expected and the cost or the collateral damage has become a concern. >> where do we go from here? >> let me tell you what should happen. it is important to make the difference between that and what is likely to happen. what should happen is you should have a political coming together on the four things this economy needs. the problem is that the political debate is very -- right now. we need structural reforms. we need more balanced aggregate demand. we need to deal with debt overhang and persistent behavior that underlines this economy. we need some really good micro elements that have to do with the education system and labor retraining. >> until we get that -- >> until we get there, we are stuck at two percent. the longer we are stuck at two

percent, the more potential growth we are coming down. the problems get structurally embedded. look at long-term unemployed and youth unemployment. >> mr. taylor, the economy has changed since the recession. many workers don't possess the necessary skills to meet the available job openings. are we looking at permanently higher unemployment for some time to come? >> i don't think we are. the problem with the unemployment rate remaining high with job growth hardly keeping up with the population could change. it depends very much on policy. to me, it is not so much second gear although i like the analogy. it is more this big heavyweight on the back of the car that is slowing the economy down.

i think a lot of it is the policy. you could look back at previous expansions. deep recession in the early 80's, growth was five percent per year. it has been 2.2% in this recovery. it is dramatic. i think you could learn from history about what to do. >> you don't think we are going to remain in permanently higher unemployment? -- there are certainly eight certainly a danger we will. i think it largely depends on policy. one of the things that could lead us in this direction is complacency. the attitude -- way back when we thought unemployment normal was four percent, there was a time where the council of economic advisers, we said because of

demographics, let's call it 4.9. it was viewed as incredibly pessimistic to say 4.9. now, we are talking about maybe 6.5. it is taking this discouraging performance and making it what we expect for the future. there is a danger to go in that direction. >> sheila -- >> i agree with that. we can do better. there is political dysfunction in washington. politicians say, this is the best we can do. i think i would agree. i think getting rid of the loopholes, expenditures, bringing the -- rate down, identifying infrastructure spending, retraining the

workforce, there are things we need to do. we need to make our country more competitive so that other people want to buy. >> is it safe to say that politics is the greatest impediment to growth? will the economy be held back? >> yes.[laughter] that is the biggest obstacle. the second one is the mindset. we grow up believing that finance was the next level of capitalism. that somehow, you better agriculture, manufacturing, services, and if you are really lucky, you can do finance. the description of my industry changed from financial services which is this notion that you served the real economy, to finance with the notion that your standalone. we need to realize that right

now we don't have a financial service industry that supports the economy enough. there is a mindset issue. i agree with john and sheila that we have to go back to genuine drivers of growth instead of this love affair that we have with leverage and debt entitlement because that will put us into another crisis. >> coming back to the present situation, income inequality is growing. lower income households are struggling. the one percent is doing just fine. we haven't seen protests in the streets like in europe, but what is the risk of the social fabric of america beginning to fray? >> it is fraying. it is fraying because we started out with social inequality and now it is getting worse. it is getting worse because of the policies we are pursuing to try and restart our economy. if the fed is the only policy

making entity in play today in washington, not by choice but by necessity, the fed can only act using indirect policies. it cannot invest in infrastructure. it cannot change the tax code. it has to convince people to do things. how does it convince people? the idea is very simple. you make asset markets unofficially high. the wealth effect, people feel richer. maybe companies will invest more who owns financial assets? you have this irony in using imperfect policy by necessity, you make income inequality worse. >> ms. bair, do you believe that this is contributing to the widening of income inequality?

>> i do. it is not trickle down. it has resulted in financial asset inflation. that benefits people who own financial assets who are the wealthier folks. there are not quality jobs. the vast majority of people in this country -- they don't own financial assets that have been inflated through this aggressive monetary policy. i think they wanted to create jobs but it is not happening. >> what is the biggest risks to the economy right now? >> i think the unsustainability of the course that we are on. we have tepid growth and we are too much trying to go back to the past. it is just not sustainable. you need real wage growth. you need production of real goods and services that others

will want to buy. fueling growth through increasing levels of leverage causes collapse. i am afraid with cheap interest rates, that is what it is designed to do. it is not sustainable. i am in the process of writing a book for young adults on the crisis and i have been interviewing families who were impacted. there are a lot of people out there still on the edge. they are just finally making it back, but they are making maybe two thirds of what they used to make. >> speaking of the fed, there is a sense that the fed is going to pull back on bond purchases. we have seen bond rates rise. how much higher do you see bond yields and interest rates rising? will it choke off growth even more?

>> bond yields are rising because financial markets behave differently. economists like to look at the journey and i am very rational that the journey can take one step here, one step here. financial markets look at terminal values, the destination. they ask themselves, what is the destination look like and can i get their first? if you get to the right place first, that is where you want to be. the minute the fed starts talking about tapering, you saw ainterest rates take off. we have now a significant tapering as early as september. that has an impact. you have seen the housing market weekend. you are seeing the effect of that. the fed is trying to play defense. the first attempt to play defense was to talk back that

pull back the tapering. the second attempt was to use its second instrument to try to compensate for the effect of the first. the second instrument is experimental forward guidance. would you see now is the fed attempting to convince people to do things by using aggressive forward guidance in order to limit the impact of high interest rates. the one thing to remember, and this is really important, is that we are in a period where the fed is using experimental policies that have not been tested. it is like a doctor that gives you a medication because he or she has to do so that hasn't been clinically tested. when that medication doesn't work well, i will give you a bit more of it. not any better, i give you a bit more. that is why this notion is so important. >> let's talk about the fed's

unconventional policy. have we created new sources of financial instability? >> i would say the caveat is it is harder to get out. they need to get out on a gradual, slow basis. at the end of 2000 well, some studies show there were 90% of new issuance back to securities. so, i would say tapering would be on a very long time frame. hopefully, that would be combined with new fiscal policy. it will not give us some short- term sugar high, but long-term economic benefit.

i think that could work. they have been away too long, but they need to get out very slow. >> professor taylor, you coined the taylor rule. what is your take on the fed's policy? what course of action would you take to this? >> i think what you're seeing now, what sheila and mohammed are concerned about, is exactly what those of us who are very wary about quantitative easing worry about. it was clear that something like this would happen. this is exactly why so many people were concerned. from nobel prize winners to former chairs of fed, very concerned with this whole action. at this point, you try to get out of it. it reminds me of what happened in the 70s. people realized that this terrible policy of the fed wasn't working.

it took a long time to get out of it. i think the number one thing should be getting back to normal policy. we had a good monetary policy that has worked very well. we have gotten off of that. it is very unpredictable. who knows what is going to happen next? markets are hard to predict. if mohammed can predict them, you can see what it is like. lay out a strategy, get back to normal policy. if not now, when? it is not going to be easy. but that is what this economy really needs. it needs predict ability about policy. go around the world and talk to central bankers. they crave the day that they can go back to normal policy. >> you advocate a tapering right now? in september? >> i would get started with it. they have laid out a plan already. they have to worry about how

they communicate this. i think the strategies are not laid out as carefully as they could be. i think a strategy, we have recommended strategies to make sure the tapering is -- i say tapering means stopping purchases before you start to raise rates. i think you have to drive down the balance sheet. that is going to take some time. >> right now, we are on course for lifting interest rates in 2015? would you advocate that or something sooner? >> i would say right now there is inconsistency in the policy statements. the idea of a zero rate in 2015, even if the economy is sluggish likely think it will be, it is probably going to look too low when 2015 comes around. that inconsistency is in the markets.

right now, there is a promise of zero rates but when the time comes, it looks like we go to be higher. >> professor taylor, your name has been brought up in certain seconds -- circles as a potential candidate for the chairman of the federal reserve. ben bernanke will be stepping down in january. any interest in the job? [laughter] >> absolutely not. [laughter] >> one thing that is great about our country is we have this civil society where people can be on the outside and comment and criticize. i am very comfortable with that role. [laughter] >> what happens when the fed does begin to pull back? how will that impact the economy is to mark will it help or hurt?

>> we do need to be back to normal. it is going to take a long time. john, i am willing to wager that unless the other things happen, unless the political system gets better, unless the drag, the headwinds that we face on the rest of the world -- rates will be incredibly low. i will take you one step further. in the short term, what you're going to have, the fed purchases have inserted a wedge. between sluggish fundamentals and asset finance. the reason we worry is we worry that the behavior is inconsistent. people are taking too much risk. sheila was worried about the mismatch that banks were taking. the fed cannot control the long end of the curve.

you will see one of two things. either the fed's policy will work, low probability but it may work. it doesn't need to press the accelerator so much. to echo what john said, this is not about hitting the brake. this is about taking the foot off the accelerator. alternatively, asset prices will come down to reflect fundamentals. when that happens, that becomes a drag on the economy. that is what we worry about most. >> can i make a comment about the impact? if you think about -- , it was first announced december of last year.

the 10 year treasury rate was 1.7 at both of those times. it got to 1.9 this week. i'm sorry, 2.9 this week. i see no positive effect from this quantitative easing. it is just not there. i know many people think it is a boost to the stock market, but if you look at fundamentals, you can explain a lot of what is happening. i think people need to realize, we don't know the impact of these policies. it is experimental. i see them as negative. to me, it is a reason to get out. i am not the only one. i can give you a long list of experts as well. they worry this is a drag. there is going to be a negative as you get out of it. ultimately, i think it will be better.

>> mohammed, to your point on interest rates at zero in 2016, obviously the fed has said that when it tapers purchases, it will keep zero interest rates in place until the labor market improves. are zero interest rates a trap? we are trying to unwind these policies. japan has been the poster child for that. they have been pursuing quantitative easing for 20 years. >> at the risk of being controversial, first of all we are in a liquidity trap. are they in a trap in the sense that we are staying there underestimating the impact? you have to tell me what the counterfactual is. if other policies get their act

together, then they are trapped. if they are discouraging as they are allowing politicians to become complacent, then they are trapped. if the alternative is absolutely no support, then they are not trapped. i just want to go back to this notion of what is happening underneath. i have a 10-year-old daughter so i am particularly sensitive to the details of unemployment. i look at two things. one is the 16 to 19-year-olds unemployment is 25%. at that age, if you remain unemployed for long you become

unemployable. there is a continuous entry of people into the labor force who are very much like you. that number, the longer it persists -- anything that can be done to support the economy and make sure we have the skill set will be better. the second number is the unemployment rate depending on what education you get. the average 7.4%, it is not a good average but it is the one everyone sees, if you haven't finished high school, it is 11%. >> we are going to talk about how to get out of this. before that, i want to talk about the u.s. financial system. september will mark the five- year anniversary of the five- year anniversary and the collapse of lehman brothers.

what is the state of the banking system now? >> i think it is certainly safer than it was. it is not as safe as it should be. many of the rules that we really need to have have not been finalized yet. we have got more capital banks primarily through the stress testing process. i worry about sustainability over time. they have raised the amount of capital that financial institutions can use to fund risk-taking. those rules have not been finalized yet. they were voted on some time ago. it is a work in progress. credential standards which was a key component for dr. frank, they were proposed over a year ago.

again, there is a lot of pushback. we don't know what will happen. before that is finalized, and different people have different views, nonetheless, it is important from a legal standpoint to get these roles done. i have to say, there has not been enough progress. those focused on march financial institutions and instabilities may create, those are barely even started. >> you brought up power regulators. you said you have been in favor of strengthening them and you are -- this is a good idea?

will banks have sufficient padding with new rules in place? >> the group that i chair, we have abdicated a minimum eight percent. they are at six percent now for insured banks. only five percent for holding companies. that would include both the insured bank and some nonbank affiliates. i think the minimum should be eight. six percent is an improvement. it seems like they should -- you shouldn't have insured banks subsidize greater leverage. i hope the fed will change that. i think those were tremendously positive. i think estimates were another 90 billion of capital. we hope to strengthen those rules further. this is important.

capital, more than anything, gives you a stable financial system. we don't know what the next thing maybe. if you have capital, there will be annexed her cushion.-- extra cushion. we have learned that these hybrid instruments don't have absorbing capacity. it has to change. the focus is now on tangible i think of all of the things that have been done so far. curtail -- new rules there is never a good time to raise capital. i remember when i became chairman of the fdic, it would have let the largest institutionstake on leverage. studies show that they could take on more leverage and we fought it off. we heard from the banks, we

don't need more capital, these good times would last forever. we know how to manage our risk. that is what they said in good time. in bad times, you can't raise our capital, it will hurt our ability to lend. im an interesting thing, the way they risk weight now is securities and derivatives. with a leverage ratio, you're going to be reducing the capitol advantage of securities and derivatives over lending. >> if the new capital requirements do go through, would it cause the nations largest banks to break up and become smaller? >> i don't know. there is probably a lot of hyperbole. they may need to get smaller.

they may sell assets to do this. some people say that is terrible. i don't think it is a bad thing. >> do you think that downsizing will unlock economic growth? >> it is complexity more than size. suddenly, the larger you are, the more difficult it is to manage. the leverage ratio will hit securities and derivatives harder than lending. i don't think that is a bad thing at all. if the fed continues with higher leverage outside, then it may move into the holding company where there is less regulatory scrutiny. i don't think that is a good result. there are plenty of studies that show better capitalized banks do more lending. they have the capital to absorb the loss. that is why you saw smaller

banks doing more lending during the crisis than the big ones. those are the ones that were suffering the market loss. it is commonly said, bad loans give us the crisis. there were a lot of bad mortgage loans out there. what accelerated it were the structured products, the synthetic derivatives, the sudden losses on those. that is what got us into trouble. the underlying loan losses, as substantial as they were, they accumulate over time. i think the system could have observed that. getting banks to do more lending is a very positive thing. >> officer taylor, weigh in on this. what is your sense of doubling capital requirements? how will it impact the flow of credit in the economy?

>> it is not really a doubling. some are higher already. wells fargo, the numbers are probably above. we will have to see. i think it is correct to look at this leverage ratio rather than the risk weight at some extent. the numbers show leverage ratios from three percent to six percent on average. i don't think a percent is going to be a problem. why are you doing this is the question. partly it is to reduce the risk in the system. also, if there is another panic, then we have these from time to time, you don't want the government to get into another mode of having to bail out. that is a dangerous situation. by having more capital, i think subordinate debt can help as well. >> a couple of senators have

proposed the idea of reinstating a modern version of class people. good idea or bad idea? that idea. i welcome it because it's -- because it puts directional pressure on the regulators saying we do not think you are doing enough. i have argued in my book that i don't like insured deposits. saw moved out. as long as there are strict firewalls. make the market fund it.

it will be more expensive if the market has to fund it. i think that will create activities. that is what i have argued, a complete split by statute. i think it is tremendous that the bill has been introduced. it goes to the right place. regulators to do more. >> let's talk about what needs to be done to pull america out of this tepid period of growth. you spoke to it a little bit earlier but if you could delve in more. >> we need to do two things. we need to boost growth to its potential. secondly, we have to enhance potential growth. the first step is going back to what i spoke about.

actual growth is held back by first a lack of structural reform. to facilitating the labor market. labor mobility is going down. giving clarity to companies of what the fiscal regime is going to look like. prefer to hold cash. you have a whole set of structural reforms that can enhance productivity, that can contribute to money being put expand aggregate demand. edit more fiscal, focused on

infrastructure. i think the return investment in this country is high. for those who didn't live like john and i did through the market crisis, a debt overhang discourages new capital from coming in. if you don't know, think ofwould you lend to detroit today? you wouldn't. you would want to find out what happens to others who lend to detroit. growth. that speaks to education. it speaks to some micro things that we should be doing. one of the problems of the fed being the center of attention is it diverts discussion away from other things. things that are more important for us and for the next generation, that this whole narrative have shifted away from.

what types of new projects are you working on? >> you have promoted me. [laughter] i am grateful to be chair of thepart of securing u.s. living in a global neighborhood that is more prosperous. it has had numerous advantages. the idea is to contribute and bring in outside perception.

we are a council made of people from very different backgrounds and experience. it is a wonderful collection of people. we have gotten to know each other over the last few months and we are working on a few major initiatives. >> how do weerica's rejuvenate the american economy? >> i think we need strongerour elected officials -- we me.

there are different ways to approach it. i am big on tax reform. i think adding rid of these the government is giving you a tax benefit versus what made more economic sense, are very harmful. make us more competitive internationally. it should fund self-sustaining projects. i think we should do it. we should be all in. government than subsidizing housing. i would love to see that. republicans have a long infrastructure spending in the

past. with greater technical expertise. we need immigration reform done we also need to make sure there are jobs. we need to make sure there are jobs there for them. those would be on the top of my list. people just seem to want excuses for not doing anything. afraid they will say the government can't do anything. they don't try any more. article last week. their economy and country very much drifted off. is that something we need to do? at stuff.

thatuld be lovely to see again. markets and political system. you're focusing on your next election cycle. i don't get that. why do you want to be in public service if you are not leaving? you have a responsibility to govern. that is what taxpayers are paying you for. jumpstart the economy? i pointed to five things. benefit analysis. based on the philosophy, i think it is pretty clear.

there are two budgets out there. they are so far different from each other. we didn't mention entitlement reform.

some certainty about that would provide predict ability. on the tax code, i agree 100%. it is a no-brainer that we need to get corporate rates down and reform the personal system. notion that you need more revenues. classic tax reform, it worked with president kennedy and reagan. you reduce rates and expand the base. it creates economic growth. we got away from that. dodd frank has a huge number of regulations. any rules haven't been written yet. that is a drag. we have to think about how we

deal with that. compromising isn't easy. there are different philosophies won't. thing, not just compromising for compromising sake. >> i agree on entitlement reform. the regulatory uncertainty is very important. finalized because our system has proven to be very resilient. interest is to get this done. >> let's talk about the reform.

he would like to use one-time funds to repair roads and bridges and improve community college system.

>> there is an example of a tax there are certain things in infrastructure we need where you need the public sector to take the lead. i would go back to the president's job plan last year. most people would agree too many components of this. it didn't go anywhere. which is, the minute a proposal is put forward, the political system encourages not consensus itilding and modification to has not to do only with the cycle, but the reality of by the extreme of your party. that impacts behavior whenthat is why good proposals are not even discussed on the basis of merit.

>> i think that is a technical question. i agree with both. i think getting corporate tax whether you're going to end up getting either one -- i don't know. my commentary would be >> this is a very importantwhen you talk about tax it is best to think about tax growth, more revenues, lower unemployment. tax reform means lowering those rates and broadening the base.

linking these other things and president reagan got through. it would be a tremendous boon to get tax reform done let alone just the corporate side of the personal site as well. >> what about the unlocking of mass amounts of oil and gas. could that be something to reinvigorate growth but also bringing manufacturing back to>> it is very important important thing.

difference. if you encourage these kinds of activities and do not discourage them that could be a tremendous bone. hugees. this economy has a weight i find it. i am worried this recovery will never be a real recovery. we may never get back to that. but there is this great potential in the united states. >> going back to taking a card out of mexico. passing a law to make members >> with this new and better. but mexico has been doing pretty well relative to the united states during this expansion.

states, because the mexican economy has done better than the years. and until recently, the emerging markets themselves. trading places. emerging markets to follow these principles, and they have at least there look -- they're moving in that direction, and we seem to be moving away. it is discouraging. we should be following the cut been recently. going back to monetary policy, extent by our own monetarythe headlines yesterday in the wall street journal, india is shocked ourselves.val of

the more we can get back to our will be. reform? that could boost economic growth system? and also for politics. moving. >> any thoughts on immigration reform? being proposed and will -- and if you look at the impact long

term, not that it has any short- term negative effects, but again, it speaks to a political system that cannot get its act together. john introduced it. there are two views about the world and the u.s. and global economy. economy is, and therefore, we should do whatever it takes to get stronger, or regardless of what the economic realities are. that is one view. the other view is we are the issuance of the global currency goods. we are in the middle of the global system. we hold it together. and therefore, when we implement upicies, we need to be about on what john has said, when

difficult to navigate a world ofthe most powerful engine down. in countries like brazil, because it is very difficult to navigate a global system with that is so fluid with capital flowing in and out. dealing with what is calledwhen a tourist goes to a developing country, they normally go with great enthusiasm.

they're going to go see a lot of nice things, etc. then suddenly, something goes wrong and they don't know the country well enough. the first reaction is to go to the airport and get out. a lot of capital has been pushedand has gone to countries -- crossover capital, where interest and the risks they are underwriting. even if it is temporary and bring the money out. world. countries that have been pursuing a pretty good policies so far. >> we have just a couple of minutes left.

questions. >> you mentioned entire reform with health care. healthcare has been deemed the in terms of paying for things. that being said, what can we do about that? should we continue with the obviously, doing nothing will not work. what would you recommend? >> the programs already existing for a long time, like medicare, for which the projections of spending are just growing and growing -- and we also of social security as well. the president a couple of years more than gdp.

agreed. do that. retirees. people know it has to bei would try to go after thebut it is also something thatbut in the meantime, focus on expenses right now, like medicare. specifically on the story in the you were prosecuting banks. attorney-general holder that. is this because we are five years into the crisis and these cases were to complicated to get to them quickly?

it is tied to the anniversary of the crisis? what about the statute of limitations? of limitations. that may be part of it. i think philemon university -- scrutiny, a lot of that. having the accountability and the certainty of enforcement

actions helps to make sure there is full compliance and when you have enforcement, that energy on this of the years we are targeting. -- of behavior's we arewhy isn't there consistency in the enforcement? i do worry when enforcement actions become a response to political pressure, or perhaps accountability and changing thei should not be so negative.

consistent and their archives know yet. >> i don't know. i did see the article. i don't know. the enforcement priorities of me. talk with them regularly. i do wish there had been a more robust policy. but again, when it is thank you for your excellent insight. [applause] [captions copyright national cable satellite corp. 2013]

>> if that it is the anniversary

of the march of washington. a discussion on the rights of women. speakers include bernice king. terry o'neil. the wife of slain civil rights leader, slain mr. everett said. and you can watch that this morning live on c-span3. tonight on the encore presentation of first ladies, frances cleveland is so's -- popular. people imitate her clothes, hair style. they really want a piece of her for himself -- for herself. we always felt we owned the first lady, someone we knew. pictures became extremely popular pier yen you can picture -- by pictures to vote in your home. while we have grover cleveland

running for president, we also have lucas cleveland running for first lady. >> encore presentation of our original series continues tonight at 9:00 eastern on c- span. >> coming up live, washington journal. at 11:00 eastern, health and human services secretary kathleen civilians talking about the affordable care act. institute randolph boasts a for marking the 50th anniversary of the march on washington. coming up, a look at the cato and astute -- institute report on the rise the cost of social security disability insurance. frank oliveri discusses the joint stridor -- right strike

fighter program. a spotlight on the magazines at 9:00. host: as the president departs for his bus tour, a proposal that will break colleges on markers such as tuition and graduation rates. if he can get congressional approval, the idea would be to tie federal financial aid to students based in part of the rankings. analysis from the census bureau shows that average median income stands at $52,090. the washington post reports this morning this comes as americans are trying to improve their income by going back to school to improve skills. bradley