 Good afternoon, everybody. I'd like to welcome you back. As you know, we're in the afternoon session of the CSIS Global Security Forum. My name is Juan Zarati. I'm a senior advisor here at CSIS. I'd like to welcome you to our new headquarters here on Rhode Island. A spectacular new center, I think. A real credit to Dr. Hamery and the leadership here for the opening and obviously for this forum. I want to thank FinMechanica again for their support. Just some ground rules before we begin. Keep in mind we are live streaming this, so this is open on the record. And what we will do is, as you know, we're set for a discussion from 1.15 to 2.30. What I'll do is lead a discussion with my colleagues here and friends for about 50 minutes, 55 minutes, and we'll open it up for questions. When we do that, we'll have microphones to ask you to identify yourselves and then ask a question. We'll try to avoid what the Italians call aide fritta, which is fried air, which is a discussion that leads nowhere. We're going to try to make this substantive and fun and interesting. I'm honored to be here with the panelists. As you've seen, the topic of discussion is what role should financial power play in national security? In some ways, the question is almost axiomatic. Financial power over the course of centuries has always been an element of national and international power. But I think the core question for us here is, what does that power look like in the 21st century? What does it look like for the United States? What does it look like globally? What are the mechanisms for its use in leveraging? And how should we be thinking about its evolution and its future? And I can't think of a better panel to discuss these issues. And I am not only honored that they're here with us today, but honored to consider them and count them as friends as well. Let me introduce them. You've got their bios in your packets, but let me just quickly introduce them to underscore their bona fides. To my far left is Ambassador Bob Kimmet. As you know, Bob Kimmet has a long and storied career in the U.S. government. He was Deputy Secretary of the Treasury, as well as General Counsel of the Treasury, Under Secretary for Political Affairs for the State Department, our Ambassador to Germany, the General Counsel to the National Security Council in the Reagan Administration. He is currently the Senior International Counsel at Wilmer Hill, and I know is an important voice internationally on all things related to U.S. national and economic security. So Bob, honored to have you with us. To his right is David Gordon. David, who many of you know, is head of research at the Eurasia Group. Also the Director of Global Macro Analysis. David, as well, has had a storied career and have been honored to see him at work in the government. He served as Dr. Rice's head of policy planning at the State Department. Also was a head of the management team at the National Intelligence Council. Was really one of the forerunners for the Global Trends series that now have become so popular and important to the intelligence community and to the broader think tank community. So that was a bit of David's vision and leadership. He works on all things global and economic, and so we're glad to have him here. Lastly, to my left is Assistant Secretary Danny Glazer, whom I consider to be a very close friend. We work together at the Treasury. Danny has had a long and storied career at the Treasury Department and is not just the Assistant Secretary for Terrorist Financing and Financial Crimes, but has been a leading voice internationally for issues related to financial integrity and the use of financial power, in particular American financial power, around the world. For many years he led the U.S. delegation of the Financial Action Task Force and is well respected around the world. And if you go to any capital around the world to talk about issues related to money laundering, financial integrity, transparency, accountability in the financial and economic sectors, Danny Glazer is top of the list. So we are really honored, and I'm honored to have a group like this with us to talk through these issues. What I'd like to do is make this a discussion amongst us and then also including you all. And I want to start first, Bob, with you, with the question of how you think about financial power and economic influence in the 21st century. How should we define this and how does it then intersect with questions of national security? Well, and thank you very much. It's good to be with old friends in a new building. And thank all of you for participating. We know you had a choice of panels today, so we're flattered that you're with us, and we look forward to it being interactive. CSIS was founded in 1962. That was the year of the Cuban Missile Crisis, right in the depth of the Cold War. Back then, the principal measure of strength and vulnerability was nuclear throwweights. That is the destructive power that could be delivered by a nuclear delivery system. In the 50 years since then, Juan, we've seen the end of the Cold War. We've seen the post-Cold War period, post-911. And now I think we're in the fourth era, that is the post-financial crisis, maybe even called the era of the G20. And I think the important thing to recognize is in this new era, economic and financial issues and considerations are as important as diplomatic and military. Not on a zero-sum basis, both and. Both diplomatic and military, but also economic and financial considerations are important to the conduct of a successful national security policy. And in this new era, a principal measure of a country's strength or vulnerability is sovereign interest rates. So we've gone from, that is, what a sovereign plays to finance its debt. When I was in Germany, Helmut Kohl knew with precision the nuclear firepower we had based on German soil. Angela Merkel today knows with precision what the spread was on the recent Spanish, Italian, or Irish bond auctions. I think recognizing that, we just have to look at national security. Interestingly, a term nowhere defined in U.S. law as it should not be. It should be a dynamic term that reflects where we are in the global security system. But for me, national security policy is the summation of our foreign policy, plus our defense policy, plus our international economic and financial policy, all resting on a strong intelligence base. And I think, therefore, in this new era, the work of the Treasury Department and its finance ministry colleagues throughout the world is every bit as important in national security success as the work of state, defense, CIA, and other more traditional national security agencies. I would just say that there are sort of two sides to what Treasury does, positive and punitive. The punitive side, you and Danny can speak to very well. That is the work done on terrorists and other illicit finance. I would say that one of the really important things that has been done in the past two administrations is combining diplomacy, both economic and traditional diplomacy, to support this effort with the U.N. Security Council resolutions that have led to EU directives that have led to more common action on sanctions, because ultimately sanctions are only effective on a multilateral basis. But the positive side of Treasury is very important, too. Treasury, both at home and abroad, has lead responsibility for a strong, sustainable, global economy that produces what is the greatest enemy of extremists, and that is growth and opportunity, particularly for young people. And I think it's important to recognize that not only is something important in domestic financial terms, but also international financial terms. Two quick examples from the last administration. During 06 and 07 is the military surge that was going on in Iraq. We also had an economic surge going on that culminated in a meeting in Sharmal Shake in May of 2007, where Nouriel Maliki appeared in front of 100 delegations to sign what was called the International Compact with Iraq, which basically conditioned assistance for Iraq, debt relief, technical assistance in return for Iraq, taking measures to solidify its economy, stabilize its currency. Iraq still has many, many difficulties, but if you look underneath it, the medium-term fiscal framework is fairly solid. Again, Treasury was very much in the lead on that. Secondly, we were having our weekly NSC meeting on Pakistan in November of 2008. And I recall Secretary Rice, Secretary Gates, Admiral Mullen, Steve Hadley talking about how difficult the security situation was in Pakistan. I was there at the NSC table, chaired, of course, by the President, and I said, listen, I don't doubt any of those classic security concerns are crucial. But Pakistan last night went under two months of import cover. Import cover is a technical term. That is the foreign currency reserves that you need to cover the imports that you have to bring in. Pakistan's two biggest imports, food and fuel. If food and fuel had been cut off, there would have been riots in the street. The Pak Army and others would have gone into the street. The Taliban and other extremist organizations would have stirred the pot, and what was already a bad security situation would have gotten much worse. It changed the whole tenor of that conversation to what can we do to address this foreign currency shortfall, excuse me, foreign reserve shortfall that put them on the edge of a balance of payments collapse. And we did some bridge financing with the Asia Development Bank, of which Pakistan is part, the World Bank, and the first international conference that the new administration hosted was a pledging conference for Pakistan in January of 2009. I say that because, in my view, it's time to make the Secretary of the Treasury a statutory member of the National Security Council. Yes, he and in the future, maybe she will always be invited, but I would rather they not be invitees. I'd like to see them as statutory members as a way to recognize, again, that economics and fans are now as core to national security success as traditional diplomatic and military means. Thank you, Bob. And you've been a leading voice on that idea, publishing very strongly on that and other matters, of course. David, how would you think about financial power and perhaps from a U.S. perspective, but also internationally? Sure. So, again, great to be here thanks to CSIS and I have really fond memories of working with both Bob and Juan on some very exciting initiatives that came into play in a very significant way for national security. So, as you said, Juan, I think financial power has always been an attribute of power. It's always been a source and an enabler of other forms of power, both softer forms like diplomacy and harder forms. And at the end of the day, there's a very direct connection between financial capability and military power. And that's a major interaction. But I think that in the modern world, in the modern world, I think that financial power in a world of globalization, in an interrelated world, does have an increasing role. And it's a role, frankly, that in many ways is parallel to that of military power. Like military power, financial power is a source of attraction for allies and for neutrals and a source of constraint and fear for adversaries or for potential adversaries. So I think that the attractiveness and the fear as part of financial power is what gives it things in common to military power. Of course, one of the biggest differences between financial power and military power is that financial power is really made up of relationships in markets, expectations by global financial players. And so its use is a lot more challenging and a lot more complicated. And I do think that really going back to President Clinton, every administration has tried to put together an interagency to meld financial and economic power with the more traditional forms of power with frankly limited impact. I think that there's been a learning curve. We've gone up. I think we've gone particularly far in this use of coercive financial power in very particular circumstances, both in the war on terror and then particularly in this global struggle to prevent Iran from becoming a nuclear capable power. So I think that piece of it has really matured and is the piece that is best fit together in the policy process. But it's still not easy to know how to wield and you in fact have a debate now of is financial power more important to be husbanded at this moment by putting our domestic house in order at the expense of some engagement abroad or would that be putting financial power actually at risk? And so I do think that we're still really in pretty early days in terms of thinking about the usage of financial power. Of course, I think there's also a really interesting paradox for the United States in our financial power and it has to do with the problematic nature of our politics and I would argue that our financial power in a very fundamental sense enables that and it's in the following sense that the U.S. remains the reserve currency of the world and the preferred safe haven. What that does is it means that unlike virtually everywhere else in the world where political shenanigans face a market cost and interest rate and other pressures for politicians to come together and do deals that's absent here in the United States and I think we've seen the absence of that in our unending budget debates we've seen the absence of it in a case like in the summer of 2011 when a rating agency downgrades the United States and interest rates don't go up they come down because people begin to worry if people are beginning to worry they put the money in the safe haven, we're the safe haven. So I do think that the reserve currency status and the safe haven nature of the United States as a market and treasuries in particular is an enormous tool, it's an enormous tool. Access to the United States banking and financial system becomes critical and that's been at the center of the ability of the Treasury to negotiate a profoundly challenging sanctions regime for the Iranian government. But it is enabling a lot of political malaise at home and of course at the end of the day if that political malaise goes too deep you can kill the golden goose and that's the dilemma that we face. But I do believe that the U.S. that at the end of the day the challenge of the world of the financial crisis the world of 0708, 09 has been handled largely in a way that has reinforced the notion of the resilience of the United States the resilience of American financial power and the likelihood of the United States maintaining that position. So again I think that we had this enormous test this enormous test but it's one that we've come out of in reasonably good shape. The question of how to use our financial power how to use it in the trade wing and I think now the very close connection between our financial power and our growing influences and energy producer I think creates an external environment that's actually quite conducive to the sustaining of American power and to the leveraging of other tools of national power. That's great Dave. I do want to return to the question of the financial crisis and what that has done to the landscape and the perception of power and influence that Bob your point the world of the G20 I do want to return to that but what I'm hearing from both of you is sort of a bit of a bifurcation between the sources of financial power things like GDP the health of the economy the reserve currency then the tools and mechanisms we use to actually leverage that power or what tools could be used. Danny in many ways you and Treasury at the tip of the spear of the use of coercive financial power and influence maybe that's too simplistic a way to put it or too martial a way of putting it but how do you think about the use of financial power and influence and how do you see it evolving? You have great continuity you served in the Clinton era Treasury Department Bush era Treasury Department now an Obama administration so how do you view this world? Well thanks Juan. Yeah I mean it's a really interesting question and I say this a lot it's just a tribute to the work that we've all done that we're even having the conversation that at a place like CSIS in a conference focused on national security you have a panel that's focused on the financial components of this and as been pointed out a number of times it really has been an evolutionary process to me really the key moment all this and I'm glad you and everybody has mentioned the role that really the very end of the Clinton administration played in all this because I think it sometimes gets lost when Larry Summers was the secretary of the Treasury he was really the first secretary of the Treasury to articulate a role for finance ministries in to articulate a finance ministry perspective in national security before Larry Summers was secretary the Treasury Department certainly had a role but it was a subservient role it was we would support law enforcement we would support the Defense Department if there was a war we would impose sanctions to support all of that of course but there was never a Treasury Department perspective what Larry Summers talked about was he talked about building a new international financial architecture and he would talk about pillars of that architecture and one of the pillars that he would talk about was a time anti-money laundering there's a phrase we used the time anti-money laundering and well it seems so obvious now but it was actually pretty revolutionary and really in many ways led to everything that we're talking about now the notion that the Treasury Department or any finance ministry as a finance ministry has a perspective on money laundering that is systemic rather than case-driven and that we have an interest in maintaining the integrity of the international financial system and of the U.S. financial system as a finance ministry from that systemic perspective you start to think about well how do people get access to the financial system how can we close them off from that access and that applied initially in the case of crime in the case of money laundering we started thinking about that in very real terms in the case of terrace financing and it was all quite successful so then as it evolves from there whatever the issue is whatever the crisis is whatever the national security or foreign policy challenges everybody sitting around the table and frankly you're responsible for this one person more than just about anyone the question comes up 95% of these challenges 99.5% of these challenges fall somewhere where the military is not an option at the one end you want to do more than just talk on the other end who can do something well we're sitting here at the Treasury we're thinking about this stuff maybe we have something to add so then all of a sudden you find Treasury applying its tools sanctions tools and regulatory tools and other sort of more subtle ways that we can influence the international financial sector in the case of Iran in the case of North Korea more recently in the case of Syria in the case of so many things WMD proliferation once you start thinking about it in these terms once you build this mechanism that we've built at the Treasury Department then you have the opportunity to start pointing in all sorts of different directions and then you could start adding value everywhere sometimes it's going to be at the center of our efforts as we found it to be most recently in the case of Iran sometimes it's only a tangential part but there's been a growing recognition and not just within the US you can see it even within the UN Security Council that if there's going to be a comprehensive approach to an international security matter there will be a financial component to it almost 100% of the time you go security council resolution to security council resolution every single issue there was a financial provision in that UN Security Council resolution there is a recognition now around the world that if you want to address an international security issue you need a financial component and I do think that's we could talk about this more as we go on depending on what direction you want to go in but I think this is only going to become more and more important and I think that the successes that we've shown in the case of terrorist financing in the case of Iran in the case of North Korea the successes that we've shown that if you use this influence that we have appropriately and intelligently it could become a very indispensable part of our foreign policy of the global community's response to any number of crises It's a great sweeping introduction from the three of you I do want to pivot from what you said Danny much of the ability to use the powers and and suasion that you've talked about is dependent on the strength of America's economic power and elements and this takes us back to the question of what has happened given the financial crisis in 2008 the U.S. in the post-Bretton Woods period has been able to be the definer of the rules internationally be they seeking investment or money laundering Danny to reference your discussion how do we think about American power in this period and in particular post-2008 and Bob I want to ask you this in particular because you live through it I mean you led the Treasury and the government through this difficult period and you saw internationally that the effects how do we think about America's ability to actually use its power and influence in that post-2008 period may make one comment first on Danny's comment if you look at the two sides of the Treasury piece and I'll just say positive and punitive I actually think on the positive side you had people before Larry Summers who are really focused on that and I think of my boss when I was general counsel and Jim Baker who really energized what was then the G-5 expanded it to the G-7 people will tell you it was the high water mark of what was called the policy coordination process led to the plaza and libra accords and I would say that we were in the early stages of using authorities available to us in the sanctions for example we put in place against Gaddafi when he was general counsel at the LL counters in Rome and Vienna and we learned a lot from that not to go in a lot of detail I think you're right that Larry in his case coming out of the Asia financial crisis the start of the G-20 gave a lot more attention than intervening people had to both that side and lay the foundation for what was done on the punitive side your question I actually think we're stronger today and better organized on the punitive side as David said I think we have to balance that with real active American leadership in the policy coordination process in the G-7, the G-8 and the G-20 and you can do that while focusing on things at home Baker also got the last major tax reform done in 1986 there are many other things going on in the U.S. also a complicated political system at that time, Democrats control the house we had the Senate and the White House I spent Halloween 1985 in the federal courthouse having been sued by the chairman Democratic chairman of the House Budget Committee for giving the secretary an opinion saying he could pay social security checks in the absence of a debt limit increase so debt limits are just not the province of the Tea Party well, let me go though to your point one and that is I think that the crisis which was sort of a mortgage finance crisis in the U.S. which after Lehman morphed into a global financial crisis was addressed relatively well as a crisis first by the U.S. and then later by the G-20 especially in its summit meetings of November of 08 in Washington April of 09 in London and then September of 09 in Pittsburgh set up a lot of structures including the financial stability board and others that I think are going to be as important to the future as some of the kind of more traditional national security structures that we've dealt with in the past but the fundamental point is that the global imbalances that pre-existed the crisis are still with us today twin deficits in the United States a misaligned currency in China and low demand led growth in Europe and Japan we still have to find a way to get at those fundamental challenges in the developed world and in the sort of merged developing countries like China, Brazil, Russia and India I think the U.S. has a particular leadership role to play there we're still 25% of the global economy as David said we're a global reserve currency and I just think it's important even in spite of the challenges that we have at home including political challenges for us to recognize that that policy coordination process on the positive side of the Treasury agenda is every bit as important as Treasury's leadership on the punitive coercive side of it and last point that I would make about our political dysfunctionality it's not just in the U.S. you mentioned 2011 where we had our near death experience in late July early August on debt limit and default Europe had just at that time begun to really address its sovereign debt and banking crisis and at their critical meeting in November and December of 2011 where they finally made some strategic tough decisions the communique was issued at 2.43 in the morning right so I think what we're seeing around the world is what I call cliff decision making people need to be at the edge before they can take tough decisions because they say I really didn't want to do this but I didn't want the U.S. credit rating I didn't want the Euro to fall over the cliff I'd like to see us back away from the cliff a little bit but I think we need to be a bit more proactive and I think that's the point that Danny was making that in the past Treasury reacted well to challenges that they came up to I think all of us both parties both ends of Pennsylvania Avenue need to find ways to be proactive in leveraging what I think is our greatest asset and that is the financial strength that we bring to the table David can you mark the issue of debt and of course the former chairman of the Joint Chiefs Mike Mullen talked about the debt itself one of the fundamental issues that Bob just referenced being a core national security if not the most important national security concern for him can you talk about some of these fundamental issues and where that puts us in terms of national security vulnerabilities so I do think that I think in at the moment of the financial crisis I think that the perception of risk in the United States really went way way up I remember in late 2007 Dr. Doom Noriel Rubini visiting me at my office in the State Department when I was policy planning director and he laid out 15 steps to the financial crisis and how it was going to come and spread and he got 14 of them right but the most important one he got wrong and that was the last one i.e. fundamental loss of confidence in the dollar and the loss of the dollar's reserves and of course that that's the piece that didn't fall I do believe I do believe that this question of indebtedness is is one that for the United States being the reserve currency and the safe haven gives policy makers much much much more space and again I think it's here that that financial guys I think tend to have a much better understanding than even a lot of brilliant economists I know most international economists every year would at the end of the year sign a thing on the U.S. debt being unsustainable and we're going to lose our reserve currency status but of course we haven't and it's not something that happens overnight that's the good news and there will be market indicators of this so we're going to know when this becomes problematic it may become problematic but I think I think right now I think right now we are in a position where we have a lot of space around those things and that's why I'm very much of the view with Bob that we can both play a continuing very robust role in the world while putting things back together at home I don't think we have to make that sharp a trade off that a lot of other countries would have to make I do think that on this question of U.S. leadership I think that in the immediate aftermath of the crisis with the creation of the G20 in the Bush administration, the follow on President Obama really using it very successfully in the first six to nine months but I think once you had the perception of a floor under the crisis that international coordination through the G20 very quickly got much much harder and I think the fact of the matter is that we're in a world in which the main financial powers are far less like-minded than they were back in the days of the G7 and that now the G20 includes a lot of different elements, countries that think very very differently about the world and of course in late 2009 we came up against this sort of practical alliance in the G20 of Germany and China, the big current account surplus countries and their desire to not move at all aggressively in evolving away from these kinds of basic misalignments that Bob was talking about. So I do think that U.S. leadership has become much more challenging and we're at a time in which the amount of multilateral cooperation that you can get on a positive agenda is harder to do and I think that that's a fundamental challenge for us. I do believe that the unconventional energy revolution has the potential to really be a game changer in that regard and to be an added increment on to the attractiveness of the United States. I think you're seeing it already with China that 2011-2012 the big energy story in China was to look west and they bought up a lot of resources in Central Asia. They became very interested in the Middle East now with a lot of instability stirring in that part of the world and with the energy revolution the practical focus of Chinese energy policy is not looking west how did they get involved and gain benefits from the North American and the western hemisphere energy revolutions and I think that will be empowering more broadly for the United States so I do think that a lot of the trends here are favorable but I think that the world that it's much harder to reach the kinds of consensus that is needed on the positive agenda and I think that it's not surprising that we have gotten a lot of traction on the more coercive the punishment side of the agenda but my own view is that I think that the coordinating central banks have been critical in this that basically the policy of monetary easing in central banks broadly worked getting away from that is I think going to be a bit of a bigger challenge than people realize and the impact of that on the world economy I think again is going to pose some challenges for the United States as we're already beginning to see as a lot of the emerging market countries really run into much sharper difficulties because the fact of the matter was in all of this monetary easing so much of the money went to the growth zones of the world and that was the emerging markets go ahead Bob just on the very last point on indebtedness there's a good news story here if you sort of put aside the political debate around debt limit continuing resolution sequester our deficit this year is going to be the lowest that it's been I think in almost 10 years certainly since the crisis having said that we still have a debt of 17 trillion dollars which is virtually 100% of annual GDP servicing that debt right now for the reasons that David described is relatively inexpensive for us takes up a good piece of the budget but it's relatively inexpensive but when rates start to rise and they will it's going to take up more and more of our discretionary spending making it tougher to find money for other programs including investment infrastructure and things of that sort and the concern that I have there is how do we get back to US trend growth of roughly 3% our growth between 77 and 2007 was 3.2% and that's what the economists call trend growth it's sort of the sweet spot you're growing fast enough to create jobs and opportunity but not so fast that you stoke inflation right now there's a missing 1% of growth in the US and in the rest of the industrialized world we're all meeting our obligations but we're not creating net new jobs and opportunity and how we find that additional 1% of growth I think is the existential challenge of the next five years I happen to think that recommitting to free trade, open investment flexible exchange rates is the way to do it which means TTIP and TPP I think are very important to finding that missing 1% of growth as we start to spend more money to service debt as interest rates rise before I get to the issue of sort of the trend that you hear about in terms of de-Americanizing sort of the American global order I do want to come back to this question of partnerships and Danny a lot of your work is spent engaging in financial diplomacy so I want to get your sense for the sake of the discussion as to where sort of cooperation on these financial issues whether they're on the coercive or on the positive side where they're headed and the challenges for the work you do and also just generally for the United States well you know I often times you hear people make sweeping statements like unilateral sanctions don't work we need to everything we need to everything we do in this area needs to be multilateral I think that's demonstrably false I think that's a demonstrably false statement I do think unilateral measures works it's a truism that the more you can multilateralize your actions the more effective they're going to be that's absolutely true and that's what our goal that's what our goal always is is to make our actions as multilateral as possible but it's not the case that you can't create important dynamics within the international financial system unilateral that will tend to isolate the actors that you want to isolate and it's also not the case that every multilateral action has to be global and if you want to create a UN Security Council resolution you could build you could build coalitions that are very effective in addressing certain issues in less than a global forum and so that's what we're constantly trying to do we're constantly trying to sort of set out what our goal is take the unilateral actions that we feel are necessary in order to accomplish those goals and then at the same time work in multilateral contexts whether it's bilaterally multilaterally or globally within the context of the UN to try to move everybody in the same direction and I think that we've been more successful at that than maybe people give us credit for if you look, Juan you mentioned the Financial Action Task Force for those of you who don't know what the Financial Action Task Force is shame on you because it's a really, really great organization it's the it is the it is the primary international body that sets standards in anti-money laundering counter-tax financing and works towards their global adoption implementation including through some fairly coercive coercive methods when I first became associated with FADF over 10 years ago it was basically a body made up of Western financial centers it was very effective over the course of the next 10 years China became a member, Russia became a member India became a member and each time there was a concern that we were going to somehow fundamentally change the nature of FADF the FADF would become more difficult to work with and the FADF would become less effective the FADF would become more lowest common denominator it's not been the case China has been an extremely productive member of the FATF China is now the president of the FATF and we work extremely well with them in that context so there is a possibility with a lot of these countries if you could find common ground with them it's quite possible to work with them on these issues in a very productive way if you look at again people come back to our around sanctions program I think that's sort of the classic case of an important international security issue that we have tackled through both unilateral measures multilateral measures and global measures through the UN Security Council but if you take the unilateral put it off to the side you take the global, put it off to the side what you're left with is us working precisely with the European Union with China with the G7 countries and with South Korea with Turkey with key international partners in order to develop a global sanctions regime that put us in a position where hopefully we could get good results from diplomacy so I think that there's oh and I should just say and I'm sorry for joining out I should just say an important component of this which sometimes gets lost and what I think that we're treasury it's not just partnerships whether it's multilaterally or globally with other countries but it's what I call our strategic dialogue with the international financial sector with the private sector and our ability to work with global banks and with banks in other countries in order to again create dynamics within the financial system that tend to isolate the people and the entities and the countries that we think should be isolated so when you take all of that together multilateral global and our strategic dialogue with the international financial community there's just so many different ways that you could play with that to get good results if you're sophisticated about it Bob I want to come to you on the question of these other players the rising economic powers in particular China and how you see China in terms of a challenge to American power and influence their rapacious need for energy but also how you think they're perceiving the use of power themselves the Chinese have started a debate internally about the potential use of unilateral sanctions we've seen export controls with respect to North Korea which is something we never imagined we'd see so these are countries that are thinking about the use of power and force of measures and positive measures so I'd like to get your sense of how you're thinking about China and the role of these other major international players when we think about economic influence first I'd pick up on the point I think the world is still looking for American leadership even people who might see themselves as strategic leaders of the United States Danny didn't give himself and the team at Treasury enough credit for bringing the illicit finance issue into the G20 context if you look at the G20 communiques that came out since November of 2008 there is always a section on compliance enforcement issues now during the crisis it didn't draw a lot of attention in the G20 we've sort of gone from crisis management through policy coordination and now there is a real focus on compliance indeed if you look at the last G20 communique it was much more about the work that Danny's doing or offshore tax havens and things of this sort and so that is very important and that wouldn't have happened without the U.S. I think that surprised people when we put that on the table in Washington in November of 2008 but it actually as you say has picked up some steam with countries who would have been initially resistant because they thought we were pointing the finger at them that's the second point that I'd make I think we really need to lead inside the G7 and the G20 on the policy coordination process my concern is that there has been too much public finger pointing at people who have economic approaches different than ours if you want to discuss those let's do it behind closed doors make those points very carefully let them see what the disadvantages are to pursuing that course even my boss Jim Baker back in 1987 found that it was not wise to criticize in public when he took a shot at German economic policy as is also the case today and the market dropped 25% the following Monday in October of 1987 policy coordination means take your policy disputes behind closed doors but let's have the U.S. leadership that's necessary to help us move in a good direction one other thing I'd mention on strategic objectives let's not forget that the Secretary of the Treasury is the only G20 finance minister who is not a budget director Treasury used to run the budget in the U.S. then it became the Bureau of the Budget and then the Office of Management and Budget but all of Secretary Lew's counterparts run their budgets so you want them to support U.S. activity anywhere in the world whether it be on military diplomatic development assistance means engage that finance minister in that discussion if you go through defense ministers, foreign ministers, development ministers it's always an indirect shot to the person who's making most of those decisions again I think U.S. leadership is important there on the Chinese I think the Chinese are going through probably the most historic of their transitions right now because it is at once a political transition an economic financial transition and a traditional military security transition I think on the economic and financial side they have fundamentally accepted that they can only be successful at home by being successful abroad on economic and financial issues they have a program called going out or going global and this means they want their companies both state owned enterprises and private to succeed abroad as well as at home which is one of the reasons why you see such a significant increase in acquisitions by Chinese companies outside of China by the way my personal view is so long as that investment does not impinge on national security we should welcome that investment I think we should compete for investable capital but in return the Chinese need to start opening their market playing by the rules and in most cases putting their companies on a path to privatization and I think that these various negotiating rounds particularly in the Chinese case not only in the U.S. but also what we do in APEC in the G20 and in the permanent five the U.N. Security Councils the clubs that really matter to the Chinese we need to say we expect you to be an ever more important part of the global economy we've got a set of rules of the road you've signed up to those in the WTO you want to join the OECD and so forth but we need you to play by those rules I personally think it's in their interest to do so I know it certainly isn't ours yeah I just real quick to pick up on what Bob said because I think it's a really important point and I I guess I don't make it enough but I agree that moment the October G20 communique was a really important moment for the work I do and the work we all do in illicit finance I think in the days even the days leading up to that communique there was some question in 08 there was some question as to whether or not everyone was going to walk away from anti-money laundering and look at it as a luxury of good times and now that we were in this financial crisis nobody was going to have the time or energy or resources to really devote to it and by ensuring that in that initial G20 communique in October of 2008 that there was reaffirmation of the important not only reaffirmation of the importance of AML CFT but linking it very very directly to questions of financial transparency which really have become central to a lot of the of both the domestic and the global reforms in the international financial system broadly and saying that anti-money laundering and counter-terrorist financing are central component of financial transparency it really institutionalized the work that we did in a way that I hadn't anticipated would be necessary but it was very clear at that moment was necessary and I think that was quite an important moment Dave, on China, I want to get your view yeah, just so I think I think the Chinese are really rethinking their views on finance in a more realistic way so following 2009 and in 2011 you had all these Chinese articles calling for the international community to create a new reserve currency they were pretty silly I think and that domestically what they were doing was trying to sort of get to internationalization of the ren men be without doing financial liberalization and it led them down a lot of dead end so you have a lot of trade denominated in ren men be but it's really not important in terms of financial power I think now this government is absolutely committed to a process of financial liberalization it's going to go in a very staged way I think they realize that it's a very tricky thing to do but I think they're heading there at the same time they've also shifted quite dramatically their attitude towards the TPP up until six months ago they were going around southeast Asia Australia, New Zealand saying TPP is not going to happen it shouldn't happen it's a trick by the United States to keep China down that's all changed and the Chinese are now thinking about their own participation either directly or indirectly and I think Bob's point about going out that's led the Chinese to enter into negotiations on a bilateral investment treaty with the United States but I think equally important it's changed the nature of the political economy of investment with China that as long as it was US firms and foreign firms seeking entry into China China was going to set the rules and then break them at will the new world is firms want to be in China but China wants to be everywhere else and I think again the prize for China is much more engagement with the United States that creates an opportunity for I think reciprocity in a way that just wasn't there so is China I mean I don't want to this is not suggesting for a moment that there aren't going to be a lot of tensions between the US and China but nature of the relationship I think has a strong competitive element but I also think that at least for right now the collaborative element on the trade side on the energy side and especially on the investment side is such that it really is a moment of opportunity for US China relations to go forward I'm going to open it up for questions but I do have one more question Bob I really want to ask you because you have been at the heart of not just the strategic thinking on this but also looking at the mechanisms and leverage for both the defense of posture vis-a-vis financial power and influence running the CFIUS process the Committee on Foreign Investment in the United States when you were Treasury but also thinking deeply and publishing on the role of sovereign wealth funds and one of the things we haven't done as much in this discussion is looking at the mechanisms of the leverage of power and in some ways CFIUS is on the defensive side the use of capital investments sovereign wealth funds is on the offensive side perhaps if you think of it simply that way in a binary way can you talk just really briefly about how you view those types of mechanisms in this landscape sure I mean look at the end of the day the US is still a foreign direct investment location for foreign direct investment it has been dropping that is our percent of foreign direct investment there was a big conference held last week on the new Select America program that the Commerce Department set up but fundamentally people still want access to our markets whether it be our equity markets our debt markets or foreign direct investment acquisitions here's the key thing to remember in the United States there are 8000 M&A deals of which in an average year 1500 are foreign acquirers and in an average year no more than 150 go before CFIUS cases so I always say if somebody wants to talk about investing in the US they should start at the strategic level look at what acquisitions are being made particularly by foreign acquirers that do not raise potential security concerns unfortunately the number of cases that go through CFIUS are relatively small and the great majority of them go through successfully in fact the vast majority with sovereign wealth funds as they became more and more desirous of making acquisitions in the United States a controversy broke out in 2007 right after the China Investment Corporation bought 0.9% of Blackstone's initial public offering and also the Germans started expressing concerns about what they call Stotzfons which translates as sovereign wealth funds but what they were really concerned about was Gazprom buying an energy company and so you have to really separate out sovereign wealth funds instead on enterprises even though they're both owned by the state sovereign wealth funds went into a process from the summer of 07 through the fall of 08 that resulted in what are called the Santiago Principles they were issued in Santiago, Chile and basically going to Danny's point they're transparency principles and those sovereign wealth funds who signed up to those principles are presumed to be investing for commercial and not political reasons and really we've had no major debate on sovereign wealth funds since that time and I think now they see it to their advantage to be more open and transparent because it creates more investment opportunity I actually think though for state-owned enterprises both from China and elsewhere were perilously close to where we were in 2007 and that is people presume that state-owned enterprises because the state has made a conscious decision to keep them in their portfolio are investing for political and not commercial reasons so I would like to see something akin to the Santiago Principles process done on the state-owned enterprise side so that they'll invest more in the U.S. but do it on a more transparent basis great let's open it up first here and again if you could identify yourself wait for the mic because of course we've got people who are not with us physically but are watching or listening online thanks Juan, I'm Will Embry from Dinecorp International September 11th focused us on international terrorism as a threat to our national security I'd be curious as to whether you think that the informal financial markets Hualas international crime networks narco-terrorists and maybe even Bitcoin are a similar threat to our financial systems so I don't think informal when we say informal financial systems what we I don't think informal financial systems are a threat to our threat at all informal financial systems often are the only systems that are available to bring financial services to unbanked areas whether in this hemisphere and other hemispheres in some countries country like Somalia it's basically the only way people say in the United States who have family in Somalia could get money there so financial systems whether it's as you say Huala or other forms of informal value transfer I don't consider to be a threat in and of themselves what's problematic about them is that they tend to be unregulated and therefore non-transparent so it gives opportunities to illicit actors whether they're terrorists or organized crime or whoever they might be to use them without the opportunity for law enforcement or for others to trace those financial transactions and that's why it's so important that we address those and that's what we try to do you address informal financial systems in a number of ways the best way to address it is to ensure that formal financial services are provided to as broad a set of communities as possible that's a long-term generational issue that we work on with governments the positive side of as Bob said of what we do we work with the World Bank on these things with the IMF on these things we work with everybody with USAID on these types of things then secondly what you need to try to do is bring some sort of very basic just very simple regulation to encourage a little bit of transparency to encourage their interaction with appropriate governmental authorities and then creating a line between what's listed and what's component of it would be enforcement and once you create that line you can use it to try to go after the actors who are not trying to comply with the rules so that's the basic strategy we have with respect to that so again I don't think that the notion of Huala or informal financial services is in and of itself problematic the problematic aspect of it is the non-transparent aspect of it which then makes it subject to the people who we wouldn't want to have access to this financial system thank you my name is Andrey Sitov I am with the Russian news agency Tartas here in Washington DC thank you for a great discussion I want to take a small issue relatively small issue in the grand scheme of things that you have been discussing some people claim that the fallout from Mr. Snowden's revelations will mostly be in the field of economics as potential repercussions for the American companies do you really see a risk like that for the American business, thank you and generally maybe if you could comment on this specific case as an intersection between the national security interest and the economic and financial interest, thank you the question of whether or not this is going to start impacting American investment and perception of American privacy I do think that American IT businesses are facing a pretty big challenge in terms of their ability to operate overseas and I think they are all now looking for what can they do to fix this you know I think that I don't think it's likely to go broader than companies in the IT sector but I think that US IT companies are very concerned now over this and I think they are facing a lot of headwinds and have very challenging tasks in a lot of places yes, right here Bob Byrd World Academy of Art and Science one of the things I've been thinking about in this moment of discussion is that maybe the proof of the last crisis was that we're too big to fail and I think it was the Atlantic economy that was too big to fail and I think the Fed was there as a kind of a secret power and the question I have to ask I'm happy to have it secret I'd like to maintain it but I'd like to also know if it needs to be repaired or whether it's just eternally good safety net Bob, could you take that? Well I think there are a lot of lessons learned during the crisis some of that led to internal restructuring inside both fiscal and monetary authorities and abroad obviously here we had Dodd-Frank legislation abroad you've had a whole series of EU directives many others being considered right now and I think at the end of the day what we learned is you really need effective coordination and interaction between fiscal and monetary authorities both during a crisis and beyond there's one unique feature of the global financial system right now and that is virtually every central bank governor in a major economy had served as a senior finance ministry official previously now this isn't just me being proud as a former treasury guy but what it means is they were in senior fiscal positions before and as now monetary officials they know that they shouldn't get in front of fiscal officials and they also I think are in a position to be able to judge when fiscal officials have done as much as politics will allow and that's why in the European crisis for example the European Council the leadership of the European Union started meeting regularly monthly about June of 2010 and it wasn't until that meeting that I referenced earlier in November December of 2011 that number one strategic decisions were made number two how do I know Britain took its first exception to the communique and third Mario Draghi began his extraordinary measures at the ECB because I think he judged that they had finally on the fiscal political side that were as far as they could go and again were ahead of the monetary authorities so I think that it is very important to keep these two in close coordination I always prefer fiscal authorities move first I would think that most central bank governors would prefer that their actions always follow sound fiscal action in the event of a crisis Ben Bernanke first Mario Draghi later when he talked about taking all necessary means that were required sometimes those banks are the only ones with a balance sheet to keep enough liquidity in the system to give the fiscal authorities time to find the ways in this tortured political system to take the decisions that they need very quickly I think the vulnerability if I were looking at a vulnerability here it's in Europe not here in the United States and Mario Draghi did say that he was going to take all necessary steps but he only got the okay from Angela Merkel the agreement by Angela Merkel to do that when she acted against the advice of the senior Bundesbank officials and so you I think in Europe there is not a lot of structure and balance in the relationship between the fiscal authorities and the monetary authorities and I think that's if I were looking to a place where you could get trouble that's where I would look one more question here sir I'm Hank Gaffney I'm Hank Gaffney used to work on defense 30 years ago I think you were still in uniform actually at that point we were selling weapons together right you know one question of national security is the trouble we're having in the U.S. budget and its stagnation the possibility of continuing resolution forever etc now defense can take these cuts it's painful but they can absorb them but the rest of the economy is going to suffer especially as it cut all those other discretionary accounts and sometimes it's mostly about not giving health care to the poor but the other thing that's invoked of course is the debt now when Tom Barnett and I began working on globalization in the late 90s with a world GDP of like 60 trillion maybe don't hold me to the number we saw 400 trillion in financial transactions taking place a day around the world now I think the world GDP is up around 70 or so and the figure for that is 800 or 900 trillion of transactions all leveraged very highly so the question was asked over here about another financial crisis happening with all this loose money going around and not enough regulations that that is probably the greatest threat to American national security in any military sense that exists today what's the possibility of getting that all out under regulation let's go lightning answers here with all three of you Bob Hank I actually think that since the financial crisis with work that's been done in the US the work that's been done abroad and particularly the central role played by the financial stability board used to be a forum now it's a formal board of the G20 chaired by Mark Carney the Canadian who is the new central bank governor in the UK has done a very good job working alongside other groups like the Basel committee and so forth to go particularly at that point you mentioned on leverage I think you'd actually find the leverage is down capital is up transparency as Danny said is significantly up having said that as I mentioned those global imbalances are still around we have to get at both our budget and trade deficit we've got to get the Chinese currency valued on a market basis and we need to see more growth on the demand side both in Europe and Japan I think it is those global imbalances that again pre existed and survive the crisis that are the greatest threat and on our side I agree with Mike Mullen that it's how we deal with our debt and one way we deal with it is not by increasing it as fast as we've done before and good news is again our deficits are dropping David quickly well regulators are never going to be able to keep up with innovations in the financial system but I think Bob's points are I absolutely right I think we're absolutely in a safer place and the institutions to monitor all of this have been really enhanced in their capabilities Danny let me just say one thing why I'm more concerned I mean as a good Republican I'd like to see less regulation than more regulation but what concerns me right now Hank is regulatory uncertainty and we have a whole series of regulatory projects coming out Dodd-Frank and other laws that are stalled it's because of political reasons in the United States but you find as you talk to foreign investors or US businesses have more cash on their balance sheets now that at any time in US history over a trillion dollars and the reason they're not investing into the economy is because of regulatory legal and tax uncertainty you know where I would come out on all those issues but I would just like us to come out somewhere because once the businesses understand where the floor is they'll pivot off of that and put that private capital in which in my view is the key to finding that missing one percent of growth just to comment on that I understand Wall Street has poured 200 million in lobbying to stop and kill Dodd-Frank well Dodd-Frank has been passed it's the law of the land I think the question now I think now it's how it's being implemented and my feeling is look lobbying goes on all the time at the end of the day let's make some decisions even if I don't agree with the decisions I will applaud the decision having been made so that then people can adjust their investment decisions to practical certainty rather than the uncertainty we have now wonderful on that lively note let me let me ask you to thank the panelists Bob, David, Danny thank you very much enjoy the rest of the form thank you really good