 Good afternoon, David. We are very, very lucky to have with us David Lipton, who is the Acting Managing Director of the International Monetary Fund. Until Monday. Until Monday? Is that right? Yeah, Christina Georgieva was selected by our executive board today. Today? Yeah. OK, so you see how lucky we are? We have the head of the IMF here, and David has been Deputy Managing Director under Christine Legarde and has been a senior US government official in both the Clinton and Obama administrations, right? Senior Treasury official in the Clinton administration on the National Security Council. In the Obama administration. In the Obama administration. And 40 years ago, we were sitting around writing our dissertations together. So this goes back a long way. And who knew that 40 years later, David would be running the fund, and I would be interviewing him on stage here. And Wing Wu was with us also. Another friend from grad school and a distinguished professor at the University of California, Davis. So David has had the remarkable career of being involved in almost every major event and crisis of the international economy. It was all my fault. For decades, we do not. He has been firefighting for a long time. And that's where I wanted to start our conversation. When we were in graduate school, we were studying the high inflation of the 1970s. And I think in retrospect, certainly one of the major components of that was a shock on August 15, 1971, when the US under President Nixon unilaterally ended what was then called the Bretton Woods monetary system. But the US ended its gold convertibility. In 1971, and suddenly all the currencies of the world were essentially on their own. And the first decade of that was a high inflation period. Then to end that high inflation came a second shock, which was when Paul Volcker was chairman of the Fed. And he put up interest rates very high in the United States in the early 1980s to end the high inflation. And that triggered, in part, a global crisis of indebtedness of the middle income countries. David had just started at the IMF then. I had just started my career as an assistant professor at Harvard University. And one of the most memorable moments for me was at the IMF in May 1982 at a lunch with the senior IMF official, David Finch, who said to me, you know, Jeff, in a week, we're going to have a major global crisis because Mexico is going to default on its foreign debt. So that began another phase of the world economy, the developing country debt crisis of the 1980s. A third crisis hit 15 years later when, after a devaluation of the Thai currency, the Asian financial markets linked to the US and global financial markets went into a kind of spasm. And Asia fell into a very extreme crisis. At that point, David was at the Treasury and was over in Korea and elsewhere trying to address that major crisis. Fast forward 11 years, 2008, September 14th. Lehman Brothers failed, September 15th, 2008, all hell broke loose, the worst financial crisis in the era since the Great Depression. And President Obama was elected, and David was one of the key experts then on the National Security Council addressing that. So my question, long-winded introduction, is we've had financial crises roughly every 10 to 15 years now, major crises, major upheavals. The last one was now 11 years ago. What have we learned? You've been fighting all of them. And when is the next one? Thank you for that concise question. That had a question mark at the end. No, it was good. I think each time we learn really well how to resolve the previous crisis. And the problem is that you never get the same crisis again because if you're able to foresee it, you prevent it. And rather, we see the world's economy changing and, in some ways, becoming more sophisticated. And to some extent, that's been driven by economic integration and the links that have come from that. So that each time the situation is more complicated, and I think I hate to say it, the pattern has been more virulent. When the Latin debt crisis happened, the only debts that countries had were all held by commercial banks. There were no bonds. There were no hedge funds. You could get bill roads of the city to round up a room full of bankers. And this fellow, David Finch, could go and say, well, what are we going to do about this? And the decision could be made by the time of some of the later country crises, that was really not an option. And you read about the holdout creditors and the problems of just in dealing with debt difficulties, the problems of rounding up creditors. I think it was that we started with sovereign debt crisis with countries that had overspent, overborrowed, overheated their economies, overborrowed, and had to contract their current account deficits and stopped their borrowing. But by the Asian financial crisis, we had financial flows, capital flows, driving imbalances. In the case of Korea, for example, it was that Korean banks, perhaps having exhausted their ability to support the economy, started borrowing abroad and channeling money to hold up a system that was becoming unsustainable in some important respects. And then the foreign banks, when they got nervous, cut off those lines of credit. Korea used all of its reserves to try to deal with that and had a crisis. So each time, the world's getting more complicated. The global financial crisis, of course, wasn't global. It was really a transatlantic US-European crisis. But the links among financial institutions across the Atlantic, the financial engineering that had created complex financing structures with all sorts of implicit guarantees, structures that were based on transforming maturities and taking liquid liabilities and putting them in illiquid assets, when that all became unworkable, it was so much more complex to deal with for policymakers. I think what that means, I think, is that we have to always be looking around the corner and asking ourselves, where are the vulnerabilities going to come? When I look at the present situation, I think that we see a global economy where the core economies are slowing. If you look at US, Europe, Japan, China, their growth rate's been slowing for a couple of years and we project it is going to continue to slow. And with that, monetary policy is having to continue to try to hold up a core of the global economy where the private sector's dynamism is abating to some extent. And I think monetary policymakers are right to be trying to provide that support. Interest rates have been low in Europe are negative. And I think they are doing the right thing. But when you look at the byproduct of that, I think it is that more and more investors seeing these very low or even negative returns are looking for more remunerative places to put their money. Some, like pension funds and insurance companies, have some set liabilities. And they feel as though they have to look for higher yielding assets in order to deal with that. So what we're seeing is, again, I think a bit like the lead up to 2008, we're seeing some increase in risk taking. Now, is it the same? Is it different? How do you get prepared for that? Well, we've done a lot, the world has done a lot, to make banks safer. There's been a whole financial and regulatory reform to make banks safer. I think banks are safer. But what we're seeing is that this new risk taking is happening mostly outside of banks. There are all sorts of non-bank entities. Some are institutions, business development corporations, they're called. Some are structures, CLO, collateralized loan obligations structures. And I think when we look at it today, we would say that these structures, somewhere between $1 and $3 trillion of structures that are investing in quite risky companies are not an imminent threat. But what will they look like in five years? If you play the clock back to 2003, at that point, we might have said that the real estate market in the United States wasn't an imminent danger either. But in 2008, what would we have wished we'd done in 2003 to see that this didn't become a problem? I think that the question to ask now is, is there risk taking going on that ought to be studied? Need more information because we don't know that much about activities, financial market activities outside of banks, analyzed, limited in some way in order to avoid having a financial stability problem down the road. It's this kind of thinking that we need to do. I think it won't be easy because there are great interests from those who are trying to get these returns and companies that are trying to get this money. And it's always very hard to, and I think it's especially hard at this juncture in our countries to expand the authority of the central banks of the world and the regulators of the world. But unless we can get ahead of the events and look around the corners in a sense of what might happen, I think we may run afoul as we have in the past of being ready to fight the last crisis and not being very good at dealing with the ones that come. That's a long answer to a long question. It was a long question too. But it worries me. One thing that does worry me a lot, I wonder whether it worries you. First, no matter what the slowing or the geopolitical crisis, the trade wars and so forth are giving us, the stock market remains high and rising. And the demand for that by easy money is very powerful right now. Politically powerful and the interest group powerful. And there is a kind of assumption that easy credit, whether QE, quantitative expansion of some kind, can always save the day right now. And I wonder whether that is. I think your right to be worried about that. The right answer is that for years, we've not had the right mix of policies. We're letting monetary policy try to address what's fundamentally a real phenomenon, which is the slowing of the dynamism of the private sector. And it's a complicated question, who should do what? But I think a different mix of fiscal and monetary policy is probably worth thinking about. But of course, if this really is a loss of dynamism in the private economy, you can't solve that by having more public demand for too long, because after all, public demand will require borrowing and eventually public sectors won't be sustainable. So you have to ask yourself, what are public sectors doing with the taxpayers' money? And are there ways to be helping to invigorate the private sector? Say, in the United States, by creating infrastructure, better infrastructure, that will be a public good and raise the rate of return on everything. I understand LaGuardia Airport is being improved. That's going to make everybody's life a little better here. Could there be more support for research and development that could perhaps promote the new, new thing that might be innovations or the use of evolving technology for more productive purposes? Should we be spending more on education in ways that would also, in time, generate new ideas that could be invigorating the private economy? I think we've got to think more about that. There are parts of the advanced world that probably would benefit from a range of structural reforms in Europe we've talked about and written a lot about, the need to improve the functioning of product markets and labor markets. I think there's a whole agenda there. We should be asking, not do we boost the deficit and boost the stimulus coming from our budgets, but we should ask, what are we spending all this money on? And what kind of, what are we getting for that? I think that's, to me, that's the way to go. Now, in the meanwhile, if we don't wise up, I think it's, I guess, I think that the central bankers have an obligation to try. I think there will be diminishing returns to their efforts as they use up a lot of the policy space they have. And I think there will be risk-taking behavior that will be a byproduct of that. But the risk-taking behavior, I mean, after all, people know what they're getting into when they invest. I think as public policymakers, what we should care about is whether there's an externality that's not internalized, that if someone creates leverage to make a return that's higher than the, to multiply the return of the company you're investing in, if you make leverage, you take into account the risk to you of that. But you don't take into account that if everyone's levering up, and that's driving the stock market, and that's creating an availability of funds to companies that really are problematic, that there's a public policy interest in limiting that. So to me, we need to explore a much broader range of what we call macro-prudential tools. We use macro-prudential tools in some cases to say, to limit loan-to-value ratios when banks lend to housing. Because again, we understand that that's the way to fight the last crisis. But we probably need to think about limiting leverage, limiting maturity transformation, limiting liquidity transformation more generally, because that's where the collective danger comes. And in essence, try to let monetary policy play the support role, and try to limit the risks through macro-prudential policy. And then in the meanwhile, try to come up with a broader range of policies to have a stronger economy. One of the reasons the IMF was created in the first place was the failure of cooperation in the 1930s to first stop and then solve the Great Depression. And the Bretton Woods Agreement, which established the IMF and the World Bank, was an agreement to create a new cooperative framework. And the US was at the center of that new framework starting in 1944 with the Bretton Woods Agreement. You're at the institution that is purportedly at the center of global cooperation, but we're not in an easy era of global cooperation right now. So what do you see, actually, in terms of how to hold things together with the geopolitics really changing now? I think it's the biggest challenge for the IMF and its membership. Let me start by saying that it's understandable that people are frustrated by the way in which global interconnectedness can upset their lives. There are more spillovers from what happens in one country or one market to other countries. And we've seen dislocation. No one ever said that trade was a Pareto optimal. We know that there are winners and losers. I think in the rich countries, we've seen some winners and losers and the losers being upset about the disruption in their lives. This has happened in a way, the more so, that the poorer countries have done well and progressed. That's natural. You don't see winners and losers in Asia because the growth rates are so high that you basically see big winners and small winners. If you look in Vietnam, if you look across emerging markets, by decile of income level, no one's gone down in the last 10 years. Everybody's gone up, but the top has gained much more than the bottom. But in advanced economies, there are, in fact, winners and losers. Now, people may exaggerate how much it's trade that's causing that. We know that technology, labor-saving technology, is a big part of that. And a lot of that would happen even if there weren't interconnectedness. But I think we need to understand this impetus that's the discontent that's given rise to the populism that we're seeing and the various ways in which it's manifesting itself in the United States and Europe. One of the things we learned in trade theory 40 years ago, and I think it's basically true, is that because there are winners and losers, the theory is the winners should compensate the losers. But I think in capitalism, it doesn't happen. In a closed economy capitalist system, it doesn't happen. But what you can do is you can have social protection for the most vulnerable. You can have education and health programs to make sure that people are protected and there's opportunity. And you can have better education in terms of training so that your economy can be more flexible and people who have to move out of sector A to sector B that that can happen. I don't think you can literally say we're gonna compensate everybody who's a loser. I don't think that will work. But surely we need, I think it's the highest goal of the international community working together at the IMF to preserve the interconnectedness. And I think this is the key point. If there's, and this is something we wrote about 40 some odd years ago. If there's any hope for the developing economies and the emerging market economies to have rising living standards that someday head towards advanced economy living standards, they need the interconnectedness. They need the trade. They need to acquire the technology. They need to acquire capital. They need to be able to educate their people and then acquire capital and technology to put people to work. It's the only hope. And if there's a fragmentation. You wrote a good dissertation on that. 40 years ago. And the question is why is it not working? It basically looked at, we did work together, that looked at the newly industrializing economies in Asia at that time. And what would happen as they acquired technology and had investment booms? How would all work out? This should be what happens with emerging market and developing economies. And the question is, will Ethiopia, will Tanzania, will Rwanda, will Ghana be countries like that? Well, surely if the world fragments and the rich countries pull away, it won't happen. There's other questions about how those countries can make themselves more attractive for them. I think there's also the problem that when this is done with a region or a country as large as China, the success is freaking out the United States. I think it is. And look, at the IMF, we say two things about the US-China tensions. One, that the tensions should be resolved through dialogue rather than through tariff threats and tariffs. But we also say that China has to think again about its trade and other economic practices. China has had many economic practices that were no big deal when they were a trillion dollar economy in 2000, roughly at the time they came into the WTO. They are now a $13, $14 trillion economy. There are spillovers. What happens in China doesn't stay in China. I also think and have made the argument with the Chinese that many of these practices, which may have helped jumpstart the economy, are no longer good for China. They're wasteful in many respects. And China could have a stronger, more balanced economy with a new set of practices. So I think there's a need to go from to de-escalate, to have dialogue, but also to seek changes that will make sure that the spillovers from country's behavior do not undermine the possibility of multilateralism into global integration for the sake of the Chinas of the future. We had the chance to work together this past year on the Sustainable Development Goals and a terrific report by one of the departments of the IMF, the Fiscal Affairs Department. And the question was, could poor countries afford to achieve the SDGs on their own? And the answer was no, that there is a gap between what they could raise in national revenues or domestic revenues and what they would need to actually achieve the goals that are globally agreed. And what is needed, therefore, is some kind of income transfer from the rich to the poor to close that financing gap. And I thought the work was fantastic and very eye-opening. But what to do now? How do you see the IMF or the international system taking this SDG mandate seriously, but basically also saying to the rich world, you have to do more, which is not an easy thing to say, but it's an important thing to say. I think, like all of these international efforts, this has to be a partnership. Just to say, at the IMF, our role in development is really in one area, which is to help countries create a macroeconomic environment that's stable. So they don't have debt problems. We don't want a recurrence of the debt problem that led to the highly indebted poor country initiative. There are some countries falling into that trap. We want to help countries to take care of their own economies and to build the capacity to be able to implement the SDGs. The SDGs really require a whole of government work across so many different fields. Now, I think the upshot of the work that Jeff referred to is that the gap that is needed to be filled to achieve core SDGs, and we just looked at core ones of health education, energy, infrastructure, and so on. It's a huge amount of supplemental resources. We reckon that maybe a third of that has to be solved by the countries themselves. They need to mobilize domestic resources, find ways through their tax systems and through the saving to mobilize the savings of the country to show that they're making an effort. The remaining portion, which is a lot, it's a lot of money when you look at any one country. But when you add it up, it's not a large amount of money for the world. Then we need to convince the world that, coming back to the arguments I made, that if the economies of the West are going to have fewer investment opportunities, the future for the German savers, Germany has a huge current account surplus. They invest that in US treasuries. They get very low return on US treasuries. That there will be opportunities to have interaction with the emerging market and developing world. It could be very remunerative and very healthy if those countries can develop. So put the money in now to help countries achieve the SDGs, become serious candidates for being the locus of investment and growth for the next generation, and that that will pay off once it happens. If by 2030 these goals are more nearly achieved, you could have a more dynamic emerging market and developing world that could be the next set of newly industrializing countries, industrializing slash technologically advancing countries. It's a great vision. It was in a great dissertation 40 years ago. Now you're putting it into practice. And sadly, our time is up. But thank you, David, for coming by our conference this year. We're very grateful. Enjoy the next three days as managing director. And then continue your leadership as deputy managing director of the IMF when Kristalina Georgieva, a wonderful leader who's coming across the street, across the 18th street from the World Bank to now become managing director of the IMF starts next Monday. Thank you so much. Thank you.