>> welcome to our program tonight from san francisco we talk to washington about the power shifted after the midterm elections with david brooks and chris mathews. also today the federal reserve took action to try to deal with unemployment. we'll talk with joseph stiglitz from columbia university and richard berner when we continue. funding for charlie rose was provided by the following.

>> charlie: additional funding provided by these funders. captioning sponsored by rose communications >> from our studios in new york city, this is charlie rose. >> charlie: president obama woke up to a new reality today following the republican party's decisive power and it has given

them six seats in the senate. huge questions face both the president and the opposition about the challenges that lie ahead. at a lengthy and at time reflective news conference at the white house he called the election humbling and would work with republicans moving forward. >> we must find common ground in order to make progress on some uncommonly difficult challenges i told mitch mcconnel last night i'm eager to sit down with both parties and figure out how to move forward together. i'm not suggest this will be easy. i'm not pretending we'll be able to bridge every difference or solve every disagreement. there's a reason we have two parties in the country and both democrats or republicans have certain beliefs or principle has it each feels can't be compromised but what the american people are expecting

and we owe them are issues that affect their jobs, security and future. >> charlie: and appealed for unity in the face of america's greatest challenges. >> the most important contest we face is not the contest between democrats and republicans. in this century it's between america and the economic competitors around the world. to win the competition and continue economic leadership we'll need to be strong and united. none of the allenges we face lend themselves to simple solutions or bumper sticker slogans nor are the answers found in one philosophy or ideology. as i said before, no person, no party has a monopoly on wisdom. that's why i'm eager to hear good ideas wherever they come from, whoever proposes them and why i feel it's important to an honest and civil debate about the choices we face.

>> charlie: he acknowledged the sadness he felt for defeated democrats. >> feels bad. the toughest thing over the last couple of days is seeing really terrific public servants not have the opportunity to serve any more at least in the short term and you mentioned there are just some terrific members of congress who took really tough votes because they thought it was the right thing though they knew this could cause them political problems and even though a lot of them came from really tough swing districts or majority republican districts. the amount of courage they showed and conviction they showed is something that i admire so much i can't overstate it.

so there's a not only sadness about seeing them go but also a lot of questioning on my part in terms of could i have done something differently or more so those folks would still be here. it's hard and i take responsibility for it in a lot of ways. >> charlie: and finally he acknowledged he lost sight of the voters that supported him. >> this is something i think every president needs to go through because the responsibilities of this office are so enormous and so many people are depending on what we do and in the rush of activity sometimes we lose track of the ways we connectede contended --

recommending for every president to take a shellacking like i did last night. i'm sure there are easier ways to learn these lessons but i do think that this is a growth process and an evolution. >> charlie: in another news conference earlier today represent john baner talked about cooperation. >> the president and i had a pleasant conversation and i look forward to having the opportunity to talk with him about those areas where we can move together. >> charlie: joining me now from washington, david brooks the columnist for the new york times and chris mathews joining us from our studios in new york. he is as you know, the host

of "hardball" on msnbc. what surprised you about this? the size of it? what surprised you that was watching it closely. >> i was surprised us pundits got it right more or less so rarely happens. the polls are right on and you're watching each race come in and it tracked about what we thought would happen, maybe a little more. i was sort of in the conventional view, 52 seat view for the republicans and wound of ten or 15 north of there but it was pretty much what we expect and the core was, as we expected, the shift in the independents before the obama swing you had people way from bush and katrina and the war in iraq and it stayed with the democrats over the last two

years they've shifted back and i guess i was stunned the pollsters know what they're talking about and it was reflected in that. >> charlie: so what do you think the future the tea party is within the republican party? >> it's a plus. it cost them some seats. it cost them the seat in delaware and probably in nevada. they may have cost them the seat in colorado that's three, maybe they cost them control of the senate if you look at it that way but did a couple things to the republicans. they distinguished these republicans from the tom delay republicans they had a reputation and it's over and the tea party has been strong anti-government and created the fervor and enthusiasm is contagious for people in

indiana, tennessee and take that region where you've had all these people with stagnant or declining incomes they're floorin looking for a home and were attracted obama and now the tea party attracted them and so far as being repelled by them they've swung over. one final point where everyone's obsessed with sarah palin. she did not take have a good night. take the house people she got behind they did poorly especially in a big republican year. the tea party is there and strong but sarah palin didn't so so well. >> charlie: so the president has a president conference today. characterize what you saw there in terms of a man who in his own words had been humbled. it was tough. did he take the first step back today or is he still a man who has something to grasp in terms

of where america is. >> he's shown what we've seen in private an intelligent man and a pragmatic liberal. you saw him today. he'd love government to be sitting ash as conservatives having a conversation, looking at the data and discarding the program that don't work and that's his idea of government it's not like that all the time. i think overall he made a fine impression today but i do have two problems. one, leadership is about an emotional connection with the american people and to make that connection you have to tell your story and why your story coheres with their story and he doesn't just tell stories he gives lectures. in the course of the was waiting for him to say it hurts me but not as much as it hurts you.

i suffered a set back and we'll figure this out and tell a story of how the progression has been. he did a little after a question from jake tapper but very little emotional connection. very little bringing people into the soap opera of all of our lives an would have hoped for a little more and a don't mean that in a soppy way but just an emotional connection that's how we relate to our people and leaders. and then the second problem i had was there was a concession of respons responsibilitied and get better there was no concession there was a policy problem. he was asked this several times by my colleague peter baker and others, did it say anything about the policies. the stimulus and bailouts and cap and trade, they were unpopular. in west virginia the democrat who got elected took a gun and shot his cap and trade bill literally in the commercial.

it suggests there's a problem with the policy or an implication. they may not be the major things but they were elements and he would not go there and i think it's important because to change or win back independents there has to be a policy shift and i was struck by his unwillingness to talk about that. >> charlie: we've been joined now by chris mathews in my studio in new york. what do you think of the president's response to the feet and how he sees the next two years. >> i thought he was responded to david in his column a number of times and the fact that the president -- seriously, the president said he appeared to be doing things he wanted to be doing in terms of big government like that was his predilection and it looked to be a second great depression in terms of the bailouts and the policy and the

big stimulus program. it made it look like he couldn't wait to do something big and he obviously sent the wrong impression. it looked like he was responding to david and talking about the paperwork of the health care bill and how it was onerous and the president out to be aware of that and people don't like paperwork in the country. they're very libertarian when it comes to that. i think he's ran out of words and people listening to him and today i don't think it helped because words aren't important right now, it's actions. and he needed to do something today or promised he'd do something in terms of a major shift in policy or a major shift of the strength of his administration and building it up in terms of bringing hillary clinton to defense and bring in' heavyweight to be an officer and he needed to be more effective as a leader and i don't think he showed that evidence today and it was important to do it.

>> charlie: david, did he need to do something dramatic today in order to grab the attention? >> not today. i agree he needs to do something eventually. today is going to be the republican day. and it's going to be their day. i think he does need to do something, some action. one of the things think should worry him a little you're beginning to see stories of people in the press from the white house and administration saying we're not being listened to. it's a small click that have all the consultations and seeing more unhappiness and they're seeing there should be more of a staff change. i think it's helpful and maybe what he should have proposed maybe, chris may agree, get together with baner and give a schedule for the meeting and hear the six things to talk about and work together.

that would be a start. >> i think he suggested opening with regard to tax policy that his real ambition was to cut taxes or keep them low for the middle class as he defines it up to 250,000 a year for a joint income and tax cuts for accelerated depreciation. i think he's looking in the direction of tax relief for individuals and for business and i think that should well received by the republicans. i think he has to offer things that are so attractive to the country that republicans would either have to accept them or look like creeps in not accepting them. >> charlie: on health care he draw the line and say this is historic legislation. we thought not tamper with it and i'll use the veto power i

have to any changes to endanger what we worked so hard to create? >> i think he has to stick to his beliefs about extending health insurance to people who don't have it but anything short of giving up on that i think he can do. i think he has to to keep the bill or make it simpler or les onnerous. they like the allowance that allows people with pre-existing health conditions to be covered and require companies to do that but to do those things you require a larger pool of insured people. there are things that have to be done to meet the republicans requirements and i think you could find a compromise there. >> charlie: can he find a compromise on health care? >> as chris says, he has to do

some things to make himself more attractive to the business community but on the health care the republicans ran on repeal and fervently believe in repeal and they'll have little things to chip away at the medicare tax cuts. there was an article in the wall street journal talking about adding on to it in a way it will destroy it and the republicans will fight on that and we'll have a fight on health care. if i were obama i'd say we'll reach the center on some of the business things and tax things and spending things but stick with our liberal friends on the health care and do both and that's how you build a coalition. >> he has to be pro-business in a way to get business to invest. the objective reality is what he has to deal with it. ronald regan was able to put out

advertising and symbolic music because he reduced the rate from 11 to 7 and if obama can do that he'll be the winner not them. he can bring them and get them in cahoots with them to create a more business investment so maybe there's common ground there politically and economically. >> charlie: is it feasible to reduce the unemployment state of 7% in the next two years, david? >> ask ben bernanke is taking a risk. i don't think the president could do much. i'm very dubious that fiscal policy could have a huge effect there. we have -- we just increased spending from 21% of gdp to 26%.

that's a huge increase of spending and that's not only obama but bush and obama and i didn't see a tremendous reduction in the unemployment rate and he has to say there's not a lot we can do over the next year or two but do the things to make sure your kids have a healthy economy, invest in infrastructure tour and education and do the long-range things and i think that will be good enough for people. i don't think people are unrealistic of what people can do in the short-term and i'm struck by the fact that over the course of this election, 65% of americans thing our best days are behind us and that long term pessimism is driving a lot of the anxiety and if he can address that he'll be connected with people. >> charlie: that's a place there's a demand for a

narrative. on the one hand everybody knows the thing that will make people have the kind of confidence in the country they've had before is investment in education and a whole range of areas that the president has talked about but how do you do that when you got the deficit in front of you and which you've also got the republicans coming saying we came here to cut the budget and to cut spending not to increase it. >> if i were the president my political line would be they want to cut and i want to replace. they want to say no, no, no, no, no, no. i want to say we're going to cut here but addhere and take the money and put it to productive use. >> i think the american people and the business community are driven by symptoms and when the economy is looking for lower

employment you look for the cause. if you can reduce the pain of the symptoms and they'll stop going after you about dyin diagc terms. he has to say i've been beaten. the republicans control basic spending and the purse strings now. you have gridlock if you will but it will be good for you because you don't have to fear more regulation for me or more taxation for me. you are in charge, your people, the house of represents. they're your guarantors so begin to invest. it may work. by changing the environment about worrying about progressives or liberals are in charge, relax and start investing. it will help him. >> charlie: how does the president convince the americans in the two years he has to do that that america's best years

are ahead of it and understands the narrative and the story that will convince them that he is right and get them excited about the future, david. >> he's done a little of that. one of the things that struck me about him all along is you can go back to bits and pieces of his record and you can find where so my mind he's done and said the right things but forgets it. he gave an at georgetown university that was in his core economic philosophy and investing in foundations but then he sorts of gets away from it and it gets lost and nobody can remember a georgetown university speech and a new foundation to what? what is the country going to look like? can it design software systems and design great products or the

gap or restoration hardware, i'm think of bay area companies. what about the people in akron, ohio or toledo and you need a vision of what kind of economy and country we'll be in 30 years and that's tough to fill in but would be helpful to give people a kennediesque thing to where we're heading. >> charlie: do you think he understands that? do you that he gets where we ought to go and how to get there? david, do you believe he gets that? >> i think he gets it as much as anybody. it's a mystery what's in the future but i do have a sense that he really would love to be thinking the long term that's naturally the way he thinks and i know for a fact that he really does not feel he's the person he's had to be over the last two years.

he mentioned this in the press conference today that circumstances forced him to be a president. not the president he chose to be and maybe that's just the nature of the presidency but he's like to do the sorts of things he dreamed of doing before the financial crisis. >> i have a strong thought political as well as economic and i've been thinking about it a long time having grown up in pennsylvania. if you look at the economic and political results starting with them yesterday from scranton, pennsylvania from eastern pennsylvania to wisconsin, all the major democratic offices went to republicans. it was a complete wipeout from the whole area from scranton to oshkosh if you will, that's the industrial heartland of the country. the republicans did well on the westcoast and eastcoast they held their own but the whole industrial area feels there's no future especially older men who feel they can become redundant in this post-industrial area.

i think he has to think about infrastructure. he has allies and has to talk about bringing back a public market for steel and heavy industry. the chinese have done it and he has to say america has to reignite itself by rail and i don't think he can say i'm adding on to the current deficit but lincoln did it during the civil war and eisenhower did it in the 50s with the highway system. i think he has to do something grand that reignites the industrial heartland and reignite their imagination and give them a future for the guys in the older industries. >> i'm a visionary but you want go back to david. >> the countries that are booming are building rail. >> charlie: japan --

>> you're out in san francisco. so much of america has been hollowed out socially from the fact that we fly from new york to los angeles and san francisco. the whole part of the country, cleveland, detroit, they're dying. chicago's always going to be an interesting exception but they all can be reunited across the continent with rapid rail with fast right away the whole thing they have in other countries. it requires imminent domain and a dramatic president can do that and if you don't you say it's for 18 and silicon valley and the hot shot kids out of the good schools and if you say that you say good-bye to a political base and you lose the next election. >> i don't think rail and even manufacturing maybe is not -- pittsburgh, a city doing pretty well actually, we do as much

manufacturing as we ever did it's because of technology we don't need the people and the question is what do we do with the people? we should build up the manufacturing base but we shouldn't imagine it's a panacea for the people needing jobs. >> charlie: i'm struck by both of you believe that some how if you can make the case for investment the essential case for investment as crucial to our future then you can blunt the deficit question or the debt question because america, a, is hurtion, b, wants to work and three, wants to -- c, wants to see in its future and you have to make the investments and that's the case the president has to make with the congress and the american people, am i right? >> that's what chris and i have gravitated towards the same if you want the heart and soul of the country right now or the heart and soul of american politics which is as chris

described scranton and minnesota. that's where you base it. not where the three of us are sitting in these cities. >> the fight over chris christy, the governor of new jersey has chosen to make the fight by saying at least for now in terms of state funding he's not going to support the new tunnel from new jersey to new york and maybe it's in terms o of efficiency a a waste like the big dig in massachusetts. these are great debates if we could get into them. >> charlie: david wrote a piece about that and the reason christy said he did not support it is because of other obligations he had in the new jersey budget having to do with pensions. >> and the golden page for me in california and jerry brown's dad and earl warren in the 50s built fantastic water projects, the

best school system in the country, great highways and it wasn't because government was bigger but less obligated to the things we're now spend on. >> david is so smart and so is mike baron, a colleague of ours. he's become a big conservative but remembers why liberalism once sold. in the days of pat brown you had an education it will system that went from berkeley to the local community college and smaller schools in between and the state college system in between. there was something for everyone and the coastal areas kept open for public use and a highway system it's within the liberals began to dedicate programs and said, you know, well means testing in stez of having programs for everyone. the great thing about infrastructure is is it for everyone and they'll support if

if it means pat brown and building things for everyone not certain programs which drives the middle class people through the roof and it's a point liberals ought to listen to. >> chris has gone all cementy on me. >> i love cement because it cracks all the time and you have to replace it which is very much a democratic notion. >> charlie: that's what happens when they come to this program, they go to a place they haven't been before. but chris, in your own home state of pennsylvania the president had a difficult time sort of speaking to the very workers that you are talking about in the primary. does he have within him the capacity to communicate in a way that makes believers out of them in the next two years because the constituent has it put him where he is came apart in this

election? >> a lot of people voted for barack obama who may not do it again. i think a lot of high-toned republicans, eisenhower republicans voted for him who won't again because he now appears more i' ideologically l than he seemed and they did okay for sestac but he didn't win and has to get the voters back. he ought to beat a toomy but the regan democrats went over to the republican candidate and again we're back where we started ten minutes ago which is jobs. >> if i were the president there are two things i'd be worried about. the 2008 magic is never coming back. they spent $30 million trying to get young people out and all that, it did not work. the second thing is abroad. if you look at this age of u

austerity and you have center-right governments everywhere and some how people are sensing we've got to control spending and we're shifting center right and we're not alone. we're part of an international trend. >> charlie: finally the republicans, what's their challenge and their risk? >> they've got to reassure people they're ready to governor and it this was clearly a rejection of the policies. i'm struck having to talk to democrat and republicans. republicans are further along in thinking about this. they understand they're limi limitations and will worried about the expectations of their voters and trying to come out in january with a series of small but plausible solutions and

they've got a strategy whether they control their base remains an open question. there will be tough votes. the democrats could pass them to pass two budgets in the coming year and the debt-limit legislation in the spring allowing the tea party people not want to vote for though it will bankrupt the country and i think they've developed a strategy at the leadership level. >> the dead commission comes out with a report if they get a majority or 14 out of 18 members of the commission on december 1st. if they come out with restrain on long-term entitles with the age of social security recipient or the ben fit level or whatever and if they get that kind of cover from the president's commission with bruce reed and allen simpson endorsing it and the president endorsing the tea

party people can find common ground for long-term debt solution. i think you can get a majority. it's a delightful umbrella to get out from under the umbrella. it will take a lot of heat and a real proposal and there's a hope for once in the next five or ten years they can get under an umbrella and say we're going face the heat on this thing and get debt reduction in the long term. >> i'm a little less optimistic because you have to have tax increases and spending cuts and not sure too many republicans or democrats are going to agree with that. >> the social security commission ran by allen greenspan and tommy o'neil is telling the story his father was at the white house, tip o'neil and they went for a walk on the south lawn and built the deal. in that case it was more taxes and more of a democratic

solution because the republicans lost the '82 election. this time because the democrats lost the 2010 election they have to tilt toward the republicans with much more cuts and benefits than any kind of revenue increase. they have to to atone to the republicans having lost the election but if the president says he's going to do that the way regan about with o'neil, maybe we can solve this thing. >> charlie: this is barack obama and -- >> that's who's there. >> charlie: great for you to delay your trip to washington and spend time with us. >> thank you. >> charlie: we'll be back and talk with the action taken today by the federal reserve and unemployment and how it may be received around the world. stay with us. the federal reserve announced earlier today it would begin a

second round of bond purchasing hopes of creating jobs and derail inflation and the first installmentment occurred in december 2008 and totalled $1.7 trillion and the new program will be rolled out in the next seven months. with me is joseph stiglitz a profirst at columbia university and richard berner from morgan stanley. i'm pleased to have you both here. joe, what kind of policy this is and why the federal reserve has taken it this time and whether it is the right decision in your judgment? >> well, typically the central banks focus on the short-end. they only buy and sell 90 day government bills.

very short-term government bills and they buy and sell to adjust the interest rate. right now the short interest rate -- short term interest rate is close to zero. it hasn't stimulated the economy very much. there's no more room to go in bringing that down when you're at zero. the objective here is to bring down the long term interest rates which are at historically low levels. they're still two and a half or so and they want to bring them down a little lower. so the two issues are will they succeed in doing that. most people will think they'll bring them down, how much, very little and the real issue is will that lead to significant increases in economic growth and what are the long-term risks to the american economy and global economy.

to a whole set of other potential risks that are opposed that may result from the policy. >> charlie: so it's clear the feds took this action and chairman bernanke recommended the action because he did not think the economic recovery was doing as well as he'd hoped and unemployment at 9.6 is hopefully unacceptable. >> that's right. in fact, if you used a broader measure, one out of six americans that would like a full-time job can't get one. the prospects of a robust recovery seem distant. you look at the numbers, the forecast coming out of most quarters. they have our economic growth over the next year, year and a half being so slow that we will not create enough jobs for the new entrance to the labor force so that number, that 9.6 or one out of six americans that would like a full-time job not able to

get it that number will stay around that level for a year or two. >> charlie -- >> charlie: richard -- >> there's a second reason the fed did this and that's very important as well because inflation is below where they think it ought to be. it may sound weird for a central bank but they talk about price stability and keeping inflation at a level for a cushion to keep from slipping into a deflationry situation and it's unacceptably low and want to bring uninflation a bit so it's closer to the margin of safety where they feel more comfortable. >> one of the criticism of the fed has been in the run-up to the crisis they focussed too much on interest rates and paid too little attention to the broader issues of how the financial system works and the

result is they let the whole financial system undertake a lot of excess risk taking and got us to the mess we're in. what one of my concerns is they're again going down the route focussing just on interest rates not thinking clearly enough about the ways in which the financial system affects the economy and whether a small change in interest rate will really boost economy to any significant extent. >> joe is right. there are blockages in what we call the transmission mechanism for monetary policy and very homeowners under water in their mortgages, one in four by most estimates. we have what we call a shadow inventory of yet to be foreclosed home and people know they're at risk of being foreclosed upon and not paying

their mortgages on a monthly basis and it creates an enormous amount of blockage in the housing market and the housing market is not functioning and the fed doesn't have all the tools it needs to correct the problem. we need to use fiscal policy and assistance from the taxpayer and -- >> charlie: what fiscal policy are you talking about? >> the idea that if we use something that the treasury proposed in the spring called earned principle forgiveness which would spread the losses which are inevitable and create incentives for people to keep servicing their debt, some incentives for lenders to agree with that arrangement and some support from the taxpayers so gradually the losses on the loans would partly be absorbed

by the taxpayer that would have some hope of solving the problem over time. the truth is here that those loans in many cases are guaranteed by the taxpayer already and so when they from foreclose they show up as losses or the two housing government sponsored enterprises. >> richard is right that one of the things we really have to do is fix the housing problem. the pace of foreclosures would have been higher in 2010 than in 2008 and 2009. this is not something in the past. this is a real problem we'll be dealing with for this year, next year, 2012 unless we do something and what that means is we have to in one way or another write down the value of the

principle. there's no way around that. what happens back in april 2009 we gave the banks the ability not to recognize losses on empirical mortgages that weren't paying. that means they have an incentive not to restructure their mortgages because when they restructure them they have to recognize the loss. what i've been arguing and there's a broad consensus about the need to write down the principles. there are a number of. i was talking about a homeowners chapter 11 which would mean you would restructure the debt, convert some debt into equity and allow people to get a fresh start. >> lots of solutions out there for the problem but we both agrow that this is the key problem and this is one we need to solve.

>> charlie: and the right policy at this time. >> one that will have to be adopted at some point. the sooner the better. >> richard's exactly right about it and there are other parts of the blockage we ought to realize. it's part of the larger problem of the blockage in the financial system. basically right now there are two kinds of firms in the united states. the large enterprises and sitting awash with money and the other part of the small or medium-sized enterprises who many of whom would like to get more credit but they have to get it through the banking system. the banking system is really not functioning the way it's supposed to partly because they're sitting on the uncertainty of the mortgages.

partly because when we restructured the financial system we saved a lot of the big banks but we didn't give too much to the small and medium medium-sized community bank and the result is we have a more concentrated banking system. the financial regulatory reform bill didn't really deal adequately with this part of the system to provide carrots and sticks to get people to lend and the net result is the amount of money lending is lower than it was before the crisis. >> there's another aspect so this charlie. when mortgages come down a lot, typically people are able to refinance their loans. a lot of people don't qualify for refinancing under today's circumstances and that's because the value of the home has come down and the loan to value ratio

has gone up a lot and they don't qualify under today's originatation. >> charlie: what happened to the economic recovery? >> my view is that we lack fundamental -- you could argue it was in artificial respiration a bubble that allowed people to consume the people they should have and the savings rate was at zero. what we've done now is taken away the artificial support. the bubble broke. it's a good thing in some ways, certainly for a long term that the savings rate has gone from zero to five percent and i don't think it should go back down to

zero but it means there's a hole. part of the mistake the administration made was if they thought if they can get the banking system back to normal in some sense and they didn't get them back to normal and didn't deal with the mortgage, we could pick up where we left off before the crisis and they didn't realize that before the crisis the economy was not a normal economy. so that's where we ought to be focussing our attention how to get the economy to get going again and that means focussing on some of the long-term problems. i think we need more investment in both the public and private sector dealing with problems in the environment. we have some huge opportunities for investment that would stimulate the economy in the

short run and lead to long-term economic growth. one of the few advantages we have is we underinvested in the public sector for the last decade weekend we have a lot of high-return opportunities. >> charlie: go ahead, richard to that and another point i want to make. >> what happened to the recovery, when we thought about where the economy was going to go in the depths of the crisis we knew the history of the financial crisis out to us after a financial crisis it takes a long time to recover and typically it's not that great and even the most optimistic of us were not looking for a big rebound and the expectations have been disappointed because it's been more tepid and the problems have proved more intractable and we put our finger on the reasons for that earlier. >> charlie: that's why i asked the question though. japan, the 90s, for a while

everybody said no, we're different. it's separate what they did we're not going to do but i've begun to notice a few people say maybe not. what do you guys say? >> i would say, look, one of the things we talked about earlier is very japan like. japan had a dysfunctional system after the bursting of their bubble for some time and they didn't clean up the balance sheets of the banks and didn't clean up the balance sheets of the barrowers and it led to a prolonged period of slow growth in the japanese economy. >> i think we've learned a little bit more of how you get into a japanese style mallais and they're unemployment rate

was five percent. we're 9.5%. secondly, they have a better social safety net. much less inequality than the united states. and is the people at the bottom that feel the brunt of an economic downturn and what worries me is if we're slow to recover in the way japan has been very slow we'll build up an even worse long term structural program than we began. when you have people out of the labor force for an extended period of time it makes it more difficult to bring them back. they lose skills and this is a phenomena that happened to japan in the 80s and economists have given it a term called

historreces and most the net projectio projectionsed are based on the economy turning normal in a short period of time. if the new normal is seven, eight,% an percent and it takes long time to get there we'll be talking about ratios worse than the pessimistic forecast of today. >> charlie: are you worried about a currency war? >> one of the consequences is clearly a weaker dollar. that's something that operates as an adjunct to monetary policy but on the other end of the telescope there are a lot of coutries that don't want to see

their currencies appreciate and it threatens their export growth model. these companies are in transition from an export-driven economy but that are more investment and consumer drive enso they worry about losing their competitiveness so the weakness of the dollar also weakens the chinese currency against those currencies and they lose competitiveness relative to china and it can create tensions across borders and within markets and about what worries me is the tensions start to multiply not into just a currency war but maybe protection. >> we've been talking about the various channels to which monetary policy operates as others look at the united states

they understand pretty well where our situation is and they realize that the main channel to which monetary policy is going to be operating is through the competitive evaluation which has become the beggar thy neighbor policies of the 21st century and they don't think it's friendly. they don't think it's good economic policy when you balance the benefits to the united states, the risk to the rest of the world, they think the united states is really pursuing a risky strategy which is imposing risk on them, the global economy, risks of bubbles within their coutries, bubbles -- global bubbles. and one of the responses to this is that they are undertaking not just intervention in their

exchange rate but also capital controls, taxes, a variety of changes. back in the 70s when we had a problem, we actually changed the global regime and ended about what was a brent and woods system. the real question are we doing that unilaterally today and there's a real risk they think our actions are going to lead to a fragmentation of markets. >> we've got an environment where growth is i inbalanced an and the u.s. can benefit but it everyone has to give a little bit and it means appreciation in other marketses. >> charlie: thank you both, very

much. >> thank you, charlie. captioning sponsored by rose communications captioned by media access group at wgbh access.wgbh.org