>> rose: welcome to the program. tonight, the global econonomy around the washington budget battle with martin wolf of the "financial times." that is where the debate ought to be somewhere. between bowles simpson on the one hand which is in the center and on the one hand brian, which is dramatic and maybe something on the other side which would suggest increase in revenue enhancement wherever you could find. >> i would say he should pick up bowles-sifrn son and run with it saving this is a sensible plan, this is what i as a realist stand for. i don't understand the politics of this very well but i have been surprised and disappointed that the president habit been willing to push this as the sensible way to go. he's stepped back from this

obviously hugely important fight. maybe he thinks the republicans will just make a fool of themselves and that's enough but i don't think... i mean, americans expect the president to lead and i think he should. >> rose: we conclude this evening with steve roberts and cokie robertss and their new book "our haggadah." >> one of the odd dis here is that while they objected to my marrying a catholic, the first seder, the first passover that my mother ever went to, was at her catholic daughter-in-laws because she never grew up with that tradition. and in many ways i couldn't have predicted it, but marrying a woman of faith made ritual and faith and belief more a part of my life and in many ways i'm a better jew today because i married a catholic. >> these religions are so intertwined and christianity is so completely based on judaism and that's another thing this little book is very clear about. and we both think of this learned a lot as we were doing the research about how really

very closely intertwined they are. >> rose: martin wolf, steve roberts and cokie roberts when we continue. every story needs a hero we can all root for. who beats the odds and comes out on top. but this isn't just a hollywood storyline. it's happening every day, all across america. every time a storefront opens. or the midnight oil is burned. or when someone chases a dream, not just a dollar. they are small business owners. so if you wanna root for a real hero, support small business. shop small. captioning sponsored by rose communications

from our studios in new york city, this is charlie rose. >> rose: martin wolf is back at the table. he is the chief economic commentator for the "financial times." while the budget battle continues in washington, europe struggles with its own debt crisis. portugal became the third country in the your zone on wednesday to seek financing to relieve its debt. we want to talk about the global economy, debt, and inflation and so many economic issues and none better to discuss that with than martin wolf. i'm pleased to have martin back here at this table to make sense of it all. welcome. >> it's a great pleasure. >> rose: so let's talk first about the overall picture of the global economy. you've been to china recently, you've been to washington recently, you talked to the secretary of the treasury and the chairman of the federal reserve so man we want to talk to you. >> all in all i think economy has been going reasonably well. the i.m.f. is clearly going say

in its world economic outlook out next week that the economy's expanding at more than 4% a year they expect exactly the same as they forecast six months ago so it's absolutely on track. they expect a similar performance next year. the emerging economies are if anything overheating but they're very, very vigorous and robust, china and india. the u.s. is also recovering very satisfactorily. we're seeing a good picture. and in core europe, germany's doing great. so if you look at the whole world economy for the first time we can really see ourselves coming out of the crisis. >> rose: do you see some threat to it because of the possibility of oil prices going over $125? >> there are nothing but threats. the oil market is obviously one. what could happen if there's further serious instability in, say, saudi arabia, extreme shock maybe much over 125. there's a big concern about overheating in emerging economies. they're beginning to worry about inflation. are they going to tighten too late in if they tighten too late

will they end up having to tight an great deal? there's clearly concern about what's going to be the resolution of the various budgetary crisis in the u.s. the big issue, obviously, being the debt ceiling question which will come up later. then the euro zone crisis clearly has the potential to get much worse. if it gets to spain it could spread further, possibly even to italy then we're talking about a really big crisis. there are plenty of things to worry about but right now we would have to say the underlying picture a quite vigorous and satisfactory world recovery. >> rose: demand is back. >> demand is coming back. too much reliance on fiscal stimulus, fiscal support but demand is undoubtedly coming back. >> when you look at inflation is there a consensus about its danger? >> no, it's very far from a consensus about its danger. in fact, it's not a consensus about anything, almost. it's clear that in the u.s. the fed as a whole is pretty relaxed

about the inflation danger, it doesn't see the policies it's pursued as creating real inflationary risks. it's not concerned about commodity prices, either. it considers that sort of an exogenous shot mainly driven by real things, demand from china. in europe, we know they're concerned about inflation, it's just raised rates so it's obvious. in the u.k. there is a big concern about inflation. we are exceeding our inflation target dramatically. so there may be tightening. i would stay u.s.is probably the part of the world which is the least concerned about inflation at the moment but even here there are people worried about it. there is no consensus on the underlying inflationary dangers. >> rose: let's talk about the debt ceiling. how do you see it and what's likely to happen? i realize economics is your game not politics. >> well, i've always believed in the churchill's famous cliche that the u.s. does the right thing in the end though not before first exhausting all the alternatives. i cannot imagine that the u.s.

will voluntarily, as it were, allow itself to default on its debt. therefore in the end, after much fudging and fiddling and i understand from my discussions with washington it could go on for some months while they hide it, in the end the debt ceiling will be raised and a deal will be reached. obviously if the debt ceiling were not raised we are in a sort of armageddon territory because we know there's a huge fiscal deficit, we know the u.s. government has to borrow and since you would have to close down or it would actually is to default. that's unimaginable. so i take it for granted in the end the pressure on the politician to do a deal from finance, from wall street, from the whole business community, from the world will lead to a solution. this is all political. this is surely political theater. >> rose: it's easy to say government shutdown but when you look at the reality of it, it affects everybody's lives, the lives of their children. >> that's why it can't happen. not for long. i mean, it's surely... it's

important, of course, for somebody coming from outside the u.s., this is all inconceivable. it couldn't happen. it is political theater but really you cannot close down the government for any lengthy time and you cannot allow your government-- in this case the most important issue of financial securities in the world to be unable to continue to issue them. so this is a problem that does have to be fixed. now, of course, i cannot judge the politics of the new intake into congress. the tea party people and so forth. so i don't know how farther willing to push this. but it would seem to me there th there has to be a deal partly because the other alternative is unthinkable. >> rose: well, the question is also how far the speaker of the house is prepared to part company with them, too. >> yes, but he also has... they have to go with him to some degree.

the... there has to be some consensus among republicans that they won't allow that to happen. now, of course, if they would rather bring down the government in order to make a point about the government and they think that's political vacuous, they might do it but it seems an unimaginable outcome. >> rose: they're negotiating as we speak. >> as i understand. >> rose: what is the impression around the world of the united states and its future? >> that's a very interesting question. i suppose it's... it's complicated in the following ways. people still regard the united states as the most innovative, creative, ultimately forefront economy in the world. there's still tremendous admiration for u.s. business and what they can do. two, the respect for the u.s. government and the u.s. financial system has clearly been very badly affected by the last four years.

>> rose: government because of dysfunctional and financial systems because of the collapse? >> because the government was dysfunctional because of the wars that were seen as not very well fought. because of the financial crisis. you go to china, go to india people don't have the same respect, the same belief that the u.s. knew what it was... knows what it's doing. that you can rely on it to run the shipell. one of the strange things about the story and looking at the chinese is that the chinese really did rely on the united states. they really believed that the u.s. economy would go on growing like mad, they could sell all the goods to them. of course it could be argued that they couldn't but they really trusted the u.s. i think they have lost that trust in the competence of the u.s. that will take quite some time to return. there's no doubt about that. when they look at the politics of it they say well, we really no longer know. i think what most people around the world... we don't know what the u.s. is going to look like five years from now. is it going to be somehow radically transformd? when you look at chairman

chairman ryan's proposals, this is for a weakened american state. is that real or not? so i think we would say that the u.s. as we thought it existed, as we thought it existed in the post-war era and the post-cold war era now around the world people are saying well, what is the real u.s. now? where is it going? and that sense of uncertainty i think is quite pervasive. >> rose: and how about the opinion that people in a general way have of the president? >> well, as everybody knows he's vastly more popular outside than t country than inside although i'm told he's got a little more popular in the last few months. generally people outside this country-- though he doesn't have the sort of megastar appeal he had in the first few months-- but generally people think of him as an intelligent, thoughtful, competent realist, balanced, pragmatic, quite cautious, dealing with very

difficult times and adjusting his country to the reality which is that it can't do everything it wanted to. the moving away from the hubris of the early bush years. i personally think though there are lots of problems all that is very sensible and we admire that. we rather admire him. we think this is a grown-up leader. we want a grown-up leader. >> rose: we made the more adult nrs charge, do we? >> we want adults. because the u.s. is in some sense everybody's adult. that's what we want from the u.s. we want the u.s. to be the responsible adult. and that's how he appears to be. >> rose: in my little travels here's what i hear that. they want the united states to lead but they also want to be listened to and they want to share. >> that is right. well, that seems to be sort of obama's personality. in the case of libya, as he said, we'll lead a bit and this now it's up to you. that serves us right. but actually the president is somebody, i think still in europe and in asia people have a lot of time for this persona.

so i don't think that's a big problem. of course, if he can't run the u.s., he can't have a budget, if he can't... then it doesn't help very much. but the concern is not about him it's about the way the u.s. as a political community is now functioning. >> rose: in other words, there's a concern about our inability to put our own house in order because of political dysfunction? >> yes. deep divisions, profound ideological conflicts and really obviously fighting debate which is going on about what sort of country the united states is to be. >> rose: speaking of that, what do you think of paul ryan's proposals? >> well, i mean, when i look at them in detail and i spent time looking at the congressional bought offices detailed analysis they seem to me sort of fantasy. so i can't imagine that this could ever happen. the most frightening feature is that essentially the u.s. government will largely get out of health care, not completely. but the more striking figure was the one that i just noticed just now that the total spending by

the federal government, outside health and outside social security, not an outside interest, so everything else, defense, everything else, will go from 12% of g.d.p. now to about 3% of g.d.p. in 2050. so essentially most of the federal government would under those proposals as i understand them disappear. i cannot believe that it would be possible to reverse a hundred years of history in that way. so in that sense they're incredibly radical. deeply radical proposals and they would amount to the dismantling of most of the federal... >> rose: but at a minimum it gets the conversation going. >> but this is the point. it's a very serious radical proposal in the sense that here he set down something which clearly would change the game if implemented the way the united states operates as a political community, the role of the federal government of the united states will be transformed and that is... he's putting his money in where his mouth is in a dramatic way so in that sense it's honest and exciting.

it's not cheese pearing a few billion dollars here. >> rose: and the idea used to be that all the republicans would talk about was discretionary spending. >> yes, that's not true anymore. >> rose: and he comes forth and says everything is on the table. so what do we have to learn from what david cameron and george osborne have done? >> well, this is sort of very british pragmatic and not very ideological. they came in-- rightly or wrongly-- they were very frightened by a deficit which was as big as america's. we were very concerned about what happened with greece and portugal and ireland so they decided to cut. we have got a structural fiscal night ng of 8% of g.d.p. over the next five years. this is huge, obviously. it's just starting now. it includes some tax increases. about a quarter is tax increases. the rest is spending cuts so rather similar to what your commission proposed. now we're going to see whether they can implement it. and what affect it will have on the economy. it's a great experiment. it's only just starting.

>> rose: whether they can implement it has to do with political judgment? >> that's right. obviously the economy collapses under you it becomes more difficult to persuade your troops to continue with the cuts. >> rose: does it make economic sense to you? economic sense? >> it does make economic sense but i regard it as extremely risky. in a sense there are logical arguments for it. economics is a very, very uncertain science so it could well be the right thing to do. my argument throughout has been you have to build in flexibility into such a plan. you have to see what happens to the economy. if it turns out the economy collapses under the weight of the cuts then you have to have some way of slowing down the process while remaining credible in the longer term. i think that can be done. >> rose: how do you build that in? >> you could announce that if the economy performs then you'd have tax cuts. why not have tax cuts? perfectly reasonable in the present situation. the emphasis really is on cutting the spending. in the meantime we can sell debt very easily. if we had temporary tax cuts on employment, taxes, for example,

we cld support employment, increase the support from the government for the economy quite easily. i think some flexibility would actually make it more plausible. it's too rigid. nonetheless it's clear that over some period, maybe not five years, certainly over seven years, we have to get rid of this huge deficit. i have no doubt about that. i admire their courage. >> rose: does growth suffer because of austerity? >>. >> the answer to that is it depends. it depends on the circumstances. nibble the current circumstances in the ushg the answer is yes. growth will suffer. and the reason is that the offsets we would normally have-- lower interest rates, we can't lower interest rates below zero, bond rates are very low, demand in the euro zone, our biggest trading partner, is very, very weak. the private sector is very cautious and our household sector is massively overleveraged even more so than the u.s. household sector. in those circumstances-- not in

all circumstances-- i believe that the austerity will prove contractionary. you have to judge. economics is a great deal about judgment. you have to judge your particular situation. so right now i believe in the u.s. it will probably be contractionary, to. but i think the u.s. these start. i'm not suggesting the u.s. can run the deficits indefinitely. that would be unwise. >> rose: not only unwise, it would be deadly. it would be deadly. >> i think you've got several years of time but it's clear the u.s. needs a fiscal plan which explains how it's going to go back into balance in that sense the chairman... mr. ryan's proposals are what is needed. of course the u.s. needs this plan, too. >> rose: so what about bowles-simpson? >> well, i'm not an expert but that struck me as a very sensible start. and it had a sensible balance

between revenue enhancements and spending cuts, it proposed a tax reform so you can... it seems to me very special and i'm surprised they don't want to implement it. that's the division of america. >> the interesting thing is that is where the american debate ought to be. somewhere between bowles simpson on the one hand, which is in the center, let's say and on the one hand of ryan, which is dramatic and something maybe on the other side which would suggest tax increases and revenue enhancements wherever you could find it. >> yes. i've expected the president to pick up bowles-simpson and run with it and say "this is the sensible plan, this is where we should be going, this is what i stand behind, this is what i really stand for." i found... i don't understand the politics of this very well but i have been surprised and disappointed that the president hadn't been willing to push this as the sensible way to go. each step back from this obviously hugely important fight. maybe he thinks the republicans will just make a fool of themselves and that's enough but i don't... i mean, the americans

expect the president to lead and i think he should. >> rose: it has something to do with his judgment about timing. >> of course. he understands these arguments better than i do. but that's what i hoped for. >> rose: i don't know whether he would fully support bowles simpson or not but he has not spoken to it, which suggests that he believes it's not the optimal time. he wants to see everybody on the table and then come in. >> that may be right but over the next two or three years it has to be done. >> rose: portugal appeals for e.u. bailout. >> yes, well... >> rose: greece appeals for bailout. >> spain is in trouble, we call it financing, not a bailout. they're going to pay it all back be. it's on a bailout if they never pay it back. >> rose: your headline writer is wrong? >> bailout is short. when is a blout a bailout? >> rose: tell me about what the economic health of europe is? >> we have a very divided european economy and it's very important...

>> rose: germany is different from portugal? >> not just germany. the netherlands, austria, finland, even france, very different. the weight of the euro zone economy is doing quite well. not very well, but okay. it's growing. they're coming out of the crisis. these tiny countries. >> rose: so-called pigs. portugal greece... >> well p.i.i.g.s. the count these have so far been saved-- greece, portugal, and ireland-- are very, very small. they have no weight in the system. their debt is quite moderate but anything that happens is incredibly painful for their citizen bus not a crisis any more than it would be if it were rhode island in difficulty. these are small places. now with spain you're talking about something quite different. spain is a big country. italy is a big country. so one of the biggest things is to ensure the fiscal crisis does not get to the bigger countries. that's one of the reasons they're resolute that they won't

allow debt restructuring. they thing once debt defaults in a small country people will start saying well, it could happen elsewhere. we're not going to finance spain or italy and then they're in terrible trouble. so it's really about building firewalls and the real question is will the firewalls hold against the spread of the fire into spain and beyond. the moment spain looks okay, the spanish have done a lot, the economy is stronger and the debt... ability to sell debt seems to be okay. but if that's... that's definitely not certain. if spain were to find at some point politics, economics, the economy isn't recovering, the revenue isn't there, they couldn't easily roll over the debt, then you're talking about a very different problem and as soon as we start talking about debt restructuring there's a real risk the contagion will spread further and there are some things that will be unmanageable for the system because the germans and others couldn't support it. >> rose: so what should the e.u.

do? >> well, i think they should have had a comprehensive plan from the beginning and the comprehensive plan needed more money. they had to have the ability to have a larger liquidity fund. they should have been willing to consider debt restructuring in some of these countries because it's going to happen and above all-- and this is the most important thing they failed to do-- they had to clean up their banks. they've had these pretend stress tests, everybody knonono they're pretend stresses. nobody knows how healthy the banks are. and it's like the latin american debt crisis. we pretend in mexico we pay the money back in order to hide the fact the citibank was busted. so that's going on here, too. i think you have to complete. but if you're going to come clean, you have put the money up front and to do that you have to admit how big a mess they've made of this and that includes the german government and they don't want to do it. >> rose: you're going to admit a mess of this in terms of fixing the problem? >> in the sense that they were part of the problem. they allowed their banks to make these loans. they allowed undercapitalized

institutions to make risky bets in lending to... >> rose: for real estate? >> buying government bonds, they bought government bonds because they were supposedly slightly higher yielding but just as safe as german debt, not as crazy so they were buying spanish bonds and a lot of it was not in portugal but in spain and ireland was commercial real estate. their banks funded this madness and now they don't want to admit they are trying to force the irish to pay it back even though that's pushed in ireland's case the debt ratio has gone from government debt from 25% of g.d.p. it will go up to 125% of g.d.p. think about that. it increases the debt by $14 trillion. the same thing. just to bail out their banks! now that's unreasonable. the irish should have let these banks go. and they should not have been expected to borrow this money on the public account to save banks most of which are in the other

european countries. we need a comprehensive cleanup and one of the good things the u.s. government did looking back on two years or three years ago they did force at least a much better cleanup of the financial system. the europeans have not done that. and we're paying a price. >> do european countries need to change their social compact? >> i tent to think that they have to modify their social compact. and some countries have done this satisfactorily. italy has done this. they have to bring under control massively bring under control their spending on pensions. that's the thing that's most honorable. the health spending interestingly is generally rather better under control than the u.s. side. cost contain system built into the system. pensions have been the big issue and the support for the unemployed there has to be a more radical scheme to get people into work. but i think of it as an ongoing process of modification and this

has been going on for quite a long time and it's a permanent... >> rose: the modification was in france, we're talking about two years difference in the retirement age. >> well, most countries in europe are moving towards pension age of 67. france will get there. it will happen kicking and screaming. it will go there. so i just think... nothing is root and branch in europe, it's all incremental. but i'm not... if you look at the underlying fcal posions of european countries they're difficult but on the whole not worse than here. >> rose: and the european... the euro will survive in entirety? every n every... >> i'm not sure. >> rose: really? >> i... my... if i were asked this, i think it's more likely than not that the euro will survive in its entirety. much more likely. but if i were told that five to ten years from now there were some countries-- not many-- that were no longer in it, i wouldn't regard that as a totally

inconceivable outcome. in the end the question is how much austerity and for how long can a political system bear? we're going to see this over the next few years in portugal, in greece, in ireland. at some point you don't know where politics will take you. it might take you to a government that says enough of all this, we're out of it. i think that's a very low probability but it's not zero. >> rose: so who are those countries? >> well, greece, portugal, ireland. i think sirld the least likely. ireland i think will get through this. then the other side there's the german side whichis that the german elite wants in, german business wants in, they believe in it passionately but if the bill gets big enough to the german taxpayer you don't know where the politics of that have will go. again, i believe the german population will always remain committed but i've always taken the view that if anything that that happens here is seen by germany or other countries as seriously threatening its own

fiscal soundness then, of course, the support won't be there. so there's sort of a pressure on the very weak country in the periphery, can it bear without the devaluation, without the currency collapses, can it bear to keep going? and then there's the strong currency countries which are providing the money. and they don't like this very much, just think what would happen if you had no federal government and you had to save the financial system in new york. new york would be bust. would the rest of the state have supported new york? probably not. it's the federal government that did this. so it's ultimately this is a political compact. and by its nature since it's a political compact among states, such a political compact is always breakable. >> rose: but some argue that it not a political compact at all, that it's simply economic. >> it's quite clear it is a political come pangt but it's a weak one. it's like the situation you had before the constitution.

it's essentially a confederation of states. they have bounding treaties among them. they have... >> rose: on economic issues. >> on economic issues but that gives... those economic issues are very far ranging. now, of course, they also have some in foreign policy and so forth. but, of course, it is a confederation of states which have much sovereignty as well. it's a very retro genius sort of structure. but i do agree where the basic premise-- and i've always said this, i wrote this 20 years ago-- in the end, i believe, which is one of the reasons i thought we shall stay out, in the end it seems to me that this will survive if and only if you move toward some sort of federation with the federal government. you will need that at some state. and i suspect the current crisis is the crisis in which that sort of reality emerges. and it's not clear how this will play out. >> rose: a federal government of

europe? is that what you're saying? >> well, there will have to be... >> rose: with its... >> there will have to be an entity of some kind which has fiscal powers. >> rose: how's it different the european union? >> that would... it would mean it could raise revenue of its own. it would... it might be the heads of government but there would be greater fiscal powers of concern. hang a currency union with a financial... with a banking unions which why i made this new york analogy, you couldn't run a financial system across the u.s. without a federal government and i think same is probably true for the european union. >> rose: looking back at the financial collapse, what was the most important lesson for you? >> the most important lesson for me was quite simply that you can't trust the risk management in the financial system. that... >> rose: you can't trust the bankers with their own definition of risk. >> they have incentives to manage risks in ways which are not necessarily the incentive that you in society at large

would have because there are risks that you might find perfectly reasonable to run from their point of view but the spillover effects of those risks that they got wrong could be an economic catastrophe so there is a profound public interest in ensuring that the risk management propensities, risk-taking propensities of the core financial system are contained in some way. that seems to me the big lesson. >> rose: do you believe that financial reform has accomplished that objective? >> i would say that it has moved us in that direction. >> rose: moved us in that direction. >> we will have to see the next crisis to know whether it's moved us far enough in that direction. but i think broad outlines of what we've tried to do, namely increase the amount of capital they have and the loss absorbing capacity of the system move a lot of the trading into exchanges, improve the capacity to resolve broken institutions, to put them through a bankruptcy

process. these were the right things to do. the question is we can never know until the next crisis whether it's been enough to prevent another such repeat. financial crisis are a recurrent feature of capitalism. we're not probably going to eliminate them. but we've had far too many of them and the real test is are we going to make them much rarer events in the future. >> rose: is it a fair statement we don't learn those lessons very well? >> we don't. one friend of mine once said it's not true we don't learn from history, we do and then we forget. >> rose: (laughs) >> the current generation of regulators it's clear from my discussions determined this won't happen again on their watch. and they're probably too cautious. the real problem will arise when these bankers have gone and then they'll have another go and the question is whether we've got a structure which is more robust

than the system turned out to be and we won't know till then. >> rose: someone said to me that they thought everything will be fine until the last person is dead who was involved in this crisis. >> absolutely. >> rose: when that person dies then you'll have another crisis. >> that's why the crisis started in the '80s because everybody who remembered the 30s was dead. the 30s were so bad people still remembered it for 40, 50 years. >> rose: once they were all gone... >> nobody remembered. my dear friend peter bernstein was probably the last. he died in his 90s. >> rose: (laughs) >> that's true. don't forget most of the traders are under 30. >> rose: exactly. and very rich. maybe less so than they were but... >> above all they want to get rich before it falls down. so they have a different time horizon from the rest of us. >> rose: you sit on a commission in the united king come that is making judgments. raise the question so we can

understand what the debate is. >> the u.k. is the home of very, very large global banks. their balance sheets, the total balance sheets of these banks are roughly five times our g.d.p. and there are only very few of them. so imagine the five biggest banks of the u.s. and you know roughly who they are, j.p. morgan and so forth had a total balance sheet of about $70 trillion. that's the equivalent. and the concern is if these institutions get into trouble the british government couldn't support them, it would be too much to bear. so we are considering structural solutions to this which make... which limit the potential damage to the economy if there were difficulty and at the same time make it more plausible that large parts of the... these

banks, if they got into difficulty would fail without government bailout. this is the two... these are the two things we're trying to do. the last it will make market forces more powerful on those institutions and the former will protect the british state from the extraordinary vulnerability created by the here is scale of their banking institutions. roughly speaking our banks, our major banks, are five times bigger relative to g.d.p. than the u.s. banks. so that means for u.s. the banking system is always something that can be unpopular but rescued. there are circumstance but we have one of the highest exposures to the banking sector of any country on earth. >> rose: so the commission will consider that idea. it's too large and secondly whether it ought to be divided in terms of functioning. >> we will be considering whether there are structural changes. we have a specific mandate, a structural and related non-structural change which is will me the banking system more stable and more supportable

by the british state. >> rose: the question is what kind of financial activities these banks should be engaged in and what should they not be engaged in >> well, it might be or alternatively all... maybe one of the issues might be to be raised by our chairman instead of... they can still do them all but with different active's the will be separately capitalize sod that they can be broken up separately. that's another alternative way of doing it. it's a question of managing the risks caused by these institutions for the country but also managing the risks within those institutions in such a way that it in some part fails the other part can survive. that's what we're trying to look at. >> rose: one of the conventional wisdoms in the american economy and the collapse was that the financial sector was too big. too large a share of the economy. >> i think that was true. but our financial sector is even larger. >> rose: that's why i'm telling

you. >> partly because in addition to having a large financial sect orel i have the to britain, as you do we are a smaller part of the world and we have banks operating throughout the entire world. so this is a gigantic business. >> rose: barkleys was here this week. >> well, he's running a very, very important global bank which has a british presence. >> rose: and he's very nervous about what your commission might... >> well, i can't possibly comment whether he's right to be nervous. but in the end you have to recognize... these are important businesses, i have nothing against the businesses. but a state has to manage its own risk about the economy. it has the responsibility to the citizens which are over and above its responsibility really to make life easier for particular banks. >> i've raised the dharns are in our terms of reference and in our in the speech the chairman

has given so i haven't told you what we're going conclude but the issues are fundamental for the british. >> rose: you've traveled to china. what is your point of view as to what china should be doing and not be doing. >> what the chinese are trying to do seems to me the right thing. they are trying to transform their economy they're trying to make itless dependent on industry and more dependent on services. less polluting, more efficient on using energy and less dependent on the world market. >> less dependent on exports and more dependent on their own demand market. >> they realize extraordinary suppression of consumption, more of the welfare of increase in output needs to go to chinese consumers. they need, in other words, to make this an internally generating self-sustaining consumer led economy as the u.s. was in the late 19th century.

china is too vast to be an export-led economy. that is clearly the structural objective. these are the structural objectives. the problem is they got an incredibly... as the premier said, unbalanced, unsustainable, uncoordinated system. can they do this? politically, economically can they pull this huge shift off? i've been arguing for years they've gone in an excessive direction in what they've been doing. this made their economy in certain ways very vulnerable. >> rose: meaning they can't sustain the growth they're on. >> growth which is driven by an ever-rising investment rate does create really big problems. >> rose: do you understand why they won't let their currency depreciate. >> i understand. >> rose: do you agree... >> i think that... >> rose: do they understand at it means for other countries? >> i think they understand that. to be fair to them, they are now appreciating about 6% a year. wages are rising very rapidly so we what we call the real

exchange rate is appreciating quite considerably. they are trying... i am optimistic, more than optimistic that as inflation recognizes in china where we started this conversation they will recognize because they hate inflation. it's more important to lower inflation by letting exchange rate depreciate than it is to worry about the fate of exporters. thatight mea this appreciation will... but i've been very struck in my considerations with the treasury that the u.s. is becoming more relaxed. think think they're going the right direction. they think they understand the arguments and that the export lobby is weakening but of course the export lobby is fantastically powerful in a country that exports more than china does. >> rose: and when you said to them they need to use their influence in the global economy, what do you mean? >> china is becoming willy-nilly. we don't like it but it's a gate global power. the world's largest exporter.

it's far and away... >> rose: 30 years it will be the largest economy. >> less than 30, i'm afraid. much less than 30. less than 20 would be my guess. the... it's far and away the world's largest importer of raw materials so it has a huge impact on the world. what i'm saying is that china has to work through how to manage that impact in the global contest and we have to work through with them. this is called the responsible stakeholder. the big issue to my mind is resources. it's the use of resources that could face potentially a massive conflict ahead between us and them on who gets the resources. >> rose: which resources? >> oil. >> rose: because they go around the world... of course >> of course. look at their economy. they're going to want the oil oil we want. we need to expand supply. we need to aavoid conflict.

this is going to be very bigish big issue and looking decades a. how do you manage the world shift to industrialization. >> rose: always great to have you here. thank you. martin wolf from the "financial times". we'll be back. stay with us. >> rose: steve and cokie roberts are here. they met as students when she was at s wellesley and he at harvard. they had different religions over terz t years their individual feiths have fortified their relationship. "our haggadah: united tradition through interfaith families" is a new book they have written together. i'm pleased to have these journalists and partners of 45 years with a bunch of grandchildren joining me now from this program.

welcome. >> charlie, always so good to be with you. >> thank you so much, pal. >> rose: you, too, my friend. of all the things you might write about-- >> (laughs) and have. >> rose: and have, yes. why the? >> well, because it's handy. people all around the country and the world celebrate passover and this is a passover... this is the ril wall for passover. it's a book that contains the prayers of the passover service. and we have had a passover seder for more than 40 years and it's always been a mimeographed originally and then xeroxed sheet of paper that i wrote 40 something years ago and we had people say to us well, we'd like that do that, too, we'd like to have a seder, it's scary, we don't know how the do it. and how do we do a passover that's open and friendly to all religions?

so we did it. >> it's a universeal story. we've been joking that we want to thank our new press agent hosni mubarak. (laughter) talk about a modern day pharaoh, the whole message of passover is "let my people go" right? and there it was. the modern day version of that story for all the world to sea and the other driving force, charlie, is so many young jews, former students of mine and others, marrying outside the tribe and in atlanta, for instance, they told us that 70% of the young people in their congregations are marrying outside. for long time organized dutyism thought they could stop this by not sanctioning these marriages, by refusing to perform them. now they understand increasingly that they have to include these young families, not exclude them. these young families don't have a lot of models. they don't have rituals that combine their traditions. one of the main reasons we both wrote this book is because we saw in so many of our young friends a real hunger for

encouragement that it was possible to do what you're talking about. >> and speaking of hunger, there are also recipes. (laughter) >> rose: i knew that. let me ask one question, though. she's not catholic, she's a big-time catholic, a prominent catholic family. her mother would later be ambassador to the vatican. >> she was. >> rose: so this is... >> that's connected bill clinton to the pope. >> rose: was it... when you were marrying this lady way back when was that a challenge? was it difficult? >> yeah, still a challenge! >> rose: i don't mean... (laughter) i mean was it... how did you approach this notion of jewish, catholic. >> i grew up in a town that was heavily jewish and heavily catholic. i lusted after an italian woman my whole high school. but... >> she never knew. (laughs) >> totally unrequited. totally unrequited.

but it took a lot of time. it took a lot of tears and years to figure this out. my family was very nervous about it because as the minority they saw my marrying a christian as a threat to judaism and the traditions. now they were not observant jews but they were strong cultural jews. in fact one of the odd dis here is that while they objected to my marrying a catholic, the first seder, the first passover my mother ever went to was at her catholic daughter-in-law's because she never grew up with that tradition. in many ways... i couldn't have predicted it, but marrying a woman of faith made ritual and faith and belief more a part of my life and in many ways i'm a better jew because i married a catholic. >> they all say i'm the best jew in the family and i keep saying low bar. >> not a lot of competition. >> rose: and to the rituals and faith and understanding what's best about the cultural...

>> and also drag him to temple and things like that. >> rose: you drag him to team? >> yes, he said for a while my mother was right, i should have married a jewish girl, she would have never made me go to temple. (laughter) >> rose: so what about the kids and grandchildren? >> the kids were raised as everything. >> rose: your kids were raised as everything? they observed the rituals of both religion they didn't have to choose? >> that's right. steve always says everybody can... there's three ways, you can do both, you can do neither, you can choose one. i'm sure there are kinds of ways you can do this but for us i didn't see any necessity to choose. these religions are so intertwined and christianity is so completely based on judaism and that's another thing that this little book is very clear about and we both think of this, learned a lot as we were doing the research about how really very closely intertwined they are.

>> rose: for someone who's trying to understand, what should they get out of this? >> several things. one is that the whole passover ritual is accessible and universal. the story of liberation from bondage is not just... it's a very jewish holiday but also a universal story. we're seeing this acted out in the street of the middle east everyday. also they should get out of it a reinforcement of the notion that so many forces in society, whether it's clergy, your parents, your community, often try to pull interfaith couples apart. they discourage this. what we've tried to do is provide encouragement, models. just look at yourselves and find the common ground. find values you shared. don't let other people tell you that you can't do it. that you can find a core of belief, a core of common values that will guide your family, guide your children, guide your future and don't let people tell

you it can't work because it can. >> rose: let me turn to politics. >> we were trying to tell them that, too. (laughter) common ground, please. >> rose: that's your message about politics, too? common ground? speaking of that, tell me what you think the emerging issues are for the 2012 presidential campaign? if you look at the republican house and you look at the democratic senate and you look at the president in the white house and you look at these republicans beginning to test the water, what are the issues that will define the next two years. >> well, the economy is going to be the issue. jobs, but right now, of course, with oil prices going the way they are and real fear about what can happen next in terms of that because of saudi arabia maybe being a country that might have its uprisings as well, i think that the economy as long as it is not terrible then you start to look at other issues. but if it's terrible that's the

only issue. >> rose: if it's terrible it's over for the president. >> that's right, that's right. but a the moment i think the president's looking quite good. >> rose: not withstanding the fact that there's not... just below 9% unemployment. >> that's right. >> but there's the trajectory, charlie. the trajectory is getting better and what the president has to tell the american people system there's hope. optimism is the most important commodity in the american politic, bill clinton knew that. he learned that from rg, it's a totally non-partisan idea. if he can go into the election saying we've turned the corner, light at the end of the tunnel, whatever cliche, i think the other emerging issue i've been noticing is that the republican party is facing a real problem with the emergence of the tea party in terms of pulling them out of the mainstream. i was looking at statistics the other day. 44% of americans in the last election call themselves moderates. 44%. a third call them conservative. about 20% call themselves liberals. of those moderates, self-defined moderates, they voted 60-39 for

barack obama. when barack obama goes to florida and stands next to jeb bush and says "we're together on teaching" when he brings up jeb bush at a fund raiser in miami and people are cat calling from the democratic ranks, this is very deliberate on the part of the president. he knows what his target audience is. his target audience is not the extremes. washington is dominated by these extremes. but he's got his eye on the ball. which are those moderates. >> and i think republican candidates are going to have a real problem with that. because they're going to have to talk to the extremes and jeb bush is an interesting example because i think what you might find is in this cycle some republicans sitting it out until this mood dies down a little bit. >> rose: may not run in 2012? >> right. right. >> rose: moderates are the most underrepresented group in the american politics. in the u.s. senate in 2010, the most conservative democrat, ben nelson of nebraska, had a more liberal voting record than the

most liberal republicans snowe and collins of maine and voinovich of ohio. in other words, there was no overlap whatsoever. >> of course, we all remember a very different time. >> in 1982 "national journal" first started doing these statistics, 58 senators were somewhere in the middle between the extremes. >> rose: in 19 what? >> '82. 58 senators between the most conservative republican and most liberal democrat. and... most conservative democrat, most liberal republican. today zero. not a single senator overlapping. >> but you know what that tends to mean is that the voters who are basically in the middle say okay, we can't trust either of these parties so we'll elect both. and i think that... to check each other. >> rose: you think that's a real factor? >> oh, i think that what happens on... even if they're not going that insane unconsciously, one party comes in and overreaches--

and it happens all the time-- and the voters say okay, that's not what we had in mind. it happened in 2006, it happened in 1982, it happened in 1994. >> rose: 2010. >> 2010. absolutely. it would not surprise me if we come out of 2012, particularly given the fact that this is the first time since 1952 that the republicans have the house in the year that they're going to be dealing with redistricting that the... we end up with a republican congress, both houses and a democratic president. >> rose: do you think washington will get serious about the deficit? >> it's getting slightly more serious. but i think that... >> rose: didn't... >> i think that the current fight over the... this 12% of the budget that is the domestic

programs that you have some control over is so distracting at the moment that it's very hard to get serious. >> rose: the part of the budget is not either defense or social security or medicare. >> right. and those are the... of course the big items. you know, we could pave over washington. we could lease out the capitol as condos, you know? all of the buildings, agriculture, justice, et cetera, and we aisle'd industrial an enormous deficit because that's not where the money is. >> rose: the money is in those programs you're talking about. >> right. >> rose: but back to my question. when will they have the political will to deal with social security and medicare? >> it's a profoundly important process and i see tiny flickers, very tiny. i just noticed the other day saxby chambliss, a conservative republican from georgia and mark warner, moderate democrat from virginia have taken a road show around the country saying... the democrat is saying social security, entitlements have to be on the table. the republican is saying wref

knew has to be on the table. everybody knows both sides have to back off their extreme position. >> but they're two of six senators who are meeting and they're trying to... but it's not... the white house is not going go there going into an election and those new republicans in the house are not going to go there because they really have not apped tir minds around it of what needs to get done. >> rose: this book is called "our haggadah." captioning sponsored by rose communications

captioned by media access group at wgbh access.wgbh.org

no. well, it's just past there. first house in the right after the cottage on the l don't panic. brazen it out. me? - no. - right. here goes. yippee!