understand why it becomes incredibly partisan. we do need to have a dialogue about 48 million of our fellow citizens who have become dependent on the government for something as basic as nutrition. >> i agree. that is the question we have to deal with. it is also related to the -- to theo wherein, reality of our income has gone in this country. people at the bottom end of the income scale, that is a polarized this. -- polarizes. millions of americans are working hard and they are not paid enough for the basics of life. housing, subsidies for food stamps.

.t is uniform for everyone housing, some get it and some do not. in the case of health care, the very lowest are on medicaid. and then you have the problem of cost of insurance. of whatpart of the cost the affordable care act deals with. as long as we have that kind of polarization of income, those costs will increase. >> now that we are away from the issue of does the government stay open or not, we will get into the debate about what do we invest in? a national institute of health, reform of how the money is going into food stamps ? it seems like we will see a

shift in the debate and how we are focusing our attention. >> let me raise another issue. i think it is complicated. less have the committees been doing their work. when they do do their work, they are overruled by central leadership. projectittees produce a -- product and then they get vetoed by leadership. my observation is that it is not nearly -- leadership is not nearly as smart as they think they are. [laughter] this issue goes beyond

appropriations. this has been a major problem with the farm bill. i will give you a chance to way back in on the farmers. weigh back in on the farmers. minnesota, the upper midwest, the farm bill is big news. a lot of people are very anxious and i am sensing some increasing frustration and anger that this has not been worked out. >> we are talking about the wrong bill. we should not be talking about the farm bill. we should be taught -- calling it a nutrition bill. this is not necessarily over the farm 25% of it.

it is more about the 75% part of it, is it not? we should be focusing the disagreement on where it is. and hisman peterson republican counterpart have come together on the egg part of it. question? i ask a discussion of this when you bringt, people together, it is tough. nobody is ever totally satisfied. issue or whathat funding mechanism was not in this bill that you think could have been added with bipartisan support? do not know enough about

the specifics of the agreement. i am six years removed from that. >> i do not know. this agreement yesterday, i think it is foretelling of the future. maybe the boat has sailed on medicare and social security. this is an historic agreement. this is a good agreement for the country, i believe. when you're trying to put a package together, you form the coalition. issueot know there is an -- not extending unemployment benefits, that was an issue, right? not tax reform. there are things you could have added to bring more democratic

support or more republican support, but bipartisan support -- i think this was a pretty good agreement. point i come back to the that marty raised? i was on the budget committee before president bush was elected and i was on the budget committee through part of his presidency. once you have an agreement thaten house and senate we're only going to spend whatever the number is, 1.7 trillion, whatever the number. once you have the agreement, it everything get so much easier. was when frustrations the bush team came in and we had the house and the senate and the white house under republican

control, i just assumed that we would have one number to start with. it would have made things so much easier. the senate had a budget. the house had a budget. the president had a budget. to use a very simple analogy. we were at this number, the senate was at this number, the president was about at the senate's number. we ended up compromising at this number. the critical point of this agreement is they finally come together and have a number. then you can have legitimate and honest debate about how much should go to this or should go to that program. that is part of the legislative progress. years, has in recent

important of a very theme that margaret thatcher advanced 30 years ago. first you win the debate. then you win the vote. what we have seen going on in congress, and why there is so leadership on both sides no longer think they have to win the debate. they just have to get enough votes. if they have to break knuckles, promise bridges, that is all considered fair game. if we can get back to the basic notion of having legitimate debate about legitimate issues and not allowing personalities to be allowed in the debate, i think you will see a much more -- you will see a washington that can work. you an example of

that we have heard in response to the murray-ryan deal. big mistake to give up the sequestration number. it was better to stick to that number and cut spending from their. once you move away from sequestration, the republicans have given up the game. now it is back to the usual give and take. was it a mistake of the republican leadership to give up the argument about spending that was tied to sequestration? >> it was a big give. it was the one club that senator mcconnell had gotten into the budget agreement. it was an awful lot to give up. end, is the agreement that was reached worth what was given up?

both sides had given up a good deal. that is why you will see some gnashing of teeth. >> i want to invite members of our audience who would like to submit a written question to do so. congressman, i want to pick up on this theme and ask you to put on your hat as a strategist. think about where the underbelly of the democratic artie is right now. -- democratic party is right now. was this a smart strategic play by the congressional republicans to say, let's shift off of this debate over government shutdowns and the budget and clear the decks to go after obamacare with oversight hearings and a 24/seven watch? >> history will tell us.

mostservation is that large computer programs in the federal government have had a great deal of difficulty getting set up. that does not relate to the obama administration. that relates to the bush administration, the clinton administration. all the way through. it is beyond me why they pay more attention to that particular issue. we have are is great little bit of a program problem -- a little bit of a software problem. i think eventually, that problem gets work out. i think thet, republicans will rue the day they made that a central issue. it will be working for millions of people. right now, it is a plus for

them, but they cannot count on computers to be troublesome a year from now. >> [inaudible] it was a caucus that was quite rambunctious when you were trying to lead them. does this strike you as a smart leadership move to get control back? but the budget issues on the back burner, but the committees work their way and put the spotlight on what is the underbelly of the democratic troublesht now, the that obamacare is having? >> that was part of the strategy. republicans had to get off the crisis to crisis management. they received most of the blame

for the shutdown. it was not fair, but they did receive most of the blame. now the slate is a little bit clean. there is bipartisan movement on the budget. republicans have won the day on discretionary spending. $200 million less than president obama recommended. how could you not consider that a victory? clear the deck and move on to an issue -- websites will be corrected. whether it is two weeks or 30 days. to me, the underbelly is the law itself. obamacare itself. the websites will be corrected, that is not the issue. my kids and grandkids have to live with the law. that is the underbelly.

the strategic lay by the republican -- play by the republican leadership, let's put the budget issues on the back burner. way for obamae care to be front page news. it is going to move well beyond the website. all sorts of issues relating to the insurance companies and he was getting covered and who is who ising covered -- getting covered and who is not getting covered. ask a lot of people -- >> a lot of people will say, the shutdown in october was a dumb fight d umbly fought. it was a fight that had to be fought from a republican

perspective. there is this polar division between those who really believe that obama care would work and those who believe it is a train wreck. democrats and the country will rue the day we went down this path. time will tell who is correct. we think we will have a pretty good verdict by next november. republicans did make the calculation that they had made their point on the budget and on obamacare with the last government shutdown. it lasted 12 days. it was forgotten by the end about tilburg i most republic -- it was forgotten by the end of a october. there is nothing left for

republicans to gain. there are so many other issues happening and is not just health care. suggested, when the website is fixed, i think the problems become even worse because you will have -- millions of americans, we do not know the number, they will lose the insurance they have today. are they going to get better insurance? issues are going to play out over time. battle.a major the key question is simply agenda control. what is the issue being debated? the underlying politics of the budget agreement was, let's get these budget issues off the

front page. let's allow obama cares to have the space on the front page. >> a quick rejoinder. i think we look forward to a .ebate millions of american people are now eligible at the lower end of the income scale. millions more who have health problems and millions more find they get a fairly reasonable deal on the affordable care act. the focus is there. >> it is a great debate, but we will not have it today. i want to ask each of you this

question. shrewd leader in minnesota of the republican party. have you been surprised that the republicans in washington have not been a victory dance in the end zone? they swept into power in 2010 with a very coherent argument that spending was out of control. the budget deficit was unsustainable. here we are with the fastest decline in the government's budget deficit in washington since world war ii. the cbo is reporting that for the next decade, the budget deficit will be in the two or three percent range. why isn't that republicans seem to make that victory dance? >> you are correct.

left-wing democrats should be shaking their heads. they cannot believe that this has happened. the spending level is one trillion, far less than any left-winger would've ever imagined two or three years ago. they should be declaring victory on the budget. i was going to respond earlier. declare victory while you clear the deck. republicans have won the day on the question of discretionary spending. that should be something that we should be able to take to the american people. spending is less. let's not eat our own. it was a victory from a conservative standpoint. >> you made some tough calls on

the spending side, decreasing spending, raising revenue. it was not particularly popular. do you think republicans have now won the debate on spending? it it long-term spending, still gets to be a question how you solve that long-term. entitlement programs and what you do with the revenue side. -- cautionary spending discretionary spending is not what was driving the deficit. in the short term, those cuts [inaudible] art of of the negotiation is even when you believe you have had a big win and you know you will have to have democrats votes in the senate and republican votes in the house, you do not want to

pound your chest too much. >> it is helpful to the republican leadership in the house to have a lot of grumbling about this budget deal. it helps them pass it in the senate. you always have to have -- be a little bit humble about the results of any negotiation. in the end, that is how it will play out. grab the victory, but do not do the victory dance. >> never try to embarrass the other side. --do want to give it away the republicans want to pivot away from talk about a shut down. strategy,rt of the but it is not just to have hearings about obama care. there are other things going on in the united states of america and around the world.

.e have a problem in syria we have a problem with iran. doubt thes no republicans will have a strong set of talking points. the democrats will have their talking points about strengthening the economy. this will get played out in the campaign. we have a question from the audience. do you think it is possible to convince an urban legislator to vote for a farm bill that would make significant reductions on the level that house republicans have talked about, more than $40 billion of cuts? do you think urban legislators in the house or the senate would ever go along with something like that? >> those cuts will be

dramatically reduced in any farm bill that passes. , therem bill in general are disagreements between the different commodity groups. at eliminatingg the basic blanket payment to farmers. perspective of urban legislators in minnesota, the farm program is one of the few programs the federal government where we get a disproportionate fare in minnesota. we do quite well in terms of money flowing to the state. >> another question from the audience, congressman. you are talking about how much larger it is in terms of the

number of people. for somee potential significant structural reform? maybe a shift towards some kind transfer? >> i do not know. we have to get our arms around it. we are supposedly in the fifth year of an economic recovery. the president has raised the issue of the income disparity. it is a fact and something we have to come to grips with. from my perspective, we have to begin to understand how and why that happens. from my perspective, we need to find out whether or not the federal government and federal policies are to blame for that.

unique things about the food stamp program is that it is universal for low- income people and it is tied to food products. sometimesme quarrel about what it is or is not. you have housing programs were a small percentage of eligible people end up getting assistance for housing. a significant difference between whether you qualify or unqualified for that type of income supplemental, one of the is thatof food stamps people qualify on a general basis. the truth of the matter is, i chaired the subcommittee that it oversight over nutrition program. -- it was done by other

people, but while i was in congress, we moved away from the paper food stamps to the debit cards, ok? we believed it would dramatically reduce the amount of fraud. cure for the number of people on food stamps is a much stronger general economy. when the real unemployment rate was down somewhere just north of three percent, we saw numbers collapsing on these programs. how do we really get this economy moving again? how do we get people to invest and build businesses and jobs in the united states? i think we are closer than we even think to that happening. policies in

washington are keeping that from happening. >> there is a debate about this issue. one of the concerns in the business community has been out the crisis nature of decision- making in washington and the government shutdowns and the threat to our currency has created a kind of a depressing effect on economic rose. this is one of those big debates. congressman, i want to come back to an issue we have not talked about that much. unemployment insurance, a lot of democrats feel the deal that has been struck in washington is basically on the backs of struggling unemployed americans, over a million will be cut off from unemployment insurance. if you were in congress, would you be voting against the steel?

-- would you be voting against this deal? >> i would be voting for it, but i would be disappointed. >> do you have thoughts about what we do about the long-term uninsured? >> long-term uninsured? >> i'm sorry, long-term unemployed? >> there are areas of our country -- you almost have to define geographically. in the coals -- states, eastern kentucky, something like 100 out of 130 mines have closed down. the ideas that you can have job training rogue rims for coal miners and turn them into training-- job

programs for coal miners and turn them into computer programmers, i have always thought that was a fallacy. i believe that simply extending unemployment benefits probably increases the unemployment rate. human nature is what human nature is and the longer people can draw benefits, the more choosy they will be about what kind of unemployment they will take or what kind of employment they will take. it is much easier to find another job when you already have a job. we need to get people back in the employment pool and extending unemployment benefits probably works against that. avoiding a government shutdown is headline news.

are curious, when you speaker, it was an interesting time in minnesota politics. we had gone from a fairly bipartisan -- there were a set of rules that both parties tended to play by. politicsbarred sort of like a government shutdown. can you put your finger on what changed that led here in that has gotten us to this point where anything goes? tougher. get i was a part of it. going to point to something specific that changed the atmosphere a little bit from

, little bit more collegial understanding of each other's positions as opposed to a hard- line partisanship, i would say preventedlaw, it individuals from getting together in the legislature and going out for a supper, getting to know each other. it might've been sponsored by an interest group. all of a was ethically wrong. if you do not know the people on the other side of the aisle, much less may be in the other body, it is more difficult -- it i think that is part of it. i also think the politics part of it, we have so many districts

democratic orll all republican. a democrat sitting right here, you will win. i like that in the 1990s and 1980s when all the challenges internally with the caucus primaries and the challenges to endorse candidates running democratic side. then they changed the republican side in 2004 and i did not like that is much because they cause problems. that did take place. >> are you finding when you are the speaker of the republican party of minnesota, that the type of people showing up and becoming part of the endorsement process of the republican party commitment,ntense uncompromising commitment, to their agenda?

did he set of issues that they thought were the most up organ, rather than to the party itself and winning elections? did you see some of that? >> there was probably less balance amongst the people who attended caucuses. that includes democratic caucuses as well. i've spoken to democratic caucuses. system the caucus intended to bring out those folks who were more passionate. less compromising, less balanced. that is why all day sunday primaries look better to me. >> i want to pick up on this point that speaker swiggum mentioned. the power of the single issue advocate. it was rising in the republican party, have you seen arising in the democratic arctic? would that make it harder for democrats to vote for compromise that would step on toes?

such as the entitlement programs. think there has been a growth of advocacy groups across the spectrum. many more than when i first started with the republicans. that is a constitutional right in this country. they are organized. hasnumber of people increased substantially. i think lots of them appeal to money for -- for money from a lot of advocacy groups across the political spectrum send out mailings to people. there is no ambiguity about what is right and what is wrong. >> does that make it harder to govern? if you were chair of the budget committee today, dealing with

well-organized, intense groups, does that make your job as chair harder? >> do you agree? in its mostcracy glorious form, but also a constraint on reaching some of these agreements that we are talking about today? >> absolutely. steve raised a good point in terms of socializing. i suspect it was true when martin was in the legislature. there was a good deal of socializing between republicans and democrats both top we got to know people on a more personal level. i never felt that my vote could be bought for the price of a dinner or a lunch. it gave more opportunities for us to get to know our fellow legislators. i do believe it. martin has in some respect contributed to the left civil

behavior of members. it is hard to call someone a name if you have spent time with them and got to know them. secondly, and i strongly agree weh what the speaker said, have seen an enormous which iation of groups would go so far as to say are not bound i the facts. they will selectively pick that about this issue or that issue and they have become incredibly effective at communicating that message to that group. vulcanization of our country with all of these various groups speaking specifically to their groups. then you overlay that in the sense that the way people get their information, the media. it performs its function, and we now have so

many different ways people get their news. amongst the young people here at the university of minnesota, very few of them probably watch the nightly news. they may have their particular cable news network that they prefer. it is obvious, at least to me and isis at two most, that each of these outlets tends to have its own point of view and its own storyline that they pursue. combine the fact that we do not get together and socialize with the geometric development andhese interest groups, what i would call the vulcanization of herbal media, media, but does that mean things cannot get better. strong leaders were committed to winning the debates before you win the votes, i think ultimately they will prevail,

even against these almost insurmountable objectives. >> i agree. >> a lot of it comes down to leadership. at the federal level, i agree with what the speaker has said. changes, thing that when i was first elected to congress, we put our house for sale and moved to washington. that was true of most of my colleagues. we got to know other people, spouses, kids of other members. today that does not happen. people run in and out on the last plane in and the first plane out. it compresses the congressional schedule. people.re to talk to career, ie end of my

would see someone next to me and asked if they would know who that was. they thought it was someone from the other side. it was dramatically different. to beyou feel, to add on persuasive list of reinforcing thatrs for factionalism, one of the challenges is the nature of our nomination process? who gets nominated today, is that different? what peopleects think of their districts. i think the reality is that people are more poor. reflected, whether it is a caucus or the primary system. swiggum, you live in the southern part of minnesota and you have been going to your precinct for many years. are you show up there,

seeing the same set of people or is there a new crowd that seems to be on the way? >> there are definitely knew people loved come. that is good. you want to branch out. anywant to be inclusive in party. that is good. as speaker of the house, when you have to go to your local precinct office and fight to be a delegate, that is questionable. but then it happened. >> one of the challenges you're there areta is that tremendous resources for groups like the tea party and they have figured out that going into the precinct office is a great way to get some leverage over the nomination process. and power to them. they are using the processes that are available and involvement and participation. you mentioned the tea party, but

there are left-wing groups that are doing the same thing. >> absolutely. >> we have seen this in the democratic party. it does not matter as much anymore, they go straight to primary. this process of the single issue advocates has played itself out. we are just about at the end of our time. give each of you a chance to reflect on where we are. we are heading into 2014, should we expect to see a continuing level of strife? corner andturned a we will see some real movement and appropriations and perhaps some reform related to food stamps, or other issues like immigration? will it be more of the same, or will this be a shift where we roll around to the end of this session and there could be a record of real accomplishment? >> i noticed that the vikings scored today and their opponents

score touchdowns in the last two minutes. things don't if move much until the end of the session and their pressure point is valid. we will always find that more activity will happen legislatively as you reach a pressure point. whether it is the budget or the debt ceiling. those are the times when you will see action. i do not recall that when moses led the israelites out of egypt he told them that they would wander for 40 years, ok? they did not know that when they left. i do not know how long we will wander in this timeframe. but i do know that ultimately i believe churchill was correct when he said americans ultimately do the right thing. once we have exhausted every other possibility. i think we as americans understand that we are all stakeholders in this government that we call the federal government.

we are kind of in a tough situation. there is a chance that we will begin to see some light at the end of the tunnel. we will always have big differences. there are real philosophical differences. there are reasons that people started throwing tea in boston harbor. we are americans and we are entitled to have strong feelings about. issues. that will create friction. i am reminded of something that we were told at the bipartisan retreat one time. i have never forgotten it. what we do every day on the floor of the house of representatives in the united states house is a substitute for civil war. you have to assume that there will be friction. you also have to assume that ultimately strong people will rise to the occasion and that ultimately we will move ahead together. >> thank you. you agree that while fiction

will remain, as a move into 2014, the pressure at the end of the session and the election in november, we may well see some touchdowns here? perhaps immigration reform, perhaps other big scores? >> that would surprise me. maybe immigration. i just hope the farm bill gets taken care of in january. i think with the appropriations numbers set, that process will work itself out. if the leadership left it happened. they could finish that work can be done in september. see lotse surprised to of high visibility political issues dealt with by the congress in the next year.

i think they are potentially on a very quiet cap. hapath. i want to swiggum, thank you. you are the guy who pulled together the panel. our staff here at the university of minnesota. they have put on more than three dozen programs this year. you tend to be bright and optimistic. this is one of the least productive congresses we have seen in some time. a you look at this deal as light at the end of the tunnel? more of a northern european cap this is of your friends?

>> looking to the outside, i would tell you that there are lessons that were learned. there were lessons learned from the shutdown, from the continuing resolutions, which the republicans had concerns about, the democrats had concerns about. i think there were lessons learned. i am encouraged about this agreement yesterday. it will a a path or the future. whether it is immigration or the farm bill, there will be a path. my students here at the humphrey school will tell you. here ifot govern from you cannot govern from here. you cannot govern from either polarized and. you have to bring people together. we have a path with the his store, i will say it's historic, agreement on the budget. >> that is what we are reporting today from the humphrey school,

i want to thank everyone for coming. [applause] >> the chairman of the house appropriations committee. you can see the interview sunday when newsmakers airs at its s.gular time >> here's the president speaking to reporters shortly before that meeting began.

>> it is a great pleasure to talk with not only the most outstanding mayors in the country, but folks who are representing incredible cities, world-class cities that are going to be central to america's economic growth and progress for years to come. i have always said that mayors don't have time to be ideological and they don't really have time to be partisan are heldhey accountable every day for concretely delivering the services that people count on all across the country. i think it is for that reason that when we think about mayors we think about folks who actually get stuff done. this is an outstanding group of both mayors and mayors alike to represent some of our major

cities. aey have a share vision -- shared vision of cities being hubs for jobs, seeing jobs create, aching sure they gateways for opportunities for people from the surrounding areas and surrounding states, the regions and in many cases the world. you have a lot of immigrant populations that gravitate towards the diversity and dynamism of the city. although we have seen terrific progress in our cities as we have across the country over the last several years, millions of jobs being created, housing market starting to recover, businesses investing again, manufacturing making an extra in her comeback, what we know is we still have a lot of work to do to deliver a vision that we all share, which is an america where if you work hard you can make it. myt that means is is that

hope and goal out of this meeting is we immediately set up a strong partnership with all the mayors here and all the mayors who aren't here where we get a clear sense of what their vision is and how they're trying to deliver services and how we can make sure that our kids are getting the very best education possible, how we make sure that we are creating the platforms, the infrastructure for jobs to or jobs to be created and businesses to succeed in the cities now to make sure art transportation dollars are flowing in a way that maximizes economic development and ofefully reduces congestion rush-hour traffic. i suspect that some of you have heard from your constituents about it. sure that there is a strong social safety net there that is not a place where people stay over the long term but wherebys a mechanism

people who had some bad luck can get back on their feet and get back into the workforce. i'm very much looking forward to the conversation. in the meantime, at the federal level there are some things we can do to help mayors. if we can get this budget deal completed and out of the senate, we can get a way for the first him in a couple of years from the constant brinksmanship and crisis governance that we have seen up on capitol hill. makesedes growth and businesses and investors less certain. i would be an important achievement and something the federal government can do to help mayors. is not in thist budget that needs to be passed right away is unemployment insurance. you have potentially 1.3 million people who during christmas time

are going to lose their unemployment benefits at a time when it is still very difficult for a lot of folks to find a job. it is not just that for those individuals and families, it is bad for our economy and bad for our cities because it didn't have the money to pay the rent will be a will to buy food for their families, that has an impact on demand and businesses and it can have a depressing effect generally. in fact, we know is economists have said failing to extend unemployment benefits is going to have a drag on economic growth for next year. there are some basic things we can do just to create a better economic environment for these .utstanding mayors there are some areas, for example, raising the minimum wage, that can have a tremendous boost in a lot of the cities where there are a lot of service and do someget up

of the critical work for all of us every single day, but often times still find themselves just really about harvard you're in some cases below poverty. but i want to do is explore ideas with them. we wish them luck and you can see that this is a diverse group, but what binds them together is a commitment to helping people succeed in this country. i want to congratulate all of them and i'm looking forward to over the next three years for me working with them for the benefit of their constituents as many of them may end up being around for 20 years or so. they will have other presidents to work with. thank you so much for coming in. >> on the next "washington a discussion of federal gun policy.

andguests are tom manger richard stanek. followed by look of the two-year budget deal passed by the house this week and headed for the senate asked week. we're joined by david lawdar. is live on journal" c-span at seven every morning. >> let me be very clear. this is a very delicate diplomatic moment.

you thatave to tell these are high-stakes. on c-span,kend secretary of state john kerry on why house members should not impose additional sanctions against iran as talks continue on freezing parts of iran's nuclear program. watch saturday morning at 10 eastern. on c-span twos book tv, dick cheney and his longtime cardiologist jonathan reiner talk about his experience with heart disease and advances in cardiology, sunday night at 11. africant the free american men and former slaves who fought for the union. sunday at 11 a.m. eastern. >> george washington university hosts reform friday on the federal reserve system. next, one of the discussions from that event. this panel talks about the federal reserve's history,

including its handling of the more recent two thousand eight financial crisis. it is a though more than an hour. >> thank you, michael. welcome, everyone, to this conference commemorating the centennial of the federal reserve. i'm indeed grateful pleased and privileged to moderate this discussion. not only of two of the the leading scholars and commentators on central banking and the global financial system that two of my most favorite authors. to my left, the author of a truly wonderful book which i highly recommend. which is about the global

central bankers of the 1920s and '30s and how we were unable to avoid the catastrophe that occurred. this book you could say won the trifecta, the 2010 pulitzer prize. he was a professional investment manager for a number of years. worked with world bank. is kurnly on the board of trustees of brookings institution, and also serves on the state department foreign affairs board. he will speak first followed by simon johnson, who is a professor of entrepreneurship for school of management and the author of many works.

my favorite being 13 bankers. which is best book contributed to the financial crisis. if you don't read any other books for the next few months, they are tremendous. professor johnson is a senior fellow for international economics here in washington. he's a very well known blogger on the baseline scenario and "new york times" in october in 2007 and 2008. he served as chief economist of the international monetary fund. so i will invite mr. ahmad and professor johnson to provide opening remarks and then there will be an opportunity for colloquy and an opportunity for questions from the audience. without further adieu.

>> i should speak from here. >> thanks. so i'm going to talk about history. and i'm going to talk about what the fed did in 1929 to 1933 and compare it to what the fed did this time around. some background. there were a the lot of parallels between the two decades. so 2000s were early similar to the 1920s. in both cases they were boom times characterized by enormous sense of confidence about the

future. there were new technologies in the 1920s with automobiles and radio. in the 2000s it was the internet. investors persuaded themselves that we entered an era of prosperity. at the same time in both cases, policymakers were struggling with major. in the '20s it was between europe and the u.s. as europe was trying to rebuild itself after the first world war. and the 2000s it was much more the imbalance between hash sha and the u.s. imbalances led to too much credit creation. in both cases, the credit

creation did not lead to. but instead in various ways, the credit creation led to bubbles. in the 1920s it was in the stock mark market. in the 2000s it was in real estate. in both cases as they always do, the bubbles burst. in both cases, although the mechanisms varied, we got banking crisis. in the 2000s there was a direct link because wangs were involved in real estate lending. in the 1920s there was a debate at the role of the stock market crash of 1929 played in the subsequent bnking crises. but we got a bursting bubble and we got banking crises. in the 1930s they were

conventional run. and you remember all those grainy black and white pictures of people lining up outside banks to take their money out. in the 1930s they introduced insurance. so this time around we didn't get that a retail run of banks, but we got a wholesale run on -- we got a run on the wholesale funding of financial institutions. both banks and so-called shadow banks like money market funds. so that's the leader. now the consequences were very different. and in part because the fed reacted very differently in both cases. so let me talk a little bit about what the fed did in '29. in 1929 immediately after the

crash the new york. fed injected $100 million in liquidity in the next few days, which would be the equivalent to injected about $40 billion. which is modest, but it actually played a very important role. it also encouraged the new york. banks to take on broker loans. a the lot of the leverage in the u.s. stock market was financed by broker loans chrks came from nonbank institutions. they pulled their money out and the fed encouraged the new york banks to take on these loans. and the total loan is about $8 billion, which was a very substantial percentage of the

capitalization of the new york stock exchange. and thirdly they cut rates from 6% to 2.5% over the next nine months. so so far so good. they did exactly the right things. it wasn't completely smooth because they entered into a big fight with the federal reserve board. the new york fed took these decisions on its own. federal reserve board tried to veto them and you the got a bureaucratic tussle between the two institutions, which the new york fed essentially won in the short run. after the first nine months, essentially the middle of 1913, the fed stopped easing for all intents and purposes. for the next two years sat on

its hands. that was very unfortunate because throughout 1913 thae rejected the idea of more open market operation. that was unfortunate because starting at the end of 113 we got the first of a series of bank runs. so late 1913 we got one bank run. we then got. another one in 19 -- in the summer of 1931. we then got another one in the fall of 1931 and that continued through until the massive bank run in '32 just at end of 1932 just after roosevelt was elected.

the consequence of these bank runs was to cause the -- let's just take u.s. bank lending. bank lending was about $50 billion in an economy that had a gdp of $100 billion. bank lending fell 40%. so bank lending went from $50 billion to $30 billion. that more than anything else is what converted a depression, a bad downturn into u.s. into a massive depression where we got over 25% unemployment. so why did fed make so many mistakes? it was created to act as a lender of last resort. after the 107 crisis new york bankers recognized that the u.s.

financial system needed a lender of last resort. it had relied until then on collective action either through the clearinghouse or most famously in 1907 with j.p. morgan got everyone together. and they realized these arrangements weren't going to work anymore and they needed an institution. so the principle that the fed's job should be to act as lender of last resort. so why did it it fail? i think there are five reasons. first, the fed began with completely the wrong view of what a central bank should be. it sort of viewed itself as a

passive reserve for the banking system. and it failed to understand that when banks start accumulating access reserves, one of jobs of the fed is to offset that. the view within the fed at that time was that if banks take the decision to accumulate reserves, then they are making the best decision for their own purposes and is not the job of the fed to counteract this. so there was no focus on the money supply. there was no focus on the credit. they view eed themselves as essentially providing -- acting as a passive resident vary of reserves. by contrast by 2008, the fed completely did the opposite. it it increased the balance sheet from a trillion to $2

trillion within the first few weeks because banks were accumulating access reserves afraid to lend to each other. the fed realized that it it had to offset this by injecting reserves back into the system. secondly the fed was in its infancy. there was constitutional weakness. when the fed was first created, it was sort of a hybrid organization that had always been historically great suspicion about having centralized power in the united states. this is the reason why the second bank of the united states was closed down by andrew jackson and the first proposal

for a central bank that emanated after the 1907 crisis was for a si single central bank. a single unit ri central bank. they didn't call it it a central bank, but essentially that was it. and that was rejected by the democrats who said we do not want to have so much power concentrated in one institution. so instead a senator came up with an alternative plan which was to have multiple central banks. a series of reserve banks around the country that would act as many central banks to the banks within the their territory. and the idea there is that you would actually not have the same concentration of power. when it was finally submitted to woodrow wilson, he thought that

you needed some coordinating mechanism. they established the federal reserve to act as a cap start to the whole thing. the board was viewed at the time as a sort of regulatory agency that was supposed to oversee the operation of the regional reserve banks. so there was considerable confusion about what authority lay with the regional reserve banks and what authority lay with the federal reserve board. that confusion became a major problem during the great depression. the federal reserve bank of new york had a much more activist view of what it thought it should do. the federal reserve board -- a second problem was that wilson

thought that it was not a good idea to put bankers on the federal reserve board because after all if you were creating a regulatory agency to oversee banks, if you put too many bankers on the board, they would be captured by the industry. so he put in a lot of people who knew nothing about banking. small town businessmen, some political acts. so the federal reserve board was characterized by -- was a remarkably inept institution in 1929. this has always been a challenge in any sort of regulatory regulation of the financial industry and remains a challenge today, which is how much do you rely on bankers to police heez

regulations and how much do you rely on insiders on outsiders. so the 1930s the first problem was a fight between the federal reserve board and the new yorkers and the reserve bank of new york. you also got competition among the reserve banks. in 1931 the federal reserve bank of new york started losing gold because britain had just left the gold standard. and whereas the federal reserve bank of chicago had access gold reserves so it offered to swap from gold with the federal bank of chicago and the federal reserve bank of chicago turned

them down because they wanted to hang on to gold just in case there was a run on the federal reserve bank on their federal reserve. so these constitutions acted in uncoordinated and often competitive way. the third problem in the 1930s was the gold standard. at the time, countries and the whole financial system relied -- the fundamental reserve asset was gold. so under the federal reserve act, federal reserve banks had to hold 40% of their liabilities in the form of gold. the remainder they could hold in the form of commercial paper. interestingly enough, they weren't allowed to hold government bonds as an asset

against their liabilities because this would be -- this would be viewed as a form of deficit -- of monetary financing the deficit. so in 1931 when britain left the gold standard, there was a run on the dollar, there was a run on gold reserves in the united states. actually the united states had very large access reserves of gold. but because the commercial paper market had dried up, there was almost an artificial shortage of gold because they could -- they either had to hold gold or commercial paper. that led to the federal reserve tightening in 1931. they raised rates from 1% to 3.5% the in the middle of the great depression.

so the third reason was the gold standard. since we have moved to exchange rates, no one now tries to -- no one except countries within the euro targets their exchange rate. so that was less of a factor this time around. fourth reason was that the fed found itself bound too rigidly by its own rules. access to the fed window was restricted to members of the federal reserve. that's 65% of the banks in this country were not members of the federal reserve system. and they accounted for about 25% of the deposits. and they had no access to the fed window.

so when the run began, the ability of the fed to act as lender of last resort or the willingness of the fed to act as lend lender of last resort to this group of banks, the fed just refused to do so. in addition, the federal reserve act had very strict stipulations on what collateral they could accept. they could only accept self-liquidating paper. they couldn't accept government bonds, there was a whole series of assets they couldn't accept. again, this time around, the fed was much more expansive in its view of what types of institutions it was willing to lend to. so it lent to investment banks

who were converted into commercial banks. it was very inventive in the types of ways that it lent financial system including and it had a very expansive view of the collateral it was willing to accept. finally and the fifth reason is that the fed had a very limited perspective on what it meant to be lender of last resort. they took the view that it was not their job to bail out bankers from the consequences of their bad decisions and only when it was very obvious were they willing to step in. the problem is in a great

depression the distinction between liquidity and solvency starts dissolving. and as a consequence, their ability to lend to most institutions in trouble were severely hampered. the consequence was that then we thought 25% unemployment this time around we got. 10% unemployment. and we essentially got about a third of the great depression. i suppose one of the interesting questions to ask is there was a view that if only the fed had acted improperly, we would have avoided the great depression. we have actually just seen an experiment where the fed has done almost exactly what a central bank should do in crisis. and we didn't get a great depression, but we got a third of a great depression.

and i think we've illustrated that there are limits. even under the best circumstances central bank acting vigorously as lend er of last resort and easing monetary policy very rigorously cannot avoid a major downturn after a financial crisis. thanks. [ applause ] >> my name is simon johnson. i'm a professor at m.i.t. thanks very much, art, for this opportunity to participate in such an interesting conference. i'm going to talk about bailouts. a short history of bailouts. and i think i'm going to agree with pretty much everything that was said about the history of the fed, but i might put a

somewhat different spin on certain aspects including how we could look at the economic and financial prospects going forward. now i absolutely and completely agree that the main. point, that mistakes were made in the 1930s by the federal reserve system that were avoided in the last few years by the board of governors under the leadership of ben bernanke. we did, as a result of the policies, from the fall of 2008 policy of the federal reserve we did have a less bad outcome than we would have otherwise. i'd like to recognize another author and commend a third book from art's list. david wes sl in the front row. his book is a really inciteful account of the the thinking inside the federal reserve and how they applied the lessons of the 1930s once the financial

crisis became. but here i thinkhere, i think i were simply we made mistakes in the past, we've learned the lesson from that history, we're not going to do it again and people should keep reading and rereading the book to make sure they don't do it again, that would be fairly straightforward, but unfortunately, it doesn't stop there. both the last 100 years and very importantly the date that preceded the foundation of the federal reserve and what we've seen around the world many, many times indicated strongly that while providing a backstop, a set of safeguards you might call it liquidity provision in some instances, might call it a bailout, and i hope we discuss those terms throughout the course of the day, but providing that kind of support has a significant effect on people's incentives. the technical term you're all aware of is moral hazard,

meaning you're less careful when you have a high degree of insurers or downside protection, and this is not a small problem. and i'd like to speak directly at that issue, addressing three sub headings. one is about political legitimacy, the second is about the new york fed, and the third is about cultural capture and what that means. so, the key issue that i would suggest the federal reserve had at its beginning and has now, perhaps will always have, is one of political legitimacy. every modern monetary system in a market economy is a partnership between the public sector and private sector. public saying is what you can use as money, what is legal tender. they are in many instances, such as this one, providing what we call a monetary base, and the private sector is allowed or encouraged to build a system of credit and money on that basis.

you might like that or not like it. that's also a great debate to have, but that's the system which we've been operating for a long time. now, there are reasons to be uncomfortable about the terms of that public/private partnership, and this is a big part of the debate in the run up to 1913, including after the crisis of 1907. there was a realization that the private insurance mechanisms, which have been relied on in u.s. markets to that time, would no longer be sufficient going toward, and therefore the government should play a greater role, at least in some urgent situations and perhaps more broadly in managing the availability of credit. now, that, obviously, was a controversial conclusion. people on the left felt that they did not want to seed excessive power to the bankers,

although new york bankers or what they called then, what we call now wall street. they didn't want to put this power, this authority of government in private hands. the private sector people, understandably, felt strongly they didn't want to seek too much to the public sector. and we ended up with this very strange hybrid that perhaps what was not so strange in its day, there were other public-private mixes, including the bank of england and european structures. all those structures have changed completely. all other major central banks, to the best of my knowledge, and most nonmajor central banks, are government institutions now. we have retained this hybrid public-private partnership. so who decides when you have a crisis or whether you have a

crisis? who should provide, who should receive what kind of support, in retrospect, you can see the story in the 1920s, 1930s, i agree with liaquat's version. you can see where some support could have been provided and wasn't and read the work of ben bernanke, i think, which is superb and may well end up getting the nobel prize for exactly these kinds of insights, but in realtime, when the events are unfolding, who should get support and who shouldn't? and on what terms? of course, walter badget identified this problem, it's not specifically american, it's not specific to the different versions of the financial system we've seen over the past 100, 200 years. we have absolutely, repeatedly experienced various forms of panic, and the right way to deal with a panic is, as badget said, to lend freely against good

collateral. but what's a panic? which -- who's insolvent and who's merely, who has mismanaged their business in an inappropriate fashion and brought distress upon themselves and, of course, had a big spillover effect on the rest of the economy, because that's what banks and the credit system can do, much more than private enterprises, so who's responsible for what went wrong, and who is merely a victim of the circumstances overcome by events, completely, they were completely conducting business in a responsible manner and all of a sudden circumstances have turned against them. and i would stress to you, this is not a hypothetical, academic, or historical question. don kohn, who is also in the front row, former vice chairman of the fed, i think you'll hear from him later today. don kohn and i are both on the

systemic advisory committee of the fdic, and we had a public meeting on wednesday, and you can review the tape. there was a fascinating discussion there of what the so-called orderly liquidation authority, created by dodd-frank, will actually mean in practice. it will not, by the way, mean liquidation. i think we established that on wednesday, whether it will be orderly is another matter. i guess it is in authority. we will find the people responsible in the heat of crisis. very hard to do. who do you trust? this is where the new york fed comes in, and the history of the

federal system, i think, is intertwined both -- you have to tell the story of the board and the development of the board and the reformers of the 1930s that brought us the current board of governors structure and the new york fed. the crisis, the epicenter was in new york, jpmorgan, the man, saved the day with his resources. benjamin strong was his point man on deciding who to open and who should stay open and who should be shut. benjamin strong became the first president of the new york fed. it made complete sense in that public-private compromise moment. and as liaquat said, it's not the case the new york fed had all the power or the new york fed was calling all the shots, it was a much more complicated and dysfunctional structure. i think everyone ended up feeling that way in the 1930s, and the reforms are reforms put through, i don't think it would ever be undone, but this central

role of the new york fed is the eyes and ears of the federal reserve system with regard to the heart of finance on wall street in new york, that role has remained today, and if you look at who's on the board of the new york fed, who remains on the board, these are people who are central characters on wall street and friends in the nonprofit sector. who has had the financial and literal capability of deciding who's in, who's mismanaged their business and who has run out of liquidi liquidity. this is now changing at the board of governors, but up until 2008, analytical wisdom, in quotation marks, of the federal

reserve of this issue was concentrated on the new york fed. and that leads to the third point, which is the, i would agree the most disturbing and uncontroversial, both perhaps historically and certainly going forward. and that is the issue of both cultural capture. who you know, who you talk with, who you hang out with, your friends, your immediate business counterparties, your associates, those are people who help you form a view of the world, both in general terms, is this a reasonable idea, would this policy work, and also the spur of the moment. when circumstances turn against you, who do you call to understand what's really going on? most of us know a very limited

number of people in those heightened, intense situations. we rely on a small set of people to guide us through the circumstances, and we tend to share their view of the world. and i'm afraid what happened, in my view, in the run up to 2008, is that over a fairly long period of time, but increasingly in the 1990s and 2000s, people who were powerful in washington, but also powerful, influential in the new york fed, became increasingly convinced that the way modern finance had become organized was superior and perhaps essential to the well functioning of the rest of the economy.

in the vernacular, i guess it's called, drinking the kool-aid. they drank the kool-aid, became persuaded, they were captured by the view of wall street as modern, as efficient. my book on this topic did not win the goldman sachs book of the year award. i have no idea why, but we lay out the argument and there's plenty of footnotes and historical references if you'd like to look at it. we're saying, plainly, that wall street captured too much of official thinking, not only through the political connections and the campaign contributions and so forth, those are important, capitol hill, absolutely important part of this, but also, unfortunately, through the way the federal reserve sold this problem and thought about it,

particularly under mr. gree greenspan, but also the early years of mr. ber knananke. there's a shift under way, i believe, of the federal reserve system away from the new york fed towards the board of governors in washington. and i think that's entirely appropriate. but what we learned in this crisis, going back to the point, we learned the federal reserve actually has much more power to stabilize, to intervene, to save than we thought previously, much more than i demonstrated it was able to do in the 1930s. now, we don't know where this episode ends exactly, and i would also stress despite those interventions, we still had a huge crisis, the worst recession since the 1930s, more than 8 million jobs lost, and we're

struggling to recover over five years later. so this is not a panacea, but it is a pretty good deal of powerful players on wall street. for management, for creditors, what exactly is going to be handled differently going forward? who's going to decide who's saved and who's not saved? does the political legitimacy -- i want there to be a federal reserve. i think we've benefitted, i think the way the fed has evolved and operated, makes sense and the alternatives are worse. but will the fed retain its political legitimacy? will you trust the fed going forward? the federal reserve act is an act of congress. it can be overturned by

congress. we have to believe that the fed has sufficient critical distance from the financial sector, from the banks, from the nonbanks, from the shadow banking system. whatever you want to call them, whoever gets in trouble next time, we have to trust that the fed will get it right. we have to believe they can sort out solvency and liquidity problems. we have to believe they are not just handing out overly generous bailouts. i hope they can do it. and it's not just about the fed, it's about the fdic, it's about treasury, perhaps it's about other parts of the regulatory apparatus also, but mostly it's about the fed. i wish the fed well. i admire many of their achievements over the past 100 years, but i'm emphasizing to you that it is not gone well in

recent years for deep structural, political, perhaps cultural reasons. and this problem has not, unfortunately, yet been fixed. thank you very much. [ applause ] >> would you like to have a few remarks in response to professor johnson? >> you know, i -- simon, essentially, said we don't actually -- the rules of the game are unclear. and that is true, and maybe they'll always be unclear, and i like his point, which is that where the rules get set has a very important, big impact on the political legitimacy of the

fed. so, let's take top. top was economically a very successful program. we saved -- it was very efficient. we injected a certain amount of capital, and we essentially after a point stopped the run on the financial system. it was first it was incredibly politically unpopular. secondly, the big question became, well, if you're going to bailout financial institutions, why aren't you bailing out other debtors? and we've never really properly resolved that. you ask the treasury at the time

why couldn't we have used some of the tarp money to help limit the degree of foreclosures. they'll come up with sort of very complicated answer of why it was so difficult, but i think it undermined the political legitimacy, so i think for simon's fundamental point, which is how these rules operate has a very important effect going forward. i couldn't agree more. >> one question i'd like to throw out to both of you, and this follows up on both of your remarks, and i think it goes to sort of what the fed's role has been during the crisis and what it might be during the next crisis, so just to throw out some round numbers, the fed's balance sheet, as you mentioned, was less than a trillion when the prices started, and most of it, about 80% or more of it, consisted of treasury bills.

the last count i've seen, the fed's balance sheet now is, i think, approaching $4 trillion, and a very big chunk of the assets they bought were mortgaged-backed securities, both issued by fannie mae and freddie mac and also by the so-called private label issuers, which were the wall street banks themselves. it's hard to get precise numbers, but perhaps there might be a trillion and a half or so of mortgage-backed securities on the fed's balance sheet, which is about roughly 20% or more of the mortgage-backed security market. very large portion of that market. in response -- and, of course, as we know, next week could bring a change, but right now every month the fed has been buying $45 billion of treasury bills, $40 billion of mortgage-backed securities. as this occurred, what's been interesting to me is the number

of both academic commentators and financial industry participants who have begun to talk about the fed, not simply as lender of last resort, but as market maker of last resort, and the argument has been made that effectively the fed was the market maker of last resort, because nobody else during the crisis would have touched these mortgage-backed securities. they were viewed as opaque and toxic and nobody knew what they were worth, and so the fed became the market maker of last resort, and there are commentators, both academic and in the industry, who argue that's exactly the role the fed should play, when the markets become ill liquid, the fed should step in as market maker of last resort. so i'd like each of you maybe to respond to two questions. one is, is it fair or unfair to say at least with regard to some assets, the fed really moved from lender of last resort to market maker of last resort, or something approaching that role,

and what would it mean if the fed actually did become something like the market maker of last resort for ill liquid markets during crises, what would be the implications of that? >> let me try. i think the why do we need the fed to be -- why do we need a lender of last resort, and essentially, the idea is that in a panic, or in that everyone heads for the door and you need an adult in the room to say, listen, you guys, calm down. you're all getting too worried about things and we can see through this trough and we can see that things eventually will get to a better level, and so we're going to counteract what

each individual, private institution, is doing. so that was the origin of the bank of england becoming the lender of last resort. they would step in when everyone else was heading for the door. that was transmitted, or that was translated into lending to institutions or lending to banks, but it needn't been, and it seems to me the idea that the fed should step in and act as the adult in the room, when markets that are critical are severely dysfunctional, it's not a great leap to go from the fed is being the lender of last resort to institutions to the financial system, to the fed is intervening in financial markets. i think there's always been a

challenge in its capacity as lender of last resort/market maker of last resort, which is how specific should it be? should it lend to individual institutions, or should it lend to the market as a whole? and i'm not sure i sort of have all those arguments in my head, but that's -- it lends to individual institutions when it worries about contagion effects. so i'm not too worried about the idea of the fed being market maker of last resort. i think i would distinguish that from the notion that the fed's balance sheet is very large and has become a big portion of, let's say, the mortgage market. i don't think that was in its capacity of market maker of last

resort, but really the decision was to try to influence long-term rates, and it wanted to select which long-term rates of influence and mortgage rates because they have such a pervasive impact on the economy, became one of the targets they were aiming for. we were not in a panic. we were in a panic in 2009. by 2010, '11, the financial panic was over, but the fed took the decision the way to get the economy going was to try to get long-term mortgage rates down. and there are, you know, there are pluses and minuses for that. pluses are that we did get mortgage rates down and probably helped to get housing restarted. the minuses are that allowing one institution like that to play such a big role in a

financial market is sort of distortionary. and i suspect one of the reasons why they are trying to all this talk about tapering is because they realize the costs are now beginning to outweigh the benefits. >> so, friedman schwartz history emphasized the monetary contraction in the 1930s and ben bernanke's academic work, which has just made famous, switches from the monetary side to the credit side of what happened in the financial system, and i think the policies that have been pursued were absolutely an application and continuation of that and addressing the point liaquat made, concern about the 1930s, which is they didn't understand what was the role of the central bank. what would happen when reserves built up. the goal should be to keep credit functioning, make it possible for credit worthy people to borrow and the fed has followed that logic in a reasonable way. they are lending, they are making loans, they are lending.

i hope that's not, but here's the problem, art, which is the deal from the 1930s, much more than from 1915, the deal was provide this lender of last resort role in return for regulation. regulation that was not entirely run by the fed as a canopy, ecosystem of regulators in the united states, but that's the quid pro quo. that broke down, regulation broke down, did not function, okay, in the run up to 2008. now we have a new regulatory system, substantially remade, on some key aspects, including the central role of the fed. the fed's the lender of last resort and it is the systemic regulator. if anything is systemic importance to bring down the system, it's the fed's job to get ahead of that. now that's the right way to do it. it's also an incredible responsibility and a very difficult task, and the legitimacy is going to be much

harder for the fed to say that was the fault of the officer of supervision or something. next time it's the fed's responsibility when it goes down, and that's a completely reasonable price tag for this enormous lending power, much larger than existed under the gold standard. like i said, belief in the gold standard and thoughts how that should operate at the central bank, that's all gone. they can make this up on the fly now, good and bad. that's where the political legitimacy comes in. >> more of a question, then we'll open to the audience, my own personal view as to why the lender of last resort has morphed into a market maker of last resort is that the banks themselves have morphed, right, that was a decision we made and by allowing banks to become very large, they are no longer simply credit intermediaries. now, in fact, they are market intermediaries, and so i think the fed could no longer really

separate as mr. ahamed said, banking institutions versus supporting the financial markets, the two became intertwined, and one sort of interesting question, one reason that we didn't do mortgage write downs, principle relief, help to home owners, that the biggest banks were sitting on $400 million of second mortgage liens that would have had to be wiped out. the first liens, which have been securitized, but they were holding the second liens, so that would have been an uncomfortable write down to look at. but as you say, the fed is now, the systemic regulator, but is one of the problems that in a sense in order for the fed to take that role on, and as you say to act perhaps a little differently the next crisis, do they have to sort of think about

how do we convince the larger financial institutions perhaps to adopt a more prudent size, perhaps, than they have going into the last crisis? >> well, you know, the question of how is not the question. >> sure, sure. >> they have plenty of legal authority, and i would emphasize, and i think this is something very clear at the meeting on wednesday, that under dodd-frank, the legislation is quite clear that all financial firms must be resolvable under bankruptcy. the so-called orderly liquidation authority is a backup in case by mistake we find out that institutions we thought could go bankrupt actually can't go bankrupt, because it would cause some sort of awful contagion. but, which of the large, complex

financial institutions of today could actually go bankrupt, go through ordinary bankruptcy procedure, as we amended, without that causing massive spillover effects to the money market funds, commercial paper market, global interactions, through the derivatives market. the answer to me, again, see review of the tape on wednesday, we had the experts in the room, the answer to me is, none, zero of these banks could do that. dodd-frank says, under those circumstances, the authorities, meaning the fed, should take steps to change something about their size, complexity, structure, whatever it is the fed has determined is the problem for bankruptcy. so, the legal authority is there. the tools are readily available through ordinary supervisory mechanisms. the question is, when will the board of governors of the federal reserve system act in this matter?

>> mr. ahamed, do you think the fed is comfortable taking on this role of saying we'd actually like to see the financial structure change to avoid a repeat of what we had in 2008 and not as it pertains drastically, but changed toward a more fail-safe type of structure than it had in 2008? >> i'm probably the wrong person to ask about the fed. i mean, my impression is that whenever i've spoken to either people in treasury or the fed, their performance would have been not to have the voel con rule, but more to focus on capital. essentially, to try to prevent a crisis by raising capital requirements. and i'm not an expert in this,

but it seems to me, broader, simpler regulations are better than sort of very intrusive regulati regulations, so i've always been a fan of increased capital requirements. >> can i invite questions from the audience? i see one back there. >> congress has asked that the federal reserve define what it will do with 13-3, if the fed hasn't defined that, it's dragging its feet. what's interesting is, i think members of congress see 13-3 as a kind of bailout mechanism. the issue is that shadow banking, money market funds and the like, as gary gordon has so eloquently written, are forms of money, so we now have a banking system that has a lender of last

resort and congress pressuring the fed to limit the lender of last resort for shadow banking, basically. of course, i can write a check against my money market fund. it's a bank by any other name. so if you were the federal reserve, how would you respond? >> so, this is a great question. the question about 13-3, emergency powers of the federal reserve, and there are two views out there, one is from gordon and also phil dudley, the new york fed has spoken in favor of extending the safety net. the other idea, which is more mainstream among federal reserve people and other people working on this issue is that we should reform money market funds so they are no longer regarded as being as good as money, and the most obvious way to do that is to float the net asset value, so remove the illusion that a dollar in the money market fund is as safe as a dollar in your bank account, and maybe there are other measures that should be taken, as well, but i think the question is absolutely

right, there is a tension right now between an obvious source of vulnerability and what the fed is empowered to do, perhaps, and certainly feels comfortable doing, with regard to providing the safety net. if you're in that safety net, this was the deal from the 1930s, the deal is, if you're in the safety net, you're going to be regulated, you have to be careful. the point i'd say, perhaps i've been spending too much time with mr. volcker, but he does impress this upon everyone, you need multiple fail safes. it's like nuclear power, has to be used with great, great caution. capital may be the right way to go, but the bosel committee, oh dear, didn't get it quite right, and the risk weights used in the

main focus, the risk weights that we use are problematic, what is a low risk weight asset in the european context? sovereign debt. what is the only thing we know about the current european context, sovereign debt is not free, so these issues continue to play out. >> i think we have time for one more question before we adjourn. anymore questions from the audience? yes. >> i was interested in your comment about how the structure of the federal reserve system is unique in that many other central banks don't have this hybrid structure, and i wondered if you could comment on what you think the advantages or disadvantages of that are and feelings on congress, as you said, the federal reserve act could be opened up. i'm curious to know what you think about that structure and looking back on that. >> well, the -- in -- when the

fed was created in 1913, the bank of england is a private institution. the government had no role. the governor was chosen from the board called the court, still called the court. there was a bunch of private bankers and it was almost a hereditary position. >> very confidence almost. >> exactly. france had private shareholders and being a share holder from france was considered a great mark of social prestige. so there's always been these hybrid things, hybrid constructions. the -- i think the hybridness of the fed was much greater in the 1930s, because the federal reserve banks had much more

power and their boards were -- federal reserve banks are essentially cooperatives of banks, and the board was a regulatory mechanism. i get the impression, and i'm not -- since 1930, since the banking act of 1935, a lot of power has shifted to the board, but there's still residual, as simon mentioned, considerable amount of authority in the federal reserve banks, particularly new york, and their boards are still largely private sector participants, and in the case of the new york fed, a lot of people from wall street. what role that -- what role did they play in the decision making, i don't really know, but

ultimately, all central banks have tended -- central banks have always had on their boards financial market participants, and so it's not surprising that there is an element of hybridness, even if there isn't a legal element of hybridness. >> one tiny anecdote to add to that, jamie dimon was a member of the board of directors of the new york fed in early 2008 when jpmorgan chase acquired stearns with financing provided in part by the federal reserve. he remained on the board of the new york fed, despite the nature of that transaction. and when i raised the matter with -- and i don't know any other organization, private, public, or nonprofit in the united states, where the, let's call it, optics of such a

situation would make people comfortable, or where this would actually be allowed to happen. when i raised this matter with the new york fed and with the board of directors, sorry, with the federal reserve board, i actually had a petition on the internet on this issue, to have mr. dimon resign, and i got a meeting with the chief council, 35,000 signatures does not get you a meeting with the governor, but does get you a meeting with the chief council, just for reference. and there are -- the answer that i got, i'm afraid i have to summarize as the rules that govern the rest of american society do not apply to us. there's a very problematic reaction when you remember the essential political nature of this institution and what i'm afraid is that the fragile nature of its political legitimacy.