 Okay, folks. I am about to tweet the beginning of this session, which makes it official. That's a sarcastic comment, sorry. It is my great pleasure to be talking to At-Martin-Wolf, the world's most distinguished economic journalist, and a hell of a lot more than that. I am honored and personally pleased to get this opportunity. We only have a half hour, so I'm not going to list Martin's 92 books and 72 honorary degrees, but I will start right in because I know the Martin groupies are here to hear him talk. Let me ease into our depth, into our dive into your psyche by starting with substance. We heard President Obama last night say that the U.S. economy is well, is healed. Have we really solved the fundamental things that started the crisis, not just in the U.S. but elsewhere? Are there issues outstanding that still trouble you? I think the answer, given in my most recent book, and I'm sure that's really why you're all here, the shifts and the shocks, the answer to the question is no. I'll state this in two ways, two aspects very, very briefly. It was my view that, and I'm certainly not the only person who had this view, but I had the view that the crisis was caused in substantial measure by the need as it was perceived by the major central banks, particularly the Federal Reserve, to run really very accommodating monetary policies in the long period running up to the crisis in response to significant global shortfalls in demand. And those were generated in a number of different ways, both internal to our economies and globally, and it seems to me those underlying conditions clearly haven't gone, and one indicator of that is that even now, in what is supposed to be a period of healing, the Fed is still pursuing by any normal standard fantastically accommodating monetary policy. And the second, and I'm particularly concerned in that regard by the way, that one aspect of that, the desire of everybody else, almost all other countries, to balance their economies by having a huge export surplus with the U.S. is returning. We can see that returning now. Just look at what everybody is really congratulating themselves on collapsing their currency against the dollar. So that's the first point. And the second point is that those monetary policies interacted with a very fragile, liberalizing, very innovative and very unstable financial system to create a monstrous financial crisis. And while there have been some improvements in the financial sector, it still seems to me in many respects extremely fragile, and in some respects possibly even more fragile than it was before the crisis began. I don't want to lose that because of course not just your writing, but your service on the banking commission in the U.K. you have a lot to say on that issue. But before we leave the global issue, my friends, our friends in the central banking community tend to say, unless we really screw up monetary policy only affects the economy over the next couple of years. When you're talking about these very large shifts, these global imbalances have to do with savings rates, with demographics, with the savings glut that Ben Bernanke spoke about. You're putting the blame, it sounds like, primarily on monetary policy choices. No, no, I don't think, I actually didn't, explicitly didn't put the blame in my book because I think they had very limited alternatives given where they were in that very, very long period. They had obligations to maintain inflation at a certain level, which meant maintaining demand at a certain level in their economies. And given what was going on in the real sector, what you call fundamental savings and investment across the world, the way they found to do that involved, as I said, pursuing a highly accommodating policy which generated a temporary, but longer than two years credit boom. So the idea that monetary policy is neutral over anything over two years seems to me clearly wrong. It has very substantial effects well beyond those sorts of periods, though in the long run, of course, I accept it doesn't determine the underlying trend real growth of the economy, which is driven by productivity, innovation, all the things that Ned Feltz writes about since he's here. But I think one of the lessons we've learned is that real economy disequilibria, particularly in the balance at the global level between savings and investment, can be such that the monetary policy response, the need to sustain demand leads, works through the credit system in highly destabilizing ways. And this is, I think, in a core way, the lesson I've learned from my admittedly much too recent reading of work of Hyman Minsky on exactly these relationships. Well, as you know, you and I, of course, obviously my opinion is far less influential, but you and I have disagreed in that I believe the fragility of the financial system, in a sense, was the key factor in amplifying and creating the crisis beyond these other factors. That may be me just making excuses for central bankers. But you did set it up that you are worried there at the financial system even after Dodd-Frank, even after the financial stability board, even after poor Jamie Dimon has been tormented by his pursuers, is not as resilient as you might hope? Is that a fair statement? That is correct. And the interact. And we are still using, of course, and this is a legitimate criticism, most of problem, the financial sector is still the way through which the central banks, who are now continue to pursue highly expansionary policies in one way or the other, are trying to affect the level of demand in our economies. What is the worry about the financial sector from my perspective? Well, first of all, in essence, it's the same financial sector. It's very clear. Nothing fundamental has changed in it. In terms of banking institutions on balance in most of the economies I'm familiar with, it's become more concentrated for them before because there's so many disappeared. So if we had a too big to fail problem before, we clearly have a bigger, too big to fail problem now. We have reduced leverage somewhat as properly measured, but, and I looked at this very recently, the leverage ratio, the proper leverage ratio, not on risk-weighted basis, I'll come to that in a moment, of the world's major banks, the globally significant international banks, is in the neighborhood of 20 and 25 to 1, between 20 and 25 to 1. So, since this is an incredibly knowledgeable audience, you can all work out pretty easily how much their assets need to decline in value before they're gone. It ain't very much. And I constantly remind people that the shock, the objective shock that caused such an enormous turmoil in the last, in 2007 and 2008, was really quite a small one. It was just losses related to property, particularly in the U.S., not a huge global event. We could imagine much bigger ones. So we have this leverage problem. We continue to rely on risk-weighting. I understand why we rely on risk-weighting, but the experience we've had, to put it mildly, is that our ability to model risk appropriately, ex ante, is very, very limited. It's partly because, of course, the data is by definition incomplete because we don't know what the future holds, but even worse, again, a Minsky point, the very perception that something is low risk tends to generate behavior that makes it riskier. This is stability destabilizes, a very, very powerful point. And the last point I would make is a huge part, I think, of the crisis, was the fundamental non-transparency of the balance sheets of banks. And I'm here, I'm not an enormous expert, of course I'm not, but I talk to a lot of people about this in the sense that when you consider the immense derivatives exposures of the banking sector, their global assets structures, which continue, the idea that either regulators or indeed investors or outside funders can have a really good idea of the resilience of these institutions under unknown stresses, I think, is very naive. So it seems to me that, in essence, this remains a very fragile system and a fragile system can fall apart at any moment. That's what was the great shock to me of 2008-2007-08. See, and again, if we were living in the pre-modern era, I would be holding up a hard copy of The Shifts and the Shocks, but it is available as an e-book, so just imagine The Shifts and the Shocks is here, you can buy it. I mean, The Shifts and the Shocks is very much a work of economic analysis and synthesis, but since this conversation is meant to give us an insight into your unique personality and insight, let me ask you a bit about the political side. I mean, sitting there in the UK, and I was overlapping with you for part of this period, we had people including not just you, not just me, Lord King at the Bank of England, Lord Turner running around at the FSA, saying things that were very radical about the banking system. And we have a system in the UK where, as you said, it's gotten incredibly concentrated. There are four major banks, one major mutual lender, and that's it. Why do you think... One foreign bank. Right. Right. But they're playing nice. Why do you think with that much people in positions of prominence, positions of authority, at least with pulpits, you, Lord King, others, saying this, why do you think there was so little change? I mean, John Vickers commissioned it, which you serve by. Why did you think that? Well, I think the answer to that is, first of all, there has been... As I said, I didn't wish that I have a long section of the book on this, and there have been quite a lot of changes. I'm trying to imply that nothing happened. Something has happened. We played a role in this because the Vickers commission of which I was a part made the recommendation of essentially splitting our banking sector into the global trading arms and the domestic retail sector. This was particularly important for the UK because our banks are incredibly big, but most of their assets are foreign assets. They're not domestic. I mean, one of my favorite statistics, which I think might still surprise some people in the audience, but I didn't know it, that when we went into the crisis in 2007, the aggregate balance sheet of the British banking sector was almost as large as the aggregate balance sheet of the American banking sector. Now, that's partly because the Americans banks in America, as we know very well now, the shadow banking thing, as it's called, had grown so vast, and it's partly because our banks were globally so gigantic. So we went into the crisis with the banking balance sheet, five times GDP, which put us almost much closer to Iceland than to America, which was pretty nerve-wracking. So we made the decision that the least bad thing we could do is to separate out the bit of the balance sheet that really on which the economy clearly depended on a day-to-day basis. We've got this frighteningly concentrated banking sector, which I hate, but clearly if that falls over, then there isn't an economy. Ben Bernanke's famous remark, when he was asked what would happen if they just let all the banks go, he said, well, then there won't be an American economy on Monday morning. Well, this is certainly true for us. So we wanted to separate them out, and that is the one significant form we've carried out. But we couldn't go any further for, I think, essentially two reasons. The first reason was a very, very strong peeling by the political and economic establishment that asked, as it were, that it was necessary that our banking sector remain globally competitive, quote, unquote, which meant that they had to be at least as unsafe as all other banking sectors. And so we couldn't go very far beyond the international consensus. So this has been generally the whole discussion of regulation and rules and frameworks has been sort of the speed of the slowest. And every country has some area that it doesn't want to tighten up on. So the end tends to be that we all agree not to tighten up very much anywhere. So that was very important. And the British government was absolutely clear in the terms of reference to the Commission that we had to take account of, quote, unquote, the competitors of the banking sector, which worked out pretty quickly to the statement that we couldn't demand any more capital or then we could, really, of any other than was going to be demanded in any other international sector. So the pulling out the retail sector, which is sort of Glass-Steagall approach, was the most radical we thought we could be. This feeling that here you've got this incredibly important, unbelievable important global industry, and each country is very concerned to preserve the competitiveness of its bit of it against everybody else, which meant, as I said, allowing them all to operate, at least as unsafe as one another, which, of course, has been again used. You mentioned a very distinguished American bank. I won't mention his name. But he has not infrequently argued that some regulation that the Americans are threatening to impose upon the American banks is, quote, unquote, un-American because it will put them at some notional disadvantage to some continental entity which might be on the very edge of disaster. So that is the answer to what happened. No, no, it's very helpful. But I mean, I just want to underline a couple things from what you said. I mean, because obviously, on this point, I can really agree with you. I gave a speech toward the Bank of England complaining about the fetish of mid-banking national champions. I compared it to rice in Japan and cars in Germany. It's just UK's national fetish. But the thing I want you to consider that you said that's very interesting is that UK establishment was against this. Now, this is therefore an establishment that somehow didn't include the chief conventator at the Financial Times or the governor of the Bank of England and yet the establishment was against this. It's interesting as we sit here at Davos and think about ideas to figure out who the true establishment is. But I think there's also a substantive point that I want to pursue with you. One of the big arguments right now is over the shadow banking issue. And there are some regulators and I think they have a point who say, actually, this is kind of what we wanted. We wanted to make the banking system smaller versus the rest of the economy. We wanted the explicitly insured sector to be less the risky part. And I'm going to oversimplify, but one could argue that part of the reason the US did better than the UK was because it may have been the same amount of credit boom, but it actually wasn't all in the banking system. It wasn't all in just a few banks. And so, you know, in your comment, you sort of seem to alight that and say credit, and this is also a mince key point. The credit booms are credit booms, credit booms are bad. But actually maybe it matters a great deal of the structure of the financial system. And how do you feel about that? Yeah, I think it does. And there we've got some very interesting tradeoffs. I think the US problem looking back on it was, to my sense, is that having this large quote unquote, let's leave aside the fact that there was a hell of a lot, let's be very, very clear, which I think was more or less uniquely American, not entirely, of straightforward fraud going on. So leave that aside. In this crisis, I don't mean uniquely American. We, I mean, the subprime story doesn't have the British equivalent in the same thought. That little bit in Iceland, but I mean, not on the... So there's a special feature of what happened in the shadow banking. But in and of itself, the great advantage of the shadow banking structure is a lot of it could collapse. The difficulty it had presented, and this is a really big issue here, which was, which is obvious, logical, there wasn't a clean distinction between the two. So a hell of a lot of stuff turned out to be very, very problematic, which was, as it were, shadowy. I mean, sieves, conduits and all the rest of it, which were attached to major banking institutions, either actual retail banks, bank holding companies, or bank holding companies which essentially were broker dealers, and therefore were systemically significant, were also deeply invested in and connected to the so-called shadow system. Now, I think it's very... And that also arose in another aspect of it, the link between the mutual funds and all this. So one of your problems is, okay, you've got this core banking sector in the US, which it's clear you really care about, you're not gonna let collapse completely, you have relatively efficient resolution procedures. That also was another big class the US had. Nobody else, we had no resolution procedures at all. So that is a big improvement, by the way. At least it's an improvement. How big? I don't know if it's an improvement. But the... When it came to the breakdown, the US problem was that it was really difficult to separate the shadowy stuff with the non-shadowy, the core stuff. So the poor old fed basically had to go out in a way that really no other central bank was shoring up everything everywhere. I mean, and you got into this really weird situation, which I like to joke about, which was that the whole housing finance system ended up being completely incorporated within the Fed, effectively, which nobody else had to do to the same group. So that was the American problem. The British problem was quite different. We didn't have those relationships. We lost an... But it emerged in another way. So I'm not sure which is better. I'm really at the moment not sure which is better. The British problem was we got incredible amount of losses on foreign assets, the British bank's lots, vastly more on their lending in America to American housing than they lost on British housing, which again is very, very surprising to many people. But obviously the Bank of England didn't have a clue about what was going on there. So it's the whole foreign asset side of it. It's very non-trans... Very, very non-transparent. But of course the other problem was, since one of the institutions which was deeply involved in that was RBS as a result of its takeover of AB and AMRO, and it's a huge core bank and we couldn't just lose it. They ended up having to take over the whole thing. So my feeling at the moment is that shadow banking sectors which are deeply intertwined with core banking sectors are very fragile and very big banking sectors, which operate globally, which don't have any shadow in, are also very fragile. And I think it's very difficult to know exactly which is going to be the more explosive. That's interesting. And it's great when you admit you're not sure yet. It's good for all of us to think about. Let me try to take a slightly different direction now. One of the best things in your book, The Shifts and the Shocks, and again I'm holding up the virtual cover for all of you to buy it now. In my opinion, as I've told you, is your section on how the economics profession just got it wrong. And you have been a sparring partner and friend to most of the leading financial and macroeconomic economists for the last several decades, at least the last couple decades. Why do you think they got it so wrong? Was it a cognitive capture thing? Was it a fear of challenging the consensus? Was it more venal motivations? Again, it wasn't 100% everyone got it wrong, but an awful lot of the people who were economists speaking at Davos through the years got it wrong. Financial liberalization was going to save the world. So why do you think they got it wrong? Well, one of the reasons I'm very sympathetic to them is that I did too. I was hoping you were going to say that, but I left it to you to say that. It's in the first page of the book. One commenter on Amazon said, why should I read a book by a person who admitted he was wrong? I think that's a very good question. Maybe the answer is that learning once mistakes is one of the ways human beings learn. I wouldn't say it was universal, but a lot of people got this wrong, and I don't think venality was a big element in it. I think there were a mixture of intellectual and historical reasons. The intellectual reason was that, as the profession of economics developed over the last 40 years after the collapse of simple-minded Keynesianism, the new syntheses were increasingly around ideas of general equilibrium and with a few imperfections or not, which basically provided you maintain, monetary stability in some sense. You don't just have anything crazy. Some people would argue even that doesn't matter. Money is completely irrelevant, but assume that you need some sort of monetary stability. The economy is going to just sort of look up to itself and it will be fine. There's nothing to worry about. Those were inherent in the models, the way the models structured, and clearly Friedman started that, but I think Lucas and his successors were very influential for very powerful intellectual reasons. The second thing is it really seemed to work. We had a wonderful period. I have a quotation in my book from a man whom I greatly admire, Ben Bernanke, a very famous speech in which he talks about the glories of the Great Moderation and claims the successes of the Great Moderation as successes for, as it were, him in his capacity or them in their capacity as central bankers. He delivered something. And in that context, the assumption was, you know, macro stability was working, worked, the economy was basically flexible adjustment mechanism. It would move towards equilibrium. And in that context, the financial sector was just not going to do anything seriously wrong. It was just part of that system. And I think it worked so well and for so long that the potential risks were just not perceived until it happened. So let me push a little harder on the inner Martin. So many of these issues you've raised and other ones like UK and Europe, you know, you have to churn out your two columns a week and these issues, like you said with global imbalances, don't go away. And occasionally it must be a little frustrating that the powers that be don't just roll over and say, okay, I read Martin on this for the sixth time, this time I get it, I'm going to change my mind. So how do you motivate yourself when you're, in a sense, having to grapple with the same big issues over and over and over? Is it you just get angry every time? Is it hope springs eternal that you'll figure out the right chart to get through? What motivates you to keep tapping? But just think how terrible it would be if they all did what I asked, then I'd have nothing to write anymore. This would be truly, truly, truly awful. So you're asking, I mean, I do this because it's interesting and enjoyable and sorting out my own ideas is really the main thing I'm trying to do. I don't really have any delusions about changing other people's minds. It's very difficult to change anybody's mind. I know that, particularly their interests go strongly in the opposite direction. So I don't see that as the objective. I usually am not very angry. It's not my temperament. Only in extreme circumstances. And as I said, it would be very, very awkward if suddenly everybody said, well, you've been right all along and we're going to do what you want. And that would be almost frightening. So almost, almost frightening. But the other point is the world changes. The things that matter to me change. And what I think about these things change. I find there are columnists who never change their minds about anything. I think that gets fairly dull after a while. I do perhaps change my mind too frequently. I don't know. So in the end, what drives me is that this is all just very, very interesting and important. And so having the opportunity to write for a paper like mine about things that seem to me interesting and important and even to be paid a little for it. Unbelievable privilege. That's how I feel about it. I've had an unbelievable privilege to take you through this conversation as I think the people in this room have. Let me throw you one last, in American terms, I hope softball, but an interesting one. One of the things which you've been noted for and your papers been noted for is you're sort of the love-hate object of the Euro area. They want to be covered in the FT. They view you as the global voice on Europe, but at the same time they're constantly complaining and frustrated you're unfair to Europe. If you're skeptical in Europe, you just do that. When you were kind enough to premiere the shifts in the shocks in Washington at the Peterson Institute, John Claude Trichet happened to show up. I made a range that. And pressed you a bit on the ongoing strength of Europe. So I guess as we close out and go back to our European Davos meeting, have you changed your mind at all on Britain in Europe or on stability in the Euro area, or is it all just a matter of countdown until this is all done? I'll make three points. First, by British standards, I know this is not a very good answer. The FT is a wildly pro-European paper. I understand. And we are criticized for it fiercely all the time. And John Boehner is an environmentalist by American standards. No, I wouldn't get that slightly unfair, Cabaret. And we remain very strongly pro-membership of the EU, I think, as a paper, and I certainly do. We have changed our position on British membership of the Euro. We had a long period when the FT argued very strongly for British membership of the Euro, and I mostly thought we were wrong. One of the great privileges of writing at the FT is that I'm allowed to write columns which are absolutely against the editorial line for years, and everybody's very nice about it. It doesn't happen at the journal in case you hadn't noticed. And so we've had that balance. Vis-a-vis, that's a sort of second point, and we will remain there. We are very strongly membership, but we do have an Anglo view. There's no doubt we do. On the comments we've made about the Euro, I think I've tried to strike a balance, but it might not be as seen as that between what I think of as the views of the north and the south, as it were. And I think that's what the paper is trying to do because I think there is an element of truth in the views of both. So I've even written some columns, I can cite them actually, which have been rather sympathetic to the German position, and then sometimes rather less so. But we have probably balanced somewhat against the northern position because it's the dominant one. It's the overwhelmingly dominant one in practice, and it seems to me somebody has to argue against it. And because of who we are and where we are, we can do that. We can do it as in the context of what we've done within the Euro as being or about the Euro issue as sort of being in a way what we would call in Britain the loyal opposition. We want, and this is very true in a very important way, which is, though I'm not sure where this project will end up, I have no idea at all, but my view has always consistently been that it would be far better if it were made a success than not. We have not called for break-up, as many have outside the Eurozone, and we want to make it work. And the only reason I've written the columns, including the one this morning, is that I fear that this is not a stable situation we're in now. And the concern I have is that it seems to me the strategies that are now being pursued are ones that put inordinate stress on an unbelievably important, but at the same time fragile, structure. So I'm perfectly happy with the position we've adopted, even though I know people disagree violently and think we're pretty bad people, but that's part of being a journalist. You have to live with that. And we will live with it. We'll stop it there. With Martin Wolf, author of Latedly of The Shifts and the Shocks, Chief Economic Commentator of the Financial Times, which he's holding up, if not of the world. So thank you, Martin. Thank you. Thank you very much.