>> rose: welcomeo the broadct. tonight, a exclusive conversation, paul volcker, the formerhairman of theederal reserve weighs in on economi recove and the need for regulation. >> all reasons to think that this recovery will be slower. we've got this underlying adjustments to make. we can'tjust pump up consumption and pump u housing agai it might cry us for a yearor two, but, you know, the impalac gous into trouble in the first place. 've got to rk toward producing more goods, selling more goods abad, beg more mpetitive abroad, maintainin a decentrate of savin,

bringi budgetary... federal budgetary situation back into somethinghat's sustainab. and all tse things... and plus e financial market is wounded. thers no dou about that. and it won't recover from those wounds, dee wounds, for a while. >> rose:aul volcker partne for thhour. captioni sponsored by rose communications from our studiosn new york

ci, this is chlie rose. >> rose: we begin night with an upde on the health care debate in the congress. the senate finance cmittee, the lastommittee to take up form, vot today reject a puic option. presidt barack obama has puicly lobbied f such a pla though his admistration has clared it not essentialo form. five democrats joined t republicans to oppose a proposal by senator jay rocfeller. a silar pposal by senater chuck humer was also voted down in a closer 13-10ote. this vote signifies divisio tween moderate and liberal decrats and a lming struggle to unify democratic reform proposals in the weeks ahead. re's a look at the debate in the committee day. >> my jois tout together a bill that will bome law. in the senate, that means my job is to put togher a bill that gets the 60 votes. now, i c count. d no one has been ableo show me how we can count up to

vos with apublic nopgs the bill. >> a w government plan that's nothingore than a tjan horse for a single payer systemin washington. >> we need this optn because insunce companies have failed to meet their obligationsn this whole matr of how do you unrollealth care reform. the insance compies, in my dgment, are determined to protect their pfits a put their customers cond. >> rose: we will continue to follow this deba in the weeks ahead, bute turn now to paul volcker for this houro talk about the enomy and has advice toresident obama on the way forwar paul volcker is her, as the onomic crisis contues, many turn to him to uerstand the rapidly changing global onomy. he has had a remarkable carr in public service. he was chairman ofhe federal reserve from 1979 to 1987 during

which was widely creted with taming rampant inflation. today he serves as chairman of president obama'sconomic recovery advisory board. i verypleased to have paul volcker back a this table. welcome. >> tha you. nice to be here. >> rose: very good to see you. let's begin th whas transpired in thelast year. how did the government do? >> well, the governmt was faced with a crisis of proportions th haven't been seen sce the 1930s, anyway and when you got to the fall and th kind of exploded in a rate they certain dn't anticipate with succession failure and new failuresstarting with their cision to support faepld and faekd ich are alrea vernment supported instutions, this deteriorated and they react ve strongly at th point wit supporting the remaining investnt banks, a.i.g., the world's biest insurance company, the recapitalized or

began toecapitalize in tter of weeks the biggest banks in the united states. meanwhile ai broad sothing similar had been ing on, but basically the financialystem was tak over and support by thfederal government, a really remarkable event. and then as tngs have evolv, the vernment has proded not to sole sourceof credit in th the economy, but amangly a large proportion o the flow of credit throu the economy, which is minished, has been by courtesy of e federal governnt. so it obviouslyeeds a very big challenge as to ho you rtore at we think ofas a reasonably functioning private enterprise system, competitive, able to finance all business, big business. >> rose: did they make the right decisions in tms of the particular institutions,n terms of the dramatic consequences of e moment? i think they certainly made e right decisns in the sens of preventing collapse that could have been more severe in terms of the enomy.

you know, ter this. ... thdays in lat september, early octobe the economy did decline despite the fact that the financial institutions were botered up, the economy declined at thmost rapid rate ofpeed i have ever seen in the first quarter of this year, pretty much paralleled around the world. so looking at that experience, i ink you would have to say th were right in providing massive support. >> rose: so you give interpret high mks to bernan and geithner and pauls... >> facedith those marges they did what they d to doat the time. th complaints could behy did we g that situation in why did it that i caemergency action? why were ty faced withhat isis? >> rose:nswer your own question. how did we in our globaleconomy ghetto thatuation? >> wel i think two faors interacted. one ishe global economy itself

was quite unbalanced. we've talked about that before. the united stes for ten years has been a ver high consumion economy. it gave up on savings, basically it didn't do much historally termsof business investment and to satisfy o consumption habits, whic have required a t of input, we impord a lot, we finance that sending over dollars whichame back to us in the form of short-term financing in all markets. now, the ease that financing helped falitate a lot of finaial shenanins. >> ros yes. >> and as the built up over time, you know one of my favorite complnts is fancy financial engineering we got during thi perd where me very smart pple thought they had mana theomplexitys of the market to the poi that the risks we not great. they hadeen redistribut in a way that would not prese a challenge. and the market came under pressu, that did not prove to be the case. and i think that combination of

theind of confidence, the facade of confidence whichre developed by these financial engineers, they were very reassuring to these firms which we very richly compensated and they wenthead and to some big risks. >> rose: right. becae they had no restrictions on their levage. >> and now meanwhileyou can talk about the faires of the institutions, but you n ask where werehe regulators. but there w a. we weren't regulating in the days, the markets were going toake care ofthemselves. this is fr enterprise, self-correctinfree enterprise, efficient markets. and that, in fac, market operators themselves, it certainlaffected t attitudes of regulators. iff regulation would not hav been very popou particular the late90s and the early part of this century. >> rose: if in fact, regulators had used e regulatns that they had in handnd had applied

them, wld we have avoided the crisis >> well, you think you could ve avoided the serity of the crisis, but y have to ask whethethat was a realistic possibility. it would have taken vy vigoro and unpopular regulatory actio people thought ty hadfor instce, capital ruirements of banks prty high. they were as gh going into this conversation.. crisis as th've beenfor some years. w, could ty have been so high? s,ut it would havbeen, i think, problynrealistwrik think they could have shed them muchigher. xeplo all these thing after the crisis. 's a lot easier to them before the crisis. which is the perpetual probl of fancialegulators. rose: your reference financial engineering is th mathematicians and a lotf other people who did t have what skill? >> they didn have theskillf thinking. remembering tha they were human beings i markets. these things are not natural

events. they're not... you know, dependent of observation. it's not like a psicist looking at me event that follows nice, normal distributionurve. but theyhought they were dealing with normal distribution curves. that's what you lear in mathematics. anthey forgot. >> rose: ty couldn't fact knorr the human emotion. >>he human emotion. and th markets, what happens today affectwhat happens tomorrow. they're not rdom ents. but the whole phosophy of financialngineering is built up on the idea th these are l... any def united nations from nmal city random. >> rose: that bngs to this question two things that will or will n chan. one, t impact of financial gineering, and, b, whether, say, aa willhange its consumption habi and america will chang its savi habits. >> those are two big crections we havto ma. we won't have thsame, i don't think, confidence in financial engineing, instituons have learned someing.

and some of these diciencies are now prettylear. it's hard to change tha, because people wanto make moy and rely upon thisind of fancy manipulation. but i tnk haer think,es, is changing the consumption habits of thunited stes. consption habits of china, china's too ltle, we're too much. we need to save mo, chi needto consume more. and that was kind of the subject of the g-20 discussion ovethe last few days. it'sot just china and the united states but we're the two polar opposites and the two big countries inhis thing. and they talk very opmistically about how they would keep this under surveillce and they woul see what progress china'saking and increasing csumption, presumab seeing wha progress we'rmaking in increasing saving >> rose: is the chise stimulus-- whi is huge, $500 plus billion-- going to create a

consumption and a demand for chinese products? >> i think their forei surplu s disappeed... not dippeared, but it's been reducein the last year or so because their economy is surprisingly going faste than i think almost anybody projected. with huge imulus program. as you mention, their stimulus program is much bigger rative to theize of their onomy than ours. anwith a still importantly ntrolled economy, is had a bi impact and t rest of the worlisn't buying so much of their stuff andthey're imrting more so their surplus has disappeared. not disappeared. halved, maybe. >> rose: right. but i don't think there's been much proess toward that basic habit of consumption the chese are not ud to consing a lot. they have a lot me than ty used tout the populatio... >> rose: thehave more money to spend, but they're not. >> thas right. >> rose:hat about us saving >> recessions e supposed to b

rative. >> rose: right. >> think had some curative aspect. viously with the loss of rsonal wealth, the loss of paper wealth, the ss of housing valu in the united states people ar waking up to the desirability of doing a litt more ving. so thesavings rate i going up. it'soing... i don't know if it's as high as i should be but it's getting much closer to that. thquestion is, will tha remain so as peop feelbetter when t economy recoveries. that's going to be tough. >> rose: to cnge thoseabits. my father was a young m during the depression. he wld never borrow money ter the depression. paid100% cash f homes that he purchased. everything: ca, homes, never did... bought anhing on credit. >> yore supposed to pay 100 borrowing. i don't know how you... one extreme e other,right. >> rose: extly. so whad that period. whe are we snowed where are the toxic assets and what's

going toappen to them >> well, the toxic asss are wearing away with time and a lot ofhose losses have been taken stl a lot more to come. but i think we're at a phase n wherthe non-toxic assets are going bad if you thinkf the toxic asse of the ereme sprime rtgages and similar ver extreme loans and otr sectors of the economy, they are n the whole of the econo, they were important enough topset us, but ordinaryloans, ordinary mortgage loans, what wld have been considered good loans after a deine inousingrices of 30%, 35%, some o thoseoans are under water people are unemployed. so ty're in troub. consumer credilosses are ring. the biggest single...ot the largest, b the biggest single threat until credit area rig now is commercial mortgages

and because offe building pres and.... >>ose: commercial re este inrouble. >> commercial real estate in troubland that's only in terms of recogning the losses just beginning. so we still have a lot of... a lot sewage to wadethrough. >> rose: but as soon as you say that, as you know much better than i do, a lot of people with on wall stre are looking in rms of what their strategys for buying up deb >>ell, some of them are, and that's a go sign that they at ast have the courag to step in there and y some of this de which. some of whi i'm sure has pusd down the prices that are unrealisticly low. >> rose: right. so there's opportunity. >> it's a gd sign that pele arin there and some ofhe beginning to work.t stf are but one asct of people feeling a little better, ere are some people... is is not throughout the financialarkets but there are some where happy tes are

back again,e'll go back to t old habits. >>ose: this is exactly what was coming. securitization is taking pce? >> you see some of the activity on wall street. among other thgs, stock price have been very good recently. but you see oer money beginning to fl, the kind of thin that people are beginng to buy what may have beenoxic assets or untoxic assetst low prices. but i think what have to gud against, the reason as i understand it thathe president came up here a week or so ago, he said "don'tforget, wve had a major crisis and we're not through the cris and we've got a lot of reform to do, it's not time to go back to biness as usual. >> rose: just inerms of practice, are we going toee other bubbles take place inevably? >> well, the history of fance has been successionf bubbles. >>ose: exact lift nothing's going to change abt that. >> notng is going to change. you're going to have excesss from time to te. but this degree of excess is very usual. and it refcts those basic

unbalances that we were talkg out international and a combination of mathetical and computer developmes tha obviouy were not known the old days, they h their o waysof making excesse but thisarket has, as a result of the complexities, becom for opue rather than mor open, more opaque than transparent and all of that hasaded up to a crisis that's as big as any since the 19s. and we had a big recession in the early is the 80sut the accompanying complications wer not so great. d when that recsion was finally oken, the economy expanded very rapiy. i think it questionae how rapidly the economy will expand after this recession bause there's a lotof basic adjustments th have to be made. >> ros how long l it be beforee get the kind of economy that isrowing at levels above 4% and have unemployme decling, say,

below 7% or 8%? >> well, i don't wan to speak withreat conviction abt t economic outlook because forests are usually wrong one way or the other. bu i think there are reasons to think that this recovery will be slower. we've got esenderlying adjustments to make. we can't just pump up consumptioand pump upousing again. that might carry us for a year or two,ut, you know, the impalace that got us in trouble in the firstlace. we've got to work toward proding more goods, selling more goods abroad, being mo competitive abro, maintaining a decent te of savings, bringing budgetary. federal budgetary siation back into sothing that's susinable. and all ose thin... and plus the fancial market is wound. there's no doubt about that. an iton't recover from tho woun, deep wounds, far while. >> ros what permanent damage haseen done that can't be fixed, that will take a ile?

>> well, what's emerged as a result of those dramac actions lastall, hour justified, is they will themsels affect expectations a behavior. anthe thing that's bugging everybody these daysnd concerns me is this idea of moral hazard. thateople expect the big institutio to get bailed o by t government and the editors won't be hur some extent the equi holders re protected. not completely,ut they weren't wiped out. the only place that both the creditors and the equity holders were wiped out was lehman, which went bankrupt and everybody now thks that was a great mistake, ritly or wrongly. >> rose: and you think? about lehman? >> well, i think ift had been rescued somehow i think still think you would have had a attack on the othe institutions. >> rose: a.i.g. and fann m. >> they would have gone from one instution another. >>ose: you mean the investment bas and... >> it may not he been asad

t i don't think that would have cured t situation. i don't think the finger in the dike at lehman would have met we didn't have a serious.... >>ose: they argue that they didn't have the authority do at. did they? they being paulson, gehner... bernanke. >> i d't know. i sn't there. but i tell you th the treasury and the federal rerve have gone.... >> rose: you kn. >>... through wh we kindly call t very edge otheir legal authity. >> rose: thedid? >> yes. >> re: did they exceed it? >> well, that's always a questi of judgment. rose: (laughs) i'm asking of your judgment. >> don't think anybo's after... y get in ese crises u fin ways to he an terpretation that fits the circumstces. >> rose: give m the closest exple of that, where ty were right up against thedge. or crossed it. will,ection 13-3, famous section of the federal reserve

said i unual andxigent circumstances you can ma loans securiti to the satisfaction of the federaleserve. that in all practice has never beensed and wedidn't use it because we knew once we use it people would tnk you would use it ain. but that has been used to.. th says you can lend again good colteral. some of the things they've en dog, arguabl are cser to buying tha lending chhnya is oneexample. but they're in a formf a loan. >> rose: they ve no pblem th guaranteeing j. morgan's bayh of beartearns and e risk... >> well, that was straightforward one but still... even in that cas there's no recourse on that loan. >> rose: exactl >> so tt's a questionof is it a purche or a lo? that's comny example. butt's intpreted as a loa there are other examps. th treasuryas used me extraordinary powers andthe

federal reserve has bought commercial paper. the federal rerve is now buying lot of things in the rket. >> rose: a you say they shod shouldn't? >> wl, a lot of the things they're buying they should. somef them i ve no stretch of the la in buying lonterm government securities. they could alway buy lg-term vernment securities. as a mat over law thean buy secuties and they're bing pile of them butthat doesn't raise any.... >> rose: so what causes you concerns about the kinof things t federal reservedid? >> whaver theyid gives succor to the nt ititution that gets in trole and to theicreditors in particular and to their customers so that thes institutions that are deemedoo large to fail will be protected, which will lead to behavior that will be stabilizing. and ultimately, if they're certain toe protectedthey ll engage in behavior tt wi require that they be

protected. >> re: they'll take more risk and get betterloans at lower rates if everydy knows they'll be protected. in td, nobody's goin to let them fail. >> right. >> rose: so what wou you do about that? >>ell, that gets tothe heart of this reform exercise. the reformxercise is ver complicated and difficult. buwhat i would do is not change what's called the so-called safety net for banks. the sensitivity of banks wit their individu depositors d their central role in the financial syem has been recognized for 100 years or more. anall countries provide som protection for their commercial banks no mter how big and they particulay provide otections to the big ones because they're more important. >> rose: because they provide the credit that ns the economy. >> and there big and so they will affect thwhole thing. a small bank isn't going to affect much. you know, this is a problem that al smith worried about back in 1776. so i don't thi you're going to chge that overnight and probably shouldn't in these

disturbed circumstances. but i dot want to extendthat sense of protection beyond the mmercial banking system. i think commercial banking system is the co. they aren charge of the payment system. they r the payment which is which fundamental, moving moy around. they lend mey to yo and ir individuals. they lend noun sinesses and that's sll a very important function. ose are basicunctions. and that's why we protect them. i don't want toee thoseanks, however, takin a lot unnecessary risks. it's rky enough lending money, ey don't have to do a lot of trading. >> rose: but that's where the question of definition comes. when you said "i dot want to see them doing a lot of tradg is it ay to do lite trading? >> wl, a lite trading is less dangerous than a lot of trading. (laughs) >> rose: of urse but what is your definition of "a little" and "a lot. >> well, in some caseshere you can define it, should the own hedge fus? no. obously they own very few hedge funds, small hedge fund, it wouldn't make any difference.

but still create conflicts inrest. but the sa thing with equity funds, yesr no. >> rose: no, not... >> sam thing wit commodities which i understand they' playing with theseays. no. banks are not out there to deal in commodities and own commodities and own oil tankers anthat stuff. when it cos to trading, the argument is okay, se trading basically is related to customer needs a... you want throb to buy, if you bu from the stomer you've got to be able to sell them. so some trading activity is naral. but i thi at some point it goes fm being a natal part ofommercial banng operion to a pely proprietary trang. it has nothing to dowith your customers, in fact, it may competwith yourustomers, it may create a conflict with yr customers. it's your proietary trading desk and ty call it a

proprietarytrading dhaefk is out there trying to make mon on margins of trading, buy at $2 sell at $2.0 i or hang o to it and hope t price goes to $3. a reanable legitime actity bui don't want to support it with taxpayers'oney. >> rose: with respec to commercial banks who did not do these otherctivities,ou're prepar to recognize the idea of "too big to fail"? yeah. ll, you have to, yes, i think. now, that doesn't say i'm committed to any of these. i want some aiguity. >> ros this is beyond deposit insurance and all of that? >> i think you can have a little constructive ambiguity here. but i can'thut off the possibility th if a really mar financialinstitution unexpectedly got in troubleou might ha to put se government money in. >> rose: make the decisionsthat the federal resee made during thlast year? >> at the time, yes, absotely. now i wa to avoid that for stitutions that are not banks. >> rose: i uerstand. but don't you also sayhat in

some cas it may be that one of those institions that areot banks have su immense consequence that if theyere abt to fail, you ought to save them? or not? >> well, i'm not very easy to give the authority to ve those institions. >> rose: wt would you do if a goldma sachs or something like that go so big tha the consequences of it failing-- ke the conseences of.i.g. failing-- uld have ormous consequees. >>s th propol on the table in geral form anyy, which i support, which the administtion supports, which foreign goverents generally support in concept. a scalled resoluti authory. now what is th resolution snort if you seene of the institutions othe brink of failure, can some government agency be authorized to step in, as you can in the banking world. some agency step in, have the authoritto deal withat. he'sot a lot of things he n do. the equity may be gone, maybe he ght to be able to rce exchanges ofebt for equity, which was not much done this time

if you can do thathat takes care of a lot of contingencies. try to merge the norgsan area where you arin full control, u don't have to worry about the stocolder interest because th's already gone. if push coming to shove u can liquidate the oanization and we oughto work toward some condition where the organization suoena prepared f that eventuality in termsf its connection with the rest of the world. so that you mimize the impact, what happened during lehman where one ofhe big impacts was to undermine money market funds beuse... particulay money market fund haa lot of lehman par andouldn't meet their professored oblation to pay it par. so we want to minimize that with a degree of regulion. and fo these really... i don't think there are very many of these institutions. there are some tt are some so big they mightn the face of it present a a threatf they nt bad.

there ought be some regulatory authorityover those institutions. it could be fairly simple. what is your capital requirement, what the leverage requirent, what is the liquidity requirement? you don't to have day to day regulation the way you dofor a bank, in my opinn. >> rose: but would you change theliquidity requirement an threv reg a risk ratios? >> wl, it'something in banking... yeah, y'd certainl look ait. d they're looking at it now. that's a nmal regulatory responbility. in extreme cases... and th non-banks i would look at , yes. >> rose: y said the regulatory proposal presentedy secretary git nor theame commiee you testified right afr he testified had practil an conceptu difficulties. are their r their co seven which you will and praical difficultys? >> that's a reference to... i don't know what you call the heart of their proposal but an important elemt of their prosal is to say we willake syematically significan institutionwhether or not they're banks, and subject them to i guess uniform... not quite

spelled out, b the same relatory standards, the same supervisorytandards we wou ve for a big bank. no my problem is ifou do that, firstf all, i don't ow w you ideify those institutns in advancementsome of them are easy, but once you get beyo the first four or five, i don't know wherehey are. it's notust a matterf size because they wld have to identi them. and bringing the into the tank, so call, you are plying... i don't knowf you're saying. legally i don' know how you'd write the law but u're implying that they're going to be protected, too. itust says a bank would be because youut them in the same grp. so that's. i want the banks... andhey're doing things... i not going to prohit him from ading. i'm not goingo prohibit them... there may be a hedge fund. thermay be an eity fund. th're offthere doing their thing in the capit markets and i want to ve stance beeen them and the bankg systemhat they' going protect.

and they've blurred that. that's why. >> rose: here's anasy question: did you have full opportuny to express yr views on these sues before the administration decided what its posion was? >> yes. aughs) >> re: so they rejected your ideas? >> they rejected.... >> rose: on this particular point of separation? >> 9 of what they...0% of what they proposed no... y kn,here's no... >> rose: and 80 of it yohave noroblem? >> no. >> rose: and the 20% maiy is what they would alloto be too big to failersus what you would all and your basic seration is between commercial and trading? >> well, there another related area. which agencies are doing what. we all agree... i sometimes think i convinced them. (laughs) but i agree. we all think that there oughto be somebody overseeing the market not from the standpoint of concentratingn individua institutions, but ccentrating on t linkages between what

falls betwn the cracks, wha new developments are there tt need attention, this ris of the subprime morage is one thing. 's not because it was killing indidual ititutions. itas anunsafe and unsound practice. wasn't somebodlook agent it? why wasn't sebody looking at edit default swaps that got to be $60 trilln at one pnt. well they are lookinat that now and it a good tng. >>ose: but will itbe something else that th don't lookt? >> well, it's very hard to know what it is. bui think somebody ought to be given that responsility. and i think thatomebody ought to be the federal reserve. now, they pposed acollege of cardinals, so topeak.... >> ros did they propose that or did dodd p knees? >> well, dodd i think has proposed something regur. >> rose: a couil of regulators i think he calls it well, he' got a councilof regulators... i thinkt may be a significant difference. the treasury wod be the chairman. and e treasury would he a staff. that tt's one way you can do

it. th treasury would put the... put the treasuren that position b the treasury has n tradition, no staf, no expertise, professional background, no traditions in the area of banking supervision. and then i tnk, you know, you ask... the federal reserves a naral place. i mean, i assumed when i was chairman of the federal reserve th i had some rponsibility for erseeing the wholeystem. whether i had any explicit authority or n. beuse the federal reserve h a special ro. it's the only instition that, first of all, isindependent and has continuity, it's ofessional, it's involved in regulation and it's got money, which body else has, you know, to go running to congress wn there's anmergency. >> ros that's why it can do the things it did. >> that's why it can the things it di >> rose:ow didit come to want to put it somewhere rathethan the federal reserve? what argument, what reasoning led them to come to a difrent conclusion? >> i can't tell u all that but at they did was in this... whatever they call it, teal 1 or

something, these group of banks and n-banks, they said they will be survised in detail by the federareserve. so they gave t federal reserve... don't know if it's a bigger or smalle respsibility, but a big responbility for the detailed day to day supervision as i understand it of a mture of banks an non-banks. and i... first of all, i don't want the n-banksupervised that closely. but i think in the distrution of authoriti among regulatory institutions, it'really the federal reserve that naturally. that suld be surveying the whole wod, so to speak. it's the federal reserve that has the best, easie conntions with foreign regulators. it's importa. we don't discuss it, but aot the stuff we' talking abo better be pretty unifm. >> rose: everydy now knows thathis was a global proem. and that we need inthe future glob coordination. yes? >> uh-hu >> ros how does that manifest

itself? >> there is an organizaon, financial servicwhich is was renamed financial services board where the g-20 some time ago, presably to give them a little more cloud or someing. but this is an arrangement among bank supervisors, whether ceral banks or somebody else, that is designed to come to a conclusion o some basic mters bankingupervision and regution. beginning with capital. when ias chairman of the federal reserve bod, we really started it the and we had the fir capital requirements between euroan banks, american banks and japanese banks. and itwas by today's standd considered pretty crude but had the advantage of making them more unifo than they would have oerwise been. >> rose: that's whatappened in part, at will happen if you don't have some kind o coordination, then it's all going to flow to wherever the lowest level i >> and this sue will arise and the kind of outline have for the commercial banking sysm

there will b big complaint if other particularly european and japanese banks are not governed by... doesn't haveo be the same role dow to the lt dotting ofhe is and croing of thes buyou have to have a silar philosophy of theseig banks, philosophy of rulation or you're going to he a same old question according to the mo lax, most open regulators. >> rose: i terms the glol recovery, china and ind are going to lead the way or not >> rose: well, china and india happily, i gue, they're happier ading the y. >> re: and then their gross domestic product gwth is 8%, . >> well, i don't know if it's quit that high. rose: next year. >> but it' pretty goo right now to everybodssurprise. the part of the world... very unusual but it's symbolic t the change in the world. instead of the emerging world

being theardest hit by this isis, the emerginworld is comingut of itpretty well. now, the had built up big resees and so they weren'tso financially hit. >> rose: because they serve... well, you're bling up such grt reserves. mae they were wise too so, but the growth in the emerging world is quite remkable in the midst of thi turmoil. and th emerging world tother, u know,t's like that uned states i terms of the impact o the worl economy. couldn't have dreamed on that 2 years ago, 30 years ago. so that's gd. on the other hand it is symbolic or more an symbolic of the lative... less dominant position the united states has, not justn the economy t in leadership in terms of tellectual and otherwise. >> rose: okay, speak that, because that's a big point for the ture. >> well, it is and i don't know how we accommodate ourselves to it. i would like to think that ven the history, theast, gin the

strength-- actual and potential-- of t amerin economy, we can and still provide a kind of indispeable element adership here. but it's notoing to be dictatorial, ll tell you that and it's very hard to herd these ca together. >> ros well, you'r already benning to see some questions abouin the terms of leadership of these gbal financial institutions. >> well, you can see, you cannot beb depeent upon these countries for three or four illion of your debt. and think that they're going to be pass i observers. >> rose: the don't want to play a role >> and they don't want have decision making authority. they wanto be at thetable. they want to be at the table but coming to the table doesn't create consensus. look a the security council. (laughs) >> rose: wl, there's veto powethere. >> even without the veto power. >> rose: okay. but what should behe membership? should it... it's no longer going to be g-7, obviously. the g-20 was what happened in pittsburgh. ould it be the 29? because some people argue that

it's only g-2 in tend. >> actuay, whatever group you make,omebody.... >> re: somebody outde wants to b inside. >> it's lik the stitutions that will be outside ofthe trsury's propol. i want to be systematically significant proof. >> ros but the consequences for the unid states that financl leadership inhe world may be shiing.... >> rose: well you know. i grew up in the world where the united states is the leader and there's no question out it and when i had responsible positions in the united statesovernment, whher it's the federal reserve or the treasu, you know, gould to meetingyou were the chairman of the board, so to speak, wherever e seatwas. and i think these institutions need kind of cohere leadership. and how do you getit when the membship of the club is and ould be more diversified? >> rose:nd is it inevitable in your observatn that china and

e united states are going to ve different porities? >> well, i think hopeful thing is in a big sse, in the econom world i think they have the same priorits. china's growing, it's got to ow, it's go a big employment problem. it's going to b become a big manufauring hub. we will want to import from china. we want to export to china, too. wee got to get a morebalanced retionship, but i don't think that balanced relationship is inrently antagonisti >> rose: certainlyot a zeroum game. >>ot at all. >> rose: and weshould be couraged by their develment and eir growth because... >> well, b better acmmodated in a way that satisfs us, too, and i uld say the se thing about china. they want to mane their growth in a way th is sustainab. and it's not gng to be sustainable if the have... i think their csumption is 35% of the g.d. or somhing and ours 70%. th's a real imbalance and

they're not going to close it because they're ing to have a savings rate. but it's in the interest both counies that it beiminished, there's no qstion about that. >> rose: can y make an argument that they're bett pauf bause they have an economy that is not run by a democratic institution? >> well, thinkt made it easier to gate rapidtimulus program rapidly.. >> rose: thecan make a coitment to do more faster than we can make a commitment, even things likeclimate change. theyl make a decision as t how climate change... >> if they mak the cision, yes. >> rose:... affects their economicrowth. >> inome areas, lack of democratic pressure or public pressure may work against appropriate policies. look at iran. you would like to think that the rebellious forces in iran would leadhe a better polic than the dictatorial forces. >> re: exactly. we clearly hope that. >> hopefully weet a good pla but i do thinwe have coon

interest and i think they understa that. no in other areas, maybe it doesn't look quite so common, but i.... rose: it's not clear that theynderstand that the dollar ought to be the reserveurrency in e long term. >>ell, that may be right, but who knows about the long term? but they've got a lot o dollars now. (laughs) i mean, they've t certain responsibilities.... >> rose: but didn't the president of the world bank just make a speech abouthat in the lasteek or sosaying that there will be so real challenges to the dolr as the reserve kurn any. >> well, look, i don't think anything there any substitute r the dollar now unles we really sew up, and i hope we don't. but that would be th real danger to th dollar. e world... the world needs world rrency. the financial world is glalized. it very much internnected and en it's glolized, you need something. these piecesf paper have to be beled something. e blips on the computer seen have to be labeledsomething. what a you trading?

when you're ping for your exports oryourmports, it's very convenient have something that you can use right away fornother payment and that's what theoctor sers. and that's why people hold so many dlars,ou may lik it or not ke it, but it's convenient. and if it's going to be asonably stable andonvenient and usab it w't go away om a hurry. >> rose: don't wassume that these countrs ho a lot of ameran securities, debt, are going to act pdent in their owreast interest? >> we have been assuming that and i think ty will a prudently unss we really ge them... don't gi them any basis for confidence in the dollar, if we really have a disruptive poly, theye not going to like that. rose: you travelround the world and y're respected in all the capitals of the rld. is tre confidence in the way we're handng this crisis? >> it not with theegreee'd

like thasee it. >> rose: what's the difference? what do they think we're not doing? >> you know, there's a history here and there's great respect for the powers and influence of the united stas and the leadership of the united stas. this mayot be representativ but,ou know, you hear these commen from people inchina or elsewhere in asia, they're actually managg their crency d they are expressing rtain degree of nervoness anraising questns about the role of the doll in an academic way. they're nodoing much. i find when i... i don'want to generalize too far,ut i think it's probably true. when you get people tha are not quite leaders of theovernment but they're noon the firing line of managing eir currency, sa look, you know the's dollar problem, we've got much more impornt things to wry about than whether the dollar is going to be depreciate ad little. now the dollar's depreciatedd whole lot, then you worry, too. bu i think... i think theres a recnition of larger inrest.

whethern chi sees interest in growing, that's their imperativethey want to employ those several hured million people who are unemployed. >> rose: because it's associated witharmony inheir own country? economicrowth and the avoidance of social tensio are directly lked in their judgment? >>nd it's directly linked with their faced with the res of the world. i think ty come to understand th they can't eort pokes ten usually without getting some reasonab balance in tir internatiol accounts and without getting a better balance in their domestic accounts. they do have a lack of consumptn problem. >> ros so you walk int the president's fice and he ss "paul, great to see you, certainly lied on your advice." maybe not anymore. (laus) >> rose: (ughs) oh, you thinkthat? you think they're throngou less now? >> n no, no. >> rose:hey don't ke their guy goinout and sing he doesn't like evething we're trying tdo. the one area where we were

depending on his cribility to help us, he's drawing divions with us. >>trike that. e president was aware that i had e or two oblems. >> rose: so you're in the ofce there and heays well... he says "i g you in tms of your argument about separatin commerci banks from hedge funds and private equity and aders. i geyou on how stronglyyou fe about comrcial ban a o big to fail. then says to you "how about execive compensation? what should i do? am i on the rht track or not?" >> oh, that's a subject viously that has occred t me and i think execute compensation or wall reet compensation, whetr they're executives or notas gotten grotquely large and it's t kind of a game yo keep up with the otr people and that' the way you measure your success to anxtent that i tnk is harmful. i uld certainlaccept what the gornment talks about and

what a lot of private people are talking about in trying to inoduce compensation practices that onl rewards mature only a period of tend yououldn't gethe rewards if the actns you're taking day don't look soood three o fourears out in the future. that's all useful. how you get the mind-set changed that somehow you'rentitled to 0 million a year orhatever, almost regardls of what happens, i think is very difficult. bui don't think you can doit byhe government jt announcing.... >> rose: so how can you do it? >> well, you know, i'd like that think cong out o ts really difficult recession would eate a different mind-set that's now specific action, but i would ink in effect that business onion, public opinion wouldhave an efct on

director's responsibilities. i've been on brds of directors they are extremelyassive in this area. it's very hard,they find, to tell their chief executive, you know, you're not goingo be i upper %... perctile because we're a good company and we can't stand if youe below the midpoint that's a terrible thing that srals everything up. t somebody's got say, y know, thatkind of criter oughto go out the window. >> rose: how doou say that? >> well, you n say that, h do you do it. >> rose:'s wha i mean. u just said it. how do u do it? you do i by... >>ell, the one thing that i have some sympathyith which drives business crazy is having at least a vote by stockholder, an advisyote as what the compensation practice ould be and since they areot so rsonally involved in the proces they're not sitting

ce to face with the exutives that they're cging the salary of you may get a restraining fluence. but i thk it's going to have to ce from some compies standing u finally and saying, look, we're going to introduce a compensation seme that seems more sensible and lower over time and kd of set a new ethic. >> rose: ds that require a different breed of dector? >> probably, yes. it certainly reqres different directors. rectors have been through a lot, too. i don't know if they willbe as i'm not sure i see a lot of idence in this but one uld think e directors wld be a littleessassive than they have been. >> ros okay, so the pressure says i get you on the presence between commerci and trading. i get youon executive... now stay with . (laughs) stayith me, i've got you... i'm going ba to new york,

mr. president. >> rose: (laughs) is that what you said? was there any job you wanted? i mean, you were. you were like... a presintial campaign has a certain association that send a signal of gravitasnd value and, you know, i'm thinking a whole rge of them. certainlsenator ted kennedy gave that... bestowed that o senator oba when he was running. certainly admiral crow bested that on billlinton. so mh what did you want from th? and did y get it? >> what i wanted was mr. ama to become president. (laughs) >> rose: extly. at was it. >>ut did you want lay a bigger different re? >> no, i am conscious of my age. and i'm. i just h a birthday recent. i'm mo consciousf it. (laughs) >> rose: 82. >> going on 83. once you get to be 83, you' gog on 84. >> rose: all rig.

but you're in good health and you're enjoyingfishing and y play aig role and you're joying respect... >> i tell you, i feel olderthan i used to be. rose: well, inetably you're older than you ud to be. >> sure. >> rose: but not as bad as you might. obama, he says to you "paul, what about invasion a lot of people tell me i oughto be worrieabout inflation." >> you ought to . you ought to be perpetually woied about inflation. you kn, the administration is perftly conscious of the fact that they've got aig problem if inflation gets out of hand and they say "our hands are tied now, we can'tdo anything now, unemoyment is appaching 10%, the econy is weak, there isn't apparent inftion problem at the ment, pces are ne and stable." but you've got tha yawning budget deficit. you've got portion of the dollar, we've g to be careful about this. but it's a problem for at least a yearout, two years out, three

years out. now, i think it's fair to say they say that, buif you have no action, howoes that become credle? and it's very hard to make a credible... maket credible if you're notoing to raise taxes right now. yohave stimulus prrams, you're not cutti expenditures right now. you're in the midst of a big debatebout health care which has been a big priority which isn't exaly... i don't unrstand it all, but i think it's safe to say it's not gog save a lot of money. >> rose: but can it be deficit neutral? >> i don't kno they say they'rerying to make it. don't ask me about health care, ve got engh things i don understand.... rose: stay with me on this. the president says "look, we've got a b... i was handed a bad problem with the deficit. whato i do? anis it t high? and hodo i make smart decisions?" >> well, i.. just in terms of ving signals, it's not just signals, it's very bstantive, the i would really love something toe done about social security. that... compar to medical care

and mecare, this is a preeminently solveable pblem. rose: solveable? >> solable economilly. whether it i politically or not i dot know. but it ought to be solveab politicay. and if we cod getthat done... i mean, i thk th would be a useful signal to the world. >> rose: yeah but you s that at a time that everybody's saying to is... he would say toou "i hear you,and i want to get to that but they' criticizing me for trying to take on climatechange and health care now. >> wl, you're tellin me ere isn't any magic awer to this i absoluty agree withou. i just say let's put this one in there. it's one that cs in theight direction. >> re: but would you say to him... >> and the suation where there'nothing you can do that's.-than-of that... you know, you're not either going raise taxes or cut expenditus right the moment, unfortunately. once you conceive that, you're taing about somethathat's gointo take place in the

ture. anhow can y deal now with something that's going to have the impact in thefuture but has that iact with somessurance? i think e one thing you can do or maybe aore immediate impact i think, you know, pay a you go expenditure.... >> rose: in terms new legislation. >> yes. and just restoringhat kind of legiation would be somewhat hopeful. of course, that's been.... >> rose:ried and... >> it's a pledge thas been broken many time in the past but it's helpfuln showing a sensof direction. you know, expenditures continue to go upandou've got aig gap between expenditures and receipts, sometimes you're gng to have to face up to the taxation questn. i don't know h you avoid that. >> rose: soon, soon? >> if you can't g the expendituresnder control. >>ose: hard to get expendure under control when you. a lot of them are ying the dt, a lot of them are mility and, you know, when it... a lot of them are xed expenditures. >> i am very aware of this. >> rose: i'm not giveing you a

lesson on budgeting. >> it's haer now than it was lastear or the year befor >>ose: exactly. so that's problem weave. >> re: that ccludes part o our conversation with paul volcker. tomorrow night he weighs in taxation and otherssues about the defici jo us. caioning sponsored by rose communications captioned by media access group awgbh access.wh.org