of the bigger projects going on in the district. higher education issues, agricultural and water projects. crawford just has a broader populist appeal of opposing some of these big agenda items that you are telling me are opposite to the wishes of the voters. he bogeyed that type of a member of converse. >> what people are looking for is a citizen legislator that reflects the values of the district's that have made a contribution here and are not entrenched in washington, not a bureaucrat, not a member of the politically. i'm not doing this to get a job, i already have a job. i want to make sure everyone in

this district to understand. >> it will feel like a coin toss. it may be your best way of guessing who will win the election. as voters decide who they like in a particular race, as television and radio ads when become at neither will identify themselves by party affiliation. and will be in name identification. to see not bee surprised a 50/49 split on this one. >> we are traveling the country as they look at some of the most closely contested house races leading of to in the midterm elections. for more information on what the local content vehicles are up to come and visit our web site, c-span.org/lcv.

>> we are looking at a live picture from the national press club in washington where we are bringing you coverage on the conference of the role of central banks. attendees are taking a break and set to return at about 1:30 p.m. and it will include a number of the former bank regulators and paul volcker. and will be moderated by the former u.s. treasury secretary john snow. live coverage resuming in a couple of minutes. until then, and that it on the pennsylvania senate race. -- an update. >> we have an update on the pennsylvania senate race. is chris brennan, political writer for "the philadelphia daily news." the incumbent, who is -- will no longer be in this seat, senator arlen specter, who was

a republican and ran as a democrat, beat joe sess tech in the primary, is now going to campaign for mr. sess tech. -- sesteck. why now? >> he's being deployed strategically in the city of philadelphia. he's still very popular in philadelphia though his favorable -- unfavorable ratings in the state are not so great. i think that this is a chance for joe sestak to raise some last-minute cash. he's kno to close late. nobody knowshat better than arlen specter. sestak was behind in the polls going into the may 18 democratic primary, and with the help of a rather devastating political campaign commercial, closed the gap and beat specter quite handedly in the end. i think specter will help him raise the money that he will need if he's going to have a shot at former congressman pat

toomey. they will be holding the primaries in a downtown law firm. it's a private event. it remains to be seen whether specter's going to have anything to say publicly about sestak before or after the event. the's a curious dynamic here. when it became clear before the may 18 democratic primary election that sestak was starting to close the gap, people started asking arlen specter if he would endorse joe sestak if he was victorious and arlen specter sort of said he would support whoever the democratic nominee was. joe sestak on the other hand repeatly said he couldn't imagine a scenario in which he would lose to specter so he codn't address the question of whether he would endorse specter if he won the decratic primary. so i got to think tt's something that arlen specter

remembers. host: the white house has been involved in this race. our viewers saw the president there yesterday. the vice president has been to the state many times. what will happen over the next few weeks? will they continue to visit the state? >> yeah, i think you'll hear them quite a bit. president obama and vice president biden very popular in philadelphia. i think you'll see them here. you may see biden in things like scranton and pittsburgh where he's also very popular. it's an interesting sort of balancing act for joe sestak because he rejected the white house's and treaties to get out of the race. they wanted him threeve arlen specter in the primaries. reject that had. rein and then he won and then -- he ran and then he won and he's trying to make great political hay around that around the campaign trail sort of declaring himself an

independent democratic stepping up to his party which in this year with the anti-incurvency fervor, that's a pretty good hessage. so it's dicey to both be the guy who stood up to your party but then also held and embraced the party in a political rally such as they had in philadelphia. host: the republican candidate in this race, pat toomy, has been ahead by -- toomy, has been ahead by seven points. what will be fort right, upfront and cenr in the next couple weeks in this race? >> the thing that jumps out most to me is the question of the undecided voter and whether they just stay home on the election day. the -- our latest "daily news" and franklin poll shows that the undecided vote in the toomey and sestak race, it was 39%. if you look at the likely voters, it's 32%. that's a full third of the

electorate that are undecided after a great deal of advertising and a great deal of media attention. this is -- this is a tional race that's getting a great deal of attention. and the fact that a full one-trd of the voters still don't know how they're going to vote suggests to me a real scenario that they wind up staying home. host: one final thing here. will the two square off in a debate? when and where? >> there are -- there's a debate in philadelphia. there's another debate scheduled in pittsburgh. i believe there's a talk of a third debate. i know they definitely have one scheduled at the national constitution center here in philadelphia next week and then there's also -- they are going to follow that a couple days later with a debate in

>> we are back live now for a conference on the role of central banks in the global economy. this will include remarks from former reserve chairman paul volcker and will be moderated by former u.s. treasury secretary john snow. this is live coverage from the national press club -- national press conference here at c-span.

>> ladies and gentlemen, may i have your attention? we want to thank our distinguished first panel. this panel will discuss and reflect on how the financial crisis has altered the landscape for central banks around the world. to kick off our conference for the second panel, i will call in our conference director, david leblanc. >> it would be hard for anyone

to follow that first panel, but i believe we have assembled a group. that express our gratitude to john snow. we're fortunate to welcome a distinguished group of the sitting and former central bankers. toshihiko fukui, mervyn king, jean-claude trichet, paul volcker, and zhou ziaochuan. secretaries know? >> thank you very much. on behalf of governor of lyle's -- blyles, let me welcome mollah

due to this central bankers forum for what i know will be a lively conversation. that is the whole point to encourage these reticent and withdrawn central bankers to share with us there and site on the global economy. they are in the iran and they wrestle with the big problems of the day. the five central bank governors who are with me on the stage today are all people i have worked with that in one way or another during my tenure in government and out will offer a truly incomparable view of the world of central banking. they have overseen the largest economies in the world representing some 70% of the

world's output. they have seen it all. from inflation, stagflation, deflationary, financial crises, panics, meltdowns, and long sustained periods of non- inflationary growth. never before have -- has there been such a gathering. then me briefly introduce each of the panelists. paul volcker was chairman from 1979-1987. three decades ago knocked off inflation. today, he is the father of the volcker rule. we will hear about that later. next, mervyn king who has been

governor of the bank of england since 2003. she has the distinction of participating in every monetary policy vote by the independent state of england since they gained their independence. he is a genuine thought leader among everyone in the global financial community. either he or governor joe ranks as the rafael nadal of the bakning -- banking circuit. xiaochuan who has presided over a long time of the sustained growth for china. gov. fukui who headed from 2003-

2008 is a very respected figure in central banking and put in place years ago the antecedents to what is it today called quantitative easing. i bet you did not know back then how famous that concept that you initiated would become. finally, my older good friend jean-claude trichet who has been the head of the ecb that oversees the largest economic gathering in the world in terms of output, and a larger share of global g.d.p., the second head of the ecb and known simply as mr. euro. there are your panelists. with the financial meltdown of

2008, central banks found themselves, i think, reluctantly thrust to the forefront of the global crisis. responding to the dense with unprecedented measures as political -- responding to the events with unprecedented measures as political bodies found themselves unable to act in a timely manner. the actions by central banks, while understandable and undoubtedly called for in many cases, blurted traditional lines between monetary policy and fiscal policy. while generally credited, these were credited with unfreezing the markets and avoiding an even more severe downturn, central banks have not been without their critics. principally, and you know the refrain, too low, too long, too

slow. right or wrong, they have emerged as the indispensable man of the global economy. the only real backstops to the global financial system. as the great american president teddy roosevelt famously said, "credit belongs to those who are in the arena, have the responsibility to act without the luxury of hindsight" and central banks have certainly been in the arena. as i kiddingly said to governor king earlier, who is a great rugby and english football fan, if you are a football fan or a rugger you will have some scars of the play the game hard and well. despite the controversies around

a central banks, they have come out of this crisis. this is an interesting thing to observe. the have come out of the crisis with even greater authority and greater powers than they had going into the crisis. today, they facing a set of circumstances -- slow growth, higher unemployment, the specter of a deflationary in the highly industrialized countries of the world. with continuing global imbalances and unprecedented levels of sovereign debt in the highly industrialized world, working with the issues of competitive devaluations. for better or worse, they remain the indispensable men and the economic fortunes of the global economy now depend, really if never before, on the actions they take and the decisions they make.

we look forward to a lively discussion and i want to thank you all again for joining us. to get this moving, let me start with a broad question that looks forward although it may sound like it is looking back. the question is this -- we seem to be well past the worst of the financial crisis from 2008, but let me ask you how what you would characterize the state of the financial markets today? is the crisis really over or are we still in the midst of it? i will open that to the floor. jean-claude, do you want to take a stab at that one? >> why not? [laughter] can i say that listening to you, i would very much agree, first, that we are on the first line when the crisis erupted.

i have a very good memory of the decisions we took in 2007 because we were looking at the money markets that were totally disrupted. we engaged in the first, i would say, non-conventional measures of this time which had been very dramatic. it was to supply unlimited amounts of liquidity at a fixed rate. the idea was to maintain order in our money market and to master our own interest rates. i would very much make the point that for us we had standard measures on one hand and non- standard measures on the other. their traditional interest rates which, for us, has to deliver stability to be anchored which is less than 2%

but close to 2% so we do not risk the deflation. we attach a lot to that. the non-standard measures, which have been early and bold, we've considered the current transition of our monetary policy during a time which is marked by very abnormal functioning of a segment of the markets and the money market. that is the way i would say the conceptual distinction we have between standard and the non- standard. prevent ourgned to definition of price stability. and your question, i would say it is a traditional question

since the eruption of the crisis. i would say we have to continue to remain extremely alert, extremely cautious and prudent. we have seen the events that were on predicted. we have -- and predicted. we have seen the events unfolding with extreme rapidity. we are doing the hard jobs which are being decided with the international community about regulation and the appropriate coordination of policies that are in the hands of the government. i would say that we would call ourselves and all institutions to be up to their responsibility in the present time which is demanding undoubtedly and calling for permanent and credible alertness. >> i interpret that as saying we

have made progress, but we cannot let up. >> a lot of good work has been done, but a lot remains to be done. >> mervyn? >> it would be a mistake to assume the worst is over. as a jean-claude explained, we started by providing extra liquidity to the system. that can i think, has had the unfortunate side effect that many commentators believe this was a crisis which could be solved by a provision of temporary liquidity. that is wrong. this crisis reflects holy unsustainable patterns of large scale capital flows from one part of the world to another with the consequence that even monetary policy that did follow the taylor wrote exactly had to insure a level of demand of the

domestic demand which was unsustainable. the banks in the industrialized countries were allowed to get to a point where in was not that they were short of liquidity, but they work in an unsustainable balance sheet provision. the leverage ratios in some of our banks, both in britain and the united states, and indeed on the continent, reached levels of 60 or more to 1. there are many and it gives you could use to describe that, but prudent and sustainable are not among them. inevitably, there was going to be an adjustment. we have spent the last few years dealing with it. her majesty the queen famously as to the question, "why did no one see this crisis cumming"? the answer not to be a long, detailed description of economics but a very simple point was that we all did say the unsustainable circumstances that we were in.

the imbalances were discussed at every imf meeting. the events that constitute the crisis are unpredictable. i cannot predict the events, all you know is that it cannot go on forever. we are now dealing with a series of events that did occur, that we are responding to come out and whether there will be more is of course impossible to say. we have shifted the unsustainable positions on the balance sheets of the financial sector to the public and we're seeing difficulties in many countries and positions that results from that. one hopes we can adjust in a relatively orderly way. this will be a long adjustment and that's something that can be done quickly. there's always the risk that an expected defense should occur that gives us headaches of a

kind of have seen over the last few years. >> i will follow-up. a question for the panel. the models that central banks use, the macro-economic models, seemed to assume a normal distribution of rest. and we haven't -- of risk. these are fat-tailed risks. what could be made -- what changes could be made to the macro economic models that underlie these institutions? >> governor zhou? >> some of the events like insolvency, bankruptcy from the financial institutions, the

panic, and others are effected. there is no description of the relationship between these. these are independent from each other. by observing these along with the crisis, the events may be interconnected. the low probability in the distribution is not enough for that kind of the event. we need to use a conditional probability. if one that event happens, the

second body that match -- would have a higher probability. the third event would then have a higher probability. the conditional model to dealing with risk may not be enough. we tried to think of it as with that kind of condition or to describe the into connectivity -- the interconnected with the problems. we do not have enough data to know if these are a probability, but you could come to some extent, use some of the methodology to think about that. to make the math matt -- to make the mathematical model, it is very complicated. we did not have existing

methodology to deal with that. we only have the larger-scale simulation model which only shows to some extent what can happen after one event. >> governor fukui? >> in considering policy after the crisis, it is necessary to bear in mind that the transformation was needed to establish procedures accordingly. change in the global economy framework is of particular importance in the integration of

both finance and economy. people, goods, information, and money now flow freely in the world. that mean demonstrate. the economy becomes fundamental to the world. price stability maintains a key market policy. minimizing the cyclical

fluctuations is of increasing importance. from this viewpoint, i deeply understand the circumstances of the approach, but at the same time when i am thinking it is always necessary for us to consider the difficulties they represent and any changing economy especially to avoid tailed risks. the basic formula illustrates a based upon the differences between the appropriate level interest rates, target interest

rates, and the gap between potential and actual gdp. even one professor himself told me that it represents the spread between the bank rate and the policy rate. if this is at a time when political risk to be underestimated and the spread narrows [unintelligible] >> thank you very much. paul, what have we learned from this crisis to make the next one less likely or less severe? you could tell us about your work with the congress to try

and plug some of the gaps with the volcker rule which has been at least partially successful. >> let me remind you -- [laughter] i want to go back to your previous question. you are suggesting macro economists have some shortcomings. macro economists have a lot of shortcomings. i studied macroeconomics for 70 years. that is pretty well understood. the problem that you kind of alluded to is one of financial engineering and not macroeconomics. for some reason or another, people began to get the idea that a very sophisticated mathematicians, physicists, and engineers could steady financial markets and find patterns of

behavior in the financial markets. they would implicitly or explicitly follow the distribution curve. if you are a mathematician, that is what you know. everything looks like a distribution curve. it is a mistake in analyzing financial markets because financial markets are not a physical phenomenon. they are a human phenomenon. they react today to what happened yesterday, what happened two minutes ago. they go to extremes all the time. just like the fat tails follow the pattern. since there are no normal pattern down there, you will not find out. they are only expected to have every 20 years or 100 years. there you never know. we have a major problem. i propose, to the question of financial reform -- i was at a

meeting with sam infrastructure people and engineers a while ago. one of the engineers was bemoaning one of his best students. it was a good, solid civil engineer, chemical engineers, they were all going to wall street. it is a very productive occupation. you know that newbridge we are building the atomic -- that new bridge rebuilding over the potomac? it looks ugly. i concluded from this conversation that the trouble with the united states recently is we have the worst of both worlds. we have lousy engineers, lousy bridges, and a lousy financial market as the engineers go to the financial market. now i have gotten that off my chest. now what you want me to respond to? [laughter]

>> eu suggested a question to the whole panel. have we overdone finance? his finance -- has finance become too big a share? >> first of all, you know the moneymaking finances way out of proportion. you look at the calculations of a value added and the u.s. gdp, i do not remember the exact numbers, but 15 years ago the financial world accounted for "x." then it got to 10%. that is value-added. as the economy operating better? not discernibly. in fact, it was not growing any faster than before. it was not growing faster than

the basic economy in the past. interestingly, the figure i gave you for value added is in nominal terms. when the economists suggested it, what they perceive it to be changes in prices, there was no added contribution to the value, no value added from the financial sector to the g.d.p. in real terms. i do not know how they calculate it, but i suspect there i have the platform. >> years ago, i was at a conference. it was cheap executive officers and a panel. i found my cell sitting next to

a founder of commercial engineers. there was some young guy on the program explaining to the chief executive officers that they better learn about financial engineering. they did it -- they did not know about swaps and all the other apparatus of financial engineering. their firms were going to be dead in the 21st century. i nudged this guy who i did not know. a i whispered in his ear and i asked what financial engineering does for productivity. he leaned over and whispered one word that was not expecting. he whispered nothing. what does it do? he says it moves around the rents in the financial markets and intellectually it's a lot of fun. [laughter] the fact of the matter is, i

think he was wrong. it increased the rents in the financial markets and that is what has been demonstrated with all the income that has been created and has given us a fragile base for economic reform. that is the basis for my lecture. >> i think we are all being enlightened. we are struggling with reform. we might be halfway there. we have a lot of problems in making it consistent internationally and all the rest. i think that the financial system in the world is basic in any economy. it is basic and globalization. i think the banks are particularly important. they are charged with certain responsibilities for the payment system, for liquidity, a safe

place for funds. they are protected. that is generally recognized. they have been protected forever. in almost all countries. today, with all this new financial technique, there is an emphasis on trading. i don't know if it is good or bad but they lend themselves to speculative activity and that instability. my view is that we should work toward a system that protects the banks as we -- as we always have but we have to interject more risk into the system to deal with this too big to fail phenomenon. that is easier to do outside the banking system than inside. we have a general consensus on the idea of some kind of resolution authority. how that gets done -- it is wonderful to describe verbally -- to get it done and to get it

credible is a problem pretty general idea is to have a very speedy process. if a financial firm fails, the government takes over -- takes it over and liquidates the organization. the stock market is gone and the management is gone and the creditors are not at rest. that is in the u.s. law now. you must liquidate. there is a lot of uncertainty how that will work in practice. >> our banks still too big to fail? are they too great to allow them to fail? should the emphasis be on preventing them from failing which is or what i think dodd frank is all about? this creates a custodial relationship. should it be on the other end, making sure that we do not have

them that bridget that they. george schultze said of they are too big to fail, they are too big. what policy role would you apply to deal with that question? >> you are of the being very cynical about the law that was just passed. [laughter] the lot in this relentlessly takes the position that we will protect -- the law takes the position that we will protect the banks. we will not expect them to kill because they will be so well protected. the others will agree -- be permitted to fail. that is on the table for every country. >> i would say that we have to do both. we have to make the financial system much more resilient and make the banking system much more resilient. let's not forget what has happened. and we were on the first line. it would be extraordinarily

naive to think that the banks -- the central banks could deal with this. what happened was the executive branches of parliament had to step in and in my own institution, we computed that when you take absolutely all the decisions that have been taken on both sides of the equation and i trust in japan, too, because there advanced economy is very much at stake, i arrive at recapitalization options. there is a guarantee on the liability as well. i arrived at 25%-27% of gdp. there is risk on both sides. that means that something bad happened which is absolutely dramatic, it was necessary to do that to avoid a depression.

we will not do that twice. to put in our democracy once again 27% of taxpayer risk to avoid a depression seems to be excluded in technical terms and in political terms. we are committed to make the system more resilience and solid. in balancing the global economy in order not to have this system at risk. we need to make the final system much more resilient. maybe what we are doing in basel in particular, we prefer the international community can be very much enlightened and able to deliver it knows the definition of capital and new

capital requirements and the conditions for getting to the new regime and we have also to care for systemic institutions collapsing, that it does not affect new drama. i think we have to do both. >> we have witnessed that central banks came out of the crisis with enhanced powers and responsibilities. now clearly responsible for systemic risks in the system. how does the new set of powers and authorities over systemic risk sit with the traditional role of central banks that create non-inflationary growth or stable prices? >> it goes back to something that was set in the first panel. whether you call it eight taylor role or taking a punch bowl away just as the party is getting

going, we had a clear framework from our policy. it is still valid and we should pursue that. viewre charles gooheart's that if you care about the neighbors, you may need to turn the music down and take the punch bowl away when the music -- when the dance to get wild. [laughter] even though we followed another country, i will not argue about the u.s., but there are many countries that follow the monetary policies of the taylor will but still have massive expansion of the balance sheets of the banking system. they have high degrees of leverage which resulted in an extraordinary fertility. we have to deal with that. -- extraordinary fragility. people have got back to the 1930's and said what did we learn.

i looked back and i am not sure the big lesson is fiscal policy. the big lesson to me is the sheer weight that has been put on the observation that spending today depends on people's beliefs about the future and those believes can be but are not necessarily volatile while but they can win that is the case -- when that is the case, the conventional risk and how much banks need and the models of financial institutions' huge turnout to be irrelevant from almost one day to the next. the one thing we must not do is to rely on models that financial institutions abuse themselves to calculate if there is too much or too little rest. if they are using those models and those models are broadly accurate, it is rather unlikely

that the system as a whole will end up in a crisis with lots of rest. where we will get a crisis is precisely when the judgments that went into those models turn out to be irrelevant. in which case, the worst is for the regulators to follow the same path. to take the engineers as an example, you're slightly harsh on the engineers. [laughter] the real engineering industry is one where not only the people working in it but the regulators are less -- earn less. they have much more sensible approach. to don't think engineers say everything is a normal distribution. i think they say that some of the systems are very, very complex and we are not entirely confident that we can model it accurately. let's stop pretending that we can and does do what we can to identify the bits that are vital

to save and make those as robust and resilience has possible and build firewalls which will be a grizzly into the bits we can't afford to go wrong. people say the financial sector is different and more complicated. it is hard to imagine a former regulation for these more important than regulation of the nuclear power industry or regulation of airlines where people died together wrong. here we just lose a bit of money. there are big lessons to be learned from the way in which people think about regulation. i think what has happened goes back to the point about finance. people got carried away by the extent to which they felt they really understood what was going on. the real thought that comes out of this more than anything else is the role of animal spirits.

there is nothing in economic science -- i defy you to bring any economic texts that can be used to argue that the distribution of returns on an asset has a certain distribution that stays the same from one day to the next or one year to the next. there's nothing that justifies that her happens to be a convenient viewing have adopted in order to do practical things with it. it is not something that is immutable. these things do change. >> you are underlying the fundamental issue of the question i have. it goes back to what governor joe was saying on modeling. i am hearing that central banking comes down to a lot of good common sense. science can take you only so far. bemal spirits really can't

modeled very well. yet if an animal spirits is that the heart of why we get panics and frozen financial markets, we better have people who have a sense of these things rather than rely on the model to get us there. >> practical man who usually believe themselves to be exempt from intellectual influence are the slaves of some defunct economist. it may be economies are banks or whatever. one danger in the financial sector is because things seemed to have worked well for a long time that they will go on forever. it is the hardest thing in regulation to say to someone that you are making a vast amount of money and you appear to be very successful and you are working in the sector of our economy that everyone thinks is a model for our economy and then to say to them that the reason

why it is successful is because you have been lucky and taken so much risk and it has not yet materialized but it could. you cannot prove it. it is a judgment. that is what the big challenges of regulators today. >> which is why i come back to has always been skeptical of options for executive compensation. yes or no? >> yes. [laughter] >> governor? >> no doubt experience from the recent crisis [inaudible] helps in the functioning of the financial system and is built to prevent systemic risk from rising.

every central bank must step up [unintelligible] i am thinking would it be possible to declare that the crisis can be entirely prevented by being fully prepared? societe may not be that much, i am thinking. central banks must remain faithful to contingencies. this demonstrates by the recent experience. it is unwise to exclude the possibility [unintelligible] it could be quite extraordinary for a central bank. it is highly important that central banks do not figure out

any of the following three conditions. a very important conscience, the first is that the system is identified. the second is that [unintelligible] only central banks could act as a player and thirdly, all the majors have been taken so as not to undermine the effectiveness of the banks. [unintelligible] >> thank you. governor judd? >>?

>> certainly the central bank will consider all of its responsibility for maintaining financial stability. there is a higher standard going out. it is creating leverage and provisions. they are also going to strengthen counter-cyclical spurts. i think traditionally central banks banks that [unintelligible] in a normal time, the supervisor

worries about this who hires the individual financial restitution. central bank's focus mainly on low inflation. in the crisis appearance, it has come out that the central banks have a crisis of management including [unintelligible] also illiquidity injections for deterioration of the crisis. now, in china, it is our different responsibility. there is something missing in these two situations. it is not one under% endowment. it is not yet a crisis.

we need to watch our work more closely of those with potential instability. it needs a kind of maintenance. it need some kind of therapy. in china we call it the online retirement of our financial markets and institutions. it took one situation to deteriorate in a crisis. what the central bankers should ---[unintelligible]

maybe there is some kind of moral here. if you do too much you create moral hazard it is worse to consider that you try to worry of the situation got into a crisis. in the crisis, there are liquidations. [unintelligible] we want to improve the highest of financial institutions.

and then it comes out that what kind of cost if you do some job in this regard. who will pay the cost? i think this opens a new page after the crisis to consider this. >> countercyclical capital is the cry of the day. that comes out of most of the academy's and basel and other places. the issue i have with that is that there is never enough capital if there is a crisis. >> it is clear that is the reason why we have to play on both sides. it is painful the resilience of the system. at the same time, it prepares us

for possible events which will be unfortunate i would like to commend under previous question. how do you combine the monetary policy and responsibility? in our case, i would say that the two responsibilities are not confused. we have the [unintelligible] and it is very clear. i have to confirm to the european parliament that we would continue to have the same kind of accountability before the population. on the other hand, together with we will have the board

set up as a lesson which has a very responsibility. we need to practice early- warning recommendations and that would be the responsibility of the body which is very close to the central banks. it does not identify itself to because youbank's would have governors of the ecp, the 27 governors and you have wise persons. i would have the authority of my credential. it is together, not the central bank bought this body that will embark.

>> a wireless bodies so together and in the u.s. now? it seems to bet the several banks is not the crisis and are perhaps the only entity -- i see paul looking at new pretension -- is the only entity that is independent, has a stake in a bit -- instability. their responsibilities necessary in the medium term. the entropy of the central bank in the consolation of entity is in our society, this is an ideal place to defy those systems.

that is the way i see the things. of course, is because of our own experience. i don't know of the concerns you. >> we have a monetary policy committee but later this autumn, we will have a financial policy committee. charged with micro responsibility. this is where the big challenge will be, the accountability of the banks. money policy and macroeconomic policy are entwined.

output growth elsewhere was stapled to to long term trends and inflation was closed the target for a long time. we had practice the right county policy but did not prevent a cut financial sector get to the point where it created challenges and risks to the system as a whole. monetary policy is necessary but you're not going to rule. you need to halt sales series of things. you don't have to do a precise calculation. in a crisis which is what matters, you will not have enough capital. the scout delayed as at the margin are not helpful. i suspect that in the spirit of trying to insure the resilience and robustness of the system it would make no sense to rely on one approach only.

and the to have several to reinforce each other. on the economic stability, you start of the sock -- talking about soccer. as captain, jean-claude will tell his trips as the amount of the field to play against the financial sector as it were. there is no point telling the team that every one of the 11 opposition players are a danger. you would have no idea where to look for what to do. you have to identify the one player who is going to oppose the real threat and marked them out of the game. or you're going to identify patterns between the opposition players. the interconnectedness of the financial system that poses a threat and deal with that. the challenge of the systemic risk board approach identifying

risks is to get away from. central banks cut sucked into this before the crisis which is listing 274 risks to the system any one of which could of record. -- could have occurred. can we identify two or three major developments which are creating risks and then have the courage to go in and tackle them if someone gets kicked hard in that process, that maybe the price of making the system more stable. speaking hypothetically, your reply good rules on both sides. you have a growth occurring at close to potential and have on employment close to where it should be and you have non-

inflationary conditions but you spot something that you think could be a bubble in a corner of the economy. what is the role of monetary policy there because it tends to be a fairly blunt instrument. it uses interest rates to affect the economy as a whole. what to affect the trouble area over there. >> i don't agree monetary policy can do it. there is a debate whether central banks should take place in collections. central banks should not take positions of collections and must have been given basis -- specific dedicated mandate to do so. the key thing that jean-claude and we have tried to of the bank of england was to assure that we stayed away we are doing things and we don't want to be

criticized for taking quasi international actions. the independence of the central bank is fundamental. it comes at a price per the prices you cannot determine your mandate. you have to take the delegation mandates from leo members of congress. managing liquidity is part of that if it turns out that the rest of society wants us to take other actions, then they should decide that and delegate authority to it. the real risk to central bank's independence comes in part if you start taking quasi movements, your question whether the rest of society would give you the independence.

it may well be that after the event, people understand they wish they had given the authority to the central bank to do it. they're glad the actions were taken. had they not been taken, the disaster would have been worth. it is far for better if we can insure the central bank's if they're going to be given a wider powers and responsibilities that we do so with absolutely crystal clear delegate mandates and forms of accountability. the accountability should be to [unintelligible] it isn't to the industry itself. >> this is quite a complicated thing. many people are trying to simplify this to say about the bubble. this is not necessarily related

to the monetary policy. there is a variety of reasons why the bubble grow. [unintelligible] the economy is still in transition. it could go into a pacific market segment. that also means that monetary policy, the other policy with the central bank's may be is not good enough to deal with that kind of bubble.

even if we got the mandate it is still difficult for the central bank to deal out with a bubble. there is also a transmission mechanism that we need to study. whether the central bank is always good enough to judge it a bad bobble the amount. it is relatively easier for our central banks to say to lean against the bank. some assets change too fast.

we tried to institute some policies to deal with that. that is a good central banker to make clear all of this and to do a very precise they're paid about the specific bauble. >> how to find out the symptom on the system is very important. also to find out the system for fraud or a bubble is more important. many banks operate in the market day and night. the central bank is easy to watch the change and that the

market is affordable. changing the liquidity portion -- in that sense it is not the responsibility for the financial system. it should not be conflicting. [unintelligible] [unintelligible] prices alone would not be sufficient. perhaps going for it to be priced extensively, the coordination between the prices in general.

and between assets to prices and inflation expectations, more deep analyses will be needed. >> thank-you. i want to go back to what mervyn said. everyone would agree that the best arrangement is one in which anything that borders on fiscal policy is clearly delineated in the charter of the central banks. we have just come through the greatest financial cataclysm since the great depression. what do central banks do when they are confronted with the absolute collapse of the system? arguably, that delegation is not clear but they do not act, the system collapses. it is unfair to ask you to respond to that but i think that is the sort of circumstance that central banks confine

themselves. -- can find themselves. >> ordinarily, you don't of the say anything. in this case, i of a slight modification of what you said on this subject. i think it is an inescapable problem. hired great -- let's look at united states history. we have this section 13. that was enacted in the middle of the night by hoover. it was herbert hoover. the federal reserve one of the emergency act and every federal reserve said they did not want to do that. once they do it, people will be all over our back in the future. that position was successfully

held until this past crisis. i fully agree that if it exists , this to be an exercise with the approval of a political body. that is not going to save you. on this independent point, you still -- we had a case in the united states which i will remember to my dying day because it is a mistake. when interest rates got to 19%, mr. carter thought he could make a contribution. a few years earlier, deliberately to embarrass president nixon, the law said the president can call upon the federal reserve to help to other controls. theoretically the federal reserve could have said whether you -- we don't care whether you call a credit controls, we're not going to do it.

that was the and stink of the board when they're concerned about this. we can't do that. the president calls upon us for credit controls that's what we do. we made the credit controls as mild as we could possibly conceive. the population understood it as credit is a bad thing and they were sending in their credit cards and ripping them off. the economy nosedived into a recession. this was an action by the federal reserve, fully authorized. did it save us? no, because you still will be implicated. you could have said no. you don't have to do it and the people oppose it, you just call and a bunch of wimps and they are politically influenced by the administration.

the opposition says your wins because you followed the administration. exercise thisg to and you can of the limit from people's minds, you are a little bit pregnant. i think that is life. you can exercise your cell. i guess you could take an anti- pregnancy bill. it's not a totally comfortable position. we are there and should resist as much as we can. we can wash our hands as much as we can. i am paunches pilot. --pontius pilate. >> you said this was a bad precedent but... >> i would draw a distinction

between central banks buying assets of long-term government bonds which put money out there into the economy and leaves the private sector to tells where their border. i think sean taylor is read about this. in the crisis, it was suggested that in the wake of this extraordinary downturn in to douse 8 hour early to dozen 9 were up one hour of aerobic labs for this was unprecedented. the bank of english said a special team to take paper issue of boat motor car. i said n o. if the u.k. government wants to do that, fine. you're not elected to take this particular decision to help a certain sector. our job is to decide whether or not the amount of broad money in

the economy is coming in quickly that to insure that we can keep inflation up to our target rather than a was it is falling about. we felt we needed to buy assets. it will match our test and will be risky for us to think that our task was to go beyond deciding auto scale of the assets you by tomorrow. this will help us decide what kinds of private paper we should be purchasing which was bound of assembling bill labeled. what made it feasible for me to do that was because i could say and a parliamentary system that if you want to make those decisions, we can tell you whether we would be prepared to create central bank money which will be available to the system to make it possible for you to finance something like that. that is a separation of responsibilities but coordination.

it was feasible in our system but clearly, was felt by the u.s. authorities and was not something that could be taken easily to congress. for a quick response. if congress is not prepared to save the livelihoods of 300 million citizens in the first panel, do you think it's right for the fed to say that we will say low -- the life of a threat to a million people or to use it to congress come go if you want to run the economy down, that your choice. i am glad we were not in that position. it is a rare situation where a system of government made easier to handle the crisis. >> a small footnote on this -- says he is not worried about buying long-term

investments. that is called quantitative easing. it is considered by some to be a good thing and others not. when i first entered the federal reserve, the federal reserve routinely wadded long term government's security. this part of the normal. the issue is the same but it is interesting how attitudes change from what was considered perfectly normal to abnormal. >> what about the ecb? how is this is to play out there? >> we are particularly keen on not confusing fiscal policy with everything else. we had to stress even more the

tradition which is a strong tradition of continental europe which in my opinion produced the u.k. and these countries need -- need to make an -- need to make a value judgment on the fiscal policy. the surveillance of this by peers, we have 16 countries in to be exhibited on line and we were very vocal and also as i would say as effective as possible in the euro-group. the issues i see for us would be the following week where we have to continue to ask for them to

take all responsibility. we are the 16th federal bank. i have to say that nobody really knows that we are in a good situation in the consolation of the important advanced economies. we are lower in terms of the deficit as 3 -- as a proportion of gdp. other economies might be 9.5% or more. is something i had to underline. my responsibility is to look at the european economy and we will say exactly how the fed looks at

we have i'm preparing to deliver the area as a whole. again, we might as messengers differ on a country by country basis clearly. in any case, we have always considered that all monetary policy decisions whether they are standard or non-standard, where designed to deliver price stability is a test in directly through the efforts that might be necessary to permit a her retransmission of the monetary policy. that is the justification. as you know, from time to time, we got fiscal decisions that'll level of you.

not to viewttest the, the incumbencies and stick to the labor and stick to independence. we consider that essential .heme it is th >> it is relatively important with a lot of government involved the potential political pressures and for credibility in making in a position and establishing neutrality and independence, these issues become even more sensitive when it is sort of -- it is for us. everything reminds me of something that happened decades ago. when the federal reserve was established, they had no authority to buy any government securities. that was a political action they considered.

the only thing -- the only thing you could buy isn't very narrowly defined commercial paper. along came world war i and the government said we have to get the war finance. ever since then, the federal reserve has bought government securities. since leaving treasury few years h-o, there is a new acronym -s, heavily indebted industrialized countries. i am talking generally. there are some countries that have very heavy indebtedness. they are presently suffering from big gaps between potential output and current output, high

unemployment, slow growth some talk of deflationary forces. that sort of environment creates pressure for monetary easing. it seems to me and i'm not talking about any country in a particular, i am having a general academic discussion with learn people. it seems that it is a fairly combustible combination to have persistence, long-term deficits and a lot of qe2. i am glad somebody would take that one. >> if we explain the understandings on this point in japan, this is not to directly charge with this.

it is a key components of price stability central banks are required to qualify its position if necessary. the general rule of course his independence. each cannot meddle with another. that does not necessarily constitute into someone else's general understanding. as far as central banks in market operations, you tried a long time ago.

it is understood that the central bank should not buy long-term government bonds. the central bank m. governor should be a themselves. there should be a strong commitment to the government solidarity. that is a very dedicated process. >> thank you. winston churchill said that your country and my work two companies/common language. ic than aather be a br hic. [laughter] it goes right back to 1944. everyone would have been happy to be an excessive home.

this is a fundamental challenge one of the big issues for the next few years which we manage somehow to get by and conceal in recent years was that is not enough anymore to pretend that merely pursuing sensible domestic policy framework will guarantee that you can generate stability. it does require the views of different countries around the world who have faced consistency with each other. the particle understandable and natural wish of countries like china to undergo a massive reorganization of its economy cannot be a project in which you would do a couple of years. it takes.

on the other hand, if you're a country that is indented with a deficit of houses, we are not likely to have the longer time to make the adjustments. if these discrepancies in the ex-nt-patent instruction are given to equilibrium at a low- level the activity, we all lose. what is missing i think and what we have to bring back >> what is the institution of the global economy through which to get that done? >> i don't know and i'm not sure if we have yet to keep devising new ones. as we keep losing financial institutions, we create more meetings. it has gone up at an extraordinary rate but we have

not yet found one which is the answer. i think deep down the need to create consistency i talked about is not a consistency and some at the expense these are deep differences between real adjustment and output of our economy which are inherently very permissible. >> be we saw some strengthening of the macro surveillance powers of the imf as a positive step. has anything happened on that front? >> yes, i think it is encouraging. >> this is supposed to be taken

by the g-20 in the framework of stable growth. that is the place where they have been with a consensus to look at them with the help of the imf worker. i have to say that the task seemed gigantic. the councils of repetitive changes. it is too slow and it is very clear that we take in the major issues which i have to say is now that we know that the global economy is not as bad as we thought. the system functions with a single event. it is able to change all

decision making processes in all the guys of the world. it could be a matter of half days. now the we have that, it could be in china or the rest of the world's and it is not commensurate with this new entity that came under our eyes on the the last 30 years. the internals asian of the super tuber interest, accelerating the pace. how can we explain that to our own people and how can we have public opinion understanding that? how can we have parliaments understanding that you should

not optimize the level of the nation or the continent or the new area, but optimize that the superior level. i am very, very sensitive to that. as you know, we have 16 countries. these countries exemplified democracy and communicating to all democracies as part of the framework of a you -- the framework, having the economy in one currency is a formidable challenge. >> china is always at the center of these discussions about the rebalancing and governor king said china is moving toward on initiatives with domestic demand which will help deal with this. hopefully, the rest of us are working our side of it which is domestic savings rates to help create this health your

equilibrium and global economy. how do you see this working out? >> you shifted the top deck [laughter] -- you shifted the topic. [laughter] it is the surplus and the deficit. there's also a stability impacted. from the point of view from the fiscal standpoint, some countries have a deficit budget -- have a deficit, but it seems to me that 180% --

most of them, maybe 95%, -- is not necessary to have an impact to the global imbalance. we say we really have a global and balanced. it is accepted of a strong, sustained growth. to me there are two parts.

one is the currency crisis. another is the structure changes and they take a longer term. it is divided into two responses. the first response is usually a very quick and immediate response that they immediately responded said they can immediately change. another change that guides in

china, for example, in the past 20 years we have cut a lot of money into the manufacturing sector. this is not only the manufacturing sectors. it should go together with those of infrastructure, education, to greet the technicians and engineers. not only the final product, but also those of materials, components, parts, these are too difficult to formulate.

this is away from the manufacturing sector. it takes time. this change should be relative to the manufacturing sector. people may not have that kind of patience. they would like to say click changes -- like to see quick changes in the balance.

it is overshooting, oscillating on whether it is good or not. i think it should be a constant conversation with a strong, sustained balanced growth. there's also the development of the strategy and we're going to deal with. >> governor zhou, you will recall, as will the rest of you, then back in 2003-2006 when we

were working together, we started with the g-seven and i will never forget that john taylor was there for my first meeting in february 2003. we talked about global imbalances in late trade and capital flows around the world. i am looking around the group and saying, "i am not sure we have the right group here" because when we get down to the subject china needed to be in the room and others like brazil. john taylor was very important and efforts came under way in moving forward in a process to say let's move forward. you and your immediate counterparts started coming to the g-7. we have a much livelier, richer, deeper discussion and i think we all agree. that was the precursor to the g- 20 being put into place.

it was the hope that maybe the g 20 could engineer this dialogue maybe with the help of the imf to create an environment where the right conversation magowan. i have been out of this now for three or four years, but it sounds to me that the effort is still very much under way. here and die worked on the ideas of the imf. >> we pushed very hard for surveillance, to move away from the idea of purely national surveillance. andy, you would feel macro policy was doing ok. the social security policy, labour market policy, but what they ought to be the thing that was the spill over effect that resulted from one country's macro policy on another. one is generally move dave --

genuinely moved a long way. the spill over effect is necessary. they have made real progress, but in the end, if you're going to see policy change as a result, it will require a political recognition that both sets of countries, or more than one set of countries, several countries will have to modify policy. this to be rather than to go to an inefficient equilibrium. i will totally share has -- his skepticism by the time i reach that age. >> let me see if i cannot do something here to rehabilitate modern finance theory.

[laughter] >> i am going home. >> just a little bit here. the argument is that there was over reliance on rational markets, rational expectations, and efficient markets, and maybe some regulators felt the market for more self-regulating than they really proved to be. they fell companies were better at doing their due diligence and so on and so forth. is it the theory or the use of the theory that got us in trouble? is there agreement there was over reliance on their ideas? or was it the misapplication? >> i do not know what you mean by misapplication. you left it to the market. >> how would you frame it?

>> said. if you look at modern economics and look at what have been the contributions to have won nobel prizes, at least half of them have been demonstrating that markets are not efficient all the time rather than the other way around. there are plenty of economists arguing that markets are not always efficient. i think this is a misapplication, if you like, but there are certain areas where economists did get carried away and allowed their ideas to be used in a way that was not very sensible. the cassette places the application of finance for there is nothing in fundamental signs that says the distribution or returns have to follow a particular pattern that was used to price the auctions. the idea of that option pricing rule is a wonderful idea that deserves recognition but it is 1 million miles from that observation to say that the precise calibration tells you with the prices.

it does not. changes in believes over time come animal spirits, will have the equity price moving around. do not rely on the stability of asset prices but am sure that the structure of the system is robust with respect to shocked just with respect to airplane wings have to be brazilian to some gusts of wind. >> governor zhou? >> it really was a challenge during the crisis. in china, we also had a very serious discussion and some people believe this way or that buy, but it is a challenge especially for the efficiency market.

there are two ways to solve the problem. one says that is not really that efficient. there is information to challenge that. animale see it is an spirits, it is largely a contradiction with the efficient market hypothesis. we tried to make some kind of modification or put a condition in the as of the hypothesis. that has come into the risk, but we say a few get there that you

are doing the efficient market. you get into an of normal time -- an abnormal time which is also the most study of either mathematical models for the risk you want. >> i would say the mathematics are not wrong. they are obliged to, i would say, intellectually disagreeing. the problem is the assumption is clear that -- there is a simplification. you have to behave to be aware

of oversimplification. before the crisis, we had discussed olivine the value at risk which was extremely interesting. and should be done. if you do not compliment that, you are probably making an enormous mistake. i have to say that we know better now to what extent the hypothesis was extraordinarily simplified and the potential of the mathematical presentation is that it gives credit authorities to what you compute or what you do. you forget easily the underlying assumption. let me see that in my own experience that i have been struck by a fact that i would not have expected, namely that absolutely all our monarchs, and

when i say "our" i mean the ecb and otheres, proved during three successive quarters absolutely, totally wrong so that the absence of confidence that had been generalized the world over was totally, totally blurring all kinds of normal behavior. for the fourth quarter of 2008, a second quarter of 2009, when rewriting of the numbers the final result was much more dramatic. its seems to me that we have to work warm ridge of work more on

a theory of the position -- we have to work more on the theory of the position. we do not have a clear representation about what is a crisis unfolding. the academy has a lot to do with this implemented. for decision makers, we have to rely very much on our judgment to an extension would not suspect and on past experience and judgment and not on projections of the figures and, as i said, and in physics you could do a lot of good work in the permanent phenomenon. the understanding of the transition phases is relatively recent and the theory is

extremely sophisticated. it seems to me that we should expect from academia a lot of research on this very short-term position when the unjust unexpectedly from an evolution of markets to this highly turbulent road which is what you exist. >> i think you are giving john taylor and the academics a tall order here. >> i went to defend some of the economics. serious economics have never claimed we could forecast the future. just as in medicine, many years ago we had quack doctors who claimed to have the answers when they did not. the financial sector is riddled with economists who claim to be able to forecast what is inherently on forecast --

unforecastable. this indicates our gullible consumers who would pay for it the quack doctors. serious economists never pretended you could do this. here is one example. and is a keynesian example. there was an active debate in the economics about whether stock-market crashes were rational. a vast amounts of economists worked on this. of course there was no answer because the question cannot be answered unless you know what the future holds. you cannot know what the stock prices are or are not rational. there is no point asking the question frankly. there is one example of the market hypothesis which comes in different forms. the reform, i think, has brought

practical benefits to ordinary people in our economy. ordinary people saving for their pensions are very vulnerable to salesman saying that if you give me your money i know how to beat the stock market. the benefit of the efficient market in its weak form was to try and say that unless you genuinely believe someone has inside information, you are foolish to and trust your money to someone who will take the money away from you in the form of a commission in to take your wealth to enrich themselves on the foolish belief that they can predict the future. they cannot do it. do not waste your money. >> you are attacking the whole of wall street. >> no, i am not. [laughter] it is not sensible to believe that someone else out there has a magic understanding of the world.

>> i think it is quite understandable that it is very difficult to predict the future. an efficient market hypothesis is not just used for forecasting the future. it is used in a variety of markets especially for the monetary policies. there are incidents where the markets are totally efficient and then what kind of insurance could provide the information through the commercial banking system, through the economy, and about what kind of response.

i think it is highly related to the transition. a different've had situation. we are not yet a full market economy. we are in the middle of an economic transition. we're more likely to use that hypothesis. it causes us to come to the conclusion that money is a powerful instrument, especially policy interest rates that central banks depend on. it is good enough to the transmission and through the whole economy. if you tried to change the hypothesis that may be money to policy instruments is not enough

through the transition to the real economy. that wealso a challenge should pay a lot of attention to the have provinces. it is a big challenge. we change a lot. we should think very carefully on that. we should study more on that. >> we want to make full use of market mechanisms. having said that, coming back to the program, every nation has

its own hidden past, i am thinking. they should have more strong, central responsibilities. the u.s., u.k., and european countries, japan, we are reaching a stage in this industrial capitalism. if we are reaching a further stage in this program, what will be the next stage, the next economy? that is very difficult to find

out. national capitalism? i am not sure. in order to destroy the credibility of the economy, it is very important to find out the new economics of it. >> thank you. our time is running on. i think we should turn to the dene in chronology of the delegation and ask him for any closing comments now that we have rehabilitated. [laughter] >> we had some very big issues here. monetary reform, economic reorganization, and it is impossible to summarize. on the one point, this conversation minded me of a

point i heard as a young man to figure out how the international financial system is working. somebody came back and said they only found two people who've found how it worked. one was the bank of england and the other was a clerk in the bank of france. the only trouble was that they did not agree. [laughter] we have not made a lot of progress since that time. it does occur to me that, i do think out of that conversation, we have reached a point where questions of international, financial, and financial reform are becoming front and center. no one wanted to talk about it. they did not know what to do about it or felt they did not have to worry about it. now they do want to talk about it because of the mountains that have a risen.

the clear born in -- the clairvoyant foresight says that china will purchase $3 trillion in reserves and the u.s. will lose $3 trillion of debt. would you want to do something about it to prevent that from happening? and-year by year end it catches up to you. it is like the fog in the hot water. -- the fraud. he does not feel it until it is really hot. if it is a real problem, how do we attack it? the said we would not have the curve of the conversation with seven people. then it escalates to 20 people.

the 21st guy is not very happy he is left out. there is a real question of how many people you can put in a room to get a decision. how do you get more people in on the action? it is a major problem when you do not have, to put it bluntly, the problem that the united states wants that -- it once had and i'm going back to the end of world war ii because basically with two countries deciding it. it was really 1.5 countries. there were four countries at war, but i am sure the others did not have much to say. they put together a plan, good or bad. that is not the world in which we live. you better have some extraordinary features and

leadership to get an international consensus that we really need. it is somehow a real challenge. >> probably will not get resolved by finance ministers or even central bank governors. >> that is the most to state and i have heard yet. >> let me close by saying i think all the governors for being here. it is a real treat for a mere finance minister to be in the elevated presence. [laughter] finance ministers deal with the nitty gritty things and so on. to be with the intellectual leaders, the gifted, talented intellectual leaders -- >> i wish you were finance minister when i was governor. [laughter] >> thank you all. [applause]

>> thank you. thank you, mr. secretary, and members of this distinguished panel for a very wide ranging discussion. ladies and gentlemen, this concludes the third annual capt. conference on the world economy. i want to thank our distinguished panelists from both panels, are engaging moderators, and the faculty and staff of the miller center of public affairs at the university of virginia. especially david leblanc and ashley lockheart. i want to recognize our benefactors and their 2010 local host committee. there will be a reception outside to give you an outside to mix and mingle with those in the audience.

let me say that today's conference was broadcast on c- span. and is -- it is available on the web site. for more affirmation log on to millercenter.org. they will be summarized in a miller center report to be produced and released by the end of the year. before i bring up one final person, let me recognize someone in the audience. he served as secretary of commerce and the clinton administration and secretary of transportation under president george w. bush. secretary mineta served with sam skinner as the cochairs of a miller center report that was released in washington last

monday. on friday, the miller center was asked by the white house to provide a briefing on that report. this morning, secretary mineta and secretary skinner briefed the secretary of transportation ray lahood, secretary of the treasury timothy geithner, and the president himself. as soon as his white house duties were over, secretary mineta came over here and is seeded in the audience. i would like for him to stand and recognized. [applause] now i would like to bring them -- bring gene to the podium. he established goldman sachs's banking reputation during the 1980's in the 1990's. he's a founding principle of

what the capital, al seen -- walter capital, llc, and is a board member of caterpillar. he now serves as chairman of the governing council of miller center public affairs. he is a wonderful friend, provides great oversight to all that goes on the miller center. for a few concluding remarks, i will call on gene. [applause] >> i have to add a word of thanks to all of you to being here and taking the time out of your days to be here and listen to this topic. having spent a good number of years of my life in the international irina for goldman, i have a very significant appreciation for the role of central bankers. i have found them to be thoughtful, well-informed, have

a lot of common sense, give good advice, and if you listen to them that really does add up to, i think, and much more thoughtful and better framework to understand. mervyn commented that no one really understands how the world works. it is true. if you are a purchase but in its day today, as much as you want to study, read, and watch committees still cannot put an altogether because it is moving so rapidly. everything is dynamic. what happened today will not happen tomorrow, etc., etc. the gentleman who represents an enormous rush -- the enormous portion of the gdp in the millions and millions of people they represent and the policies they do, it invites people at a very human level and the impacts us, too. every single one of us. to have this group of very

knowledgeable people here today, i think it is a most remarkable event for us and certainly for the miller center. we greatly appreciate you taking the time to be here to share your thoughts, to give us ideas, and it is an idea of -- an opportunity that is rare for us to have. thank you very much. thank you to all of you. [applause]

>> today's campaign 2010 coverage begins with a live debate in the kentucky, republican rand paul and democrat jack conway. that is beginning at 7:00 p.m. eastern. then on to indiana where there is another senate seat opening up. he is running against a two- term republican incumbent and an

independent candidate. the mayor of lansing is facing off against the ceo of gateway. his republican john -- challenger for new hampshire served as the state attorney general. >> this week on "the communicators," reed hundt, kevin martin, and michael powell on regulating broadband, broadcast indecency, and the fcc. tonight on c-span2. >> the keyspan network to provide coverage of public affairs, non-fiction books from

an american history available on television, radio, online, and and social media networking sites. find our content any time for our c-span content library. we take our content on the road bringing resources to your community. washington your way -- the span networks now available in more than 100 million homes. created by cable and provided as a public service. >> the conversation now about the declining water supply in the southwest from today's "washington journal" and is under 45 minutes. barringer is the national environmental correspondent for "the new york times." thank you for being with us. i want to talk about a situation in the west with water. he recently wrote an article that the headline was water in the southwest was headed for a day of reckoning.

what is the situation? guest: basically, along the line of the rockies there has been in a 11 year drought. 11 years of under-average and in some cases, like 2002, one- quarter of average rainfall, meaning that there is an area of the country where 28 million people live that is looking towards the future where there may not be, certainly will not be the water supplies that they were used to in the past. it may be difficult to sustain continued growth in that area. specific areas like los angeles and phoenix, this is where most of the growth has taken place in the country over the past couple of decades. we are sort of looking at a tipping point in the country

where they have been the growth engine. host: what is the impact of what you just said? guest: you have cities debt have been putting in strict conservation measures for years. in some cities you have roughly a 20% decline in the average per capita water use by people like you and me. at the same time, the growth from both of those cities has outpaced the savings. sort of like the red queen in alice-in-wonderland. in terms of water conservation they're moving as fast as they can but are falling backwards. host: according to "the new york times," phoenix average per tap

daily household use dropped 20%. host: what is going on here. where is the water coming from? why is it at record lows? guest: the drought has reached its record lows and the vast majority of the water for cities like las vegas and phoenix comes from the colorado river, which is a series of reservoirs' the code down, if you imagine a necklace hanging from the top to the bottom, the reservoir is run along it. two of the biggest are near the lower end. those are lake powell in utah and arizona and lake mead near nevada and arizona. lake mead is really the reserve

tanker, the holding tanks for water for las vegas and phoenix. and also for a chunk of southern california. they also get water from northern california. phoenix has a couple of other sources. but the colorado river is basically it. lake mead is about 6 inches below its historic low level, reached in 1956. it has dropped not quite a foot since the article was published a few weeks ago. this means that for a city like las vegas, think about what brings people there. certainly, gambling. but also things like [unintelligible] -- golf. what does it take to keep a golf course green in the desert?

one of the world's best known desert. it takes an incredible amount of water. they have tried to dissuade people with financial incentives and have had stomachs -- some success. are you going to ask a city like las vegas to get rid of its golf courses? those other kinds of things, if this drought continues to tighten, they might have to start thinking about with significant economic consequences. host: what are the local, state, federal regulations in terms of what they're thinking about doing on this issue? guest: the first is to find another source of supply. phoenix has already done some of that. las vegas is already looking to move across the state in a

northeasterly direction to get some water from the snake valley, straddling las vegas and utah. they are also planning for a future when the levels of lake mead might get below the two places they'd pull water from. imagine, if you will, lake mead is a large class of beer mugs. you have two straws in it. one that falls from 1 inch below the top, the other from an inch and a half. they're worried that the level might drop below the second straw. what they are doing is putting in a third straw, an intake level that is 50 feet below the existing top intake level.

underneath the lake right now, this was fun to do when we were reporting on the story, a huge undertaking, very technically complicated, one of the biggest operations in the world, it is the kind of effort that a city like las vegas has to go through to make sure that the water supply is protected for the near future. host: if you look at this map we have been showing viewers, look at the proximity to the hoover dam and think about the electricity that is provided. guest: a huge accomplishment at the time, franklin roosevelt came out 65 years ago this fall to dedicate it. it was designed as much as a

hydroelectric facility as it was a water storage facility. like the water from lake mead, it goes around the southwest. again, to cities like phoenix and las vegas. host: mary, independent line, good morning. guest: i am calling with a serious question. please give me a serious answer. is it not a fact that the massive amount of population growth in the american southwest has come from illegal immigration? it is troubling that the environmental movement refuses to address this overpopulation that causes a drain on water supplies. it is alarming to me that the sierra club and what have you, that used to talk about concerns of overpopulation, once they started getting in bed with

corporations -- host: i think we got your point. would you like to weigh in on the impact of illegal immigrants and population growth in the area? guest: there has been population growth from many sources in the southwest. i am sure that illegal immigration is a part of it. how dominant it is, i could not say. moving from the northeast into the southwest has been a major factor curium this -- factor. this area -- the sierra club had a contentious election years ago where this was on their minds. this is something that is talked about, but at the moment the caller is right, population issues are not at the forefront.

host: felicity barringer joins us this morning from mountain view, california. we are talking about the dwindling water supply. what does it mean for the rest of the country? guest: well, this idea that problems with water are less along the meridian, divided between the west and east, the wet and dry, is a little bit false. look, you had the city of the plant out over the last few years with a major problem. they got into a serious drought. in the great lakes region they are very concerned about protecting not only quality, but

supply of water that they have. and they have always been concerned that there are areas of the country that are not as rich in water and might look to them to provide water. there is a compact amongst the great lakes states and canadian provinces. one of the elements of it is that water cannot be exported outside of that particular region. it is not legally possible to, say, build a pipeline from the southwest to the water-rich portions of the country. host: since it is not possible, legally, what does it mean for the southwest? if their resources are limited only to what is around them?

guest: it means they will have to look very closely at other ways to deal with water supply. parts of the southwest have already tapped into their underground reserves at levels that cannot be sustained. this is true or in parts of texas, tapping into one of their biggest underground reservoirs in the entire country, it stretches from texas north towards. also in california, particularly in their agricultural areas in the central valley they have been tapping into groundwater. one of the places that you can go, it has already been in the central valley of california,

particularly on the western side. how about reusing water? the supply of water in the world does not grow or diminished. it changes through cycles. one of the cycles is based on the properties that we put it through. after the water has been used in a variety of ways, can it be treated in a way that can be reused? we will be looking at that first as a sheer matter of necessity. but this is an incredibly intensive process. there is a desalinization plant going out of sight of san francisco, another one in san diego. these are possible engineering solutions but they are extremely

expensive, even more than the economic expense it takes tremendous amounts of energy. host: we are talking felicity barringer with, who recently wrote that perhaps 9.5 million people in the lower colorado river basin depended on the water supply in the late 1950's, today more than 28 million people. joe, democratic line. caller: i would like to request the to do a program on mountain top removal, directly related to the water situation. here in west virginia, as you are probably familiar, they are destroying the mountains by excavating the coal, ticking off the tops of the mountains. particularly wheat originated much of the water for the eastern united states, but it is

being polluted with heavy metals. once they flow downstream to the river basins of the eastern united states, the programs are about clean water. why are we not addressing the issue of clean water? once this water is contaminated with heavy metal, especially through the release of mercury in the burning of coal, there is no system that actually remove is heavy metals from water other than reverse osmosis. guest: mountain top removal is an incredibly important environmental issue, won the the obama administration has weighed in on as the epa removed permits from certain operations because of what the impact is on streams. not just contamination, but

basically the elimination of the stream by dumping so much material into it. the question of water quality is a bit separate from the water quantity question. everything seems to be linked to everything else in some way. but the issue of pollution is certainly one, particularly mining pollution, is on the front burner agenda of the environmental movement and the obama administration. host: meghan, chicago, republican line. go ahead. caller: i would like to say that we are one nation under god and my belief is that bottled water is a big issue. i believe that america of needs to like save our water.

host: does bottled water factor into this debate? guest: it is a part of the debate. the caller is extremely correct. the notion that companies, in some cases companies whose headquarters are outside of the united states, are coming in in doing this illegally for years. how long have people been drinking water from maine? there are bottling plants to go in under the supermarket shelves. they all take water from various cities. usually in the northeast or the upper midwest. down perfectly legally, but people are getting more, from

the places the water is coming from, getting more concerned. why are they exporting something that is such a basic human need? so far as not particularly heard the bottled water industry, but there have been many revolts and objections in vermont and michigan. this is something that is more and more on the radar of local communities. host: one viewer says -- guest: that is actually true. my colleague did a wonderful story on this, there has been a slight liberalization about the water of your roof. remember what i said earlier, as a civilization we will not give any more water than what we have

right now. the fda is going to recycle the system. one of the cycles is the rain. because of the precise ownership claim on the colorado river, in states like colorado where droplets of rain in other systems have defined all the ships -- defined ownership. the water coming out of the sky is supposed to be destined for someone's well. for someone's water rights. meaning that it is technically owned. meaning that it will look silly on the face when you take the rainwater from the roof. host: independent line, minnesota during guest: --

minnesota. caller: i have a couple of questions in the comment. first of all, i cannot believe that she can phone rainwater runoff. most of our water in minnesota comes from the mountains in south dakota. filtered and it comes into minnesota. that is where most of our water goes. when i lived in las vegas, nev., there was water 50 feet underground everywhere. is that water not used staloff -- not used down off the drawing the water from somewhere else? this water used in loss -- not used? of are they drawling the water from somewhere else?

guest: there is water in las vegas. one of the things i was told the the people that are concerned about the water issue criticize the casinos for those fountains, but those fountains actually recycle water from the underground aquifer of las vegas. but again, and aquifer is replenished very slowly and overtime. if you take out water faster than you replenish it, you are essentially drawing down the community savings accounts and it will take years or decades to replenish that savings account. i am not sure what the reservoir situation is underneath las vegas, but whenever it is, it is not something that will recharge very fast. if you take it now in 2010, 2015, 2020, it will not be there

essentially for another 100 years. they probably want to do that with some care. host: another trader from a viewer that asks -- guest: a very pertinent question, particularly here in california. there are a number of claimants on a river system at any given time. the time that the colorado river was established in southern california near the mexican border, most of the water came from northern california through a system of conveyances. this had been a matter of debate going back decades.

they are not just individual businesses, communities, agricultural operations. as of the passage of the endangered species act, as a result of that and, like fish, fish within a river, like salmon that live part of the lives in the ocean and go back up river all kinds of the individual elements of the natural world. if they are threatened by an absence of water, they become a legal claim and. the regulations that enforce

that, recently upheld by some courts in california, means that there's a new competitor to the water that humans are a competitor for. by itself it has lost water to the drought over the last couple of years because of the endangered species act and the claims of the natural world. regulators are now enforce a law that the congress passed the created, essentially, a new climate. host: a new e-mail from a viewer -- guest: it is certainly a very live issue of there, about this

shale that has been exploited newly underground in new york and pennsylvania. i would remind viewers that this process has been going on. it is not brand new. it was used in wyoming over a decade ago. it was the cause of some concern to ranchers out there at the time. there are issues associated with what happens to the process that we are talking about, including chemicals added to the water under high pressure, shooting into the rocks below the surface, freeing up natural gas. does that water with this mineral contents windup polluting the water systems that the community depends on?

the argument over whether it does or not, certainly in wyoming there were bodies of water that were affected, as we wrote at the time. but exactly what will happen as a result of this process in new york and whether it will affect the water table, there is much debate over the actual facts. host: georgia, alabama, florida, fighting wars over water forever. winter haven, florida. go ahead. caller: so glad that you are on this topic this morning. i have been working on it for a long time. we seem to find that we need to manage our water resources on the watershed approach. what i have been looking at lately is the concept of water farming.

holding the rainfall -- rainfall in the soil to make it to the offer, one of the problems in florida is we are sending all of the water into the ocean. guest: endicott -- fascinating concept, the idea of water farming. it is great that this is something you are working on, undoubtedly you know far more about the issues in the southeast that i do. but the point that you made about what is the way to manage water and should not be managed on a watershed basis is an extremely good one. the way that our jurisdictions are set up have to do with the way that our state boundary lines in the county boundary lines are drawn. they seldom have anything to do with the watersheds that run through them. i do not know if you have been

able to put this on your screen, but if you look at the colorado river basin, a little bit of wyoming and western colorado, a good chunk of utah and nevada, including las vegas, this is a jurisdictional nightmare if your water sources are being governed not according to where the water is and what water is connected to other water on the state boundary line. karen's idea is something that is beginning to be talked about more but it is still a bit away from becoming a reality. host: las vegas, republican line, good morning. caller: thank you for c-span. i would like to assure you that las vegas is very cognizant of the situation in storage it is

very important to all of us. felicity already indicated that many of us have given out lawns. -- given up lawns. we have turned to a form of landscaping that uses little water and we still have beautiful, green landscapes. the casinos have been pretty good about making sure that they conserve water to make sure that they make up for lost procedures. most people would be surprised to find out that nevada has virtually zero% of its water supply in lake mead. i was wondering if you could comment on the legal

ramifications to keep nevada from getting a fair share, if you will, of the water supply from colorado, possibly commenting on the idea that one share could be ameliorated by how effective conservation is in a local area. guest: those are excellent points. in terms of the total water supply of lake mead, which goes everywhere from what was the colorado delta down in mexico to an area that is dry much of the time now, the same amount that the united states is trying -- drawing, when the compact was put together it was thought of baa's water for agriculture. but parts of which desert did we want to claim?

how did we want to do it? nevada was not a place where agriculture was particularly fashionable. i heard a joke that the nevada delegates for the colorado river basin commission was mostly absent, perhaps in a local watering hole and that there was not much they could do to get a share of the risk. not much before las vegas was anything more like the city we know today. the las vegas claim on the river water is 2% or 3%. it is 1/10 the amount of the imperial valley agricultural district. both places are deserts'. imperial valley owners were there early. the legal system of how water

rights works essentially has to do with how they got their first. it gets very complicated, very fast. i will not pretend to understand more than simply the thinnest top layer of this. it has been the dominant determinant of the waters contribution with las vegas going up against the eight ball, as it came late. the water rights were jr.. one of the things that was being done, however, was the effort towards creating a a little bit of a market. there were legal limitations, but some claimants can sell their water to other claimants. going in fits and starts, but as

your caller says, las vegas has very few rights. certainly the imperial valley would think that the situation is perfect. in the future, let's say that you did away with some obstacles in the imperial valley sold its rights to the water. selling them back to las vegas. a lot of things could change. host: we have another twitter -- let's take out one part in the middle, that it seems like it could be a real issue. guest: i am sorry, what is it? guest: the issue of dwindling water supplies and what is going on in the southwest?

absolutely, it is the sleeper issue of our time. thinking about climate change, speaking to someone who knows about the science of it, he told me that climate change as a bull's-eye on the southwest. it will get more dry, it will get more hot, and it is the biggest impact of climate change that we, as a nation, are going to feel. we are going to feel it in a place that has been the fastest- growing part of the country for three decades. host: for other parts of the country not familiar with what is going on in the southwest, describe how residents in the area of view their water. guest: there is an old sought out here, i ordered a glass of

water at the bar and the bartender said that you do not understand, whiskey is what we drink, water is what we fight over. the average citizen out here turns on the tap, the water runs. they do not view it as threatened. there has been much conservation over the years that has created household fixtures like low flow toilets and shower heads. so, you are certainly conscious of what it takes to keep a long green if you have one. the caller from las vegas mentioned it, particularly in desert cities, also coming through in northern california, there is a growing consciousness of water as limited resource. growing up back east, i certainly never felt that. i think that will migrate across the country. i think that particularly in

areas where we drawdown ground water or areas like the southeast, georgia, florida, people are going to start looking at this the way that they think about gasoline now. something that we pay a bit more attention to when the price goes up. host: let's try to get more phone calls. trevor, independent line. caller: i have a two part question. what about the salinization? of how effective our city centers at birth -- recycling what they use? that is pretty much it. guest: both are interesting. i think that it really depends on which community were talking about. some communities are relatively

dry, others are more wet, they're very conscious of recycling and reusing, more likely to be true out here in the midwest. you cannot make a firm generalization about it. about the salinization -- about de-stalinization, it is a viable technology, but it is very expensive. it takes an lot of energy. and it has environmental consequences. when you take the salt out of the water, you are putting much saltier water back into the place where you took the water out, so you are changing the marine ecosystem around. so, there are lots of reasons to not look at desalinization as some kind of cure all. is it going to be a factor?

i think so, absolutely. host: independent line, of port washington, maryland. caller: my entire family grow up in the state of wyoming. one part of my family has been battling for 20 years. you have covered a lot of the issues i was going to bring out, but the issues that i see as key are the state's impacting states with water. looking at wyoming, for example, the surface water, they say, does not impact the ground water. you have a well that is being drilled with states saying that welles do not affect or surface water, but it is obvious that the water will decrease. that being said, once you have states impacting states, state

laws and federal laws, is there any more being given by the federal government for the state government in terms of cooperating together? like many of the callers have said, local government controlling water as opposed to it having a bigger impact on the community, you have to live with water. you do not have to buy gasoline to live off of it, but you do need water. guest: these are very good points. hydrology is a science that is largely beyond me, but i think i am correct in saying that most would laugh at anyone who said that there is no connection between surface water and ground water. all water is connected to all other water. if you pull of of water from a

well, the streams can go down. it does not seem to make sense to argue that there is no question between them. can the states cooperate? i think that the key determinants, first are there are thinking in far-seeing leaders? at royal runs the las vegas water supply -- pat roy runs the las vegas water supply and she is firm on saying that before we get to the next really problem of low water, at which everyone starts fighting with each other because water is such an essential commodity, the fights will get very brutal, very fast. if we wait to the last minute and everyone looks at shortage of a sudden, if the states can

get together early, as the states from the colorado river basin did a few years ago, they basically produced a scheme for dealing with shortages of to a certain level. once they get past that level they do not have a plan for what to do next. her point is -- let's talk about that now. let's not wait until the last minute. i think that state and local governments, the federal government, all of the players can cooperate if they start early enough and are creative enough about solutions. but i agree that if they wait it will be a very unpleasant fight. host: felicity barringer,

>> to this campaign 2010 coverage begins with a live debate between u.s. senate candidates in kentucky -- today's campaign 2010 coverage. you can see that what starting at 7:00 p.m. eastern here on c- span -- you can see that live. then, we go to indiana where there is another seat opening up. a former senators seeks to begin his old job. they are competing to succeed democratic senator evan bayh, who is also retiring. live coverage of that starting at 8:00 p.m. eastern. at 9:00, the race for michigan governor. at 10:00, john lynch running for

reelection for a fourth two-year term. his republican challenger has served a state assistant attorney general and health services commissioner. now to london, where british prime minister david cameron announced a probe into a failed hostage rescue attempt on friday. new information suggests that a grenade detonated by u.s. troops may have caused the death of a british worker. the prime minister talked about his decision to use the american team and also entered questions on budget cuts. from 10 downing street, this is about 45 minutes. >> british aid worker linda as you know, linda died late on friday evening during an operation to rescue her from her kidnappers in northeast afghanistan. the decision to authorize the hostage rescue operation was taken after careful consideration by the foreign

secretary in the proper way and with my full support. we were clear that when this life was in grave danger and the operation offered the best chance of saving her life. in this death is a tragedy for her family and those who worked alongside her in afghanistan. she was a dedicated professional doing a job she loved in a country she loved. early this morning, general petraeus contacted my office to inform us that in the review of the rescue operation, new information had come to light about the circumstances surrounding linda's death. general petraeus told me that review has revealed evidence to indicate that and then that may not have died at the hands of her captors, as originally believed -- that linda may not have died at the hands of her

captors as originally believed. that evidence suggests that linda could have died as a result of a grenade detonated by the task force during the assault. however, this is not certain, and a full u.s./u.n. -- u.k. investigation will now be launched. linda's family were informed this morning, and i have spoken to linda's father. my thoughts and the thoughts of the whole country are with them as they come to terms with the death of their daughter and this deeply distressing development. the decision to launch this rescue operation was not an easy one. you will understand that i cannot discuss the intelligence which led us to conclude that a rescue operation was the best way forward, but i am clear that lindas life was in grave danger from the moment she was taken. those on the ground and in

london feared she would be passed up the terrorist chain, which would increase even further the already high risk that she would be killed. the only choice was to go ahead, recognizing that any operation was fraught with risk for all those involved, and success could by no means be guaranteed. linda was taken and held in afghanistan. that is why this operation was carried out by u.s. forces. from the moment linda was taken hostage, general petraeus has treated her as if she was a u.s. citizen. he and u.s. forces did everything in their power to bring linda home safely, and we should remember that linda was being held at a remote location high in the mountain. this was a very difficult operation. we should also remember that ultimately the responsibility for linda's death lies with those who took for hostage. u.s. forces placed their own

lives in danger. general petraeus has told me they are deeply dismayed at the outcome of. i want to thank them for their courage. none of us can understand just how painful this must be for linda's family. also, it is deeply regrettable, particularly for them, that the information published on saturday is highly likely to be incorrect. the statements were made in good faith and on the basis of the information that we receive. i want to assure mr. and mrs. norgrove that i will do everything i possibly can to establish the full facts and give them certainty about how they -- their daughter died. the secretary will be making a full statement to the house of commons this afternoon. my apologies for the delay in starting this press conference. i'm sure you can understand why. happy to take questions. >> thank you very much on tv. as he said, the news conference

has been delayed about an hour. can you tell us whether you have been talking to linda's family and with general petraeus? and a couple of factual issues, did you speak to lintas family before taking the decision to authorize the hostage rescue mission? and has any evidence emerged that her captives were wearing suicide vests or were capable of carrying out a suicide mission, which was the information given originally to explain how she died. >> this morning, my office was contacted by general petraeus. obviously, this information, relatively early this morning. i then had phone calls with general petraeus this morning and also with linda's father this morning, and obviously, this press conference was scheduled for 11:00. i wanted to make sure i had complete information before saying anything to the press here in london during obviously,

it is difficult to answer all the questions about an unbelievably tragic but also very complicated chain of events, and the last thing i want to do is put out information that in any way is incorrect. in terms of the specific questions you ask, clearly, as soon as linda was taken hostage, there were regular meetings here in london -- i think 12 lionel -- where all the evidence, all the advice, all the best information we had was look back. the family were kept in touch during this time with the decision making, and the decision was recommended, and as i explained in my statement, authorized by the foreign secretary, fully agreed by a need to go ahead. in terms of the specifics about the operation, i think you will have to wait for the investigation. so, as i say, there's no danger

of putting out information that in any way is incorrect. the basic information has been put forward, but i think you will have to wait for the investigation before much further information can be put forward. in the end, i know there will be many details and complicated questions, but this is an issue of their difficult judgment. there is no certainty. you can never be certain that going ahead with an operation like this will lead to the successful release of a hostage. likewise, you can never be certain that someone who is taken hostage will be killed or their life in danger if you do not authorize that rescue. it is a judgment. you look at the advice, the intelligence, and you weigh everything and asked question after question, but in the end, you have to make a decision whether to go ahead or not. that was the decision that was taken. i'll go over in my mind 100 times as to whether it was the right decision, but i profoundly

believe it was, given everything we knew about then that -- about linda's dreadful situation. >> how did it come to be that a live grenade appeared to have been detonated in the vicinity of a hostage? is there any evidence that the american forces were reckless in your view, and do you believe at the end of the day there may be some public anger with americans over this? >> there will be a huge number of questions that have to be answered. very important that we have a full investigation into what happened, and david petraeus is starting that investigation. it is in some form going to be a joint investigation between the u.s. and the u.k. we must get to the bottom of what happened. we'll we have relatively sketchy information, but it is sufficient to overturn what had previously been announced. we must now wait for this investigation to get to the bottom of what happened, but i

have spoken to general petraeus about the need for the investigation to be thorough, to be joined in some form so we can fully understand what happened, and i think we have to wait for that. everyone will want to know how this happened. >> can you give us an idea of the nature of your conversation with general petraeus? did he apologize for what now seems to have happened? >> i spoke to him over the weekend, and i spoke to him again this morning. obviously, he deeply regrets what has happened. he believes, as i believe, it was the right decision to try to rescue linda from the very precarious situation she was in. u.s. forces have an excellent reputation in this regard. it was the normal practice to use u.s. forces in the heart of the country where they are in command and know the terrain, but obviously, he deeply regrets

what has happened, as do i, and we must get to the bottom of what happened and make sure first of all that the family get this information and that they know exactly how they're wonderful daughter died. -- how their wonderful daughter died. >> do you accept that liberal democrats are going to have to compromise on this more than your party? >> i think everybody has to compromise because the truth is that we all want the same thing. i think this goes right across parties. we want well-funded universities that can compete with the best in the world. we want to make sure we can go on expanding higher education and improving access. we also have a massive fiscal crisis where we have to rein back public spending and make our public services affordable, and we want to see universities that are strong and independent and able to develop themselves and their expertise. if you want all of those things,

it is quite clear that the status quo cannot deliver them, so we need reform. john brown will be producing his report tomorrow, and i think we should all read and then respond to that report. those of us who want well-funded universities, bright children from four homes be able to go to those universities, we need change, and with the coalition is determined to achieve is to bring about that change. we are facing very difficult decisions from everyone involved, but i'm heartened by the fact that whether it is conservative colleagues for a liberal democrat colleagues, we all want to achieve good universities, social ability, fairness, and i think that is exactly what we will do. >> i know laura brown is going to come out with his report tomorrow, but i just wanted to ask about the principle of this. what proportion of our school

leaders do you think should be going to university? previous government had the deep%. secondly, you have said that for residents should be helped attend university. does it follow from that that you believe there should be some kind of progressive instrument whereby better off -- would end up paying more -- better off graduates end up paying more? >> lots of questions. i do not fundamentally believe in some sort of top-down target participation level that you can deliver. i think what we need to do is have a system where young people can make choices about what is right for them, and i think many people believe is right for them to be able to go to university. looking at participation rates for the moment, if we stay where we are, i think there is a danger that when you look up for dissipation from lower-income households, he would be excepted a lower level of participation, so over time, i want to see

university access expanded. in terms of making sure people from four homes can go to university, this is absolutely vital, and any system has got to be able to achieve that, and i know laura brown is looking at this, and in our response, we want to make sure we prioritize that. if you look at children who make it to the university, it is extremely disappointing. i want us to do a lot better. your next question -- should there be a progressive element? i think there should. it is important to demonstrate this is a progressive approach, but we have looked at it through graduate tax, and it is very good for universities. it is good for american universities. it would drive people to go study overseas, and i think a few graduate tax would be extremely unfair in terms of european students who would come and study and would not be charged a graduate tax when they

go back to their own country, so i think the graduate taxed here in simple does not work. we looked at it in very good faith over the summer. it would actually raise the deficit over the next five years significantly because it does not bring in extra money. it does not start to actually break even until about 2014. it is full of problems. it does not work, so i hope that good and sensible politicians in all parties can get together over laura brown kozyrev warned that remember was commissioned, and i hope everyone can come together and say that we want the same thing. good universities, widening access, the sufficient from people in low-income homes, and a system that is affordable in our country. i think there will be people across the political spectrum who can get together and support that.

>> you talk about universities competing with the best in the world, but still, we have with the offer for value for money with yale and harvard if they are forced to charge the same fees. >> you have to wait to see the detail of the brown report. clearly, a sustainable, good system has got to be one where students make choices and universities have greater independence from the government and where there is a flow of funding into higher education that means we have well-paid tutors and well-stock libraries and the rest. that is the key, and any system we established has got to meet those guides. when you look across the peace, do we have some world-beating universities? absolutely we do, and the danger is we stick with the status quo.

it is unaffordable but also been rewarding for universities, and i think that is what this coalition is trying to sort. not just saying let's offer the easy life and stick with what we have got. let's make bold reforms that may be difficult, may result in a difficult choices, but actually will lead to a better university sector. >> thank you. how important is it on universities to bring with them, keeping the coalition on the road, and the benefit last week, who apologized for breaking effectively a pledge from us in the election on uniform child benefit, what is the status of the other pledges he made in the general election -- should we write those off? or was it difficult because they

were on camera? >> first of all, we want to bring everybody together behind a sensible reform of university student finance that safeguards the future of our universities. what i can say about the internal workings of the coalition is i think this has been another example along with welfare reform and i believe in time defense as well, another example where defense of decisions are being made in a coalition government and people are working together to do the right thing in the national interest. higher education is extremely difficult for both parties. of course, it is difficult for liberal democrats, but they want to sincerely reform the sector in a way that is progressive and that they can explain to their supporters, and we are working hard to achieve that. in terms of child benefits and

pledges, what i said at the election is i said i think several times last week those are the promises that i want to keep. >> on march 23 this year, at a news conference like this, you said very specifically the label was lying when it said that engineers will be cut by a conservative government. he said, the "we will keep what we inherit." can you be very clear and repeat that promise for us today? >> i have said what i said, particularly at that press conference. labor were telling lies. they were putting up leafless, specifically saying there was some hidden plan to take away bus passes or something, and that is just not the case. those are promises i made and promises i want to keep.

>> prime minister, do you think that with the target the last government had that it did lead to mickey mouse-style courses? >> i think there is a problem, which is if you have a target for higher for dissipation and you do not need the resources available, either through government support for fees, you start ending up with a university sector that just becomes very stretched. in the end, one french with from our university graduating thinking -- i want graduates from our universities graduating thinking, "i want an education that helps me stand with graduates from america, france." one of the strains of a fee- based system is that students aren't making a choice about what is it worthwhile degree to them -- one of the strengths of

a fee-based system is that students are making a choice about what is a worthwhile degree to them. the students are voting with their feet for those forces because actually, we have a demand what our society, so i think the fee system should get over the so called mickey mouse degree. i remember reading some years ago in one of the newspapers about news of studies. we have a massive expertise in music in this country, great competitive advantage, but we need more graduates with more expertise in the production of music, says something that might be dismissed as a victim must agree is actually vital for our future success in exporting and. >> i just wondered if you could clarify your remarks last week

about the tax allowance. he seemed to suggest that it could in some way mitigate the loss people will feel from child benefits. are you looking at widening the scope of the tax allowance? how would you keep your coalition partners on board? >> the coalition agreement, you will see that that does refer, non-specifically in terms of who would benefit, but it does refer to a recognition of marriage to a transfer, and that is in the coalition agreement. i have always supported the idea of transferable allowances. there were things in the coalition agreement which recognized that not always do both parties agreed. for instance, on that issue for on tuition, fees, and other things, sometimes written in that we could have, if you like,

a slightly open disagreement. the work that is being done is so good that i hope we will all be able to sign up together to a bold and radical reform of university finance. that is the strength of putting all the brain power together. right at the back. >> weeks ago, we saw with of the findings of the defense security review. i just wondered what you would want to say to the people in the military who are ultimately footing their lives on the line in afghanistan, and also, the void in the defense industry to make the kit which the troops used. what did you want to say to them? >> first of all, a huge raise to

people who worked extremely hard weather in defense industries or with the marines or other is based in plymouth. the first priority of the government is the defense of the realm, and strong defense is protecting our interests, and i want people to know in this review, first of all, that is absolutely the case. second of all, i terms of afghanistan, we will do everything necessary to give our forces what they need in afghanistan and to succeed in afghanistan. i will have to wait for the announcement of the defense review, but it has been done, i think, in a correct way. we are looking at a national security framework. there are others around the table, whether in development for foreign affairs, looking at our industrial base. we are looking at these things properly, wanting to make sure we make difficult decisions but the right decisions for the future defense of our country,

in which i know plymouth bass plays a hugely important part. >> returning to linda norgrove, you spoke to john norgrove today. can you tell us a little bit of that conversation and what kind of assurance he gave him? >> it was obviously a very private conversation. all i will say is that i just want to make sure, particularly as potentially wrong information was made public, i just wanted to make absolutely sure from now on that the information received, we explain everything we can to the family to try to give them as much understanding as we possibly can of what happened and how their daughter died and the decisions that led up to that and indeed what

happened on that night. i think that is the most important thing that we can do, and that was something i wanted to make clear. >> you made it clear you want to eliminate the structural deficit, but on the timing question, you are not/to the mark. do you see some merit in in the cuts? >> obviously, we are going through a complicated process of trying to get all the budget into shape so we can deliver what was promised in the budget statement, and it is not sufficient to have the deficit in four years. you do need to get to grips, other was the problem keeps getting worse. i also believe that, of course, the british economy is making good progress. the forecasts are positive, but

of course there are risks to the british economy. what will happen to the american recovery? how strong is the economy in europe? there are lots of moving parts we have to keep it very close eye on. i also believe, and i'm very consistent in this, that it actually is military policy that is a better lever in trying to make sure that the economy is progressing and demand is growing. i need this is why a lot of support from the imf in that stands in the recent report, and i think that is where we should be focused. >> i want to go back to the hostages you if i might. did you at any point consider using british special forces? if not, why not? is it not right to say that british special forces have a far better record than american

special forces? >> i asked a huge number of questions through of the many days that linda was a hostage. the right approach on these occasions is you have to look at afghanistan, and there are parts of the country where british forces are in control, parts of the country where american forces are in control, so it was right on this occasion to allow american forces to go ahead an attempt the rescue. it was part of the country they control, ground that they know, and in the end, you have to listen pretty closely to the advice you are given by commanders on the ground. i want to praise what the american forces attempted and the bravery that they showed. obviously, we now have to have this investigation to find out exactly what happened and whether that mistakes were made. yes, we need to do that, but i think it would have been quite

the unorthodox to overrule and insist on a frigid killers set of forces to carry out an operation against the advice of the extremely talented and professional commanders on the ground -- insist on a particular set of forces. >> was the family kept in touch during the decision making process? did you personally speak to the norgrove family before the attempt was made? you have made much emphasis of fairness being a guiding principle. certainly many of your entities and members of the public felt that child benefits like by neighbors who are less well-off than their neighbors might be worse off and might lose their child benefits while their richer neighbors were allowed to keep it. many people felt that would not be fair. how do you define fairness? >> on the first question, this morning was the first time i have spoken to the norgrove

parents. what happens on these very difficult, very distressing occasions is, as i have said, to make these regular meetings of hobart -- i think coburn that 12 times -- i think cobra met 12 times. i was updated twice daily on the discussion and on the advice and information and intelligence we were receiving. the formal decision is one to be made by the foreign secretary on the advice of all those officials, and i gave my blessing, my full backing to the decision of the foreign secretary, and you will be setting out more details on the timeline this afternoon. as i said, there was contact with the family, obviously, after linda was taken hostage,

an on going through that time. in the end, the decision has to be made by the government in the way that i have suggested, and let me repeat again -- there is no certainty with these decisions. you have two very difficult options -- to act with the knowledge that you might release the hostage but equally, you might well have lost the impossible, as tragically was the case here. the alternative, to wait here it at all times, we were told that this bill was in danger of being killed and that danger was getting worse -- we were told that linda was in danger of being killed and that danger was getting worse. so there is no certainty. you have to make a decision. i think it was the right decision because of the information and advice we were

given. i'm deeply sorry and stressed that it did not work out in the way we all want it to work out, but you have to make a decision, and i think this decision was the right one. fairness -- i tried to define fairness in my speech. seems to me making sure we help the forest and neediest in our society -- that is fair. we also have to ask the question of what is it fair for us to ask people to pay, but equally those on lower incomes. i think the third consideration is to ask some questions about what it is people deserve in terms of fairness, and i think it is important that of course, there are universal benefits. of course, there are universal entitlements, but i do think it is worth asking whether someone is actually seeking work. i think there is the frustration that it is unfair that we take money off hard-working people to subsidize the lives of people

who could work but refused to work. it seems to me those of the three elements of fairness -- helping the least well-off, making sure it is fair what we asked people to contribute, and making sure it is fair in terms of what people can make themselves. it seems to me, though, two questions -- the first, is it right to go on paying child benefit to top-rank taxpayers, people we do not define as rich. some turning 43,000 or 44,000 pounds. not saying they are rich, but they are better off than someone making average earnings. with all the difficulties that we face in this of falling inheritance we have, it is not fair, so we should stop paying child benefits to those people. the next question is obviously, what about the anomaly of the people earning 30,000 or 40,000 who are still getting child benefits?

we introduce a means testing people for families all the way up the scale, and that is an option. that is something that has been considered in the past. i do not think it is the right answer. i think it would be adding complexity, cost, and intrusion, and i think the approach we set up is the right one. >> thank you, prime minister. on the issue of fairness, do you recognize criticisms that the decision to implement the child benefit changes, among the inner circles, as he puts it? also, what do you think about the fact that he says you are rather left wing of the public? >> i was trying to figure out whether he was accusing me of being too right wing or two left wing, but i'm sure he will make it clear before long. this was an idea we had

discussed before the budget, that we have been discussing over many months. there are no easy choices. we have a bill growing something like 45% over the last decade. a welfare bill responsible for one in every 3 pounds spent by the government, and it is incredible to try to deal with the deficit unless you try to deal with welfare. in my view, you have to look at the benefits that better off people get to make sure your changes are progressive, and you also have to look at the problem of dependency warehousing benefit is a benefit that we now spend more on housing benefits than we do on police and universities combined. it is north of 20 billion pounds. it seems to me if you have to do both of those things. we have to -- we have been trying to do both of those things. i do not expect the decisions we made will have universal acclaim. i come back to the main point, which is if you want to deal with the deficit, you have to

deal with welfare. i think this government, but correctly, have been sitting around a table and discussing what benefit changes we can make, what is a sensible approach and such like. i think actually, instead of it being a bilateral treasury dwp, it has actually been sat around a table trying to work out a benefit reform approach that will help out the course in our country but will save money at the same time, and i think we are making progress on that. another couple at the back. >> can i just checked whether you are being fair to ian duncan smith? you have no capability assessments, your child benefit cuts come in your change to the

definition of benefits, and you have your housing benefits cut. i was just wondering whether there was any more you would be demanding of in between now and october 20, and what is he getting in return? >> he and is being a radical and successful and told secretary of state -- ian is. it is impossible to deal with the deficit without dealing withi welfaredealingaj -- without dealing with welfare. i think that will over kinds of the will poverty trap issue that has bedeviled governments of all colors. it used to be poverty trap that affected mostly people out of work. then it affected people in low- paid work. now, if both. that is an enormous price that has eluded governments for years, so he is being extremely red from there, but also from a yes, i am looking at full

benefits that go to better off families where we need to make some savings, and benefits in terms of dependency benefits, he is going to bring some significant savings. we have to do this if we want to make sure we properly fund our schools, we properly fund our hospitals, and maybe a proper approach would be to lock a certain amount of each budget. i just think that beat the long, and as we deal with this, we need to do it in a way that makes sure we go on investing properly in schools and in health care and universities and also we do not cut for the capital spending that we were left. this is vitally important, and i have said that if you do not deal with pay and with pensions and welfare, you cannot possibly deal with the deficit in a way that makes sense in a modern, competitive country. we have had the pay freeze which has been announced. we had a very good report on

pensions, and we see very good report on welfare. all these things, in my view, are necessary. >> if britain was sissy -- was to see its gdp decrease again, what would he do? would you go on with spending cuts, or would you decrease? >> i think it is a very different situation between ireland and britain. britain has an independent office of budget response of a livid that issued a forecast to the economy shows growth this year and next year and the year after and that showed unemployment falling. i have to rely on the infinite forecasts that are out there, and almost all of them -- i have to rely on the independent forecasts that are out there. the second point is that ireland is in the euro and britain is

not. i have always argued consistently over a number of years that the problem of being in the euro is you are not able to have monetary policy made in the uk for the uk for the benefit of citizens of the u.k. that is why i am opposed to the membership of the euro. we have the advantage of being able to stay out of it, and we have been able to tailor monetary policy that suits our needs, so i have always said, as long as i am prime minister, we will not join the bureau -- join the euro. >> the european commissioner has somewhat positive opinions on the financial activity tax. are you still going to hold out for a global arrangement, or might you be prepared to accept