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Time	Speaker	Text
00:00:05	>>	NOW A DISCUSSION ON THE GLOBAL ECONOMIC OUTLOOK WITH TWO FORMER CHIEF ECONOMIST AT THE INTERNATIONAL MONETARY FUND. WE WILL HEAR TWO DIFFERENT VIEWS ON THE ECONOMY. THIS IS HOSTED BY THE PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS. IT IS ONE HOUR AND 30 MINUTES.
00:00:27	>>	AS BOTH MY SPEAKERS DEPARTED, I AM WONDERING IF I SHOULD GO AHEAD AND START THE PROGRAM. I THINK THEY ARE PREPARING THEMSELVES FOR THEIR PRESENTATION. LET ME WELCOME ALL OF YOU TO OUR PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS TODAY. WE HAVE A SEMI-ANNUAL SERIES ON THE GLOBAL ECONOMIC PROSPECTS SESSIONS. WE ARE AT ALL TIMES ASSESSING THE OUTLOOK FOR THE GLOBAL ECONOMY, PARTICULARLY IN TOUGH TIMES LIKE THESE. WE FORMALIZE THAT TWICE A YEAR AS MANY OF YOU KNOW, BECAUSE YOU HAVE BEEN HERE BEFORE. WE HAVE PROGRAMS LIKE THIS WHERE WE LAY OUT OUR PROJECTIONS FOR THE COURSE OF THE GLOBAL ECONOMY FOR THE REST OF THE CURRENT YEAR AND INTO NEXT YEAR, 2010 AND IN THIS CASE. WHAT WE HAVE USUALLY DONE IS TO HAVE A SERIES OF THREE OR SO PRESENTATIONS. ONE ON WORLD ECONOMY, ONE ON U.S. ECONOMY, AND ONE ON SOME OTHER PART OF THE WORLD. WE PRESENT THOSE AS COMPLEMENTARY VARIANCES ON A THING. THIS YEAR, WE DECIDED TO DO SOMETHING DIFFERENT. WE ARE TRYING TO TAKE ADVANTAGE OF WHAT WE THINK ARE ADVANTAGES OF OUR PETERSON INSTITUTE, NAMELY A VERY VIGOROUS INTERNAL DEBATE OVER LOTS OF TOPICS. ON THIS OCCASION, WE WANT TO PRESENT TO YOU DIFFERENT VIEWS ON THE OUTLOOK FOR THE WORLD ECONOMY. THEY ARE NOT ANTAGONISTIC. THEY ARE NOT FIGHTING EACH OTHER. THEY ARE ALTERNATIVE VIEWS OF WHERE THE WORLD MIGHT GO IN THIS NEXT YEAR OR A FEW MONTHS. NONE OF US REALLY KNOWS FOR SURE. WE THOUGHT IT WOULD ONLY BE THE MOST -- THE BEST SERVICE WE COULD PROVIDE FOR A THOUGHTFUL PRESENTATIONS ON DIFFERENT PROSPECTS. WE THOUGHT THAT TO BE THE CASE BECAUSE THE PRESENTERS ARE BOTH FORMER CHIEF ECONOMIST OF THE INTERNATIONAL MONETARY FUND. MICHAEL MUSSA WHO HAS ANCHORED THIS ENTIRE SERIES WAS CHIEF ECONOMIST AT THE IMF FROM 1991 TO 2001 WHEN HE JOINED THE INSTITUTE. BEFORE THAT, HE WAS ON THE COUNCIL OF ECONOMIC ADVISERS WITH PRESIDENT RONALD REAGAN. HE HAS ORGANIZED THIS SERIES THE ROUTE. HE WILL LEAD OFF WITH HIS VIEW OF WHERE THE WORLD ECONOMY IS GOING. THE SECOND PRESENTATION WILL BE BY SIMON JOHNSON, OUR NEWEST SENIOR FELLOW AT THE INSTITUTE. HE JOINED AS LAST SEPTEMBER AFTER SPENDING A YEAR AND A HALF AS CHIEF ECONOMIST AT THE IMF. HE IS ALSO TEACHING AT MIT SINCE LEAVING THE IMF. HE HAS BEEN VERY ACTIVE ON COMMENTING ON THE CURRENT CRISIS. WE PRESENT TWO ALTERNATIVE VIEWS OF WHERE THE WORLD ECONOMY IS GOING BY TWO FORMER CHIEF ECONOMIST OF THE IMF. THEY CAN NOW TELL THE TRUTH AND WHAT THEY'RE REALLY BELIEVE. MIKE AND DAN SIMON. [APPLAUSE] -- MIKE AND THEN SIMON. [APPLAUSE]
00:04:13	>>	IT IS A PLEASURE TO RETURN TO THE PODIUM. THE EVENTS OF LAST FALL REMOVED ALL DOUBT AS TO WHETHER THE U.S. ECONOMY AND THE WORLD ECONOMY WOULD HAVE A RECESSION IN 2008 AND 2009. THE U.S. ECONOMY SUFFERED A 6.3% ANNUAL RATE OF DECLINE IN GDP IN THE FOURTH QUARTER. THE STEEPEST QUARTERLY DECLINE SINCE THE EARLY 1980'S. THE WORLD ECONOMY AS THE IMF MEASURES IT ALSO IS ESTIMATED TO HAVE SEEN A 6% ANNUAL RATE IN THE FOURTH QUARTER OF THE GDP. FOR THE WORLD ECONOMY, THERE PROBABLY IS NO OTHER QUARTER IN THE POST-WAR HISTORY WHERE WE HAVE HAD SUCH A CONCENTRATED DECLINE IN OUTPUT AND ESPECIALLY IN INDUSTRIAL PRODUCTION AND IN THE VOLUME OF WORLD TRADE. THE FIRST QUARTER THIS YEAR IS ALSO SEEING A CONTINUING DECLINE IN OUTPUT ACROSS MOST OF THE WORLD ECONOMY. IT APPEARS LIKELY THAT OUTPUT WILL CONTINUE TO CONTRACT AT LEAST THROUGH THE SECOND QUARTER OF THIS YEAR, AND MANY THINK FOR A NUMBER OF ORDERS AFTER THAT. IT LOOKS PRETTY CERTAIN THAT ON A YEARLY BASIS, GLOBAL REAL GDP WILL HAVE AN OUTRIGHT DECLINE BETWEEN 0.5% AND 1%. THE U.S. ECONOMY WILL SUFFER SUBSTANTIALLY LARGER OUTPUT DECLINED. MEANWHILE, INFLATION WHICH A YEAR AGO WAS THE LEADING WORLD ECONOMIC ISSUE WITH THE GLOBAL CPI RATE HAVING RISEN TO 6% ON A 12-MONTH BASIS VERSUS NOT MUCH ABOVE 2% IN IN 2003. GLOBAL CONFESSION -- GLOBAL INFLATION HAS CHANGED DRAMATICALLY. THE 12-MONTH FIGURES HAVE COME DOWN TO ABOUT 4%. THEY ARE HEADED LOWER. INFLATION IS NOT ON THE NEAR- TERM HORIZON AT LEAST AS A KEY POLICY CONCERN. IN THESE REMARKS, I WANT TO TALK A LITTLE BIT ABOUT WHAT HAS CAUSED THIS SUDDEN DETERIORATION IN ECONOMIC CONDITIONS WORLDWIDE. SECOND, I WANT TO TALK ABOUT THE GLOBAL PROSPECTS IN COUNTRIES OTHER THAN THE UNITED STATES. I THEN WANT TO FOCUS THE ATTENTION ON THE U.S. ECONOMY, IT'S RECESSION, AND THE PROSPECTS FOR RECOVERY. FIRST, AND THE CAUSES. , WHAT CAUSES THE NEGATIVE SHOCKS. THE ECONOMY LIKES TO MOVE FORWARD AT A REASONABLE PLACE. THEN SOMETHING COMES ALONG AND NOT SET OFF TRACK. WHAT CAUSES RECOVERIES? THE SHOCKS DISSIPATE IN THE NATURAL PROCESS OF ECONOMIC RECOVERY TAKES OVER, OFTEN AIDED BY POLICY STIMULUS AT LEAST IN THE POST-WAR TIME FRAME. WHAT WERE THE SHOTS? WE HAD A VERY LARGE SHOT THROUGH THE CARNAGE OF SYSTEM HITTING THE GLOBAL ECONOMY IN THE BALL OF LAST YEAR. -- IN THE AUTUMN OF LAST YEAR. THERE WAS OUTRIGHT FAILURE OF LEHMAN BROTHERS IN SEPTEMBER AND AIG. ALSO SIGNIFICANT PROBLEMS WITH BANKS IN EUROPE AND ELSEWHERE. THE KIND OF SEIZING UP OF THE GLOBAL CREDIT MARKETS WHERE FOR THE FIRST TIME SINCE THE 1930'S, WE SAKI CREDIT MARKETS NATIONALLY AND INTERNATIONALLY SIMPLY STOP FUNCTIONING. SOME OF FIRMS FOUND OUT THEY CANNOT ISSUE COMMERCIAL PAPER. THEY CANNOT SECURE FUNDING THROUGH THAT. MAJOR BANKS WOULD -- WERE NOT PREPARED TO LEND TO EACH OTHER. THE LIBOR INTEREST RATE SPREAD OVER TREASURYS AND WENT UP TO 400 BASIS POINTS. NOBODY WAS BORROWING AT THOSE INTEREST RATES. THAT TYPE OF CREDIT MARKET DISTURBANCES -- THE CREDIT SYSTEM STOPPED CIRCULATING CREDIT. IT AFFECTS THE ECONOMIC ACTIVITY AND TRADE. IT IS VERY NEGATIVE VERY FAST. EARLIER IN THE YEAR, WE SAW MARKET PRICES ESCALATE WITH OIL PRICES REACHING $147 A BARREL IN THE SUMMER. THAT TYPE OF SEARCH HAS A NET DEBT ECONOMIC IMPACT ON IMPORTING -- HAS A NEGATIVE ECONOMIC IMPACT ON IMPORTING. IT YET AS AROUND THE FOURTH QUARTER. EARLIER IN THE YEAR IN 2007, MANY COUNTRIES BESIDES THE UNITED STATES HAVE BEEN TIGHTENING THEIR ECONOMIC AND MONETARY POLICIES. THEY ARE CONCERNED ABOUT RISING INFLATION. IT BEGAN TO GET US WHEN WE DID NOT NEED IT, AROUND THE END OF LAST YEAR. A COMBINATION OF SHOCKS BUILT UPON EACH OTHER AND MUTUALLY REINFORCE ACROSS THE HIGHLY INTERACTIVE AN INTEGRATED GLOBAL ECONOMY. WE SAW THIS RAPID DROP IN GDP AND A MUCH LARGER DROP IN THE PRODUCTION OF TRADE. THAT IS CONTINUING INTO THE FIRST QUARTER OF THIS YEAR. THAT IS NOT SURPRISING. THERE WAS A AND I GOT MOMENTUM COMING OUT OF THOSE SHOTS. -- THERE WAS A NEGATIVE MOMENTUM COMING OUT OF THOSE SHOCKS. IT WAS 27 YEARS AGO THAT I STARTED MY CAREER AS AN ECONOMIC FORECASTER. AT THAT TIME, I ASK MY COLLEAGUE AT THAT TIME WHO HEADS DIED LAST MONTH -- WHO HAS DIED LAST MONTH, WHAT HIS ADVICE WAS. HE SAID AN ECONOMIST HAVE NEVER BEEN ABLE TO FORECAST WHEN EXPANSIONS WILL END AND RECESSIONS WILL START OR HOW LONG RECESSIONS WILL GO AND WHEN THEY WILL STOP AND EXPANSIONS WILL OCCUR. IT IS NOT TRUE THAT LONG EXPANSIONS ARE FOLLOWED BY THE DEEP RECESSIONS. THERE IS ONLY ONE RELIABLE REGULARITY IN THE BUSINESS CYCLE HISTORY IN THE UNITED STATES AND ELSEWHERE. DEEP RECESSIONS ARE FOLLOWED BY STEEP RECOVERIES. ECONOMIC FORECASTS ALMOST NEVER TAKE INTO ACCOUNT THIS REGULARITY. THE THINKING IS ALWAYS THAT THIS THING IS GOING TO GO ON FOREVER. WHEN WE START TO TURN AROUND, IT IS GOING TO BE SLUGGISH. THAT IS THE STORY OF THE L- SHAPED RECESSION AND RECOVERY. LET ME KNOW AND NOW THAT IN THE BUSINESS CYCLE HISTORY OF THE UNITED STATES, GOING BACK AS FAR AS WE CAN WITH AND BESHORE PRODUCTION DATA, TO THE 19 -- AS FAR AS BEGAN WITH INDUSTRIAL PRODUCTION DATA, TO THE 1930'S. THE JURY IS RECESSION OR THE NON-RECESSION -- THE JOYOUS RECESSION OR THE NON-RECESSION, GDP DROP 13% AS FEDERAL EXPENDITURE ON THE WAR EFFORT DECLINED FROM OVER 40% OF GDP TO ABOUT 9% IN TERMS OF FEDERAL SPENDING. THE RESURGENCE OF PRIVATE CONSUMPTION AND INVESTMENT COULD NOT OFFSET THE IMPACT OF THE DECLINE IN THE WAR EFFORT. EVERYBODY WAS ACTIVE. THEY WANTED TO RELAX A BIT AFTER THEY WORKED SO HARD TO WHEN THE WAR. THE RECOVERY OF THE GDP WAS N GDPIL OVER -- OF THE GDP WAS NIL. THE 2001 RECESSION AND RECOVERY, THE RECESSION WAS VERY SHALLOW AND THE RECOVERY WAS VERY SHALLOW AS WELL. IT WAS A VERY SHALLOW "V." BEFORE TURNING TO THAT TO THE UNITED STATES, LET ME SAY A FEW WORDS ABOUT THE PROSPECTS FOR THE WORLD ECONOMY. THERE WE ARE. OK. WHAT I FORESEE FOR THE WORLD IS THAT GDP IS GOING TO DECLINE THIS YEAR. IT WILL HAVE A V-SHAPED RECOVERY. IT WILL PICK UP AGAIN NEXT YEAR. THE INDUSTRIAL COUNTRIES ARE GOING TO ADVANCE. SOME WILL DROP 3%. THERE WAS A 83% RECOVERY. JAPAN IS TAKING A BIG HIT THROUGH PRIMARILY -- THERE WAS A 3% RECOVERY. JAPAN IS TAKING A BIG HIT. THE U.K. IS HAVING A SERIOUS RECESSION AND IN 17 YEARS. IT WILL CONTINUE FOR A WHILE. THEIR ECONOMY HAS AN IMPORTANT FINANCIAL SECTOR WHICH HAS BEEN HIT HARD. IT IS GOING TO TAKE A WHILE FOR THAT TO COME AROUND MANUFACTURING WILL IMPROVE WITH THE POUND. THAT WILL TAKE A WHILE. IN THE EURO AREA, WE ARE SEEING A SIGNIFICANT RECESSION. IT IS IMPORTANT TO KEEP IN MIND, THESE LAC DEVELOPED IN EUROPE IS LESS THAN IN THE UNITED STATES. THE UNEMPLOYMENT RATE IS UP LESS THAN A PERCENTAGE POINT OF THAT IS THE TROUGH LAST YEAR. IT WAS. 5 PERCENTAGE POINT BELOW LAST YEAR. EVEN WITH THE OUTPUT DECLINE THIS YEAR, THE MARGIN OF SLACK IN WESTERN EUROPE WILL BE LESS THAN THE UNITED STATES AS WE BEGAN TO RECOVER FROM THE RECESSION. THAT LARGELY A COUNSEL FOR THE FACT THAT THE POLICY RESPONSE HAS BEEN LESS VIGOROUS IN EUROPE AND CAME LATER THAN IN THE UNITED STATES. I ANTICIPATE THAT WE WILL SEE RECOVERY IN EUROPE BEGINNING PROBABLY LATE THIS YEAR AS WELL AS IN THE UNITED STATES. TURNING TO EMERGING-MARKET, CHINA HAD A SHARP SLOWDOWN IN GROWTH AT THE END OF LAST YEAR. GDP GROWTH ON A QUARTERLY BASIS WAS CLOSE TO ZERO. THE TIGHTENING OF POLICY AND THE WIND DOWN FROM THE BEIJING OLYMPICS, THE CHINESE GOVERNMENT IS ENGAGING IN MASSIVE POLICY STIMULUS THROUGH THE BUDGET BUT ALSO THROUGH THE MONETARY AND CREDIT SYSTEM. I EXPECT WE WILL SEE A RAPID REBOUND IN GROWTH. THE EVENTS OF LAST YEAR WILL DRAG DOWN GDP GROWTH ON A YEAR- TO-YEAR BASIS. THE STORY IS SIMILAR FOR INDIA. THEY ARE LESS TIED IN TO THE GLOBAL ECONOMY. THEY HAVE NOT SUFFERED AS MUCH FROM THE NEGATIVE SHOCKS. WE HAD FAIRLY GOOD MONSOON AND THE AGRICULTURAL SECTOR IS IMPORTANT. GROWTH WILL BE REASONABLY WELL- SUSTAINED BUT WELL DOWN FROM THE 8% FOR THE HIGHER RATES WE HAVE SEEN IN RECENT YEARS. THE REST OF ASIA IS MORE DEPENDENT ON TRADE AND HAS BEEN HIT HARDER. SOME ECONOMISTS ARE SUFFERING SUBSTANTIAL DROPS IN GDP OF THIS YEAR. IN LATIN AMERICA, BRAZIL HAD A NEGATIVE FOURTH QUARTER. IT LOOKS LIKE THERE WILL BE-YEAR AFTER YEAR. MEXICO HAS BEEN PULLED DOWN BY EVENTS IN THE UNITED STATES AND WILL BE INFLUENCED BY THE CONTINUING U.S. RECESSION. THE REST OF LATIN AMERICA IS BEING HIT. WE HAVE A-YEAR THIS YEAR IN LATIN AMERICA. A RECOVERY IS EXPECTED NEXT YEAR. A NUMBER OF ARE IN DEEP TROUBLE. SOME ARE AROUND THE ZERO LINE. WE WILL SEE A DECLINE IN THE 3% RANGE IN CENTRAL AND EASTERN EUROPE. RUSSIA IS SUFFERING AN OUTWARD DECLINE LINKED BOTH TO THE DROP IN OIL PRICES AND THE UNDERLYING PROBLEMS IN THE ECONOMY THAT HIGHER ALL OIL PRICES HELPED TO CONCEAL. THERE IS UNCERTAINTY AS TO HOW THE RECOVERY WILL LOOK IN RUSSIA. THE MIDDLE EAST, THE DROP IN OIL PRICES DOES NOT DIRECTLY AFFECT REAL GDP. THE DIRECTION OF OIL PRODUCTION VOLUMES DOES. THEY ARE GOING TO SLOW DOWN AND HAVE A RECESSION. A SUBSTANTIAL SLOWDOWN OF GROWTH IN THAT AREA. IN AFRICA, SOME ARE MORE OPTIMISTIC THAN I AM. IF THEY MANAGE TO% REAL GROWTH, THEY WILL DO PRETTY WAY -- IF THEY MANAGE TO%2% REAL GROWTH, THEY WILL DO PRETTY WELL. AN IMPORTANT PART OF A STORY IS WHAT IS GOING TO HAPPEN IN THE U.S. ECONOMY AND IN CHINA AS WELL. THE CHINESE ECONOMY IS GOING TO BE RECOVERING. AS IT RECOVERS, IT WILL HELP PULL UP THE REST OF ASIA. THE CHINESE FORCE IS NOT GOING TO BE ABLE -- THE CHINESE HORSE IS NOT GOING TO BE ABLE TO PULL THE WAGON ALONE. THE U.S. ECONOMY NEEDS TO BE MOVING FORWARD AS WELL. WE ARE DEFINITELY HAVING A RECESSION IN THE U.S.. I HAVE BEEN TRYING TO DO A COMPARISON WITH THIS RECESSION COMPARED TO PREVIOUS RECESSIONS. THE GDP WILL FALL TO 2% FROM THE SECOND QUARTER. WILL HAVE A MODERATELY POSITIVE GROWTH IN THE THIRD QUARTER AND PICK UP IN THE FOURTH QUARTER THROUGHOUT 2010 AND BEYOND. THAT FORECAST SAYS THAT YEAR OVER YEAR -- EXCUSE MAIN -- EXCUSE ME, THE DECLINE IN GDP FROM THE SECOND QUARTER OF LAST YEAR TO THE SECOND QUARTER OF THIS YEAR WILL WORK OUT AT ABOUT 3.5% -- 3.25%. OTHER MEASURES OF THE DEPTH OF THE RECESSION MAKES THIS RECESSION THE DEEPEST IN THE POST-WAR ERA, ESPECIALLY IF YOU LIKE AND HOW MUCH THE UNEMPLOYMENT RATE IS RISING. WE WILL HAVE A 5% RISE IN THE UNEMPLOYMENT RATE WHICH IS THE BIGGEST OF ANY POST-WAR RECESSION. IN OTHER RESPECTS, THE RECESSION IS SIMILAR IN SOME WAYS IN DIFFERENT IN OTHERS FROM EARLIER POST-WAR RECESSIONS. MANY RECESSIONS ARE DOMINATED BY THE SWING IN INVENTORY INVESTMENT. IN FOUR CASES, THE SWING IS MORE THAN THE TOTAL DECLINE IN THE GDP. THAT IS NOT HAPPENING ON THIS OCCASION. WE ARE GETTING QUITE MODEST DECLINE IN INVENTORIES. I THINK WE WILL SEE MORE OF A DECLINE IN THIS QUARTER AND NEXT VEERED INVESTMENT IS DOWN IN A RECESSION. -- IN THIS QUARTER AND NEXT. INVESTMENT IS DOWN IN A RECESSION. HOUSE AND BEGAN TO CRASH AT THE END OF 2005. THE A CUMULATIVE DECLINE -- THE A CUMULATIVE DECLINE IS-%. THERE ARE OTHER DECLINES IN THE RECESSION. CONSUMPTION SPENDING IS FALLING IN THIS RECESSION. IT DOES NOT DO SO IN EVERY RECESSION. THIS IS GOING TO BE THE LARGEST DECLINE OF ANY POST-WAR RECESSION. CONSUMPTION SPENDING GROWTH IS GOING TO BE SLUGGISH COMING OUT OF THE RECESSION. THAT IS WHAT THE RECESSION IS GOING TO LOOK LIKE. WHAT ABOUT THE RECOVERY? IT IS HARD TO SAY WHEN THE RECOVERY STARTS. I HAVE AN EARLY STARTING POINT FOR IT. THE RECESSION COULD GO ON ANOTHER QUARTER OR SO. IT IS INTERESTING TO LOOK AT WHAT TYPICALLY HAPPENS IN A RECOVERY ONCE IT STARTS. THESE ARE THE NINE PREVIOUS POST-WAR RECOVERIES. THEY ARE LISTED IN THE FIRST COLUMN. THE SECOND COLUMN LISTS THE DEPTH OF THE PRECEDING RECESSION IN TERMS OF THE DROP IN REAL GDP. WE HAD TWO RECESSIONS IN THE 1980'S. THE REAGAN RECOVERY IS FROM THE TWO RECESSIONS. THE STRENGTH OF THE RECOVERY IS MEASURED IN TERMS OF THE A CUMULATIVE GAIN IN GDP DURING THE FIRST SIX QUARTERS OF THE GOVERNMENT. , MUCH OF THE ECONOMY IS GOING TO GROW BETWEEN THE END -- HOW MUCH THE ECONOMY IS 20 GROW BETWEEN THE END OF THIS YEAR AND NEXT YEAR. -- HOW MUCH THE ECONOMY IS GOING TO GROW BETWEEN THE END OF THIS YEAR AND NEXT YEAR. THERE WAS A SHALLOW RECESSION AND A SHALLOW RECOVERY. THE FIRST OF BUSH HAD A WEAK RECOVERY. WE HAD A TWO-QUARTER RECESSION. ALL OF THE OTHERS HAVE OUTPUT GAINS IN EXCESS OF 7%. THE AVERAGE FOR ALL NINE IS 7.7% IN THE FIRST SIX QUARTERS. THE AVERAGE OF THE ODD INVENTORY CYCLE IS 8.8%. RECOVERIES DO INDEED TO BE QUITE POWERFUL AT LEAST IN HISTORY. I CONSTRUCTED A SCENARIO THAT RESPECTS THAT GENERAL REGULARITY. THAT IS IN THE THIRD COLUMN OF THIS WHERE THE SECOND COLUMN LISTS THE LEVEL OF REAL GDP ANTICIPATED THAT THE CYCLICAL TROUGH AT THE END OF THE SECOND QUARTER. THE FORECAST IS THE GAINS IN REAL GDP AND IS COMPLIMENTS OVER THE NEXT SIX QUARTERS. THE FINAL TWO COLUMNS ARE WHAT SCENARIO -- WHAT THE SCENARIO WOULD LOOK LIKE IF WE HAD AN AVERAGE RECOVERY. NOTABLY IN A 6.2% RECOVERY, CONSUMPTION SPENDING IS GOING TO RECOVER, BUT AT A LOWER RATE THAN GDP. THE SAVINGS RATE IS GOING TO GO UP. IT WILL REACH ABOUT 7% IN MY FORECAST BY THE END OF 2010. DURABLES GET HARD HIT DURING A RECESSION. THEY HAD A BIG GAIN AS SERVICES KEEP GROWING. ONE HAS A LARGE GAIN, 25%. STRUCTURES WILL CONTINUE TO SHRINK A LITTLE BIT. THAT MAY OR MAY NOT BE RIGHT. IT DEPENDS ON HOW MUCH THE STIMULUS BOOST PRIVATE INVESTMENT IN STRUCTURES. EQUIPMENT AND SOFTWARE ALWAYS HAS A BIG CYCLICAL RECOVERY, SIX QUARTERS OUT. RESIDENTIAL INVESTMENT HAS A LARGE GAIN. THE LEVEL IS STILL FERTILE% BELOW THE PEAK -- IS STILL 30% BELOW THE PEAK. NEW HOME BUILDING GOES UP ABOUT 1 MILLION UNITS A YEAR. THE LAST COMPONENT HAS LESS THAN THE OTHER CYCLICAL CATEGORIES. THE U.S. ECONOMY WILL RECOVER EARLIER AND MORE STRONGLY IN MOST OF ITS TRADING PARTNERS AND WE WILL BE EXPORTING DEMAND TO THE REST OF THE WORLD WHICH WILL BE A DRAG ON OUR OWN RECOVERY. SOME MIGHT SAY THAT THIS IS AN OPTIMISTIC FORECAST. I REGARDED AS CONSERVATIVE. IT IS BELOW THE AVERAGE OF POST- WAR RECOVERIES. WE ARE RECOVERING FROM A DEEP RECESSION WHERE IN THE PAST RECOVERIES HAVE TENDED TO BE QUITE STRONG. SUBSTANTIAL ALLOWANCES ARE MADE HERE BOTH WITH THE POSSIBILITY THAT THE RECOVERY MIGHT NOT GET STARTED QUITE AS EARLY AS I HAVE INDICATED. THERE ARE FACTORS THAT I WILL LIKE TO RESTRAIN A BID FOR THIS RECOVERY. ONE CAN EASILY HAVE A SUBSTANTIALLY STRONGER CYCLICAL ECONOMY WITHOUT BEING OUTSIDE THE RANGE OF WHITE MEAT -- OF WHITE -- OF WHAT MIGHT BE REGARDED AS REASONABLE. THE FEDERAL RESERVE HAS THAN -- HAS AN EXPANSIVE MONETARY POLICY. IT IS EXPENSIVE ON BOTH SIDES OF THE BALANCE SHEET. THEY ARE BUYING UP ASSETS, LENDING OUT MONEY ON THE ASSET SIDE TO RESTART VARIOUS FINANCIAL MARKETS AND PROVIDE CREDIT DIRECTLY TO SUPPORT THOSE MARKETS. THE LIABILITY SIDE HAS TO BE EXPANDING AS WELL. THEY ARE STUFFING EXCESS RESERVES ON TO THE BANKS. THEY'RE HOLDING OVER A HUNDRED BILLION DOLLARS OF EXCESS RESERVES NOW. THE FED'S BALLOTS SHEET GOES UP ON THE ASSETS SIDE TO -- THE FED'S BALANCE SHEET GOES UP ON THE ASSET SIDE TO $3 TRILLION. THEY ARE EARNING A QUARTER OF A PERCENTAGE POINT. SOME MAY SAY WE COULD EARN ANOTHER 300 BASIS POINTS IF WE LET THIS MONEY TO SOMEBODY ELSE. I THINK THERE IS GOING TO BE PLENTY OF CREDIT AVAILABLE FOR THE BANKING SYSTEM TO LEAD OUT AND PLENTY OF INCENTIVE FOR THEM TO DO SO. IN THE END, THIS WILL WORK TO PROMOTE RECOVERY IN THE PRIVATE SECTOR. SOME SAY, MANY SAY, WE NEED TO FIX THE BANK'S FIRST. I HAVE NO PROBLEM FIXING THE BANKS. THAT IS NOT THE WAY IN WHICH IT HAS USUALLY HAPPENED IN THE PAST YEAR IN THE DEEP RECESSION OF THE MID 1970 YOU SEE -- MADE 70'S -- MID-70'S -- THE SAVINGS-AND-LOAN INDUSTRY NEVER RECOVERED. THE EXPANSION CAME NEVERTHELESS. THE HOUSING SECTOR RECOVERED EVEN THOUGH ITS PRINCIPAL LENDERS OF THE SAVINGS-AND-LOAN INDUSTRY WAS DEEPLY INSOLVENT. WHAT HAS HAPPENED IN THE PAST IS THAT THE RECOVERY OF THE ECONOMY HAS HELPED FIX THE BANKS. IT HAS NOT BEEN TO SOLVE ALL OR MOST OF THE PROBLEMS OF THE BANK BALANCE SHEETS BEFORE 1 STIMULATES THE RECOVERY. THAT HAS BEEN TRUE IN THE UNITED STATES. WE LOOK AT THE MANY COUNTRIES THAT HAVE HAD FINANCIAL CRISES. THE BANKS REMAINED IN ROTTEN SHAPE AS THE ECONOMY RECOVERED SPECTACULARLY IN THE INITIAL STAGES. I THINK ONE MAN WILL BE PROVED RIGHT AGAIN. WE WILL SEE AV-SHAPED -- L.A. V- SHAPED RECOVERY. -- WE WILL SEE A V-SHAPED RECOVERY. WE WILL SEEK THE VIEW FOR VICTOR -- WE WILL SEE THE "V" FOR VICTOR. [APPLAUSE]
00:32:49	>>	THANK YOU VERY MUCH FOR THIS OPPORTUNITY. DESPITE WHAT ONE PERSON SAID, I THINK THERE IS A STARK CONTRAST BETWEEN THE VIEWS OF THE FUTURE AND THE VIEWS THAT MIGHT JUST PRESENTED VERY CLEARLY. -- THAT MIGHT JUST PRESENTED VERY CLEARLY. -- AND THAT MIKE -- THAT MIKE JUST PRESENTED VERY CLEARLY. THE BASIS POINT THAT I WOULD SUGGEST IS THAT IT IS A SLUGGISH RECOVERY. IT IS A RECOVERY THAT STRUGGLES TO TAKE HOLD BOTH IN THE UNITED STATES AND GLOBALLY. HE EMPHASIZED A KEY POINT WHICH IS IF I AM TO BE RIGHT AND THIS HAS TO BE DIFFERENT FROM WHAT WE HAVE SEEN BEFORE. I AM ALWAYS SUSPICIOUS OF ANYONE WHO STANDS UP BEFORE YOU AND SAYS THE WORLD HAS CHANGED COMPLETELY, DISREGARD ALL PREVIOUS OBSERVATIONS YOU THOUGHT WERE RELEVANT, AND LET US THINK ABOUT THIS DELAY. THAT IS GENERALLY NOT TRUE. I TAKE SOME COMFORT THAT I SAID THAT AT THE END OF SEPTEMBER LAST YEAR WITH SOME RELUCTANCE. IT WAS MET BY A FAIRLY UNIVERSAL THIS POLICE -- DISBELIEF. THERE WOULD BE A CONTRACTION OF ABOUT 1% IN GDP WHICH AT THE TIME SEEMED OUTRAGEOUS IN 2004. I THINK THAT TURNS OUT TO HAVE BEEN IN THE RIGHT BALLPARK. IT DOES NOT MEAN THAT WE WILL BE RIGHT IN THE RECOVERY. WE DID HAVE A GOOD SENSE OF THE DOWNTURN. WHEN I SAY WE, I AM SPEAKING OF A SMALL GROUP WITH WHOM I'D RUN A WEBSITE WITH -- WITH NO I RUN A WEBSITE WITH. -- WITH HWHOM I RUN A WEBSITE WITH. WE DO IT BLOG -- WE DO BLOG. WE TRY TO UPDATE OUR BASELINE VIEW. I WOULD LIKE TO RECOGNIZE MY FORMER COLLEAGUE HERE. ALL OF THE IMF PEOPLE ARE SITTING AT THE TABLE OF MICHAEL MUSSA. I AM SURE THAT IS COINCIDENCE. CHARLES AND I USED TO TALK ABOUT THE FORECAST. ALWAYS WANTED TO MOVE THE BASE LINE. CHARLES WOULD ALWAYS MENTION THE PROBLEMS ASSOCIATED WITH DOING THAT. NOW I HAVE MY OWN BASELINE, AND I MOVE IT ON A DAILY BASIS. [LAUGHTER] CHARLES GETS LESS SLEEP AND MOVES THE BASELINE MORE OFTEN NOW. HOW CAN THE WORLD HAVE CHANGED? WHAT HAPPENED IN THE FALL? WHAT IS HAPPENING NOW? WHAT IS THE BASIS OF THE ARGUMENT? I WILL REFER YOU TO A NUMBER OF PIECES WE HAVE DONE THROUGH OUR WEB SITE TO ARTICULATE THIS IN MORE DETAIL. THE BASIC POINT, WHICH YOU CAN ACCEPT OR REJECT, IS THAT THE U.S., THE HEART OF THE GLOBAL ECONOMY, AND I WILL INCLUDE EUROPE ALSO, HAVE BECOME A LOT MORE LIKE EMERGING-MARKET THEN WE HAVE EVER SEEN BEFORE. WE HAD THIS IDEA PREVIOUSLY THAT DEVELOPMENT AND MODERATE ECONOMIC GROWTH WAS ABOUT EMERGING MARKETS BECOMING MORE LIKE INDUSTRIALIZED COUNTRIES, SUBJECT TO CAPITAL FLOW AND SHOCKS AND SO ON. THE U.S. HAS BECOME MORE FUNDAMENTALLY UNSTABLE BECAUSE OF THE WAY THE FINANCIAL SECTOR DEVELOPED. I WILL REFER YOU TO AN ARTICLE THAT I JUST PUBLISHED IN A MAGAZINE THAT IS AVAILABLE ONLINE. WE ARGUED THIS THROUGH THAT THE FINANCIAL SECTOR BOM THAT HAPPENED IN THE UNITED STATES AND IN OTHER COUNTRIES HAVE AN EMERGING MARKET BOOM. YES SOME EFFICIENCY GAINS. YOU GENERATE SENSIBLE PROFITS. -- YOU HAVE SOME OF THE EFFICIENCY GAINS. YOU GENERATE SENSIBLE PROFITS. DERIVATIVES ARRIVED. THE SECTOR HAS AN OPPORTUNITY TO CONSTRUCT ITS OWN FUTURE PROFIT OPPORTUNITIES. IT FEEDS INTO FURTHER CONCENTRATION OF POLITICAL POWER. WE HAVE ALLOWED TO DEVELOP IN THIS COUNTRY A SECTOR THAT IS DANGEROUS. IT IS CAUSING AND HAS CAUSED A DEGREE OF COLLAPSE. IT IS AN UNPRECEDENTED DEGREE OF COLLAPSE IN THE U.S. AND GLOBAL ECONOMIES. IT IS A PROBLEM FOR THE RECOVERY. THIS IS NOT JUST ABOUT THE BANKS. IT IS NOT JUST ABOUT THE RECOVERY. THE BANKS ARE THE HEART OF THE MATTER. IT IS THE POLITICAL POWER OF THE BANKS THAT PRESENTS THE MOST SUBSTANTIAL PROBLEM TO THIS ADMINISTRATION IN TERMS OF MOVING FORWARD WITH A SENSIBLE POLICIES. MOST OF THE ADMINISTRATION'S POLICIES I SUPPORT. I SUPPORT SOME OF THEM VERY STRONGLY ON A DAILY BASIS ON MY WEBSITE. THE FINANCIAL RESCUE OF THAT POLICY I THINK MAKES LESS SENSE. IT CATERS TO MUCH TO THE FINANCIAL SECTOR WHICH IS NOT GOOD TO THE GROWTH OF THE ECONOMY OR SOCIETY AS A WHOLE. WE TAKE ISSUE WITH THAT. I AM HAPPY TO DISCUSS THAT FURTHER. IT'S THE COLLAPSE OR THE DECLINE WE HAVE SEEN SO FAR -- IF THE DECLINE WE HAVE SEEN SO FAR HAS BECOME MORE LIKE WHAT WE CALL THE PARADE -- YOU CAN WORRY ABOUT THE BANKING SYSTEM. IF YOU LOOK AT THE CREDIT DEFAULT SWAP SPREAD ON MAJOR NON-BANK HOLDING COMPANIES, -- IF YOU LOOK AT WHAT IS HAPPENING TO THESE, THEY HAVE INCREASED OVER THE PAST COUPLE OF WEEKS WHILE OTHER CREDIT RISKS HAVE GOTTEN BETTER. THE EQUITY MARKETS ENJOYED A PRETTY STRONG RALLY. SOMETHING IS STILL GOING ON WITH THE BANKS. THE CHANCE WE GET OUT OF THIS WITHOUT FURTHER COLLAPSE IS RATHER LIMITED. THERE ARE PROBLEMS WITHIN THE SHORT TERM OF THE FINANCIAL SYSTEM. THERE ARE ALSO PROBLEMS IN TERMS OF THE GROWTH POTENTIAL OF THE FINANCIAL SECTOR. ALL THE ECONOMIES REPRESENTED TODAY MOVE MUCH MORE OF THE GDP INTO FINANCING SINCE 1980. I DO NOT KNOW WHAT THAT IS SUSTAINABLE. IN ADDITION TO THE FINANCIAL DISRUPTION, THERE IS A CHANGE IN THE ALLOCATION OF CAPITAL. THAT IS A LONG PROCESS. IT IS NOT MADE EASIER BY THE FACT THAT CREDIT IS STILL STOPPED. -- IS STILL STUCK. THE BALANCE SHEETS OF CONSUMERS AND OF BUSINESSES ARE DAMAGED AND VIEWED AS BEING DAMAGE. THIS IS THE SENSE IN WHICH THE JAPAN SCENARIO IN THE 1990'S IS IRRELEVANT. IF THE CONSUMERS ARE TRYING TO PAY DOWN THEIR DEBT AND BUSINESSES ARE TRYING TO BE MORE CAREFUL -- ONE OF MY CLOSE COLLEAGUES AT MIT TELLS ME STORIES ABOUT HOW THE RECESSION IN THE 1990'S HIS COMPANY REALLY REGARDED TAKING CREDIT AS BEING EXTREMELY RISKY BECAUSE YOU DID NOT KNOW IF THE CREDIT WAS GOING TO BE THERE IN THE FUTURE. THEY WOULD TRY TO PAY DOWN THEIR DEBT WITH EVERY CENT THEY HAD. THIS IS A GLOBAL COLLAPSE AND A DIFFICULT RECOVERY BASED ON THE PROBLEMS IN THE FINANCIAL SYSTEM. IT IS SO DIFFICULT -- IT IS A DIFFICULT PROBLEM TO ADDRESS IN THE UNITED STATES AND OTHER COUNTRIES. WE HAVE NO IDEA WHERE THIS DOES. THAT IS MY POINT. WE ARE IN UNCHARTED TERRITORY. PRESIDENT OBAMA SAID IT IS THE GREATEST FINANCIAL CRISIS SINCE THE GREAT DEPRESSION. I THINK THAT IS RIGHT. WHAT IS THE DEGREE OF LEVERAGE? HOW MUCH LEVERAGE ARE PEOPLE WILLING TO HAVE IN THE HOUSING SECTOR OR THE CORPORATE SECTOR? I HAVE NO IDEA. I THINK THEY WILL NOT WANT TO HAVE THE DEGREE OF INDEBTEDNESS THAT THEY HAVE. I THINK THIS WILL FIT VERY MUCH WITH THE JAPAN-TYPE SLUGGISH RECOVERY. MOST OF THE BELLS? -- THE MOST RAPID COLLAPSES WE HAVE SEEN IN EMERGING MARKETS ARE FOLLOWED BY RAPID RECOVERY. IT TYPICALLY INVOLVES A BIG EXCHANGE RATE DEPRECIATION AND A RAPID INCREASE IN EXPORTS. JAPAN'S 1996 HAD A STRONG EXPORT PERFORMANCE -- JAPAN'S 1990'S HAD A STRONG EXPORT PERFORMANCE. IT IS THE NEGATIVE PARTS OF A COLLAPSE -- MY SCANDINAVIAN CLIENTS SAY THEY BENEFIT FROM STRONG ROBUST ECONOMY AND IN THE WORLD. LET ME CONCLUDE WITH A COUPLE OF REMARKS ABOUT POLICY. LET ME BRING OF THE G-20 PERHAPS. -- LET ME BRING UP THE G-20 PERHAPS. I THINK THE G-20 SUMMIT DID NOT DEAL WITH ANY OF THE FIRST ORDER QUESTIONS. THERE IS NO ADDITIONAL STIMULUS COMING OUT OF THE PROCESS. THERE IS THIS UNFORTUNATE RELUCTANCE TO DISCUSS MONETARY POLICY FROM THE HEADS OF GOVERNMENT. THAT IS A HUGE PART OF THE BALL GAME RIGHT NOW. THE DISCUSSION ON REGULATIONS IS NOT GOING IN A PRODUCTIVE WAY. THIS IS ALL ON MY WEBSITE. YOU CAN SAY ALL THINGS ABOUT ME ANONYMOUSLY, BY THE WAY. THERE IS NO SERIOUS DISCUSSION ABOUT HOW YOU DEAL WITH THE BANKING PROBLEMS WITH THIS ISSUE OF WHAT TO DO TO RECAPITALIZE BANKS. THERE IS NO STRATEGY FOR THAT. SOME MIGHT QUESTION WHETHER THE EUROPEANS CAN AFFORD THAT STRATEGY. A BIG PART OF THE PROBLEM IN TERMS OF POLICY RESPONSE IS IN WESTERN EUROPE. I HAVE BEEN URGING FOR SOME TIME FOR WESTERN EUROPEAN GOVERNMENTS TO TAKE SERIOUSLY THAT EASTERN EUROPEAN IS SUFFERING A SLOWDOWN AND WILL CONTINUE TO DO SO FAST. THAT HAS IMPLICATIONS FOR BANKING. EXPORTS ARE COMING DOWN AND IN MANY EUROPEAN COUNTRIES. I DO THINK THAT THE G-20 SUMMIT -- I REGARDED AS A SUCCESS IN THESE TERMS BECAUSE MY EXPECTATIONS WERE SO LOW. I THINK THE ADDITIONAL SUPPORT GIVEN TO THE IMF BOTH IN TERMS OF THE ADDITIONAL CREDITS PROMISED AND THE PROSPECT TO BORROW $500 MILLION, I THINK THIS IS GOOD. ONE PARTICULAR ALLOCATION COULD BE EXCELLENT. THE AMERICANS MAY HAVE INSISTED ON READY RESOURCES OR RESERVES THAT SOME EUROPEAN GOVERNMENTS CAN LEND TO EUROPEAN DEFICITS. I THINK THAT IS EXCELLENT. IT IS A PILOT PROJECT. SOME ARE AFRAID IT WILL CREATE AN IMMEDIATE GLOBAL INFLATION. VARIOUS ASPECTS OF IT NEED TO BE WORKED OUT. IF THE RECOVERY REALLY FAILS TO TAKE HOLD WAS A TIMBER, THE NEXT DAY -- FAILS TO TAKE HOLD BY SEPTEMBER, THE NEXT G-20 SUMMIT MAY HAVE MORE ALLOCATION. I THINK THIS SDR MOVE, I DO NOT KNOW IF TED TRUMAN IS HERE -- HE IS BLUSHING. I THINK. YOU SHOULD BE. THIS IS A TERRIFIC IDEA THAT HE HAS BEEN PROMOTED FOR A LONG TIME. MANY OF US DID NOT THINK IT WOULD EVER TAKE HOLD. I DO NOT KNOW HOW HE AND OTHERS DID IT. PERHAPS YOU CAN TELL ME. THERE REALLY IS A POSITIVE STEP HERE. IT CREATES A POTENTIAL FOR DRAMATIC FURTHER ACTION SHOULD THAT BE NEEDED. THE G-20 SHOULD BE APPLAUDED FOR THAT. I HAVE APPLAUDED THEM REPEATEDLY. ON A FINAL NOTE, MONETARY POLICY. THIS IS SOMETHING THAT I PUBLISHED AN ARTICLE IN THE " WASHINGTON POST." I AM TRYING TO BE VERY CLEAR ABOUT WHICH COURSE OF THE U.S. FOREIGN-POLICY I SUPPORT AND WHAT I OPPOSE. THE FINANCIAL RESCUE IS NOT GOING WELL IN MY OPINION. IN TERMS OF MONETARY POLICY, I THINK THE STEPS BEING TAKEN BY BEN BERNANKE AND THE RISKS THAT THEY ARE TAKING OUR EXTRAORDINARY AND UNPRECEDENTED. I SUPPORT THEM FULLY. I DO AGREE WITH THE HEAD OF THE EUROPEAN CENTRAL BANK THAT THERE ARE RISKS OF INFLATION. I DO NOT AGREE THAT THERE IS NO RISK OF INFLATION IN THIS SITUATION. BECAUSE THE DYNAMICS OF THIS ECONOMY HAS CHANGED AND WE HAVE BECOME MORE LIKE AN EMERGING MARKET, STANDARD MODELS OF INFLATION IN THE U.S. DO NOT NECESSARILY APPLY. I DO NOT KNOW THAT THEY APPLY. BUT THE KIND OF MONETARY POLICY THAT HAS BEEN SUMMARIZED CAN LEAD TO INFLATION EVEN WHILE UNEMPLOYMENT IS STILL RISING. IT IS UNPRECEDENTED. THERE IS RISK OF INFLATION. THE RISKS THAT BEN BERNANKE IS TAKING IN TERMS OF ECONOMIC OUTCOMES AND IN TERMS OF FUTURE INDEPENDENCE OF THE FED ARE VERY REAL. IT SHOWS GREAT COURAGE. I RESPECTFULLY THE VIEW OF THE EUROPEAN CENTRAL BANK. I THINK SOME ARE WRONG IN THEIR POLICY. I DO NOT THINK THEY ARE READING THE RISKS RIGHT. THERE ARE RISKS ON BOTH SIDES THAT ARE QUITE SEVERE. IN CLOSING, CONTENDERS COME AND GO. WE CAN TALK AGAIN IN SEPTEMBER, OCTOBER, OR IF YOU DO NOT SIMIC, YOU KNOW WHAT HAPPENED. THANK YOU. -- IF YOU DO NOT SEE ME, YOU KNOW WHAT HAPPENED. THANK YOU VERY MUCH. [LAUGHTER] [APPLAUSE]
00:50:55	>>	LOTS OF FOOD FOR THOUGHT. WE INVITE YOUR QUESTIONS ON WHAT THEY SAID. THE FLOOR IS OPEN. WELCOME. DO YOU WANT TO LEAD OFF? ALL RIGHT, I WILL COME BACK TO YOU. PLEASE IDENTIFY YOURSELF. USE THE STANDING MICROPHONE THERE OR THE ONE THAT IS BEING PASSED AROUND. GET THE MICROPHONE. GO AHEAD AND INTRODUCE YOURSELF.
00:51:51	>>	MY QUESTION IS TO WHAT EXTENT DO YOU THINK THE CURRENT DIFFICULTIES ARE FUNDAMENTALLY CAUSED BY A SIGNIFICANT ECONOMIC AND BALANCES BETWEEN CONSUMPTION AND SAVINGS BETWEEN EXPORTS AND IMPORTS AND BETWEEN THE FEDERAL GOVERNMENT'S WILLINGNESS TO SPEND AND TAX THAT WE SEEM TO BE UNABLE TO DEAL WITH? CAN WE HAVE A SUSTAINABLE RECOVERY UNTIL WE DEAL WITH THOSE FUNDAMENTAL AND BALANCES? -- FUNDAMENTAL IMBALANCE?
00:52:45	>>	NO AND YES.
00:52:47	>>	WOULD YOU CARE TO ELABORATE? [LAUGHTER]
00:52:53	>>	IN TERMS OF THE IMPACT OF THE IMBALANCES, MANY HAVE EXISTED FOR A CONSIDERABLE PERIOD OF TIME. I DO NOT THINK IT IS NECESSARY TO GET RID OF ALL OF THEM IN ORDER TO HAVE A RECOVERY. WE DO HAVE SOME IMPORTANT LONG- RUN PROBLEMS FOR THE U.S. ECONOMY AND SOCIETY. THE PRESIDENT HAS SPOKEN ABOUT THEM. WE FACE A MAJOR FISCAL CHALLENGE AND A SOCIETAL CHALLENGE IN DEALING WITH THE HEALTH-CARE ISSUE. I THINK IT IS GOING TO BE FAR MORE DIFFICULT TO RESOLVE THAN THE PRESENT RECESSION. I COULD GO ON ABOUT THAT. WE HAD AN UNSUSTAINABLE BUILDUP IN INDIVIDUAL INVESTMENT, WHICH HAS HAPPENED BEFORE. THE UNWINDING OF THAT SITUATION IS PLAYING A MAJOR ROLE IN THE RECESSION. THAT PROBLEM IS BEING CORRECTED VERY RAPIDLY. THE INDEX OF HOME PRICES IS BACK DOWN TO WHERE IT WAS IN TWO DOZEN THREE. WE'RE DOWN NEARLY 30% FROM THE PEAK. WE'RE STILL FALLING 1.5% A MONTH. WE NEED RECOVERY IN THE HOUSING MARKET, HOPEFULLY SOMETIME THIS YEAR, MAYBE A AROUND THE MIDDLE OF THE YEAR. IT TOOK 12 YEARS FOR JAPAN'S PRICES TO CLIMB DOWN TO REASONABLE LEVELS. THAT PROCESS IS HAPPENING. ONCE IT IS ACHIEVED, THERE COULD BE SUBSTANTIAL RECOVERY IN HOME BUILDING. IT IS A LONG WAY TO COME BACK. ON THE TRADE SIDE, ONE OF THE THINGS WHICH SHELTERED US FROM THE RECESSION FOR A YEAR AND A HAVE IS THAT AS THE HOUSING INDUSTRY SHRUNK, OUR WILL TRADE BALANCE IMPROVED. WE HAD AN OFFSETTING CORRECTIONS OF THOSE IMBALANCES. ON THE TRADE DEFICIT SIDE, WE WILL HAVE A MORE POWERFUL RECOVERY THAN SOME OF OUR TRADING PARTNERS. THAT WILL BE A PROBLEM DOWN THE ROAD FOR US AND FOR THEM. IN GETTING THE WORLD ECONOMY BACK UP AND RUNNING AT A MORE SUSTAINABLE PACE, HAVING THE U.S. LEAD, IS NOT SUCH A BAD THING. I DO NOT BELIEVE THAT IT IS THE IMBALANCES THAT WERE THE PRINCIPAL SOURCE OF DIFFICULTY. WHEN SIMON TALKED ABOUT IN TERMS OF EXCESS OF RISK TAKING AND INAPPROPRIATE ASSET AND LIABILITY CREATION IN THE FINANCIAL SECTOR AND THE UNWINDING OF THAT, THAT HAS BEEN AN IMPORTANT PART OF THE STORY OF THIS DOWNTURN. THAT HAS HAPPENED MANY TIMES ARE AROUND THE WORLD AND IN THE UNITED STATES. 50 YEARS AGO, WHEN I WAS A HIGH- SCHOOL STUDENT, AND BEFORE I KNEW ANYTHING ABOUT ECONOMICS, I RODE A TERM PAPER ON A SUBJECT I WAS INTERESTED ON. THE SUBJECT WAS INJURED JACKSON AND THE -- WAS ANDREW JACKSON AND THE CONTROVERSY ASSOCIATED WITH A PART OF HISTORY. THERE HAVE BEEN BIG FINANCIAL BUBBLES AND THE COLLAPSE HAS PLAYED AN IMPORTANT ROLE IN THE ECONOMIC RECESSIONS OF THOSE TIMES. THE RECESSION'S HAD NOT LASTED FOREVER.
00:57:03	>>	AND NOTHING LASTS FOREVER. I THINK THAT IS WHAT ONE PERSON SAID ABOUT THE ROMAN EMPIRE. IF WE AGREED, AND I AGREE WITH EVERYTHING HE SAID. WE SHOULD THINK OF THE DYNAMICS OF THE SITUATION BEING MORE ABOUT PROLONGED FINANCIAL DRIVEN BUBBLES COLLAPSING. .
00:58:13	>>	IS THERE A DEEPER STRUCTURAL PROBLEM HERE OR -- AND EVEN IF WE RECOVER, I WILL STILL INSIST THAT WE THINK HARD ABOUT THE BANKING. IF YOU START WITH 10 OR 12 AND YOU END UP WITH THREE THEY HAVE AND EVEN MORE COMPELLING OPTION. DOWN THE ROAD IT IS EASIER ARE MORE TEMPTING FOR THEM TO TAKE ON MASSIVE AMOUNTS OF RISK. WE MAY HAVE FINANCIAL INSTITUTIONS THAT ARE TOO BIG TO FAIL AND IN SOME EUROPEAN COUNTRIES, FOR EXAMPLE, I THINK ABOUT THE UNITED KINGDOM AND THE WORLD BANK OF SCOTLAND, THEY HAVE BANKS THAT ARE TOO BIG TO RESCUE.
00:59:09	>>	I WOULD ADD ONE WORD ON THE INTERNATIONAL DIMENSION OF THE IMBALANCES THAT JOE ASKED ABOUT. THE CHAIRMAN HAS TALKED ABOUT THIS QUITE ELOQUENTLY. IT IS QUITE TRUE THAT THE CHINESE AND THE OIL EXPORTERS AND OTHERS WHO WERE HUNTING HUGE AMOUNTS OF FOREIGN LENDING IN THE U.S. ECONOMY DID NOT FORCE US TO MAKE STUPID SUBPRIME LOANS. THAT BIG INFUSION OF FOREIGN CAPITAL EASE MONETARY CONDITIONS, CLOSED INTEREST RATES DOWN, AND HELPED CREATE THE ENVIRONMENT IN WHICH IT WAS MUCH EASIER TO MAKE THE FINANCIAL MISTAKES THAT WERE MADE HERE, AND INDEED ONE MIGHT SAY MADE THE INCENTIVES TO MAKE THOSE MISTAKES. AS YOU LOOK TO THE NEXT ROUND AND TRYING TO AVOID REPETITION, I WOULD ADD TO THE LIST FOR POLICY INITIATIVES AND TRYING TO LIMIT THE BIG INTERNATIONAL AND BOUNCES OF THE TYPE WE HAVE SEEN IN THE PAST. I THINK THAT IS IMPORTANT BECAUSE OF ONE OTHER FEATURE OF THE CRISIS THAT WE HAVE NOT REFERRED TO HERE, WHEN YOU LOOK TO PREVIOUS CRISIS OVER THE LAST DECADE OR TWO OR THREE DECADES, THE COUNTRIES THAT FELL INTO THEM WERE OFTEN ABLE TO EXPORT THEIR WAY OUT OF THE CRISIS BECAUSE THE REST OF THE WORLD WAS DOING OKAY. SIMON DID MENTION THAT. IT WAS TRUE IN JAPAN IN THE 1990'S. THEY READ ABLE TO EXPORT TO THE REST OF THE WORLD AND YOU DID NOT HAVE TO RELY ON MARS. THIS TIME THE COUNTRIES THAT MIGHT TRYING WITH EFFORTS TO GET OUT WITH A SOARING FOREIGN DEMAND MIGHT ONLY HAVE ONE PLACE TO LOOK AND THAT IS THE UNITED STATES, IF THE UNITED STATES FOR ABLE AND WILLING TO MOVE BACK INTO VERY LARGE EXTERNAL DEFICIT THAN BEFORE, THAT WOULD RECONCILE THE DESIRE OF A NUMBER OF OTHER COUNTRIES, INCLUDING THE EUROPEANS TO EXPORT FOREIGN DEMAND RATHER THAN DOMESTIC DEMAND. I THINK AS WE FORECAST RECOVERY SCENARIOS AND TRY TO DESIGN POLICIES TO MAKE THEM SUCCESSFUL AND SUSTAINABLE, THAT ELEMENT HAS GOT BE FACTORED IN.
01:01:36	>>	OK. YOU.
01:01:47	>>	I AM WITH THE CARNEGIE ENDOWMENT. IF YOU BELIEVE MKE WE DON'T HAVE TO DO MUCH MORE AND IF YOU BELIEVE SIMON, WE HAVE A BIG POLICY DEFICIT. I WANT TO ASK MIKE WHY IN HIS PRESENTATION, THAT HE STOPS IN 1945, AND WHY HE DOES NOT GO BACK FURTHER TO THE GREAT DEPRESSION. THE REASON I AM ASKING IS YESTERDAY A PAPER WAS PUBLISHED AND IT SHOWS IN THE DECLINE IN GLOBAL INDUSTRIAL PRODUCTION AND IN TRADE OVER THE LAST YEAR IS GREATER THAN THE FIRST YEAR THAT FOLLOWED THE CRASH OF 1929. THE QUESTION REALLY IS YOU ARE ASSUMING THAT SOME HOW THE MECHANISMS ARE THERE FOR THE RECOVERY TO HAPPEN, AND THAT IS TO BE THE HEART OF THE QUESTION, WHICH REALLY SEPARATES THE TWO OF YOU. THE ARGUMENT IS THAT IF THE FINANCIAL SYSTEM IS SEVERELY IMPAIRED AS MANY OF THE ESTIMATES SUGGEST, GIVEN THE INCREDIBLE HOUSING BOOM AND BUST THAT WE HAVE HAD, AND IF AT THE SAME TIME THE WORLD ECONOMIC ACTIVITY IS DECLINING SO THERE IS NO EXTERNAL SUPPORT, WHERE IT IS THIS RECOVERY GOING TO COME FROM? IT IS NOT CLEAR TO ME.
01:03:41	>>	I DON'T GO BACK TO THE 1930'S BECAUSE THE U.S. QUARTERLY GNP DATA STARTS IN 1947. I DON'T HAVE A VERY GOOD BASIS FOR DRAWING THE COMPARISONS IF I WANT TO USE THAT TYPE OF INFORMATION. OBVIOUSLY, I HAVE A BET THAT DATA -- I HAVE LOOKED AT THAT DATA. I WOULD SAY THAT GOING BACK TO THE FIRST WORLD WAR AND BEYOND THAT AND THEN IT BECOMES EVEN MORE DIFFICULT, THOUGH YOU WOULD GO BACK TO THE CIVIL WAR AND STILL IS SOME USEFUL INFORMATION THAT IT IS QUITE A DIFFERENT ECONOMY BACK THEN. THE AGRICULTURAL SECTION WAS MUCH LARGER. THIS IS REALLY I THINK MORE THE QUESTION -- IT REALLY DEALS WITH SIMON'S POINT. IT IS DIFFERENT THIS TIME BECAUSE THE NATURE OF THE CRISIS IN THE FINANCIAL SYSTEM ARE DIFFERENT FROM ALL OF THE EARLIER POSTWAR RECESSIONS. EACH RECESSION IS DIFFERENT. THE QUESTION IS, AT IS THERE A SUFFICIENT COMMONALITY THAT WE CAN SAY SOMETHING USEFUL? IF THERE IS NO COMMONALITY WE CAN JUST BABBLE ON FOREVER WITHOUT ANY CONSTRAINT, AND I DO NOT FIND THAT USEFUL. THE GDP IS CONSUMPTION + INVESTMENT AND GOVERNMENT SPENDING AND EXPORTS AND- IMPORTS. THE GDP IS GOING TO RISE AND FALL AND WE HAVE TO COME THROUGH THOSE THINGS I LIKE TO HAVE A STORY THAT AT UP IN TERMS OF THE NUMBERS. WHEN THE NUMBERS BEHAVIOR IN A MANNER THAT IS RESPECTFUL OF THEIR IRREGULARITIES THAT WE HAVE OBSERVED IN THE DATA GOING BACK TO THE PURSE WAR, BUT CONSIDERABLY LONGER. WE KNOW IN BUSINESS CYCLES THAT CONSUMPTION OF SERVICES DOESN'T MOVE VERY MUCH. IT IS WHAT IS DOABLE THE BIG ACTION IN CONSUMER BEHAVIOR. INVESTMENT IS A BIG MOVER AND IT IS OFTEN INVENTORY BUT HOUSING IS ALSO BIG AND SO FORTH. AS OF THINGS TO LOOK AT AND TALKING ABOUT THE BUSINESS CYCLE. THE QUESTION IS, WHEN AND WHAT CONDITIONS MIGHT WE EXPECT THAT THE HOUSING SECTOR, WHICH HAS SUFFERED AN ENORMOUS DECLINE MIGHT BOTTOM OUT AND RECOVER? I INSIST THAT ONE NEEDS TO TAKE ACCOUNT OF THE FACT THAT NEW HOUSEHOLD FORMATION IS ABOUT 1.2 MILLION PER YEAR AND WE REMOVED ABOUT HALF OF BILL -- HALF A MILLION STOCKS OF THE YEAR. WE ARE PRODUCING NEW UNITS AT ABOUT HALF A MILLION A YEAR. WE ARE WELL BELOW TREND. THERE ARE GOOD REASONS WHY THAT WE ARE IN THAT SITUATION TODAY. PART OF THE PROBLEM IS THE HOUSING PRICES HAVE BEEN FALLING AND PEOPLE ARE EITHER FEARFUL IF THEY BUY NOW THAT THE PRICE WILL FALL OUT FROM UNDER THEN OR IF THEY WAIT THE PRICE WILL FALL FURTHER. WE NEED TO GET THE PRICE DOWN TO A POINT WHERE WHEAT DISSIPATED SOME OF THAT AND WHERE THERE IS ADEQUATE FINANCING FOR PEOPLE OF REASONABLE CREDIT WORTHINESS TO BE ABLE TO BUY A NEW HOME AND MOVED OUT OF THEIR EXISTING HOME AND SELL IT AT A PRICE THAT THEY DON'T THINK -- IF THEY BUY A NEW WHEN THEY WILL NOT BE OF A SELL THE OLD ONE. I THINK WE ARE GETTING NEAR THAT POINT WITH THE ENORMOUS DECLINE THAT WE HAVE SEEN IN HOUSE PRICES, AND THE BIG PRODUCTION WE HAVE SEEN IN MORTGAGE COSTS, AT LEAST FOR CREDITWORTHY BORROWERS. THERE IS A LOT OF DISCUSSION IN THE FINANCIAL SECTOR. THE SAVINGS-AND-LOAN INDUSTRY WAS A TOTAL MESS, NOT ONLY IN THE 1980'S, AND MUCH OF IT WAS THAT MECHANISM OF HOUSING FINANCE BEFORE WE WENT INTO THAT RECESSION. IT WAS BLOWN AWAY IN TERMS OF INSOLVENCY. NEVERTHELESS, WE HAD A SPECTACULAR RECOVERY IN HOUSING SECTOR IN THE 1980'S. ALL OF THOSE PEOPLE WHO WERE NAILING TO BUY FARMERS STOCK MAILING THEM BECAUSE THEY NEEDED THEM TO BUILD THE HOUSES. THERE ARE REASONS WHY THIS CYCLE IS GOING TO LOOK DIFFERENT AND IT ALREADY HAS LOOK DIFFERENT FROM EARLIER ONES. THAT DOES NOT REPEAL ALL OF THE IRREGULARITIES OF MACRO ECONOMIC BEHAVIOR THAT WE HAVE BEEN ABLE TO OBSERVE AND DOCUMENT OVER THE PAST 50-100 AND YEARS. I COULD GO ON AND ON ABOUT THAT.
01:08:53	>>	I HEARD TO MAKE A SIMILAR POINT ABOUT AUTOMOBILE DEMAND THAT YOU JUST MADE ABOUT HOUSING DEMAND. DOES YOUR ARGUMENT FOCUSED HEAVILY ON THE DEMAND DEVELOPING OVER THIS TIME OF DOWNTURN AND SLACKING IN CONSUMER SPENDING, THE SAVING RATE RISES TO A NEW LEVEL AND THEN LEVELS OFF, MAYBE, AND THEN CONSUMER DEMAND RESUMES ITS GROWTH. IS THAT THE MECHANISM YOU HAVE IN MIND?
01:09:28	>>	FUNDAMENTALLY, YES. I HAVE THE SAVINGS RATE GOING UP TO 7%. IT IS NOT THAT I DON'T THINK HOUSEHOLD ARE GOING TO ADJUST, I THINK THE WEALTH WILL COME BACK SOME, BUT I DON'T THINK WE ARE HEADED BACK HOME PRICES TO WHERE WE WERE IN 2006. I THINK CONSUMERS ARE GOING TO WANT TO SEE MORE BECAUSE THEY ARE GETTING LESS OF THE GAME FROM THEIR WEALTH FROM OTHER FOR FORMS. THE QUESTION IS, HOW LARGE SHOULD WE ASSUME, I AM ASSUMING WE WILL PUSH THE SAVINGS RATE UP TO 7%. I THINK THAT IS A QUITE SIZABLE ADJUSTMENT. COULD IT BE BIGGER? OF COURSE IT COULD BE BIGGER. IT COULD ALSO BE SMALLER.
01:10:15	>>	NEXT QUESTION. SIMON COMEDY WANT TO COME IN?
01:10:24	>>	I AGREE WITH THE SIZE OF THE DECLINE. -- SIMON, D ONE TO COME IN?
01:10:31	>>	I AGREE WITH THE SIZE OF THE DECLINE. THERE IS EVIDENCE OF THE RECOVERY ON THE WEBSITE. I GUESS IN LESS WILLING TO RELY ON THIS BECAUSE MOST OF WHAT WE HAVE BEEN SITTING IN THE PAST SIX MONTHS HAS BEEN OUTSIDE OF WHAT HAS HAPPENED IN THE LAST HUNDRED YEARS. I GUESS HE SAID THE SHAPE OF THE RECESSION WOULD BE THE INVERTED SQUARE RESIGNED. I THINK I KNOW WHAT HE MEANS IT IS WAY TOO COMPLICATED FOR ME. ARE GOING DOWN? I GUESS HE MEANS YOU GET A BOUNCE OFF THE BOTTOM. THE OFFICIAL FORECAST -- THE DE 20 COMMUNICATIONS WAS PREDICATED AND EMPHASIZED ON THE FORECAST. I DON'T SEE THAT YET.
01:11:38	>>	LET ME PUSH YOU ON ONE POINT THAT YOU MADE IN YOUR REMARKS. YOU SAID IT WAS ANACHRONISM.
01:11:57	>>	I SAID THEY DID NOT FILL COMFORTABLE DISCUSSING THE MONETARY POLICY. -- THEY DID NOT FEEL COMFORTABLE DISCUSSING THE POLICY. THEY DON'T LIKE TO TALK ABOUT INTERNATIONAL BANKING. BUT BEN BERNANKE IS DOING IS CREATING AN INFECTIOUS WAY AND IT IS A GOOD WAY. THE DOLLAR WILL TEND TO APPRECIATE AND I THINK THAT WILL BE CONTAGIOUS IN A WAY THAT FISCAL STIMULUS IS NOT CONTAGIOUS. WHITE DON'T WE DISCUSSED THAT -- AND WHY IT DIDN'T DISCUSS THAT? THAT'S MY POINT.
01:12:47	>>	THE CHINESE CENTRAL GOVERNMENT PROPOSED A GLOBAL CRISIS AND I AM INTERESTED IN KNOWING WHAT THE PALACE TAKE IS ON THAT? THANK YOU.
01:13:01	>>	I WILL RESPOND ON THAT. I THINK THE GOVERNOR AND OTHERS IN CHINA WHO MADE THAT SUGGESTION RECOGNIZES IT IS A LONG-TERM IDEA AND NOT VERY PRACTICAL TO THINK ABOUT ANY OTHER ASSET REPLACING THE DOLLAR IN THE SYSTEM ANYTIME SOON. HIS COLLEAGUES HAVE MADE IT CLEAR THAT WAS AN INTELLECTUAL PRESENTATION IN FOR DISCUSSION, NOT FOR ANY EARLY NEGOTIATION OR SERIOUS REFORM. HOWEVER, THERE IS A PART OF THE STATEMENT THAT I THINK DOES CALL FOR EARLY ATTENTION. THE VERY LAST PARAGRAPH OF HIS SPEECH OR PAPER SUGGESTED CREATING SOMETHING THAT USED TO BE CALLED A SUBSTITUTION ACCOUNT RIP COUNTRIES, CENTRAL BANKS AND OFFICIAL HOLDERS TO OUR ANXIOUS ABOUT THE STABILITY OF THEIR DOLLAR HOLDINGS COULD CONVERT INTO SDR'S IN A KNIT CAP IN AN OFF MARKET WAY. THAT WOULD ENABLE COUNTRIES WHO WANTED TO DIVERSIFY THEIR HOLDINGS TO DO SO WITHOUT HAVING ADVERSE MARKET EFFECTS. THE U.S. WOULD PREFER THAT BECAUSE IT WOULD AVOID A SHARP FALL OF THE DOLLAR. THE EUROPEANS WOULD PREFER IT BECAUSE IT WOULD BE A SHARP APPRECIATION OF THE EURO. THE CHINESE AND OTHERS WOULD GET THEIR DIVERSIFICATION AND THE GLOBAL SYSTEM WOULD REMOVE ONE IMPORTANT SOURCE OF INSTABILITY. IT IS A WIN-WIN-WIN PROPOSITION. I THINK THAT HE SAID IT COULD BE ADDRESSED SEPARATELY AND PURSUED. I THINK IT IS ENCOURAGING THAT THE CHINESE HAVE MADE AT LEAST THAT ONE PROPOSAL FOR MODIFICATION OF THE INTERNATIONAL MONETARY SYSTEM THAT WOULD BE QUITE POSITIVE, AT LEAST IN MY VIEW. IT COULD LEAD TO LONGER CHANGES THAT -- IT COULD LEAD TO LONGER CHANGES AS WELL.
01:15:10	>>	THANK YOU. THIS IS A VERY INTERESTING CONVERSATION. IT IS VERY HELPFUL. YOU HAVE DIFFERENT INTERPRETATIONS OF THE NATURE OF THIS RECESSION. I WANTED TO ASK YOU A POLICY QUESTION. MIKE SAID HE DID NOT THINK THAT CLEANING UP THE BLOCKAGES IN THE CREDIT MARKET WERE NECESSARY TO GET A RECOVERY GOING. AND NOT BE A MORE COMPLICATED RELATIONSHIP. I WANTED TO ASK EACH OF YOU TO DESCRIBE WHAT ROLE YOU SEE THE CREDIT MARKET PROBLEM IN THE RECOVERY, AND SIMON YOU MENTIONED THE KIND OF RESERVATIONS THAT YOU HAD WITH REGARD TO THE PROPOSAL FOR MOVING THE BANKS FOR WORD UNDER THE TREASURY'S PLAN. WHAT ROLE DOES ALLOWING THE RECOVERY OF THE BANKS PLAY IN THE RECOVERY PROSPECTS THAT YOU SEE? AND HOW YOU EVALUATE THE STEPS THAT HAVE BEEN TAKEN BY THE TREASURY TO ACCOMPLISH THAT?
01:16:19	>>	ELABORATE ON THIS.
01:16:23	>>	LET ME ASK THE CENTRAL PART OF THE QUESTION. WHAT IS THE ROLE OF CREDIT IN THE RECOVERY? IT IS THE RECOVERY THAT HELPS IMPROVE THE BALANCE SHEETS OF THE BANKS. THAT IS ONE WAY TO DO IT. YOU COULD ALSO HAVE SOME INFLATION AND THAT WAS MY BEN BERNANKE SUPPORTIVE IS ONE IN WHICH THERE IS MORE INFLATION THAT THE FED BELIEVES IS LIKELY. THE MODERN DEGREE OF INFLATION WOULD REDUCE REAL INDEBTEDNESS. IT COULD BE MOST HELPFUL TO THE BANKING SYSTEM. THE BANKING PLAYS A ROLE IN THE RECOVERY. IF WE HAVE FURTHER COLLAPSES, AND FURTHER REPEATED CRISIS OF CONFIDENCE, REPEATED RUNS ON THE GOVERNMENT, AND THERE HAVE BEEN ALREADY AND THEY CONTINUE TO HAVE TREASURES IN WHICH THE FINANCIAL MARKETS ARE RUNNING ON THE GOVERNMENT'S ABILITY TO SUPPORT THE BANKING SYSTEM. THERE ARE QUESTIONS ABOUT THE GOVERNMENT'S ABILITY TO COME UP WITH THE CASH OR TO COME UP WITH THE REQUISITE POLITICAL WILL TO SUPPORT THE BANKS IN A WAY THAT SPECULATORS WOULD ACTUALLY LOSE. IN THIS, SITUATION IS THEY CONTINUE TO CREATE THIS. I WOULD EMPHASIZE THAT THE MORE YOU EASE THE CREDIT IN THE ECONOMY, FOR EXAMPLE THE THE KINDS OF MEASURES THAT BEN BERNANKE IS DOING, WHICH I SUPPORT, ONE OF THE SIDE EFFECTS WOULD IT BE EASIER FOR PEOPLE TO TAKE SHORT POSITIONS AND THE CREDIT OF MAJOR BANKS. WHAT WORRIES ME IS THE POTENTIAL TO GET WORSE AND THE POTENTIAL TO SPREAD GLOBALLY. THE DISCUSSION IS CENTERED AROUND THE UNITED STATES AND WHERE THE INSURGENCY IS. I WOULD EMPHASIZE AND REMIND TO YOU WHAT I ALLUDED TO VERY BRIEFLY. WE TALK ABOUT IT MORE ON THE WEB SITE WHICH IS THE EXTENT TO WHICH EUROPEAN GOVERNMENTS HAVE A PHYSICAL PROBLEM BECAUSE THE BANKS ARE SO BIG RELATIVE TO THEIR ECONOMIES. WE DON'T KNOW THE FULL DEGREE OF LOSSES THAT HAVE ALREADY INCURRED IN MAY AND HER -- AND THEY ALSO MAY OCCUR HERE. IN TERMS OF THE GOVERNMENT'S PLAN, I HAVE WRITTEN ABOUT THIS EXTENSIVELY, AND I DON'T WANT TO BORE THE AUDIENCE. I THINK SOME FORM OF A PREPACKAGED BANKRUPTCY IS A PLAUSIBLE WAY FORWARD. IT NEEDS TO BE ON THE TABLE. IT NEEDS A DIFFERENT EXTENSION OF ITS LEGAL AUTHORITY TO HANDLE THE LARGEST HOLDING COMPANIES. I RESPECT THAT AND I HOPE THAT THEY GET THAT QUICKLY. I AM SUPPORTING IT IN MY CONVERSATIONS WITH CONGRESS. I DON'T THINK THAT IS THE END OF THE MATTER. THE ISSUE IS RECAPITALIZATION. I WOULD RATHER DO THAT WITH GOVERNMENT MONEY AND RECEIVE AN APPROPRIATE AMOUNT OF COMMON STOCK WHICH COULD THEN BE SOLD OFF QUICKLY. MANY PEOPLE FEEL IS A FORM OF NATIONALIZATION. I OPPOSE THE GOVERNMENT'S TRYING TO RUN THE BANKING SYSTEM. IF IT IS NOT ON THE TABLE AND I FEEL IT IS NOT ON THE TABLE, THEN YOU ARE LOOKING AT A FORM OF DEBT EQUITY CONVERSION. ANYWAY YOU LOOK AT IT, IT IS A MESS. IT IS A POTENTIAL DAMAGING TO CONSUMER CONFIDENCE AND BUSINESS CONFIDENCE. YOU UNDERSTAND WHERE THE BUSINESS PEOPLE WERE COMING FROM WHEN THEY SAID THE CREDIT WAS THERE AND WE COULD RECOVER AND INVEST BUT I DON'T KNOW IF THE CREDIT IS GOING TO BE THERE IN THREE MONTHS. THAT IS NOT ENCOURAGING YOU TO GO AHEAD WITH THE PROJECT THAT YOU THOUGHT MADE SENSE. IT IS NOT AS IN THE UNITED STATES, IT IS GLOBALLY.
01:20:34	>>	WE SHOULD GET ON WITH TRYING TO STIMULATE THE REAL ECONOMY. THE CREDIT RUNS ARE NOT SOMETHING I WOULD BE WILLING TO DO.
01:20:45	>>	IT IS IMPORTANT TO UNDERSTAND THAT ON THE ISSUE OF WHAT WE ARE DOING ABOUT THE BANKS AND THE FINANCIAL SYSTEM, TO PARE PHRASE WINSTON CHURCHILL, NEVER HAS THE GOVERNMENT'S DONE SO MUCH ABOUT A PROBLEM IN SO SHORT OF A TIME. THE ACTIONS THAT HAVE BEEN TAKEN TO STABILIZE THE FINANCIAL SYSTEM AND TO RESTART CREDIT FLOWS HAVE BEEN WITHOUT PRECEDENT IN THE HISTORY OF THE UNITED STATES OR INDEED OF THE WORLD. THE FEDERAL RESERVE HAS GIVEN THE INTEREST RATE TO ZERO. IT HAS NEARLY TRIPLED THE SIZE OF ITS BALANCE SHEET. WE HAD FIVE MAJOR INDEPENDENT BROKERAGES OUTFITTED 15 MONTHS AGO AND TWO OF THEM SURVIVE AS INDEPENDENT ENTITIES. ONE OF THE FIVE LARGEST BANKS HAS BEEN MERGED INTO ITS PREVIOUS SMALLER RIVAL OF WELLS FARGO. WAMU HAS BEEN MERGED. FANNIE MAE AND FREDDIE MAC HAVE BEEN TAKEN OVER BY THE GOVERNMENT. FUNDS HAVE BEEN INJECTED INTO THE MAJOR AND SMALLER BANKS AND THE LIST GOES ON AND ON. I AM NOT ARGUING THAT NOTHING NEEDS TO BE DONE TO DEAL WITH PROBLEMS IN THE FINANCIAL SYSTEM. WHAT I THINK IS A MISTAKE IS TO BELIEVE THAT WE CANNOT GET A VERY SUBSTANTIAL RECOVERY UNLESS WE FIX ESSENTIALLY EVERYTHING IN THE FINANCIAL SYSTEM. THERE ARE A LOT OF QUESTIONABLE ASSETS THAT SIT ON THE BALANCE SHEETS OF FINANCIAL INSTITUTIONS. MANY ARE YOU THEY ARE DISTRESSED PRICES ARE BELOW WHAT THEY WILL ULTIMATELY BE ABLE TO PRODUCE. THAT IS THE ARGUMENT FOR OFFERING MORE ATTRACTIVE PRICES FOR THEM. IF THAT IS TRUE, LEAVE THEM WHERE THEY ARE. AFTER ALL, THE BANKS NEED TO RECOVERY. AND THEN THEY CAN SIT PERFECTLY COMFORTABLE WHERE THEY ARE IN ALL INSTANCES. YOU GET A BANK THAT IS IN SUCH SERIOUS TROUBLE THAT IT CAN NO LONGER MEET THE OFFICIAL STANDARDS FOR ITS CAPITAL. THEN YOU NEED TO INTERVENE IN THAT BANK. AND THAT HAS INDEED HAPPENED, MORE RAPIDLY INTO LARGER INSTITUTIONS THAN HAS PREVIOUSLY BEEN THE CASE IN U.S. HISTORY. I DON'T THINK WE SHOULD STOP THAT. IF WE HAVE THE STRESS TEST REVEALED THERE ARE ADDITIONAL INSTITUTIONS THAT ARE TOO WEAK TO IT CAPITALIZE THEN THERE IS GOING A NEED TO BE CAPITAL INJECTION BUT SOME INJECTION OF GOVERNMENT CONTROL TO GET THOSE INSTITUTIONS BACK INTO SHAPE AND TO LIMIT THE RISK TO WHICH THE TAX PAYER IS EXPOSED. THE HISTORY OF PAST FINANCIAL CRISIS IS THAT YOU DON'T NEED TO SOLVE ALL OF THOSE PROBLEMS AT THE DEPTH OF THE RECESSION. AN IMPORTANT PART OF THEM WILL SOLVE THEMSELVES AS THE ECONOMY RECOVERS.
01:24:01	>>	FINAL QUESTION.
01:24:07	>>	THANK YOU. I AM FROM BROOKINGS. AN IMPORTANT PART OF SORTING OUT THIS DEBATE IS GOING WITH THE SIZE OF THE STIMULUS PACKAGE IS OF THE MAJOR COUNTRIES. SIMON AND I TALKED ABOUT THIS BEFORE LUNCH, BUT I WANTED TO TALK ABOUT IT HERE. THE STORY LINE COMING OUT OF THE SUMMIT THERE WAS NO FISCAL STIMULUS AMONG THE 20 COUNTRIES. THAT IS TRUE BUT PARAGRAPH 6 OF BUTG-20 COMMITTED -- COMING OUT OF THE G-20. IT INCLUDES AUTOMATIC STABILIZERS AND SOCIAL EXPENDITURES THAT KICK IN WITH RECESSIONS AND IT INCLUDES A FISCAL STIMULUS THAT THEY ARE MAKING IN SOME OF THE BAILOUT MONEY THAT HAS BEEN DISCUSSED, BUT IT IS FIVE TRILLION DOLLARS. IS NOT MENTIONED IN THE MEDIA. OR IN THE MARKET OR COMMUNICATIONS THAT HAVE HAPPENED IN THE WAKE OF THE SUMMIT. IS THAT $5 A TRILLION -- IS THAT $5 TRILLION WON DO HAVE AN EFFECT?
01:25:25	>>	IT WILL OBVIOUSLY HAVE AN EFFECT. THE QUESTION SPEAKS TO THE BROADER ISSUE. WE HAVE DONE ALL LOT. THE GOVERNMENTS HAVE DONE A LOT. POLICY IS CHANGED A LOT. THE QUESTION IS, IT IS RELATIVE TO THE SKILL OF THE PROBLEM. I THINK THAT IS WHAT WE WERE DISCUSSING OVER LUNCH. TO MY MIND IS NOT ENOUGH. THERE IS ACTUALLY A LIMIT AS TO HOW FAR YOU CAN GO. I THINK THAT IS WHY MORE OF IT FALLS ON MONETARY POLICY WHICH IS WHAT I SUPPORT. I REGARDED AS VERY RADICAL ON MONETARY POLICY. IF WE HAVE A MORE EMERGING MARKET TYPE OF FINANCIAL POLITICAL STRUCTURE, WE WOULD HAVE MORE OF AN EMERGING MARKET WITH INFLATION. THERE'S ONLY SO MUCH AS YOU CAN GO UP.
01:26:29	>>	USE A MORE RADICAL MONSTER ACTION. I KNOW YOU MEET IN EUROPE. -- A D U ALSO MEAN IN THE UNITED STATES?
01:26:39	>>	IT IS MORE RADICAL MONETARY ACTION. WE ARE SUPPORTING WERE BERNANKE IS NOW. WE HAVE BEEN PUSHING HIM TO GET TO THAT POINT. GIVEN WHERE THEY ARE NOW, I THINK THIS IS MOVING IN THE RIGHT DIRECTION. I THINK THEY WILL PUSH AHEAD WITH IT.
01:26:57	>>	TO DO YOU THINK THE FED SHOULD DO MORE NOW?
01:27:01	>>	WE ARE COMFORTABLE WITH WHAT THEY ARE DOING NOW. THE EUROPEANS, NOT SO MUCH.
01:27:07	>>	WHAT YOU'RE CALLING FOR IS FOR EUROPE.
01:27:10	>>	ON THE MONETARY SIDE.
01:27:17	>>	MIKE, YOU GET THE LAST WORD.
01:27:20	>>	ONE OF THE REASONS WHY THE REAGAN RECOVERY WAS AS POWERFUL AS IT WAS WAS BECAUSE WE HAD NATURAL FORCES IN RECOVERY BUT THE TAX CUTS WERE QUITE SUBSTANTIAL. IT PROVIDED ADDITIONAL MORE TO THE RECOVERY. THE FOR RECOVERY WAS NOT AS STRONG AS THE REAGAN RECOVERY. THERE WAS OF FISCAL STIMULUS TO HELP BOOST THE RECOVERY FROM THE RECESSION. PERHAPS THE EASING OF MONETARY POLICY WAS NOT QUITE AS DRAMATIC AS IT WAS BEGINNING IN JULY OF 1982. I THINK STIMULUS MONETARY AND FISCAL HELPS TO KEEP RECESSION LIMITED AND TO PRODUCE A MORE RIGOROUS RECOVERY. WE ARE GETTING AN ENORMOUS AMOUNT OF POLICY STIMULUS. CERTAINLY ON THE MONETARY SIDE ON THE UNITED STATES. BEYOND ANYTHING THAT HAS PREVIOUSLY BEEN DONE. THE CRITICISM OF THE FED IN THE EARLY 1930'S WAS THAT THEY SAT BACK AS THE MONEY SUPPLY DECLINED BY 40% IN THE BANKING SYSTEM WAS WIPED OUT. THAT IS NOT R FED AT PRESENT. THEY ARE PUMPING IN HUGE QUANTITIES OF RESERVE AND FLOODING THE BANKS WITH LIQUIDITY IN ADDITION TO OPERATING DIRECTLY YANKEE CREDIT MARKETS. -- DIRECTLY PUTTING AN END TO THE CREDIT MARKETS. WE FELT NO IMPACT FROM E YET. IT WOULD BE PRETTY LIMITED IN THE SECOND QUARTER. BY THE THIRD QUARTER WE WOULD BE GETTING MORE BANG AT OF THAT FISCAL STIMULUS PACKAGE AND I THINK THAT IT IS GOING TO WORK TO BOOST AGGREGATE DEMAND IN THE UNITED STATES. AND THE STATE IS BUILDING MORE ON THE ASSET SIDE OF THE BALANCE SHEET AND ON THE LIABILITY SIDE ON THE BALANCE SHEET AND WE WILL SEE MORE OF -- OF THAT AS WE MOVE FORWARD. I AM NOT AS OPTIMISTIC THAT THE ECONOMY WILL RECOVER ON ITS OWN, THAT WILL EVENTUALLY HAPPEN, BUT THERE IS NO REASON TO SIT BACK AND SAY WE ALL ARE GOING TO LET IT HAPPEN. THAT IS NOT WHAT IS BEING DONE. WE HAVE ENORMOUS AMOUNT OF FISCAL STIMULUS AND AN UNPRECEDENTED AMOUNT OF MONETARY INTERVENTION TO BOOST THE ECONOMY. I THINK IT WILL WORK.
01:30:08	>>	AT ABOUT THE REAGAN RECOVERY WAS SO ROSE BECAUSE ALTHOUGH HER LEAVE THE INFLATION. AND HE AGREES. [LAUGHTER] THIS DISCUSSION WILL CONTINUE. I WANT TO THANK ALL OF YOU FOR COMING. WE WILL COME BACK IN SIX MONTHS AND WE WILL SEE HE WAS MORE RIGHT OR NOT RIGHT AT THE TIME. THANKS TO BOTH OF YOU VERY MUCH. [APPLAUSE] [CAPTIONS COPYRIGHT NATIONAL CABLE SATELLITE CORP. 2009] [CAPTIONING PERFORMED BY NATIONAL CAPTIONING INSTITUTE] PRESIDENT BARACK OBAMA IS BACK AT THE WHITE HOUSE. HE HAS NO PUBLIC EVENTS SCHEDULED TODAY. THERE IS A MEETING AT THE WHITE HOUSE TODAY FOR IDEAS ON HEALTH CARE REFORM. PRESIDENT OBAMA WILL DEAL WITH MILITARY HEALTH CARE TOMORROW AND FRIDAY IT IS THE ECONOMY. SMART NIGHT THE PRESIDENT AND HIS FAMILY WILL MARK THE BEGINNING OF PASSOVER, AND GUIDING FRIENDS OVER TO THE WHITE HOUSE. THE SENATE BANKING COMMITTEE HAS BEEN LOOKING INTO REGULATION OF THE SECURITIES MARKET OR BUNDLES OF FINANCIAL PRODUCTS LIKE, ARE BOUGHT AND SOLD AT 5:00 EASTERN TODAY. THIS IN A HEARING WITH THE CHAIRMAN OF THE SECURITIES AND EXCHANGE COMMISSION HERE ON C- SPAN AT 6:00 EASTERN. RETURN MURDOCH WILL BE JOINING THE HEADS OF TIME WARNER AND VIACOM TO TALK ABOUT CABLE AND TELEVISION FOR THE MARKETS AND HOW IT HAS CHANGED THE U.S. MARKET. CIVIL RIGHTS AND THE PRESIDENCY AT 8:00 EASTERN. THAT IS HERE ON C-SPAN.

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