>> rose: welcome to our program, we begin this evening by looking at arguments before the supreme court todayç about the constitutionality of healthcare recare, we talked with jan crawford, political and legal correspondent for cbs news. >> within five minutes, charlie, within five minutes of these two hours of arguments the justices right away were hammering the administration's lawyer, the four conservatives who are most active expressing serious doubts about the law and that was just in the first five minutes, it went on from there, they got more and more into the examples of what would happen if the justices were to uphold this law and then of course the liberal justices immediately jumping in and pressing the other side to say why is this any different, why isn't this like social security? defending the law. >> we continue this evening with part 1 of a conversation with former secretary of state jim baker about foreign policy today.

>> this is not just ji jim baker saying this to you but i have just come back from the region and somebody said to me in the region, the israelis say they have a window of opportunity here, and they say that is before iran hardens all of these sites to the point that they will not be effective in trying to take them out. but he said, i think the window of opportunity closes on november the 3rd or whatever the day of your presidential election is. and that this person thought they were trying to put pressure onç the president split clil, politically, now that was an interesting comment. >> rose: we conclude this evening by a look at the global economy, the u.s. economy,ç monetary and fiscal policy with kevin warsh, former governor of the federal reserve. >> we need policies to be far better than they have been, and if we have the right policies on taxes and trade and regulatory

issues, this economy can grow faster than the economists believe but not when so many policies are so disruptive of growth. >> jan crawford, jim baker and kevin warsh when we continue. >> funding for charlie rose was provided by the following.

>> additional funding provided by these funders.ç and by bloomberg, a provider of multimedia news and information services worldwide.ç captioning sponsored by rose communications from our studios in new york city, this is charlie rose. >> rose: today, the supreme court held its second day of hearings on the healthcare reform law, the conservative justices vigorously questioned the obama administration's lawyer on the central issue in the case. does congress exceed its constitutional authority in requiring most americans to purchase health insurance? >> assume for the moment this is unprecedented this is a step beyond what our cases have allowed, the affirmative to go into commerce. if that is so, did you not have

a heavy burden of justification? >> i understand that we must presume laws are constitutional, but even so, when you are changing the relation of the individual to the government in this, what we can stipulate i think is a unique way do, you not have a heavy burden of justification to show authorization under the constitution? >> that is the area that congress was chosen to regulate. this was the healthcare market, everybody is in it, so we can regulate it and we are going to look at a particular serious problem which is how people pay for it. but next year they can decide, everybody in this market we are going to look at a different problem now this is how we are going to regulate it and we can compel people to do things,ç purchase insurance in this case, something else in the next case because you have accepted the argument that this is a market in which everybody participates. >> rose: in its final day of oral arguments tomorrow theç justices will address the two remaining issues raised in the

case, first if the court strikes down the individual mandate must the entire law fall with it? and finally, does the federal government violate federal principles of government in expanding medicaid. >> joining me from washington, d.c. is jan crawford, the political and legal correspond democratic for cbs news, i am pleased to have her on this program, because we frequently see each other in the morning. welcome. >> thanks, charlie, it is nice to talk to you at nighttime, this time. >> rose: give me a sense of being in the courtroom and what we learned from the questioning that took place. >> well, of course, it felt very historic, even if you looked at the people in the audience, you had members of congress, you have members of the administration, you had people in that courtroom who had been waiting five days just to get one of those coveted seats inside because as you know these are aren't televised the only way you can see what is happening is to be there and it paid off. these were not only historic arguments but they were captivating and engaging the

justices within five minutes, five minutes of these two hours of arguments the justices right away were hammering the administration lawyers, the four conservatives who are most active expressing serious doubts about the law, and that was just in the first five minutes. it went on from there. at the got more and more into the examples of what would happen if the justices were to uphold this law, and then of course the liberal justices immediately jumping in and pressing the other side to say, why is this any different, why isn't this like social security defending the law. you reallyç saw the justices he today taking a serious look, not at the politics, which has been dividing america, divided congress when this law passed, ç serious look at the law and the very fundamental issues that are in play in this case, the question of congressional power over american lives. >> so this is -- i am quoting now from who writes for new york times as you know the question was, even by the standards of the garrulous current court, unusually intense and pointed,

and the atmosphere in the courtroom which is generally subdued, was electric, which is what you just said as well. so -- >> it was, it was electric, and it reminded me in many ways of bush versus gore in the sense that this was a case that you knew was going to be a big deal and people were literally sitting on the edge of their seats and the justices when that hammer went down to start this session were ready, they were jumping out of the blocks to ask these questions, they were very prepared, they know these issues as they should, but the lawyers also very prepared, some of the most excellent lawyers in the country as they should be, this is an important issue, a law that could affect every american in this country, you would certainly hope the third branch would perform well and today they did. >> rose: this was the super bowl. justice scalia one of the conservatives asked at one point, quote, government is supposed to be a government of limited powers. what is left if the government can do this? what can it not do? that goes to the essence of the conservative argument, does

it? >> that's exactly right, nm justice scalia today i thought was the most forceful critic of this law but let me tell you what, charlie, the conservatives were all critical of it, even the key swing justice, justice kennedy was raising serious questions about the law but scalia's point is just as heç said, listen, if congress can order you to buy health insurance, if you don't want it and they still say i don't have to buy it what does congress not do? they gave an example congress can make you exercise because that will make you healthier and bring healthcare costs down for everyone. chief justice john roberts also very forceful in asking other examples if they uphold this law, if they say congress has this power, what is next? justice chief justice roberts said, can the government make us all buy cellphones thinking of course you are going the need a cellphone eventually if you need an accident and need to call 911 so if they can make you buy health insurance because you will need it eventually they can make you buy something like a cellphone, the point being this is a big deal that congress and

the courts can be opening up the gates to entirely new legislation from this place up here on capitol hill and put even more power over america and american lives. >> kennedy at one point said allowing the government mandate, allowing the government mandate, this is the swing justice in this court. that's right. >> he said allowing the government mandate would, quote, change the relationship between the government and the individual in a profound way. i mean, this is -- >> and that is critical. >> that is critical and to hear that from justice kennedy, who like youç said is the swing voe in so many cases, sometimes he will vote with the four liberals and sometimes vote with the four conservatives so he can be that decisive vote and to hear him cast this case as a fundamental change inç way the court has considered its previous cases, he sees this case as different, of course, the administration has been arguing and the liberal justices are suggesting today this isn't all that different,

congress has broad powers and of course congress can regulate health insurance and health market because people are already participating in it, justice ginsburg said today just like congress can order us to, you know, pay for social security, even if we don't want that, so when justice kennedy said this is different and it is fundamentally different that was big and that suggests that kennedy has serious doubts about the law and is prepared at this point, though he could change his mind he has in the past, at this point, to strike down this individual mandate. >> if, in fact -- i mean, does it follow in the many cases that you have seen argued before the supreme court, that you can get a sense of the decision by the way the argument goes? >> yes. you can, charlie, because you can see from the justices questions how they feel about the case. and this is what is so interesting. they almost use the lawyers to make their point to the other justices. so let's say the administration's lawyer was up there today and hammering him let me tell you, charlie, they

were really, really pressing him, the conservative justices were but the reason, is they are not only looking for his responses, but they are looking to show weaknesses in his case, almost to demonstrate to the liberals, look, see what is going to happen? see they don't have a good answer, he does haven't a good answer for how this would be limited to healthcare. so sometimes they use those lawyers and so, therefore, you can get a sense of where they are going, but here is the it is a huge mistake for us tonight to declare that the supreme court is going to strike down the individual mandate, they may be ready to strike it down today but think what happensç next, next they will o at the end of the week and go into their private conference and sit around this huge table right off the chambers of the chief justices, big ornate, you know, wooden table, wood paneled walls, they sit around and they talk about the cases, and why they are going to vote the way they do. then the chief justice signs the opinions and the justice goss off and start writing those opinions, and as they are writing the opinions, the dissent, the justices sometimes talk among themselves and

sometimes they change their mind, now, they may be persuaded by something else and that has happened often in the past and especially with justice kennedy, there is one case that is one of my favorites with this example. in 1992, there was a landmark case that could have overturned roe versus wade which of course guaranteed a woman's right to an abortion, everyone knew when those arguments were over justice kennedy was a sure fire vote to over turn row versus wade, the liberals were horrified, conservatives were thrilled and finally the court was going to over turn row versus wade, you know what happened? a few months later justice kennedy came back, formed a, joined forces with justice o'connor and justice suitor and put it mohr, on more solid ground than it had in theç past. >> it is getting dark, than thak you, good to have you on the program. >> thanks. >> rose: james baker is here, he is one of this country's most distinguished diplomats and public servants, servedç under

three u.s. presidents and held some of the highest offices in american politics, include secretaries of state, secretary of the treasury and white house chief of staff and led campaigns with gerald formed, reagan and george h.w. bush over the course of five consecutive elections, perhaps he was closed to george bush 41 and their friendship stretches back to the 1960s when they started playing tennis the together and the elder bush called baker quote a man whom without i would not have become president of the united states. and a man to whom friendship means everything. and i am please to have jim baker back at this table. welcome. >> thank you, charlie. >> looking ahead to foreign policy, one thing we have talked about before and you headed up an important committee. you and lee hamilton. >> yes. what will history say about iraq? >> i think it is too early to know. i think it is still, still baking. >> rose: go ahead. >> it could be, it could really say some very good things about

it. if iraq -- it iraq turns out to be an open and pluralistic society as peace with its neighbors and that doesn't brutalize its own people it is going to be -- it will say very good things. >> rose: and theç fears about iraq don't seem about to happen which is be sub serv subservien. >> i don't think you will see iç subservient to iran. >> there is more shiite. >> there is more space there programs for iran. but, you know, what is happening it is day to day in iraq it is very encouraging, they are having an arab league summit in iran -- in iraq and proving to the audit saudis and other arab countries that come there we are not a vassal state of iran and i don't think -- i think iraqi nationalism will prevent that from happening. i think the biggest -- the biggest risk still is the think a sunni, shy a, shia sunni

divide and there might be more ethnic tensions and there is, they are still blowing people up over there. >> rose: yes, they are. >> but i think iraq dark i think history could prove to be -- history could turn -- >> rose: and also thinking about decisions like that in which you have to ask yourself what is the opportunity lost? what might have happened i if yu hadn't done that, first of all of hives and secondly of treasure. >> yes. >> rose: and third of options to do other things, might afghanistan be different? >> #02: well you can do all of those hypotheticals and. >> rose: if you don't learn from history where are you going to learn it from? >> you will learn from history, all i am saying is the jury is still out, and it remains to be seen how that is kind of ultimately going to turn out and it could turn out well it could turn out very well and it couldç turn out not so well. >> rose: should we leave afghanistan as the president has scheduled it? >> in 19 -- >> rose: in 2014. >> yes, we shoud, should we leave earlier than that? >> i think what w we ought to do

is change the mission. i am not sure -- i don't think we ought to bug out, we have lost too many lives there to just pick up and leave. i tell you what i think -- >> rose: nobody is suggesting bugging out. >> no, i think what we ought to do is leave on the schedule that the president has laid out. i support that. and change the mission from one of counterinsurgency to one of counter-terrorism. maybe you do counterinsurgency in the big cities and counter-terrorism elsewhere in the country. with the predators and so forth, predator drones. >> rose: yes. >> that is probably what i think. and that was the argument that vice president biden made internally in the administration. >> rose: afghan pack review. >> he lost that argument, but i think that was probably the right position, is the right position to be in today, but i think there is something else we ought to try, and this has been commented on a number of times by others, but everybody in the

region has a stake in not having an afghanistan that is a base for terrorism. india does, pakistan does, iran does, russia does, china does, why don't we have a conference of all of these nations, pull it together, we could lead or get coleadership or something and get them all together and say look, it is in all of our interests that we not have an afghanistan that just is a base forç terrorism. >> rose: and we can do that -- >> and we have 100,000 troops there and you don't have any. >> rose: would you do do that now or wait until after the election?( >> well, i don't think -- i don't see any major political down side to doing that. i mean, maybe there is one that i don't see. >> rose: well, out campaigning and this could be an important focus and say, the stakes there are so serious we ought to immediately have a conference. and bring together an international conference. we have a stake in this. >> i think he can run for office

and -- >> rose: so you are recommending a conference now. >> and chew gum at the same time. you have a secretary of state that can lead the charge on it. i think it would be a very important thing. >> rose: why don't you do something about it? you have a voice. >> no, i just told you, i just said something to you. >> rose: but it is a good idea. >> yeah. >> and henry kissinger would be very supportive of that in his crumb he raised -- >> he already mentioned it. yeah. in fact, maybe i stole the idea from henry. >> rose: well. >> >> rose: you both could make that point that we really need to get involved here and see, people who who have a vital interest get involved right away. but you have the problem that they ride to have, you know,, a resolution about syria in the united states and russia and china were not prepared to go but now they are -- >> this is something that they can all agree on. now, look. >> rose: you think so? in other words, they, china would come, russia would come, iran would come? >> rose: turkey would come? >> i don't know that they would but they have a national interest in coming. he might get attacked from -- by

the republicans for saying, well we would be sitting down with iran, you don't want to sit down with iran, well, guess what? the first time, iran helped us. we asked them. they -- >> well pqv had a rob with the taliban, a, they lost 40,000 people. >> and they will have another big problem if this thing unravels there. that's why the conference makes sense. >> rose: and guess what jim baker also believes that you ought to be talking to the iranians anyway. >> i think you ought to talk to everybody. >> rose: but you specifically include talk to iran, don't have these conditions you have to have conditions before you talk. >> yes don't be afraid to talk if you know what you are doing you don't lose a damned thing by talking. i don't buy to this argument you give somebody by talking to them if you are tough. >> rose: what is going to happen there? do you think the israelis at some point are going to say sanctions have not changed their minds? so we are

going to change their mind? >> i have no idea what is going to happen but let me tell you what my view is on that issue, talking now about iran and the nuclear. my view on that is, that our -- that our policy and the israeli policy fundamentally are not very far apart. we both believe that it would be a disaster for iran to acquire a nuclear weapon. not so much because of the threat that they would use it against united states or europe or israel, but because it would mean rampant proliferation of nuclear weapons. >> rose: and there is always a possibility of theft. >> in a very unstable part of the world and theft. so my view is that the difference between this is essentially one of timing and -- between us and the israelis. >> rose: we all know that. >> and one of who should do the job. by view is that the israelisç e not the best-equipped to do the job. we are better equipped to do the

job. we might be able to prevent iraç from weaponizing. the israelis would probably only be willing -- only be able to deny -- delay their weaponizing. if you -- you may know that israelis came to the 43 administration and asked for bunker busting bombs, over fly rights and inflight refueling capabilities and president obama 43 said, no, that is not in the interests of the united states. >> rose: the israelis came to the united states. >> the israelis came to the united states and bush 43 quite rightly said no that is not in the interests of the united states for you to strike iran now. and then the same appeal was made to the obama administration with the same basic response. now they did get some bunker busting bombs, but essentially the same response, it is not in the national interests of the united states for you, israel, to now bomb iran.

it will venue then the hard-liners, sanctions are finally beginning to show some sign of bite. there is time for us to get this done, and we are in a better position to do it and can get it done than are you. so please don't do it. and then martin dempsey the chairman of the joint chiefs of staff goes out here just a week or so ago and says if israel does this it is going to mean the loss of american lives in the region. >> rose: so does jim baker believe that you can through all of that, use of embargoes, use of of computer viruses that you can somehow, you can bring the iranians to stop? >> i don't know whether you can or not but what i am saying is, there is still timeç left o continue to ratchet those things up, and try to do that. and if it doesn't work, you have always got the military option. >> rose: but here is the problem for the israelis.

they watch that happening. they watch the ratcheting up and have been a part of the process. some of those things they have been involved in, and they have watched it and they say, at some point, they are going to be invulnerable to what we need to do, and so we -- >> inabsolutely national to, invulnerable to what they can do but not us. >> rose: if we don't go now, our ability to change -- >> that's right. their national interests there is a little different than ours. their national outlook, and that may be true. but it is not going to become invulnerable to ours so i guess what i am saying is, i think we still have time, that's what the administration is saying. that's what the bush 43 is saying. that's what martin dempsey and others are saying. >> rose: we have time? >> yeah. we do. >> rose: we can make this work. >> that doesn't daschle that doesn't mean you are going to rely on sanctions forever. it means that you are going to -- that indeed the military option is indeed going to be the last resort. >> rose: but --

>> >> rose: but will we use it if everything else yes. >> yes. never tame it off the table. >> rose: taking it off the table is one thing but the other is you can count on us using it if you don't stop. that sat different -- >> i suspect that is the conversation that president obama is having the prime minister netanyahu, look, don't you guys do this. it really doesn't -- it really us doesn't work for you to do this now and when the time comes when it is necessary to keep this from happening, we are going to do it. >> rose: what did you learn from all of yotb experience in dealing with the israelis? >> well, that you have got -- that they respect strength, that they -- that they expect you to say what you think, and mean what you say. ase. you know, -- >> rose: if you show weakness or some -- >> if you show weakness they can smell it 1,000 miles away, you bet. but they respect strength, and my experience was that the

israelis understand that we are always going to be there for israel. president obama put it pretty well when he said we have israel's back. that was a good way to put it. we will be there for israel whether we are a democrat or republican. >> rose: he said all the things they wanted to hear, evidently, he said look we are not in favor of containment, we understand you have a different obligation to your own citizens than we do, you know, we understand -- >> i think they understand that we will be there. >> rose: right. >> and i just think that the issue now is primarily just one of timing, and, you know, i had somebody made an interesting comment to me. this is not my -- it is not jim baker saying this to you. but i have just come back from the region, and somebody said to me in the region, the israelis say they have a window of opportunity here, and they say

that is before iran hardens all of these sites to the point that they will not be effective in trying to take them out. but he said i think the window of opportunity closes on november the third or whatever the day of your presidential electionç is. and that this person thought they were trying to put pressure on the president politically. now, that was an interesting comment. but. >> rose: you mean the president would have a different attitude if heç wins reelection is what that means? >> no. what it means is that the israelis are pushing harder now because they are -- they are at the time of utmost leverage, maximum leverage. >> rose: because we are in the middle of a -- >> because we are in the middle of a presidential election. >> rose: which mean he may have a different attitude after the election. >> how do you view the election. so much has been involved in presidential campaigns. >> i don't mind the conventional wisdom because we are having a

knockdown dragout primary it is very bad for my party, the republican party. i don't buy that at all. i have always been of the view that mitt romney is a strongest candidate we can nominate, i believe that because you win general elections by appealing to independent voters in the swing states and i think he is best-equipped to do that. i say that -- i don't believe in the conventional wisdom that the primary is going to kill -- the fighting is going to kill us because i think it strengthens or candidates. >> rose: what else to do you think about this general election that is coming up? >> well, i think we have an excellent chance to -- the economy is not coming back -- the economy always determines in the absence of actual war and peace, there is no other real -- people vote their pocketbooks. you see, it is the economy, the economy, and the economy that's it in that order. >> rose: is healthcare a huge negative for the president? >> i don't know the answer to that. it is a huge negative among many

voters whoç hate to see the continued expansion. >> rose: of government. >> of the federal government. >> rose: even though they love their medicare. >> they love it. >> rose: they love their medicare. >> they love it but -- well that isç fine, but obama care is moe than medicare, it has taken over more and more aspects of our national life, and people don't really like that. at least they don't on my side of the aisle. >> rose: why can't -- and do you have a sense that it will change, mitt romney connect with people more than he can? >> well, they used to say that about george h.w. bush and guess what? he was elected president. >> rose: yes. >> and they used to say, they have said it about other candidates. i mean,. >> rose: and it all depends. >> will this election, many, let me say the following two things, one, if it is a referendum on the president his road is tougher than if it is a referendum on the future? >> i agree that.

>> okay. >> i agree. >> i should talk about syria. what do we do next? >> well, i don't know. that is a very, very interesting question right now. and it is being debated as you well know on this very day. i think whatever we do, by not talking about provisioning nonlethal aid to the provision but we should think about several things. >> rose: this is the recommendation of -- >> the chinese may be involved? >> they might. but my view is, we ought to have a broad-based multilateral coalition to do it, don't do it, unilaterally or just one or two. we ought to know a little more about who we are going to give it to. we don't know these peopld> look, you know, i have got to tell you i am not a big fan of what we did in libya, although i am glad to see qaddafi gone. what have we got there? what -- the people we helped there are have a civil war. we don't know who these people

are, the presyrian army we don't know who they are and syria is a hell of a lot different case than libya. syria is at the crossroads there of turkey, iran, israel,. >> rose: i tell you what, we don't know what kind of anti-aircraft weapons they have been supplied by the russians either. >> to no, we don't. well the russians do. we could probably find that out. but i think we just need to proceed very cautiously, we don't -- look, we are broke, we don't need another major engagement. we really don't need that, that we can't fund right now and can't pay for. they are not talking about military aid and i think that is good, but provisioning nonlethal assistance, humanitarian assistance is something that might -- but we ought not to do it alone and we ought to think too, you know, assad has lost legitimacy, you can't murder your own people and expect to survive for very long.

and when he goes, and my view ultimately he mr. go, that is not all bad for us from the standpoint of the situation with iran. >> rose: yes. >> because iran, you know, syria -- >> they are very close and the whole hezbollah a m mamas thing. >> hamas thing. well, we areça policy institute that we are not a school, we don't grant a degree, but we fund fellowships, we bring people in from tho world of action, people who have been out in government and so forth, we give them two-year fellowships, they work on various research issues or projects, they interface with the faculty there in rice, the idea, i stole it from woodrow wilson center for scholars in the smithsonian which is to bridge the gap between the world of ideas and the world of action. >> rose: indeed, yes. >> so you bring people in from the world of action and they relate with the world of ideas

and people who sit in their ivory towers they have good time to think of good theories the guy in the world of action is dealing with his inbox that's the theory of it, we are strictly bipartisan we never conduct seminars conferences or anything that don't give both sides or all sides of a problem, and we have been very fortunate, we have had everybody that has come down there to exspoorks, speak, all of the former american presidents and people like nelson mandela and gorbachev and putin, so we will get you down there one of these nights. >> rose: i promise already. you have had a remarkable life, thank you for coming. >> thank you very much, charlie. >> rose: jim baker from houston. kevin warsh is here, he is a distinguished visiting fellow by the hoover institution and graduate school of business from stanford, from 2006 to 2011 he was a member of the board of possess os the federal reserve. he was a fed representative to

the groupç of 20 and the boards emissary to the emerging and advanced economies in asia and also acted as liaison between the fed and wall street during 2008 financial crisis i am pleased to have him here at this table for the first time and it is aboutç time. welcome. >> charlie, thanks very much, thanks for having me there is a lot to talk about. i hope some of this we can do another time. especially some of the history you have seen. i really want to talk about where we are today, and some of the history, a great story of at the time of the worst and the darkest days of 2008, in which there was a recommendation that goldman sachs take over wachovia with all kinds of issues having to do with that. >> so deep in the darkest moments of that cry sits, charlie, there were a lot of pieces on the chessboard, and the question in some sense was, how are these chess pieces going to fit together, the financial markets were running away from policy makers, we were in an old-fashioned panic, and i would say some of the federal reserve some at the treasury recognized

it wasn't just a period of weakness or recession, it was a panic and i give a lot of credit to people like chairman bernanke who had the knowledge of history to know that you have to break the glass on occasion and see if you can't facilitate discussions between and among firms, between banks and wall street, and the government to try to get to a better place. but the tough judgments at that moment were what is going to work? will the government's be an extraordinary one time event or will it become more permanent .. and i would say in some sense, charlie, the challenge now wasn't, could we have done better things in theç deepest, darkest moments to crisis? the challenge now is, is the banking system well positioned in the u.s.? is the banking well positioned overseas, to help get us to grow an economy faster than it is today. >> >> rose: so you took me into the future right there right

then. so to answer your own question -- >> i would say in the u.s. we have come into 2012, in my judgment, with some considerable momentum, but that momentum isn't at first order, because of some government policies, the i see cal or regulatory or even monetary, the policies of the federal reserve, for example, are incredibly powerful, charlie, in bringing us back from the abyss, and avoiding the panic. but these policies can't be so instrumental to drive a booming economy, with massive job creation. and massive risk taking. so even the things that were done in some ways to bring stability in the darkest stems we have got to make sure we reorient ourselves so we are focused on growth today, and the banking sector i think there is a risk, the risk is that coming out of dodd frank, which they call comprehensive fundamental regulatory reform, whether or not perhaps we have reinforced

the two big to fail problem, with we now have a set of quasi public utilities governing our financial sector, i hope not, that certainly is not the way to have a robust banking system, to have massive credit availability to the real economy, but i tell you it is a risk, because markets have começ to believe that what the government did in 2008 and 2009 isn't a one-time deal, that the government will? how come to the rescue of these big financial frms firms in newç york and a couple of others around the country, markets need to learn that that is not going to happen, but markets right now are of the view that if one of the big folks get in trouble, that government will be there to bail them out. >> rose: so too big to fail and moral hazard live? >> they live more than i think many in washington want to acknowledge. >> rose: what should have happened? what would have been a better solution. >> so in the darkest days of the crisis, i wouldn't be able to have perfect 20-20 hindsight. but we can do a lot of things

now so that the economy is growing faster, so for example, i would recommend that any of the financial services firms, particularly those that are the largest, those that have the largest amount of assets, are most collect connected to the noble economy, if they can't prove to the regulators, and if they can't prove to the market that if tough times hit them they could unwind themselves without a problem, then we shouldn't howie them to be of the size they are. george schultz -- >> rose: we shouldn't allow them to be the size they are, therefore we should do what? >> well, if they can't suffer through a very tough scenario, then we shouldn't let them live in the prosperity of the moment. so george schultz said a long time ago if institutions are too big to fail, they are too big. so the burden should be on them to persuade market participants and in my view government officials that they can withstand the shock and if they can with stand the shock, the

value but unwind themselves without necessitating the government to come in and write a big check, that is fantastic. if they can't pass thatç test, then i think we have got ourselves a problem. the second thing i would recommend, charlie, for those institutions and my former colleagues is that the information about these large financial firms continues to be incredibly opaque. investors in the stocks, people that own the debt of large financial firms, they don't really understand the firms themselves, they don't really understand much of the assets and liabilities and the risks. we should make that disclosure so much better so that market discipline can work. so it is not just a bunch of regulators who have to make decisions, so that markets can help us police these firms, to see the risks over the mountain or around the corner, because markets are complacent again, then the government and the firms themselves will find that we are back in a very, very difficult situation.

>> rose: so how do you see the capital requirements set up by, say, boswell 3? >> so i would say the bosse l-3 process, as the world's government and central bankers meeting monthly in a small town in switzerland to try to come up with the right answer, but i would say, in the u.s., we need to set the right capital for our own firms and i have a lot of confidence with the brain power, intelligence, knowledge that ouç firms have that if we ensure that they have the right capital, they will be able to out compete and win business against any firm anywhere in thç world. >> rose: that means what? to set what certain requirements for capital requirements? and would they be different than bos l-3 or not? where would they be? >> they could be. my concern amount bos l-3, is that the bos l-3 process could end up like 1 and 2, where the process gets so complicated the results of the process become so difficult for investors to

understand and many of the firms that are involved in the bos l-3 process are effectively backed by their governments so the largest banks in france and germany, across much of europe they have long been in effect, public utilities that is how those governments want to run their banking systems and it shouldn't be my judgment as to whether that is right or wrong. but, in fact, if you are an investor in deutsche bank or an investor in society general you have an expectation born of long experience that that government is standing behind that firm, because that firm is in some sense so large relative to that country. that is not our banking system, charlie. my view is that shouldn't be ours. we have the benefit of 9,000 banks, we want these banks to compete with each other. we want the biggest bank in one decade to be able to fail and to become smaller without causing taxpayers to write a check. so i think we have huge benefits of a diversifiedç banking syst,

one that is able to provide a lot of credit to small and immediate size enterprises so i work i are about international processes where we are negotiating with other countries, whose bankingç systs at their core are so different from ours. >> rose: the bottom mine of this conversation is so far too big to fail is still withs us. >> it sure is. we havwe have a window of oppor, charlie, to change that, a dodd frank implements it over the next couple of careers but if we miss that opportunity, we will end up with a banking system that does not look like a u.s. banking system, but instead looks like banking systems that we see in many of our trading partners, it might work for them, my judgment is it doesn't work for us. >> rose: got you. let me talk about the economy, where you think the global economy is today. >> >> before we go to the u.s. economy. >> so. >> rose: from europe to asia to latin america. >> when we think amount the global economy in 2012, we shouldn't make the same mistake that some market participants and some policy makers did going

into the last crisis. we have one globally integrated economy, we have one set of integrated global financial markets. the idea? how that a problem in one country stays in that country, experience tells us that doesn't work, so if you think back to the crisis, charlie, for several years in '07 and in '08 and even early into '09, many folks in europe and across the globe said that was a u.s. problem, that it is a problem of u.s. sub prime mortgages. the u.s. economy is weakening. and many around the world said thiin this isn't about us, but e are now seeing in europe, what we are now seeingç in europe shows this is not a coincidence, the european sovereign debt crisis and the u.s. sub prime mortgage crisis are not independent phenomena, this is 3 global phenomena, so when the u.s. as we look at our economy, as the europeans look at theirs, we have to be spending at least as much time understanding what

is going on around the world as opposed to? how thinking that those economies have decoupled from ours, my sense of the european economy is they may well have through a aggressive central bank action, dealt with the liquidity risks in their banking system, they may well have at least for a time taken some of the risks from some of the sovereign funding issues in italy and spain and portugal. but i think the area that is still a concern at least for me from the outside is the real side of the economy in europe. if the european economy starved for credit, perhaps, continuing to be uncertain with lower confidence about their system of government, about the european union itself, could the european economy slow so much, could the problems in the european banking system find their way back both to the u.s. and around asia, the answer to that is yes. so the biggest concern i would

have in the near term about europe would be the real side of their economy and if europe goes into an old-fashioned recession, which we should not be dismissive of the possibility of, that will certainly be impacting our economy here in the u.s. >> rose: how do you come down on this notion of finding a balance between a growth strategy and a deficit reduction strategy? >> right. so i would say there is in some ways a false dichotomy that has been set up. we see certain members of the policy-making circle that say what we need isç austerity, on the other hand, we see other policy makers that say, no, what we need to do is spend, the government needsç to intend mo, and aggregate demand by the private side is shrifnging that is false choice. the right strategy is the one that you suggested. these countries, our country need a growth strategy, i would say that for the last several

years, including since the panic left our shores in the u.s., our government across administrations have been focused on stability, not growth. we have been focused on how do we make sure that the economy and the banking system holds together, how do we help gdp in the next quarter? how do we make sure that employment looks good by the next election? we need a more longer term growth oriented strategy that says we can't do that much about the economy between now and december, but there is a lot we can do about the economy three and four and five years out, so i would push for a pro growth strategy here and i am encouraged that the europeans seem to recognize that they need a growth strategy of their own, and a growth strategy doesn't suggest that he everything will be perfect every day, but it would allow some creative, structural reform so economies can grow fast enough that the

labor markets can actually improve so we end up with a better economy, three, four, five years from now. >> would you have supported bowl simpson? >> i think that the structural .. deficit issues that irrelevant skinç bowls and senator simpson outlined are hugely consequential, they are a huge risk to our economy, and a plan likeç bowls simpson is highly constructive to this debate. it is, in some sense, a tragedy that the considerable work that they did in framing this issue is not in the middle of our political discussion. >> rose: right, uh-huh so i would theyed that stay window of opportunity lost, but i have some nstinct that particularly their focus on tax expenditures, that they suggest might be spending through the tax code, between a trillion and a half and $2 trillion, when it comes time

in early 2,013 when democrats, republicans, some newly elected have to get around the table, programs the first thing that will take off the bookshelf is bowles simpson, and if they don't. >> rose: to examine it? >> to examine it, not to accept wit an up and down vote but this is where the debate starts. there are some things in bowles simpson that didn't appear to be sufficiently growth oriented but at least they acknowledge the problem which isn't a republican or democrat problem and i say, charlie, if we miss this window of opportunity to solve these debt and deficit problems over the next couple of years, markets will solve it for us. >> rose: is there some magical number, whether three to one or four to one between spending cuts and revenue increases? >> so our understanding of economics isn't that good. milton friedman used to say the only thing we really know about economics we teach in he con one and everything else is made up. >> what was that, supply and

demand? >> that is about all we know. we don't know what exactlyç is the right mix, but i think we know a couple of things, some of which we might have forgotten over the last several years. one is, we know if the u.s. economy doesn't grow above some trendç level, that the economy will not be able to be as productive as we need, be as conducive to job creation, and drive the kind of economic opportunity that we think of in some sense as distinctly american. so we know that. i think the real issue about what mix is of tax and spending are in order are really a function of credibility. and i think what our political class needs to do is to put some points on the board sooner than later. >> rose: this notion of the federal, the federal reserve decisions has made about monetary policy, and including the more recent decisions to keep interest rates low, is that the right choice?

>> so i have been gone now for ten months, so i have not, i am not privy to the great knowledge they have have in that room, i can tell you what my biases are. when you are in the middle of a great panic, you need to break the glass. >> rose: right. >> perhaps throw tout textbook and to be aggressive, to meet that moment. in my judgment, we are no longer in a great panic. we are in a mediocre recovery, we are in a sub optimal economy, but we need to go back to a more traditional are a jeep, regime. i don't think there is any forecaster even one as tall lened as chairman bernanke who really knows where the economy is going to be in 2013 and 2014. so i would personally hesitate to be ableç to make commitments beyond the horizon, when central bankers get together in rooms like they do every six weeks or so, you want your cun,il bank to be responsive to the latest

information on the real side of the economy, to signals from the financial marketplace and to the extent we have signaled or the central bank has signaled that interest rates will be at zero as far as the eye can see, i worry that that makes the discussion in that room less fertile, less dynamic. in my view, the risk rewarld of those sorts of judgments are not nearly as compelling now in what might turn out to be q e-3 as they were in the darkest days of the crisis of q e-1. >> rose: q e-1. >> so i wish i could tell you i came to q e-1 with dogma, when it comes to the darkest days of the crisis, and extraordinary actions have to be done, i was a supporter of q e-1. i thought that the economy was so close to the abyss that even though the central bank shouldn't be having to carry this burden itself, there was no one else around to help. >> rose: what grade would you give the federal reserve between

2007 and 2012? >> so it would depend on that period. >> rose: okay. >> i would say before the financialç crisis, i would hard pressed to give the federal reserve a super high grade. >> rose: because interest rates were too low and credit was too easy and too much money was being spent on housing? >>ç so i would say there was an incredible amount of come play 7 city, born of 25 years of what the economists call the great moderation .. financial markets thought that really bad things couldn't happen and wouldn't happen because policy makers had gotten so good with their skills, their knowledge of the economy had been so strong that they could have a mild recession but they knew how to get their way out of it. central banks should be worried when no one else is, and no one else was worried, so central bankers. >> rose: should be worrying. >> would be worried in those moments and that is not a criticism of my predecessors, that's a criticism of us.

i arrived in february of 2006, and we needed to be, i think, raising a calculator i don't know call about risk. >> rose: right .. >> there are many wrote speeches and talked about a complacent financial system, a system that there was too much liquidity but in all candor if you look back at those moments there should have been more of that. >> is this the same kind of clarion call, i don't know the answer that chairman greenspan made about the tech bubble in 2001? >> so i think he attempted to ring the bell, but no one wanted to listen, charlie. there is the nature of complacency. this is the nature of our markets. >> rose: so let me ask you this last question. it is 2012, there has been a presidential election and somebody has been either re-elected or elected presidentç either one of them, calls you into the office and says, tell me, what is it, what are the

three most important things i need to do in order to setç ths economy and this country in the right direction? you can take 1, you can take 2, you can take 3. >> well, hopefully that candidate has asked for a mandate going up to those elections. >> rose: and what mandate would you have liked him to have asked? >> i would have liked him to ask for to the very adult mandate, and the adult mandate is, our budget situation is unsustainable, we need to put points on the board soon, because if we don't, we are going to have a serious problem. and if we start doing the right things, taking our revenues and expenses and having them come closer to some balance, if we shrink that gap, and secondly, we do that in a way which isn't about trying to make gdp or employment look good tomorrow but it says between now and four years from now, i want to do some of the tough and right things with fiscal policy that

create a growth oriented economy so that four years from now, when i come back before you, i have got a set of results that you can believe in. and so that is a long-term strategy, not a short-term strategy. it is a strategy that says that we are going to grow and we are going to make tough decision dogs do it. and it is also a strategy i think, charlie that says, we can't ask any single institution of government to do it by itself. and if the federal reserve has been trying to compensate through the best of intentionsç for the failings of other policies, the failing of broken fiscal policies that are trying to solve for the moment, that are trying to solve for broken regulatory and trade policies, you take the burden offç them. no single institution of government can do it by itself. and i would think that the president in 2,013, no matter who he is, needs to remind the american people that there is a

huge opportunity in front of us. this economy is not stuck with some described as the new normal. >> rose: right. >> that suggests well this economy can't grow too much in the next ten years, so we need to lower expectations. >> rose: in terms of everything? in terms of growth, in terms of employment, in terms of, you know, the strategy of -- i mean in terms of possibilities of the economy? >> right. and i just don't believe it. i call that the new malaise. we need policies to be far better than they have been, and if we have the right policies on taxes and trade and regulatory issues, this economy can grow faster than the economy mists believe, but not when so many policies are so destructive of growth. >> rose: and there is paralysis in washington. >> absolutely. >> rose: thank you, charles. >> thank you, that is good to hear. thank you for joining us, see you next time.ç

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