>> rose: welcome tthe broadcas tonight, an exclusive conversation, paulolcker, the former cirman of the feral reserve weighs in on economic recoverynd the need for regulation. >> all reasonso think that is recovery will be slower. we've got this underlying justments to make. we can't st pump up consumption andpump up housing again. it might car us for year two, but, you know, the impalace got into trouble in the first place. wee got to wo toward producing more goods, selling more goods abro, bein more coetitive abroad, maintaining a decent te of savings,

bringingbudgetary... federal dgetary situation back into something tt's sustainable and all thohings... and plus th financial market is wounded. there' no doubtbout that. and it won't recover from those wounds, deep wounds, for a while. >> rose: pl volcker part o fothe hour. captioningponsored by se communications

from our studios inew york citythis is charlie rose. >> rose: we begin toght with an updaton the health care debate in the congress. the senate finance comttee, the last cmittee to take up rerm, voted todayeject a publ option. presidenbarack obama has publly lobbied forsuch a plan though his adminiration has deared it not essential t rerm. ve democrats joined ten republicans to oppose a proposal by senator jay rockeller. a simir prosal by senater chuck scmer was also voted down in a closer 13-10 ve. this voteignifies divisions beeen moderate and liberal demoats and a loong struggle to unify democratic reform oposals in the weeks ahead. he's a look at the debate in the committee toy. >> my job to p together a bill that will bece law. the senate,hat means my job is to put togetr a billhat gets the 60 votes. now, i can count. anno one has been able t show

me how we can count up to 60 votewith a blic nopgs the bill. >> a ne government plan that's nothing me than a tron horse for a single payer system washington. >> we need this optio because insurae companies have failed to meet their obligations i this whole matte of howo you unroll hlth care reform. the insurce compans, in my jument, are determined to protect their prots and put their customers send. >> rose: we willontinue to follow this debate in the weeks ahead, but w turn now to paul lcker for this hour t talk about the ecomy and has advice to psident obama on the way forward. paul volcker is here, as the ecomic crisis contins, many turn to him to undstand the rapidly changing global ecomy. has had a remarkable caree in public service. he was chairman of t federal

reserve from 1979 to 1987 during which heas widely credid with taming rampant inflation. today he serves as chairman of presidentobama's enomic recovery advisory board. i am very eased to have paul volcker back at this table. welcome. >> thankou. nice to be here. >> rose: very good to see you. let's begin wi what' transpired in the st year. how did the government do? well, the governmen was faced with acrisisof proportions thataven't been seen sin the 10s, anyway, d when you got to the fall and thisind of exploded in a rate they certainly didt anticipate with succession of failuresnd new failures arting with their desion to support faepld and faekd whh are already gornment supported institions, thing deteriorated and they reacted very strongly at that point with pporting theemaining investme banks, a.i.g., the world's biggt insurance

company, they recapitalized or began to rapitalize in a maer of weeks theiggest nks in the united states. meanwhile air,road someing similar had been gog on but basically the financial stem was taken over and supportedy the deral government, a really remarkable event. and then as this have evolved the gornment has provid not to sole source credit in the the economy, but amazily a large proportion of the flow of credit throughhe economy, which is dinished, has been by courtesy of thfederal governme. so it obviously nds a very big challenge as to how you resre wh we think of a reasonably functioning private enterprise system, competite, able to finance small biness, b business. >> rose: did they make the right decisions in ter of the particular institutions, i terms of the dramatic consequences of thmoment? >> think they certainly made th right decisio in the sense of preventing a llapse that could have been more severe in terms of the ecomy.

you know, afr this. ... the ys in late september early october, the economy did decline despite the fact that the financial institutions were bolsred up, the economy declined at the st rapid rate of sed i have ever seenin the first quarter ofthis year, pretty much paralleled around the world. so looking at that experience, i thk you would have to say they were right in providing massive support. rose: so you give interpret high mar to bernanke and geithner and paulson. >> faced wh those marges they did what they ha to do the time. thecomplaints could be w did we get that situation in why did it that i can ergency action? why we they faced with that crisis? >> rose: awer your own question. how dide inur global onomy ghetto that siation? >> well, i think two facts interacted. one is t global economyitself

was quite unbalanced. we've talked abouthat before. the united stas for ten years has been a very high consumptn economy. it gave up on savings, basically it didn't do much historicly in terms business investment. and to satisfy ouronsumption habits, whichave required a loof input, we importe a lot, we financedthat sending over dollars which ce back to us in the form of short-term financing in all markets. now, the ease of that financing helpedfacilitate a lo of nancial shenigans. >>ose: yes. >> and ashey built up over time, you know, one of my favorite cplaints is fancy financial engineeringe got duringhiseriod whe some very sma people thought they had nage the complexitys of the market to theoint that the riskwere not great. theyad been redistruted in a way that wou not psent a challenge. and the market came under prsure, that did not prove to be the case. and i thin that combination of

the kind of confidence, the facade of confidence which are developed by tse financial engineers, they were ver reassuring to these firms which were very richly compensated and they wt ahead andtook some big risks. >> rose: right. cause they had no restriction on theeverage. >> and now meanwhile, u can talk about the failus of the institutions, but you ca ask where were t regulators. but there was a... we weren't regulating ithose days, t markets were going to take care of themselves. this ifree enterprise, self-correing free enterpris, efficient market and that, inact, market operators themselves it certnly affected the attitudes of regulators. stiff regulation would notave been vy pop you particular the la '90s and the early partf is century. >> rose: if, in fact regulators had us the regations that they h in hand and had applied

them, would we have avoid the cris? >> well, yo think you could have avoided the severity of the crisis, b you have to ask whher that was a realistic possibily. it would have taken very virous and unpopular regulatory aion. people thoug they had, for stance, capital requirements of bankspretty high. they were as high going into this conversati... crisis as theye been r some years. no could the have been so high? yes, but it wouldave been, i think,robably unrealist dwrik think they could he pushed them muc higher. pl do all these thing after the crisis. it's a lot easier to do them before the crisis. which is the perpetual pblem financial regulators. >> rose: your reference to financial engineering isthat mathematicians and a l of other people who did not have what ski? >> they dn't have the skill of thinng... rememberinghat they wer human beings in markets. these things are not natural

events. theye not... you kw, independent of observati. it's not like a phycist looking at so event that follows a nice, normal distribution cve. but they tught they were dealing with normaldistribution curves. that's what you learn in thematics. and ey forgot. >> rose: the couldn't fact knorr the human emotion. >> t human emotion. and then markets, what happens today affects at happens tomorrow. they're not ranm eves. but the whole philophy of financial eineering isuilt up onhe idea that these are al.. any def united nations from norl city random. >> rose: that bris to this question. o things that willr will not change one, the impact offinancial enneering, and, b, whether, say, asi will cnge its consumption habits and america will change its saving habits. those aretwo big corctions we have make we won't have the me, i don't think, confidence in financial engineerg, institutis have

learned somethg. and some of these defiencies are now pretty car. it's hard to change that, becauspeople want make moneand relyupon this kd of fancy manipulation. but i thi hard think, y, is changing theonsumption habits of the ited stas. consumion habits of china, china's too lite, we're too much. we need to save more, china needs consume more. d that was kindf the subject of the g-20 discussion over e last fewdays. it's n just china andhe united stes but we're the two polar opposites a the two big countries in this thing. and they talk very optimistically about h they would keephis under surveillance and they would see what progrs china's making and increasing consumption, presumablyeeing what progress we're king in increasing savings. >> rose: is the chine stimulus-- whichs huge, $500 plus billion-- going to create a

consumption and a demand for chinese products? >> i think their foreign surplus ha disappear... not disaeared, but it's been reduced the last year or so cause their economy is rprisingly going faster than i think almost anybody projected. with a huge stulus program. as you mentioned, their stimulus program is much bigger relive to the se ofheir ecomy than ours. and th a still importantly corolled economy, it'had a big impact and the rest of the world n't buying so muchof their stuff and ey're impoing more so their surplus has disappeared. notisappeared. halved, maybe. >> rose: right. >> but i don't think there's been much progrs toward that sic habit of consumption. the chine are not use to consumg a lot. ey have a lot mor than the used to b the population.. >> rose: they ve more money to end, but they're not. >> that'right. >> rose: wt about us saving? >> recessions ar supposed to be

cutive. >> rose: right. >> think had someurative aspect. obously with the loss of peonal wealth, the loss of paper wealth, the lo of housing valuesn the united states people are waking up to the desirability of doing a littleore sang. so the vings rate is going up. it's gng... i don't know if it's as high as it should beut it's getting much closer to that. the estion is, will that remain so as people feel tter when the economy recoveries. that's going to be tough. >> rose: to chae those hits. my father was a young man during the depression. he wou never borrow money afr the depression. paid 0% cash for homes that he purchased. everything: cars homes, never did... bought anytng on credit. >> you' supposed to pay 100% borrowing. i don't know how you... one extre the other, right. >> rose:exactly. we had that period. wherare we snowed where are

the toxic assets and what's going to hpen to them? >> well,the toxic asset are wearing away with timeand a lot of tse losses have been taken, stila lot more to come. but i think we're at a phase now where eon-toxic assets are going bad. if you think o the toxic assets the extme subime mogages and similar very extreme loans and othesectors of the economy, they are not the whole of the economy, they were important enough to uet us, but ordinary ans, ordinary mortgage loans, what wou have been consideredood loans after a decle in hsing pces of %, 35%, some of those lns are under water, people are employed. so there in trouble consumer credit sses are risi. theiggest single... n the largest, buthe biggest single threatntil credit area right now is commercial mortgages.

and because offic building pric and.... >> re: commercial real estat in tuble. commercial real estate in trouble d that's onlyin terms of recognizi theosses just beginning. so we still have a lot of... a lot of sewage to wade rough. >> rose: but as soon as you say that, as you knowuch better than i do, aot of people with on wall streetre looking in tes of what their strategy i r buying up debt. >> wl, some of them are, and that's a good sign thatthey at let have the courage to step in there and bu some of this debt which.. some of which i'm sure has pushedown the prices that are unrealistical low. >> rose: right. so there's opportunity. it's a goo sign that peop are there and some of t prices of sum o that stuf are beginning to work. but one aspe of people feeling a little better, the are some people... ths not throughout the financial mkets but there are somehere happy tim are

back again, wll go back to the old habits. >> re: this is exactly what i was coming. securitization is taking pla? >> you see some of the activity on wall street. among other thin, stock prices have been very goodecently. but you see oth money beginning to flow the kind of thingshat people are beginni to buy what may have been tic assets or untoxic assets a low prices. but i think what weave to guar against, the reason as i understand it that t president me up here week or sogo, he said "don't rget, we' had a major crisis and we're not through the crisi ande've got a lot of reform to do, it's not time to go back to business as usual." rose: just in terms of actice, are we going to see other bubble take place evitably? >> well, the hisry of finance has en a successn of bubbles. >> rose: exact lift nothing's going to changabout that. >>othing is going to change. you're going to ha excesss from time time. but this degree of excess is very unusual.

aniteflects those basic unbalances that we were lking about internatially and a combination mhematical and computer develmentshat obously were not kno the old da, they had their own ways of making excses. but is market has, as result of the complexities, bome for opaque rather thanore open, more opaque than transpant. and all of that has haded up to a crisis that's big as any since the1930s. and we had a bi recession the early is the 8 but the accompanying complicationsere noto great and when thatecession was finay broken, the economy expanded very pidly. i thinkit's questnable how rapidly th economy willxpand ter this recession becse there's a lot basic adjustments thatave to be made. >> rose:ow long it l it be before wget the kind of economy that is gwing at vels above 4% and have unemployment declinin, say,

below 7% or 8%? >> well, i don't want to speak with gat conviction abou the economic outlook because forecas are usually wrong one way or the other. but i think there are reasons to ink that this recovery will be slower. we've got the uerlying adjustments to make. we can't just pump up consumption d pumpup hsing ain. that might carry us for a year or two, b, youknow, the impalace thatot us in trouble in the first pce. we've got to work toward producg more goods,elling more goods abroad, being more competitive abroadmaintaining a decent ra of savings, bringing budgetary.. federal budgetary situion back into someing that's sustaable. and all the things. and plus the fincial market is wounded there's no doubt abouthat. and it w't recover from those woundsdeep wounds, far while. >> rose:hat permanentdamage has bn done that can't be fixed, that it will take

whe? >> well, what's emerged as a result of those dramati actions last fl, hour justified, is they will themselve affect expectations and behavior. and e thinghat's bugging everybody these days a concerns me is this idea of moral hazard. that pple expect these big institutionso get bailed out by the government and the critors won't be hurt. to some extent the uity holds were protected. not completely, but they weren't wiped out. the only pla that bothhe creditors and th equy holds were wiped o was lehman, which went bankrupt d everybody now thinks that was a great mistake, rightly or wrongly. >> rose: and you thi? about lehman >> well, i thinkif it had bee rescued somew i think sll think you would have h an attack on the her institutions. >> rose: a.i.g. and fannie mae >> they would have gone from one instition another. >> re: you mean the investment bankand...

>> it may not hav been as b bui don't think that would have cured the situation. i don't think the finger in the dike at lehman would have mean we didn't have aerious.... >> re: they argue that they didn't have the authority to do th. did they? they being paulson, geiter... bernanke. >> i don't know. i wasn't there. but i tell you both the treasury anthe federareserve have gone.. >> rose: youknow. >>... througwhat we kiny ca the very ed of their legal authory. >> rose: they d? >> yes. >> ros did they exceed it? >> well, that's always a questionf judgment. >>ose: (laughs) i'm asking of your judgment. >> ion't think anybody after... youet in therises yo find ways to hav an inrpretation that fits the circumstans. >> rose: give me the closest exame of that, where the were right up against the ee. or crossed it. >> will, section 13-3, famous

sectioof the feder reserve said inunusual and exigent circumstances you camake loans secuties to the satisfactio of the federal reserve. that in all practice has ner en used and we didn't useit because we knew on wesed it people wou think you would use again. but that h been used ... that says you can lend ainst goodollateral. me of the things they've be doin arguably, are clor to buying than lenng. chechnya is one example. but they'rein a form of a lo. >> rose: ty have no problem with guaraeeing j.p. morgan's bayh of bear sarns and th risk... >> well, that was a raightforward one but still... even in that case there's no recourse on that loan. >> rose: exactly. >> so thas a question is it a purchas or a loan that's compa example. but is intereted as a loan. there are other example the treasury h used so

extraordinary powers and e federalreserve has bought commercial paper. the federal resee is now buying a lot ofhings in the maet. >> rose: andou say they shoul or shouldn't? >> wel a lot ofhe things they're buying they should. some o them i ha no stretch the law in buying long-rm vernment securities. they could always buy lonterm gornment securities. as a matover law they c buy securies and they're buyg as le of them but at doesn't raise any.... >> rose: sohat causes you concerns about the kind things theederal reserve d? >> whater they d gives ccor to the nex instution that gets in troub and to their editors in particular and to their customers so that these institutions that are deemed t large to fail will be protected, which will lead to behavior that will be deabilizing. and ultimately, if they're certain to b protected, ey wi engage in behavior tha

willequire that they be protected. >> ros they'll take moreisk and get better ans at lower rates if everybo knows they'll be protected. in ten nobody's going to let them fail. >> right. >> rose: so what wouldou do about that? >> wl, that gets to e heart of this reform exercise. the reform ercise is very mplicated and difficult. but at i would do is not change what's called the so-called safety net for banks. the sensitivity of banks with their individual depositors an their central role in the financial syst has been recognized for 100 years or more. and l countries provide some protection for their commercial banks no matr how big, and they particularl provide prections to the big ones because they're more important. rose: because they provide the credit that ru the economy. >> and they' big and so they will affect the ole thing. a small bank isn't going to affect much. you know, this is aroblem that alanmith worried about back in 1776. so i don't think you're goingo chan that overnight and

probably shouldn't in these disturbed circumstances. but i don'want to extend at sense of protection beyond the coercial banking system. i think commercial banking system is the core they are i charge ofhe payment system. they runhe payment whichis which isundamental, moving monearound. ey lend mon to you and i o individuals. they lend noun bunesses and that's sti a very important function. the are basic fctions. and that'shy we protect them. i don't want to s those bks, however, taking a lot of necessary risks. it's ris enoughlending money, th don't have to do lot of trading. >> rose: but that's wherethe estion of definition comes. when you said "i don'want to see them doing a lot of trading is it okay too a little trading? well, aittle trading is less dangerous tn a lot of tradg. (laughs) >> rose:f course but what is your definition "a little" and "a t." >> well,n some case where you can define it, shouldhey own hedgfunds? no. obviously they own very few hedge fund small hedge nds,

it wouldn't make any difference. but still crtes conflicts of intest. but the samehing with equity funds, yes o no. >> rose: no, not... >> same thing withommodities which inderstand they're aying with these ds. no. banks are not out there toeal in commodities and own commodities and own oilankers and at stuff. when it come to trading, the argument is okay, som trading basically iselated to customer needs and. you wanthrob to buy, if you buy from the cuomer you've got tobe able to sell them. so some trading activity is natul. but i think at some point it es fro being a natur part of cmercial banki operatn to a pury proprietary tradi. it has nothingo do th your customers, in fact, it may compete th your ctomers,t may create a conflict with your customer it's yrroprietary tradi desk a they call it a

proprietary trading dhaefk is out the tryingo makeoney on margins of trading, buy at $2 sell $2 is or hang on to it and ho the price goes to $3. a reasoble legitimat activy but don't want to support it with taxpayers' mey. >> rose: with respectto commercial banks who didot do these other activities, you're prared to recogne the idea of "too b to fail"? >> yeah. well, you haveo, yes, i think. now, that doesn't say i'm committed to any of these. i want some ambiguity. >>ose: this is beyond deposit insurance and alof that? >> i think you can have a little constructive ambiguity he. but i can't shut off the possibilitthat if a really major financial institution unexpectedly got in trouble y might have to put som government money in. >> rose: make the decisions that the federal serve made during the last year? >> at the time, yes, solutely. now want to avoid that for institutions that are not banks. >> rose: i understand. but don't you alsoay that in

someases it may be tha one of those ititutions that are not banks have such immense consequence that if they we abouto fail, you ought to save them? or not? >> well, i'm not very easy to give the authorityo save those initutions. >> ros what would you do if a goman sachs or something like that goso big that the consequences of it failing-- li the consequces of a.g. failing-- wod have enmous consequenc. >>s that proposaon the table, in genal form anywa which i support, which the administraon supports, which foreign governmts generally support in concept. a so-lled resolution authorit now what is the resolution snort if you see o of these institutions on e brink of failure, can some government agency be authorized to step in as you can in the banking world. me agency step in,ave the authority deal with tt. he's g a lot of things he ca . the equity may be gone, maybe he out to be able to foe exchanges of dt for equity, which was not muchone this

time. you can do that tt takes care of a lot of contingencies. try to merge the norgs area where you are full control, yodon't have toorry about the stockhder interest because that already gone. if push comingto shove yo can liquidate the orgization and we ought t worktowardome ndition where the organization subpna prepared for that eventuality in terms o its connection with the rest of the world. so thatou minize theimpact, whathappened during lehman where one of t big impacts was to undermineoney market funds becae... particula money market fund had lot of lehman papeand cldn't meet their professored obligion to pay it par. so we want to minimize thatwith a degree of regulatn. and for these really... i don't ink there are very many of these institutions. there are some tha are some so big they might o the face of it present a a threat i they we

d. there ought toe some regulatory authority er those institutions. could be fairly simple. what is your capital requirement, what ishe leverage requireme, what is the liquidity requirement? you don't to haveay to day regulation the way you do r a bank, in my opinio >> rose: but wouldyou change the quidity requirement and the v reg and risk ratios? >> wel it's sething in banking... yeah, you certainly look at . anthey're lookingat it now. that's a norl regulatory responsility. in extreme cases... and the non-banks i would look at it, yes. >> rose: youaid theegulatory proposal presented b secretary git nor the se committ you testified right aftehe testified had practica and conceptual difficulties. are their r their con seven which you will and practal difficultys? >> that's a reference to... i n't know what you call the heart of their proposal but an important elemenof their propal is to say we will te systatically significant institutions ether or not they're banks,and subject them

to i guess uniform... not quite spelled out, buthe same regutory standards, the same supervisory sndards we would ha for a big bank. now,y problem is if y do that, first o all, i don't kn hoyou identy those institutio in advancement me of them are easy, butonce you get beyondhe first four or five, i don't know where ty are. it's not jt a matter o size because they wou have to identifyhem. and by bringing them intohe tank, so callyou are imying... i don't know i you're saying... legally i don't know how you'd write the law but yore implying that they're going to be protected, too. it jt says a bank would be because you p them in the same grou so that's... want the banks... and ty're doing things... i'm not going to prohibihim from tring. i'm not going t prohibit them... there may be a hedge fund. there y be an equy fund. theye off ere doing their thing in the capital markets and want to ha a diance betwn them and the bankin system tt they're going

protect. and they've blurred that. that's why. >> rose: here's an ey question: did you have full opportunitto express you views on these ises before the administration decided what its positi was? >> yes. (lghs) >> ros so they rejected your ideas? >> they rejected.... >> rose: on this particular point of separation? >> 90%f what they... 8 of at theyroposed is no... you know tre's no.... >> rose: and 80% of it you ve no pblem? >> no. >> rose: and the 20% mainl is what they would allow be too big to fail vsus what you would allow and your basic sepation is between commercial and trading? >> well, there's 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 ought t be somebody overseeing the market not from the standpoint of concentrating i individual institutions, but conntrating

on the linkages between what falls betweethe cracks, what w developments are there tha need attention, this risef the subprime mortge is one thing. it not because it was killing indivial instutions. it w an safe and unsound practice. wasn't somebody ok agent it? why wasn't somody looking at crit default swaps that got to be $60 trillio at one poi. well they are looking that now and it's a good thi. >> re: but will it something else that they don't look a well, it's very hard to know what it is. but think somebody ought to be given that responsibity. d i think that sebody ought to be the federal reserve. now, they prosed a llege of cardinals, soto sak.... >> rose:id they propose that or did dodd pronees? >> well, dodd i think has proposed something gular. >> rose: aouncil of regulators i thinhe callsit. >> well,e's got council of regulators... i thk it may be a significa differenc th treasurwould be the chairman. d the treasury wou have a

staff. th that's one wayou can do it. the treasury wld put the... put the treasure in that positi but the treasury has no tradition, no aff, no expertise, professional background, no traditions in t area of banking supervision. and then think, you know, you ask... the federal resve is a natural pce... i mean, i assumed when i was chairman of the federal reservthat i had so responsibility for overseeing the whole system. whether i had any explicit authority not. because the federal reserve has a specialrole. it's the onl initution that, first of all, independent and has continuit it's professional, it's involve in regulation and it' got money, whh nobody else has, you kn, to go running to congress when there's an emergen. >> rose: that'why it can do ththings it did. >> that's whit can dohe things it did. >> rose: how did it come to want to put i somewhere rher than the federal reserve? what argument, what reasoning led them to com to aifferent conclusion? >> i can't tl you all that, t what th did was in this...

whatever they call it, teal 1 or something, these group of banks and non-banks, ey said they will besupervised in detail by the feral reserve. so they gav the federal reserv.. i don't know if it's a biggeror smler sponsibility, but a big reonsibility for the detailed day to day supervision as i understand it a mixture of bankand non-banks. and i. first of all, i don't want e non-banks supervised that closely. but i think in the dtribution of authoties among regulatory institutions,t's really the federal reserve that naturly. th should be surveying the wholworld, so to speak. it's the federal resve that has the best, eiest nnections with foreign regulators. it's imptant. we don't discuss it, but a lot of the stuffe're talkingbout better be pretty iform. >> rose: erybody now knows at this was a globalroblem. and that weneed in e future global coordination. yes? >> uh-huh.

>> rose:ow does that manifest itself? there isn organizati, financial service ich is was named financialervices board where the g-20 some time ago presumly to give them a little more cloud or somethg. but this is an arrangement among bank supervisors, whether centl banks or somebody else, that is designedto come to conclusion onomeasic matrs of banking servision and regulaon. beginning with capital. when i w chairman of the federal reserve boar we really started it then. and wead the first capital quirements between europe banks, american banks and japanese banks. and it s by today's standar considered pretty crude but had the advantage of making them more uniform than they would have othwise been. >> rose: that's what hpened in part, wh will happen if you don't have some kind of coordination, then it's all going to flow to wherever the lowest level is? >> and this ise will arise and the kind of outline i have for

the commercial banking syste there will be big complaints if other particularly european and japanese banks are not governed by... doesn't have tbe the same role downo the las dotting of t is and crossg ofhes but u have to have a simir philosophy of these b banks, philosophy of regation or you're going to hav a same old question according to the mostax, most open regulators. >> rose: in terms of the globa recovery, china and india are going to lead the way or not? rose: well, china and india happily, iuess, they're happr leading the wa >> ros and then their gross domestic product groh is 8%, 9% >> welli don't know if it's quite that high. >>ose: next year. >> but it's pretty good right now to everybody' rprise. the part of the world... very unusual but it's symbolic to the change in the world.

instead of the emergingorld being th hardest hit by this crisis, the emeing world is cong out of it pretty well. now,hey had built upig serves and so they weren't so financially t. >> rose: becau they serve. well, you're billing up sh great reserves. maybe they were wise to do so, but the growth in the emerging world is quiteemarkable in the midst ofhis turmoil. anthe emerging worldtogether, you know, it's like thaunited stat in terms of the impa on the rld economy. couldn't have dreamed that 20 years ago, 30 years ago. so that's good. on the oer handit is symbolic or more than symbolic of t relative... less dominant position the unid stas has, not st in the econy but in leadership in terms of intellectual and otherwise >> rose: okay, speak that, because that's a big pointor e future. >> well, it is and i d't know how we accommodate ourselvesto . i would like to think tha given the history, the past,given the

strength-- actual an potential-- the arican economy, we can and still provide a kd of indispensle element of leership here. but it's not gng to be dictatorial, i' tell you that. and it's very rd to herd these cats together. >>ose: well, y're already beginning to see some questns out in the terms of leadership of these global financial institutions. >> well, you can s, you cannot beb pendent upon the countries for three or four trillion of your debt. and think that they're going to be pass i observers. >> rose: theydon't want toplay a le. >> and ty don't wt to have decision making authorit theyant to be at t table. they want to be at the table but coming to the tab doesn't crea consensus. lo at the security council. (laughs) >> rose: wel there's veto power ere. >> even without the veto power. >> rose: okay. but what should be t membership? should it... it's no longer going to be-7, obviously. the g-20 was what happened in pittsburgh. shld it be the g 29?

because someeople argue that it's only g-2 in tend. >> actually, whatever group you make, sebody.... >> ros somebody outsi wants be inside. >> it'sike the institutions that will be outsidef the treasury's pposal. i want e systematicly significant proo >>ose: but the consequences for thenited states tha fincial leadership in the world may behifting... >> rose: wl, you kn. i grew up in the wor where the united states ishe leadernd there's no questn about it and when had responsible positio in the united stes government, whether it's the federal resve or the trsury, you kno, gou to a meeting, you were the chairman of the boar so to speak, wherer the seat was. and i think the institutions need kind of corent leadersh. and how do you get it when the mbership of the club is and should be more diversified >> ros and is it inevitable in

your obseation that china and the united states are gointo have different priorities? >> well, i think hopeful thing is in a big sense, in the ecomic world i think they he the sa priities. china's growg, it's got to grow, it'sgot a big employment problem. it's going t be become a big mafacturing hub. we will wt to import fm cha. we want to exporto china, too. we've got to get a more balanced relationship, but i don't thk that balanced relationship is inherently antagontic. >> rose: certaly not a ro-sum game. >> not at all. >> rose: ande should be encouraged by their delopment d their growth because... >> well, be betteraccommodated to in a way that sasfies us, too, and i would say the same thing about china. they want toanage their growth in a waythat is sustaable. and it's not going to be sustainable ifhey have... i think their consumption i 35% of the.d.p. oromething and ours is 70%.

that's a real imbalance and they're not going close it because theye going to have a savings rate but it's in the interest of both untries that it be diminished, there's question about that. >> rose: c you make an argument that they're tter pa because they have an economy that is not run by a democratic institution >> well, i think it made it easier to gate rapid stimulus progm raply.... >> rose:hey can make a commitment to do more faster than we can make a commitnt, even things like climate change. they'lmake a decision as to how climate change... >> if they make the desion, yes. >> rose:... affects their economic gwth. >> in se areas, lack of democratic pressure or public pressure may work against appropriate policies. ok at iran. you would like to think tha the rebellious foes in an wou lead the a better picy than the dictatorial fors. rose: exactly. we clearly hope tt. >> hopefullwe get a goodlan.

but i do ink we have acommon interest and think they undetand that. now, in other are, maybe it doesn't look quit so commo but i.... >> rose: it'sot clear that ey understand that the dolr ought to be the reserve currency in the long term. >> well, that m be right, but who knows abt the long term? but they've got a lot of dollars now. (laughs) i mean, they've got certain responsibilities.... >> rose: but didn't th president of the world ba just make a speech out that in the st week or so saying that there will bsome real challenges to theollar as the reserve kurn any. >> well, look, i don't thin anything tre's any substitute for the dollar now uess we real screw up, and i hope we don' but that would bthe real danger tthe dollar. the world... the world needs wod currency. the financial world is globalized. it's very much ierconnected d when it'slobalized, you need something. these pies of paper have to b labeled something. the blips on the computer screen have to be labeled something.

wh are you trading? when you're paying for ur exports your imports, it's very convenit to have something that you can u right awayor another payment and that's what the doctorerves. and that's why people hol so many dollars, you mayike it or t like it, bu it's convenient and if it' going to be reasonably stable and convenient and able, it won't go away from a hurry. >> rose: don't we assume that these cotrieshold a l of erican securities, debt, are going to act prudent in tir own breast intert? >> we ha been assuming that and i thi they will act prudentlunless we really give them... don'give themny basis for confidencen the dollar, if we really have a disruptive polic they'r not going to like that. >> rose: you travel aund the world and youe respected in all the capitals of the wod. is the confidence in the way we're handlithis crisis? >> it's not with the dree wd

like that e it. >> rose: what's the difference? what do they think we're not doing? you know,here's a history here and there's great respect for the powers and influence of the united stateand the adership of the united state this may n be representative but, y know, you hear these commentsrom people in ina or elsewhere in asia, they're actually managintheir curncy anthey are expressing a ceain degree of nervousss and ising questio about the role of the dollar in an academic way. they're not ing much. i find when i... i don't nt to generalize too far, b i think it's probablytrue. when you get people that are not ite leaders of the gernment but they're not the firing line of managing thr currency say,ook, you know the's a dollar problem, we've got much more importa things to wor about than whetherhe dollar is going to be depreciate add little. now the dollar's depreciate a whole lot, then you worry too. but i think... i think there i a recogtion of larger

intest. whether i china seesnterest in growing, that's their imperative, ey want to empl the severalhundred million people who a unemployed. >> rose: because it's associated with harmony in their own country? economic gwth and the avoidance of social tension are directly lind in their judgment? >> a it's directly linked with their facedwith the rest of the world. i think the come to understand thathey can't expt pokes ten usually without getting some reasonablealance in the internationaaccounts and without getting a better balance in their domestic accounts. they do have a lack of consumptioproblem. >> rose:o you walk into the president's ofce and he say "paul, great to see you, certainly reed on your vice." >>aybe not anymore. (laugh >> rose: (lahs) oh, you think at? you think they're throng y less now? >> no, no, no. >> rose: ty don't like their guy going out and saying he esn't like everything we're trying to do.

the onearea where we were depending his credibility to help us, he's drawing divisions with us. >> strike that. the president s awarehat i had one or o problems. >> ros so you're in the office there and he says wl... he says " get you in terms ofyour argument abouteparating commercial banks from hedge fundand private equity and traders. i get u on how strongly u feel about commeial banks and tobig to fail. hehen says to you "how about execute compensation? what should i do? i on the rig track or not?" >> oh, that's a subject obously that has occurd to and i think executiv compensation or wall stet compensation, whethe they're ecutives or not h gotten grotesely large and it's the nd of a game you keep up with the othepeople and that's the way you measure your success to an eent that i thi is harmful. i wod certainly cept what

the govement talksabout and what a lotf private people are talking aboutin trying to intruce compensation practices that only rewards mature only a period of tim a you wldn't get e rewards if the actio you're taking toy don't look so gd three or four yrs out in the future. that's all useful. how you get the mind-set changed that somehow you're titled to $1million a year or wtever, almost regardles of what ppens, i think is very difficult. but don't think you can do by t government jus announcing.... >> rose: so how can you do it? >> well, you know i'd like that think comi out of thi really difficult recessionould crte different mind-set. that's now specific action but i would thk in effect that business opion, public opinion would ve an effe on

director's responsibilities. i've been on boas of directors they are extremely psive in this area. 's very hard, ey find, to tell their chief executive, you know, you're not going t be in upper 20.. percenle because we're a good company and we can't standif you'r below the midpoint that's a terrible thing that spils everything up. bu somebody's got to say, you ow, that nd of criteria ought t go outhe window. >> rose: how do y sa that? >> well, you can say that, how do you do it. >> rose:'shat i mean. yojust said it. how do yo do it? you do it by.... >> wl, the onething that i have some sympathy wh which drives business crazy is having at least a vote by stockholders an advisor ve as to what the compensation practice shld be and since they are n so peonally involved inhe

process,hey're not sitting fa to face with the execives that they're colng thealary of you may get restraining inuence. but i thin it's going to have to comfrom some compans standing up finally and saying, ok, we're going to introduce a compensation sche that seems more senble and lower over time and kin of set a new hic. >> rose: doe that require a different breed of dirtor? >> probably, yes. itcertainly requis different directors. dictors have been through a lot, too. i don't know if they will as i'm not sure i see a lotof evence in this but one wod think th directors wou be a little ls psive than they have been. >> rose:kay, so the pressure says i get you on the presence between commercialnd trading. i get you executive... now stay with me (laughs) stay wh me, i've got you... >> i'm going back to new york

mr. president. >> rose: (laughs) is that what you said? was thereny job you wanted? i mean, you were...ouwere like... a presideial campaign has a certain association that send a signal of gravitas a value and, you know, i'm thinking a whole ran of them. certainly nator ted kennedy gave that... bestowed that on senator obamwhen he was running. certainly admiral crow bestow that on bill cnton. so muc what did you want from that and did you get it? >> what iwanted was mr. oba to become president. (laughs) >> rose: exacy. th was it. >> but did you wan to play a bigger differe role? >> n i am conscious o my age. and i'm.. i just had airthday recently i'm more conscious o it. (laughs) >> rose: 82. >> going on 83. once you get toe3, you're goinon 84.

>> rose: all right but you're in good health and you're enjoying shing and you play a b role and you're enying respect... i tell you, i feel older an used to be. >>ose: well, inevibly you're der than you useto be. >> sure. >> rose: but not as bad as you might. obama, he says to you"paul, what about invasion in a lot of ople tell me i ought be worried out inflation." >> you ought to be you ought to be perpetually worrd about inflation. you knowthe administration is perfecy conscious of the fact that they've got a b problem if inflation gets out of hand and they say "our hands are tied now, we can't anything now unemplment is approhing 10%, the economis weak, there isn't apparent inflaon problem at the momt, pris are nic and stable." but you've got that yawning budget deficit. you've got a portion ofhe dollar, we've goto be careful about this. but it's a problem for at least a year t, two years out,hree

years out. w, i think it's fair to say they say that, but you have no action, how ds thatecome credib? and it's very hard to make a credible... make icredible if you're not gng to raise taxes right now. you ve stimulus progms, you're not cutting expenditures right now. u're in the midst of a big debate aut health care which has been a big prioritywhich isn't exact... i don't undetand it all, but i think it's safe to say it's not goin toave a lot ofmoney. >> rose: but cant be deficit neutral? >> i don't know. they say they're ting to make it. don't ask me about health care, i've got enou things i don't understand.... >>ose: stay with me on this. the president says "look, we've got a bad. i was handed a bad problem with the deficit. what di do? and it too high? anhow do i ma smart decisions?" >> well,... just in terms of giving signals, 's not jt signal it's very substantive, the i wod really love somethinto be done about social security. that... coared to medica care

andmedicare, this is a preeminently solveab problem. >> rose: solveable? >>olveable ecomically. whether is politically or not don't know. but it ought to be solable polically. and if wecould get that done... i mean, think thatould be a useful signal tohe world. >> rose: yeah, but you say that at a time that everybody's saying to th... he would say to y "i hear you, d i want to get to that, but they're iticizing me for trying to take on climate ange and health care now." >> wel you're telling me the n't any magic ansr to this, i absolutel agree with y. i just say let's put this one in ere. it's one that cut in the rht direction. >> ros but would youay to him... >> and the sittion where there's thing you can do at's..than-of that... you know, you're not either going raise taxes orut expenditure right athe moment, unfortunately. once youonceive that, you're talkg about somethat tt's

going take place in the fure. and w can you deal now with something that'sgoing to have the impact in the ture but has that impt with some aurance? i think th one thing you can do or maybe a me immediate impact i think,ou know, pay as you go expenditure.... >> rose: in terms ofew legislation. yes. and just restoring tt kind of legislion would be somewhat hopeful. of course, that's been.... >> rose: ted and... >> it's aledge that' been broken many timesn the past but it's helpful ishowing a sense direction. you know, expenditures continue to go up d y've got a b gap between expenditures and receipts, sometimes you're goi to have to face up to the taxation questio i don't know howou avoid that. rose: soon, soon? >> if you can't get the expenditures uer control. >> re: hard to get expendite under control when you... lot of them e paying the debt, a lot of them ar mitary and, you know, when it... a lot of them are fixed expenditure >> i am very awe of this.

>> rose: i'm not givei you a lesson on budgeting. >> it'harder now than it was st year or the year bore. >> rose: exactly. >> so that's a problem we have. rose: that concludes part one of our conversation with paul volcker. tomorrow night he weighsn on taxation and oer issues about the decit. join us. captioning sponsored by rose communication captioned by media access gro at wgbh acce.wgbh.org

sturbed.

i can't go back. hey. yeah. [ laughs