 Hello, if I may have your attention. I'm Sheryl Sweniger, Director of Economic Growth Program at the New America Foundation. And we're very pleased that you could come out on a very rainy day. There will be a few, or quite a few, additional people drifting in. I think the inclement weather and some problem on K Street may have slowed everyone arriving. So I will fill up a little bit of airtime so that many people don't miss the main event. This is the latest in a series of what we've called growth seminars or symposiums that the Economic Growth Program have hosted over the last few years in an effort to try to understand the nature of the crisis that we're undergoing and to chart a growth path out of it. Interestingly, it was four years ago virtually to the day that we held the first symposium. And the lead speaker at that symposium was Simon Johnson, who was then Director of Research at the IMF. And Simon laid out in a very sobering and alarming detail the size of the housing and credit bubbles, not just in the US and just not in those circles where you had the largest housing bubbles, but also in Europe. And Simon and other speakers sort of foretold the seriousness and the gravity of what was going to unfold in the months that followed. Since that point, in putting on these programs, we've had three essential working assumptions. First, this is not what we've experienced is not a normal business cycle recession. It was the result, as Simon Johnson in that initial seminar pointed out, the largest credit and asset bubble in world financial history. And therefore, we've approached this that the conventional macroeconomic tools would have severe and serious limits. They were important, but we would need to be much more radical in our approach. The second working assumption that we have had is that the crisis has been global and systemic in its nature. It just wasn't a US financial system crisis. It was a product of global imbalances and a global pattern of growth and development over the last couple of decades. And therefore, since it affected large parts of the other world, and particularly the Eurozone, there was going to be no easy global trade adjustment path out of this. The US would not be able to count on the rest of the world cooperating. Indeed, the danger would be one of beggar by neighbor policies, competitive devaluations, not necessarily US being able to grow as others expanded their own demand. The third working assumption that we've had in putting on these symposium is about the crisis is that austerity at best is a dead end and at worst very counterproductive. The heart of the problem still, even after three to four years of deleveraging, is, on the one hand, a dead overhang. And on the other hand, still an enormous imbalance between supply and demand in the world. There is simply too much labor, too much capital, too much productive capacity that is laying idle in many of economies of the world. Obviously, there are areas of tighter demand, tighter supply. But by and large, our problem can't be solved by austerity because that gives rise to the danger that the three authors of the paper were featuring today of debt deflation. So our emphasis has been on growth, debt relief, and rebalancing growth by finding new sources of economic growth as the economy rebalances. Today, we're going to feature an important paper in this series that I think picks up that builds on these working assumptions that we've had in these growth symposium. The paper titled The Way Forward, an optimistic note that indeed there is a non-austerity path out of this, moving from the post-bubble, post-bust economy to remote growth and competitiveness. And we're going to begin with the three authors of that paper, Daniel Albert, Robert Hockett, and Nouriel Rabini, to give us an overview of how they see the problem still afflicting the US and the world economies and how their program that they have outlined in their paper allows us to work our way through it in a healthier, growth-oriented way. That will take up the first 30 minutes. Then we will have a larger panel discussion in which we will bring in some additional voices and additional perspectives on the nature of the risk currently to the US economy and what the prospects for a sustained economic recovery program are. In this case, we have Leo Hendry at the far end of table, Bruce Bartlett and Leah Kada Ahmed. And they will form the second phase of kickoff, the second phase, which will be a larger panel discussion in which we will then work also in the authors of the paper. And finally, we'll save time for questions and comments from the audience. So we begin the first phase, which is Dan, Bob, and Nouriel with a presentation of the main points of their paper. Thanks, Sean. I'm afraid Bob and I are the warm-up act for the guys to the left of us, but you'll hopefully tolerate it. The paper that we wrote really breaks into two or three different sections. One is sort of telling the story of what happened. The second one is explaining why people have gotten it all wrong. And then finally, some prescriptions on what we need to do. And so we're going to walk you through this as quickly as possible. Some of the stuff, the graphs and charts you're going to see are things that two years ago would have made everybody's eyes bug out, but today they're kind of accepted. But I think they're necessary in order to lay the groundwork. So the credit bubble in the United States saw aggregate debt double during the period of time from 2000 through the end of the bubble. It went from already elevated 273% to 360%. This was a continuation of a trend. As you can see, we were flat debt to GDP prior to the 1980s. And starting in the 1980s, things changed. As you can also note on the chart to the left, the things slowed down a little bit in the 1990s when we had this wonderful productivity boost. It's what I call growth that's bought and paid for and not borrowed. And that really is, in fact, what happened. In raw dollars, the issue is even more dramatic. As you can see, starting in the early 80s, we went from below $10 trillion of debt all the way up to its current 52. And by the way, don't let anybody fully total debt outstanding in this country, still hovering around 52. It's just shifted from one pocket to the other. The biggest climb, of course, as you can see, was during the previous decade. So the basic construct of the paper is all of this would be bad enough. We'd get a conventional Irving Fisher-style debt deflation. And we'd be in trouble for a while. But the problem is that something else was going on. And so the three of us spent a lot of time trying to think through, I know, Nurell and I have been discussing it for four years, but I think through all of the things that really come into the equation of why this time is different and why this time is very special. And the thing that I've been focused on for a very long time, obviously, is the end of the Socialist era and the release of 3 and 1 half billion people in the BRIC countries into competition with the United States and the other developed countries. So we have created an enormous imbalance, which has created an excess supply of labor, of productive capacity, and ultimately of capital. A lot of the debt that you saw in the first graph is really the capital being earned by folks in developing countries coming back at us in the form of treasury purchases. So we looked like we were doing OK. We looked like we were doing fine because we had plenty of cash to spend. And of course, this creates very, very low interest rates. But the problem is, is the prosperity that we saw, or what we thought was prosperity, which was really the act of going progressively into debt, was ephemeral. It wasn't real. And the reason for that we'll explore a little bit further. I think as an additional point, we need to point out that this situation hasn't been, in its current state, just over the course of the bubble, really at the end of that big prosperity boost due to internet technology and all the wonderful things that happened in that period, credit the private sector, discredit the Bill Clinton administration theory that just because he was in office, everything was fine. The answer is he was great president. No problem with that, but let's face it. This was real private sector productivity. It equates to the invention of the railroad, the radio, whatever element of great advance you want to point to. The problem is when that was over, we entered a period of massive stagnation in US median family incomes. And as you can see, things have been fundamentally flat going all the way back to 1997. Now, arguably, the prosperity continued beyond 97. I'm aware of that, so you saw a little peak in Valley in there. But the truth is that this is a situation that is not tenable for a prolonged period of time. What's a bubble look like? This is kind of a very easy way to understand a bubble. What this chart does, and it's very small, and I know you can't read it, it looks at the inflation-adjusted movement in prices of all of the inputs that you could possibly think related to housing. In this case, we have rents, we have building materials, we have the cost of labor to build houses, all of the various things except one element, which is land. And the big blue line that goes up and down, that's obviously the price of housing. This is inflation-adjusted, so you don't see the conventional case-shill or indices that you would be familiar with. You have to take out inflation. This is what it really looked like. As you can see, the prices of nothing else really budged during that entire period of time. What really happened was we saw an enormous debt-driven, credit-driven expansion in the price of homes. And that occurred really simply because people were shoving money out and it had no place to go. So it went into the one thing that's very, very hard to value, and that is the other component in housing, which is land. Effectively, we had a massive land bubble except nobody could see that. They just saw the houses that were built on top of the land. What went on with our labor force during this entire period of time? So we've had this wonderful thing going on in the United States, and we should all be very proud of it. Starting in the late 70s, we saw this enormous expansion of labor force participation by virtue of the fact that women entered the labor force. Now, economists can sit there and say, well, women entering the labor force that costs us their free labor in households and all sorts of things, so you have to net that out. OK, fine, but the fact that we absorbed an enormous number of people into the labor force and saw labor force participation go up from the 60s level of the high 50s all the way up into the high 60s is quite spectacular. The problem is, of course, if you ramp over to 2000, we've been going down for a while. And not only that, after the recession and during the recession, after the recession, we've really plummeted. There's been a little uptick the last couple of months. That's good. That uptick, in my opinion, is happening for the wrong reasons. And that is that people are falling off the back of their unemployment benefits. And in fact, they're willing to take lower price jobs. And so we're seeing number of wages bobble around right now. And I believe they're going to fall. Obviously, real wages have fallen considerably. What's the other impact of credit that we think is very interesting? Well, this graph shows per capita adjusted personal income, and it strips out all of the elements of personal income that don't relate to actually going to work and earning a living. And so what you have is that line contrasted with growth rates. These are growth rates. These aren't absolute. I'm sorry, these are indexed numbers, not the absolute. Average hourly earnings of production and non-supervisory workers. These are the 82% of all wage earners who aren't the bosses. And you contrast the growth rate in both, and you'll see going back to 1964, which is when the data starts, they parallel each other perfectly. They're laid on top of each other. The whole everybody's growing at the same rate. Yes, the rich people will have more money, and the poor people have less money. But at the end of the day, everybody's growing at the same rate. And you then see this massive divergence. There are a lot of things that folks in this room who study economics can point to that could cause that. There's demographic issues. There's all sorts of things. But it just so happens that that point of divergence also correlates with the point of divergence in the expansion of debt in this country. And so to a certain extent, you can say that the debt, which obviously isn't the debt of the blue line people, it's the debt of the red line people, is pushing more money up to the blue line people. And so this is something that we think over time is going to need to be evaluated. Everybody looks at income inequalities in the form of quintiles, and which group has more than another group, and what's the gap between them. We like this chart over my firm, at least, because we think it expresses this in a way that understands the nature of the gradualism and how it kind of snuck up on us while we were looking. So where are we now? We've got 25 million working-age Americans who are unemployed or underemployed. Our employment population ratio, which this slide's a little bit old because we gave it in October. It's ticked up a little bit since then, I think two-tenths of a point, is now 58.5%. We have only 112 million, and this is really an interesting number. We have 112 million full-time workers and 26 million part-time workers supporting a population of 312 million people. Think, just let that go into your head for a little bit. That's quite something that is really quite amazing. And of course, that population's aging. It's a demographic issue we didn't explore in this paper. Another time. Part-time employment, a lot of what you hear is employment is really part-time, right? And the government has a wonderful number called workers who are part-time for economic reasons. It is extremely easy to see on this chart what happened in 2008. We had this enormous blow-up in the number of people who were working part-time for economic reasons. That number has been bobbling around the 8 million to 9 million, 8 million, 9 million person level now for really since the end of the recession. And it isn't coming down. And so that's one thing that when you look at the headline unemployment number, you need to keep in mind these are not necessarily people who are employed in long-time jobs. We asked the question, you know, what's happening? Well, something's happening and it's starting to become very, very clear. We ask why this credit bubble is different than all others in modern history? Why is the slump so resistant to conventional recovery? Why this debt overhang is the most massive in modern history? And we turn to the next page to sort of start giving you the answers. We contrasted the bubble of this last decade with that of the only other real credit bubble that we can point to in modern history which was during the 1980s. Now, what do we define as a credit bubble? A credit bubble is a period of time that where credit grows at a rate or rather debt to GDP grows at a rate in excess of 2% for a protracted period of a number of years. So in other words, it doesn't go below that level, right? And there are only two periods that that applies to. We called one the great credit bubble of 2001, 2009. The other one the lesser credit bubble of 82, 87. And as you can see when we overlay real median family income, again, this is rate of change. You can see that the red line which is median income rate of change during the lesser bubble of the 1980s did what it usually does, which is parallel growth, right? You had growth, you saw the income go up. In fact, median income is actually quite a wonderful number. If you look back in the 1960s, credit growth actually was negative for a period of time, right? But you still had median income growth. So it really never had a period of time when you look at this entire graph that things broke down the way they did all the way to the right, where we had massive increase of credit, but no real growth that percolated down to the level of households. So real median income actually deteriorated net net and when you look on that, the next one, you'll look at household net worth, what did this really translate into? This wonderful upward sloping line and this beautiful trend line that's shown there that kind of fell apart in the late 1990s. We had obviously the tech rack, the collapse of the equity markets that caused that first little drop off, but then you'll see massive credit creation created this ephemeral wealth that literally just went away, which is that big peak over to the far right. And so really where we're at now is right back where we were in 1997. And I'm sorry, that's housing. This is January 2000, my mistake, I get my numbers confused. But yes, back in 2000, we've had no improvement in household net worth. And as you can see, look at the period of time of the 1980s, right? Which is that other credit bubble. It's a pimple by comparison. So ultimately, the numbers, it's all in the data, right? We look at the bubble of the 1980s. We see that households coming out of the other end saw aggregate real median income growth of about 12%. They saw a net worth growth of about 30% from beginning to end of the bubble. The numbers are here on an annualized average basis as well. And of course, when you look at this in the current bubble, you see negative numbers and very, very flat household net worth numbers. So that's us is sort of explaining why this time is very, very different. And so what worries us, Neri-El and Bob and ourselves, is that this is an issue of insufficiency of demand relative to excess supply. We've been living in a supply side here, so people in this room live in Washington. You're familiar with the debate between the supply ciders and pretty much everybody else. And the truth is that the concern back in the 1970s, which was quite legitimate, was that we did have demonstrably an inadequacy of supply relative to demand. Things have changed so dramatically and due to a historical event, due to the event that occurred with the release of the previously socialist populations. So we now have this excess of supply relative to demand. We call it demand deficit. We have deflation in debtor nations. And the absence of the ability to debase debtor nations currencies is a huge problem, which I'm sure Neri-El will talk a little bit about later, which is, we have involuntary currency alliance between the United States and China. China's not allowing us to devalue our currency. And in fact, they are now, as of about two weeks ago, seriously trying to devalue theirs because they're fearing weakness going forward. And of course, Europe is tied up in a complete mess, which you all know about, and Neri-El will talk about, but the bottom line is we have a choice at this point. We either need to do something about the demand side, forget about the supply side. We need to do something about the demand side or we're gonna be facing a Japanese-style continuous stagnation. So with that, I'm going to turn this over to Bob, who's gonna take us through the next several slides. You use this button here. Thanks, Dan. So sort of a core proposition that we're putting forth in the paper is that one of the reasons that initiatives tried thus far to sort of get us out of the current slump have all failed is because they're all predicated on misdiagnoses of the problem. So Dan, of course, has just given you a kind of quick and dirty version of our diagnosis of the problem. And our thought, our working proposition here is that if we do a decent job of actually diagnosing the problem, then the solutions that we have to offer will sort of recommend themselves in effect. They'll appear all the more compelling to all of those who otherwise would have been skeptical. So what I'm gonna do is first, we can say a little bit about the misdiagnoses that we understand as having been, sort of incorrectly done in contrast to the diagnosis that we've given, and then move on to the sort of criteria that an adequate program of response to the current demand deficit would feature and then begin to talk about our three-pillared plan essentially by focusing on pillar one. Then I'll hand it back over to Dan for pillar two and Nouriel will take over pillar three. So as far as the misdiagnoses that we've had thus far and the conventional policies that have responded to them are concerned, first of all, one policy response that was attempted was so-called monetary reflation whereby, of course, the Fed grew the money supply in order to respond to the quick freezing up of credit markets. While liquidity provision was wise policy at the time, we argue that of course it's reached the sort of outer limits of its effectiveness now. So monetary reflation did make sense, again in the early stages, but it has sort of run out of, it's no longer effective. So quantitative easing as one of the more recent sort of shapes that monetary reflation has taken, basically underwrites only fleetingly positive wealth effects, we say, and eventually those fleetingly positive wealth effects are more than offset by rising costs in the commodities markets, which also unfortunately tend to hit disproportionately hard, those at the lower ends of the income ladder. Likewise, limited direct credit easing could, maybe still help a bit, but it's not likely to make much appreciable difference over what we've experienced thus far. Next, there continues to be sort of ongoing debate about the effectiveness or the efficacy of quantitative easing and maybe possible for the rounds of quantitative easing, but we think that the tape, as we call it here, actually tells the tale. So what you see here, basically, is the red line, of course, is the CPI. Blue is the average hourly earnings. You don't see a great deal of rise in either of those during the period of QE. You do see, on the other hand, a sort of quick, brief ephemeral transitory arises in the S&P 500 and more dramatically still in the commodities indices, which of course is represented by the purple line. And you note that once the QE policies were backtracked from and discontinued, those commodities prices came back down. So what you saw is essentially a very temporary bubble in commodities prices as a result of QE. So we view this as further evidence that QE is not likely to be altogether helpful in future, that we've essentially made the best use of those kinds of policies that we can, and now there's not much more to be done with them. Next, another feature of sort of recent attempts at stimulus is the reliance heavily on undiffuse or indirect demand stimulation, especially through tax policy. And our argument here is that first of all, in a globalized economy with excess capacity and ongoing private sector delivering, tax cuts tend simply to be hoarded by those who are retrenching and trying to deliver rather than being used to pay down debt. You can view this as one instance of many that might fall under the more general rubric of what economists out there will know is a collective action problem that basically when you've got a serious demand deficit problem, you can't expect it to be dealt with in a kind of un-concentrated or diffuse way because it's individually rational for all of those individuals out there who are delivering to go ahead and hoard. So in effect what you really need is a concentrated spender if you're going to rely on spending of last resort to sort of reflate or sort of reignite the economy. Likewise, another method that might be relied upon at least in future to sort of help boost or restore growth in the macro economy would take the form of trade adjustment. But the problem with that at present at least is that it's not currently available on a sufficient scale and the reasons are presumably fairly obvious. The principle would be generators of global demand would be the EU on the one hand, the US on the other hand, and then finally China and maybe some of the other emerging market economies. The EU and the US clearly of course are going to be embarked upon retrenchment for their own parts over the next five to seven years at least that spells a need to rely more on emerging market nations, again especially China, but it's going to take a bit of time for them to ramp up. And of course part of pillar three that Nero will discuss is concerned with sort of how to get them to ramp up or how to sort of facilitate and speed up that ramp up process. But in the meanwhile, we'll have to adopt more concentrated demand-stabilitative policies of our own and debt-forgiveness policies of our own over the next five to seven years, but we'll come to that when we turn to pillars one and two. There are also of course, as you all know, a number of proposals out there that seem to be proceeding on the basis of no diagnosis at all rather than incorrect diagnoses. So of course, fiscal austerity seems to be all the rage in some policy circles, particularly in Europe, also here in the States, and especially on one side of the aisle in Congress, that we think is of course wrong-headed if not disastrously so. It essentially eggs on the sort of vicious circle that we're faced with right now, that sort of vicious spiral into sort of long-term debt deflation and ongoing recession. Another policy that's been proposed by some, and I think Ken Rogoff is one of these, has been deliberate monetary inflation, the idea that you might have a kind of a stealth debt-forgiveness plan in effect, essentially by rendering debt sort of in real terms less onerous than it would be, essentially by increasing the rate of inflation and by sort of explicitly embracing. Having the Fed, for example, explicitly embrace an inflation target of somewhere around 5%. We don't think that that's a terrifically good idea either, in particular, owing to the difficulty that is sort of historically known to attend to all such efforts. Once you let that sort of genie out of the bottle, as they commonly say, it's a bit difficult to get it back in. So, and the other thing, of course, is that you're unlikely to see wage rate growth in the near-term future that would match any such inflation rate, and so you might indeed exacerbate the real wage stagnation problem, which is one of the underlying causes of the crisis in the first place. Other possibilities out there that are sort of offers, while waiting for the emerging markets to increase the degree of demand that they add to the global economy. Again, in principle, that would be lovely. The problem is it's going to take a while. And again, so over the next five to seven years, which is essentially our sort of target period with this policy paper, that's not going to cut it. So the idea then is we have to do something to sort of get us over the hump, so to speak. We have to sort of provide a bridge that'll get us over the next five to seven year period until you can actually have a real appreciable increases in consumer demand from the emerging market nations. And then finally, this sort of sane-looking policy proposal to Azure is the idea of embracing short-term stimulus combined with a long-term fiscal consolidation, stated at that level of abstraction. This sounds fine. The principal problem with this sort of style of proposal that you're hearing, particularly from the democratic side of the aisle these days, is in the particulars. And in particular, what we're concerned about is that the stimulus that seems to be contemplated by those who are advocating this new, at least semi-sane solution, is very much like the previous stimuli up to now. Let's say it's largely tax policy-based, largely diffuse, as it doesn't address the basic sort of fundamental collective action problem that any debt deflation essentially amounts to. So while we think that those who are advocating short-term stimulus combined with a kind of credible commitment to a longer-term fiscal consolidation have their hearts in the right place, their heads aren't quite there yet. So we're hoping to sort of push them the rest of the way. All right, so having, we hope, sufficiently dispatched the sort of current vogue-ish policy solutions that are offered out, they're all of which we think are predicated either on false diagnoses or no diagnoses of all, we turn then to basically elaborating a few criteria that we think any proper diagnosis-informed program would feature. So first of all then, we think that any stimulus program in the coming five to seven years is going to have to rely more on concentrated rather than diffuse demand. We have to be able seriously to fill the demand hole that we're likely to face in the U.S. and global economies over the next five to seven years. That hole, again, you'll remember, is essentially opened by consumer and private sector delivering. And insofar as that's the case, of course, simply giving more tax cuts to those who we wish to spend more aren't going, isn't going to work. So the idea is what we have to do is rely on concentrated direct job stimulation by a real concentrated spender in last resort. Insofar as a debt deflation is a collective action problem, the solution would seem to require action by a collective agent. That's what we sometimes call government. And so we are thinking in terms then of the U.S. government actually adopting a serious infrastructure investment program, more on which in a moment. By the same token, while you're sort of closing the overhang that's opened up between debt levels on the one hand and income levels on the other. One way to do that, of course, is increase income levels by boosting demand. But the other way to do it is, of course, to operate from the other end and trim back on the debt, the debt end from the debt end of the overhang. So another then criterion that we think a workable plan is going to have to meet is to address or at least to sort of expedite the rate at which ongoing delivering takes place. And so any plan then ought to look seriously at the possibility of serious debt restructuring. And in some cases, debt forgiveness, but not free lunch style debt forgiveness as we'll elaborate soon in the private sector, okay? And then finally, a third criterion that we think any workable plan is going to have to meet is essentially any such plan is going to have to begin at least to address in a serious way the longer term fundamental underlying problem that sort of fueled or sort of underwrote the problem that we're now living with the consequences of in the first place. And that's the long-term global imbalances, right? Essentially the global oversupply problem or supply glut. So in effect, what we're going to have to do is ultimately see much more demand generated by those very nations that have added so much to global supply, throwing the world out of balance in the first place. And that's going to require some real institutional reform down the pike and it's going to require some sort of simulated institutional reform in the form of particular treaty arrangements or informal agreements between certain nations in the shorter to medium term. Now, conveniently enough, each of these three criteria corresponds to one of our three pillars. And so we'll now begin to turn then to the plan itself that we have to offer for the next five to seven years. So the way forward in detail is indeed then this three-part recovery plan. So to begin with what we're calling pillar one of the plan involves a $1.2 trillion five-year public investment program that will target high return public investments in energy, transportation, education, research and technology development, water treatment, infrastructure and the like. Pillar two, it then involves a very complex but we think optimally complex or optimally granular debt restructuring and debt forgiveness program and regulatory capital loss absorption plan as well. And then finally, pillar three in the interest of global rebalancing involves or includes a new G20 commitment to currency realignment, domestic demand growth and reduction of current account surpluses on the part of the surplus nations, the emerging market nations. Also a G20 or IMF coordinated recycling of East Asian and petrodollar surpluses to support or to at least help support economic recovery in Europe and the Middle East. So we'll begin, what I'll do is I'll walk us through quickly a few of the details of pillar one, the reemployment program, the public investment program then I'll turn it back over to Dan to cover pillar two on debt restructuring and debt forgiveness and regulatory capital loss absorption. So pillar one begins with a five to seven year public investment program again in basic transportation, energy, communications, water treatment and so forth infrastructure. The basic plan or hope here is with one point and the paper by the way backs up the numbers. So pardon the other kind of quick and dirty treatment of the numbers. But the target would be again 1.2 trillion of additional public private investment and then the consequent creation of an additional 5.2 million plus jobs in each year of the five year program. Again, we can give you the sources for the numbers if you like. There'll be an emphasis of course on high return investments and energy transportation applications to eliminate economic bottlenecks and restore productivity. I guess I have to pick up the pace of it. Also creation of a national infrastructure bank to help out in that. All right, I think I'm gonna maybe slide over quickly more of the details of pillar one since I'm told to pick up the pace here. Everything else actually that I had is more or less repetitive. Maybe just two quick final points on pillar one and then we'll move on to pillar two. These two points are as follows. First is that in another project, another paper that we're doing for the New America Foundation we've actually run the public investment numbers through a widely respected macroeconomic model put up on the web by a Ray Fair over at Yale. And maybe not surprisingly, it turns out that this sort of program at 1.2 trillion in public investment in infrastructure would be significantly self-financing owing to the multiplier effects and hence the consequent effects on employment and tax revenues. That's the first point. Second point is that it will never be cheaper in all likelihood to undertake these investment projects. And given that there seems to be widespread agreement even among those who are skeptical about public investment in general, that these are going to have to be done at some time, now that we've sunk to 16th worldwide in the quality of our public infrastructure given all of the private costs to the private economy of bottlenecks and other forms of inefficiency that are generated by deteriorating public infrastructure. Given all that and given that therefore there's no doubt but that these projects are going to be undertaken at some point, it would be nothing less we argue than financially irrational not to undertake them now given how much less expensive it is to undertake them now than it will in future with capital costs historically low, with labor costs historically low, with materials costs historically low and so forth. That's the second point. All right, with that I guess I'll turn over a pillar to Dan again. Yeah, just a small commercial, we're in Washington, right? And half the people in this room are sitting here saying, what are you nuts? Nothing like this is ever going to happen in this town. We're here to tell you what it is we believe should be done. What gets done in America is a factor, generally speaking, of fear. And at the end of the day, as long as we're able to sort of keep the situation from completely declining, we would agree that this is not the kind of climate in which to get these things done. However, Neriall will tell us a little bit about why we shouldn't be so complacent about the situation continuing as it is. So we wrote a pillar too, which I'll whip through pretty quickly. It really comes down to the issue of restructuring all the bad debt. You can obviously grow your way out of debt, that's great. You can try to increase savings, that's a possibility too. You could create unexpected inflation to devalue the debt. But as a practical matter, we believe we're way past that and we do need to deal with, especially with the enormous shadow inventory coming down the pike in housing and being liquidated, we're going to need to confront the need to actually restructure the debt. And my background comes from restructuring so that this is an area that I'm pretty comfortable with and I think was one of the reasons that we sat down and did this. But look, I'm not gonna go through this in glory detail because the appendix to the report, which you can all pick up in the hall, really works through all of the details of what we have in mind. The key to what we really advanced here was the notion of minimizing moral hazard. Now clearly if you run around handing out, dropping money from helicopters and handing out money for free to people, they're gonna be incented to do the same thing over and over again. And so what we try to do is come up with a number of things that really weigh the economic benefits relative to the obvious moral hazard of writing off or restructuring debt. And we came up with three levels of debt restructuring for housing. One which was focused on bridge loans for existing mortgage orders who really have interim payment distress. The second contingent principal reduction basically, if you make payments at this lower rate after 12 months, we will actually slice your principal off but we're not giving it to you until you show that you're gonna perform. And then finally, there are people who are going to just need to hand their deeds over. This liquidation process is incredibly expensive. Recoveries for non-GSE mortgages are averaging at 40 cents on the dollar through liquidation. That is a ridiculous hit when some of these borrowers can be saved by merely taking their loan over and renting them back their house and not having to have that house enter the market to further depress prices. So we spent a lot of time on that in a lot of detail and I am going to move beyond that because I'll mention one more point and then we'll move on to Nury Hall. And that is that in order to make that work, you need to be realistic about how you're gonna finance it. And so we've suggested a couple of things with regard to how we handle it on the other end, one of which is the phased-in recognition of losses. If you wanna tank your banking system tomorrow and it would tank, you would just simply tell your banks to mark all of their portfolio loans, forget about the securities, to the market value of the underlying collateral. There'd be no equity, right? And so you do need to have some way of avoiding having to either nationalize or restructure, take bankholding companies through bankruptcy or all sorts of other ideas that are out there. If you wanna maintain the existing institutions, not necessarily for the benefit of their shareholders, but certainly for the benefit of their creditors. And so what we've suggested that policy focus on is something similar to what happened in the 1980s when we had the Latin American debt crisis, where banks were able to effectively escrow their losses and recognize them over a period of time, provided they didn't fall below positive capital or sufficient positive capital. So that's another thing that we map out in detail. And then finally, we spent a little bit of time dealing with these huge roadblocks. I know there are a few folks from Treasury who I thought was, I don't see them out there right now, but they were saying they were gonna come. I've spoken with them a lot about this subject. This issue of first mortgages not being able to modify and compromise and deal with borrowers on a straight up basis simply because the borrower has this little thing called a HELOC or a home equity line of credit that is in second position behind his first mortgage. And he's still paying that loan because that's his credit card. Okay, and the payment's rather small. And what the first mortgages have gone and done through the American Securization Forum here in Washington is they've gone to the major banks that hold these HELOCs and they've said, listen, we're willing to give this borrower a 20 cent slice off their mortgage and try to keep him in his house. He's not paying us, by the way, he's paying his HELOC. And we'd like to try to resuscitate that mortgage and the banks turn back and say, the hell you do, we are not giving any principal right down our HELOC, which would mean effectively any principal right down that the first mortgage would be giving would be handed over to the HELOC holder. And so consequently, those are things that need, that can be worked out through policy, that can be worked out very adequately through regulatory policy. There just needs to be an awareness in this town of the effects of that on the overall market. So with that, we're gonna turn it over to Ternurial who's gonna discuss the global issues that were the third pillar in our paper. And thanks very much. Thanks. Well, you know, the problem of the United States, you know, re-leveraging of the private sector of course is part of what was going on in the global economy. So I want to give you a bit of a context of how this is a more of a global picture. And if I had to describe the global economy for the last 10 to 20 years, I would say that it was divided between two groups of countries. One was a group of countries that I would define as the consumers of first and last resort, spending more than their income and running ever larger trade and current account deficits. And then on the other side of the world, you had the countries where the producer of first and last resort, spending less than their income and running ever larger trade and current account surpluses. And the second group include China, most emerging Asia and other emerging markets, but also a number of the advanced economies, you know, Germany and the core of the Eurozone and Japan. And in the former group, the one of the overspending countries, of course, we had two sets of countries. One was not just the United States, but also other countries in which you had a housing bubble. Think about the US, but also the United Kingdom, Iceland and within the Eurozone countries like Spain and Ireland. So that excess of spending led to a buildup of private debt, essentially debt of the household sector in all of these countries. So what happened in the US with the housing bubble had a mirror, you know, also in UK, Ireland, Iceland, Spain and Ireland, and you name it. But then you had also a bunch of other countries in the periphery of Eurozone where the buildup of debt was not in the private sector mostly, but rather in the public sector, Greece, Portugal and Italy. And now, if you had to go to, let's say, to explanation, I would say of what was going on in this global economy, I think that these imbalances in part, as pointed out by Dan and by our analysis, were driven by this increase in income and wealth inequality that occurred around the world. Essentially for a long period of time, wage growth and real income growth in most advanced economies was anemic. You can discuss how much of it was technology, international trade, labor, skilled buyers, technological change. But essentially to keep up with the Joneses in the Anglo-Saxon country, we decided to democratize credit. That happened in US, UK, Spain, and Ireland and so on. So the huge massive buildup of private debt, mortgages using your home ATM machine, you know, personal debt, credit cards, student loans, you name it. While in the kind of social welfare states of the Eurozone, especially the periphery, instead of the democratization of credit, they led to a buildup of massive amount of private debt, you had the increase in public debt. So we decided to finance with public debt, social services, education, healthcare, and others that people could not afford. And therefore in one group of countries, you had to build up first of private debt. In the other country, build up of public debt. But of course, when the housing bubble went bust, we had to socialize these losses or we decided to socialize the losses of households or the financial system. So private debt became public debt. So the end result was the same, a huge amount of public debt in a variety of advanced economies. Now starting with these situation of imbalances where you have now large stocks of private and public debts in a number of advanced economies. And you have also still these large imbalances, current account and now fiscal. The question is how you address these imbalances when you return to economic growth. Of course in principle, the right solution will be the following one. There'll be a painful process of the leveraging in all the countries that were overspending, overspending in the private and or the public sector. They have to spend less in the private and public sector to save more or to save less to reduce debt and leverage over time. Assuming that you're not gonna have debt restructuring because in some cases the debt levels are so large that we're gonna need restructuring of debt of the private sector like mortgages or even of the public sector. But if domestic demand is gonna be weak in these economies are going through a painful process of the leveraging, the way to avoid the hard landing, double depreciation, permanent stagnation is that there has to be an improvement of their net exports. That's gonna be the source of going back to potential growth. And how you're gonna get to that improvement of net exports of course you need a nominal and a real depreciation in these countries that have had excessive overspending so that as domestic demand is weak in the private and public sector, net exports are gonna improve and therefore you're gonna get back to growth. Now in the over-saving countries where consumption was weak, saving was high and net exports were high. Of course if they have to accept a reduction in their net exports through a nominal and a real depreciation of their currencies in China, in Japan, in Germany, in other parts of the world in emerging markets, the way to achieve and maintain their potential growth of course implies having the kind of structural reforms that are gonna lead to save less and consume more. And especially in China and emerging Asia there are lots of policies that we discuss that will lead to an increase essentially in consumption and reduction of savings because their growth model was biased towards net exports. So that's the global rebalancing that occurs. And therefore the important point to make here is that people think about the imbalance between the US and China, this Chimerical relationship within US, China and emerging market, but the similar kind of imbalance did occur within the Eurozone where the core was running large current account surpluses and the periphery was running large current account deficits and yet the same system of vendor financing that occurs in between US and China and emerging market also occurring within the Eurozone. Now the crisis led now to a situation which these imbalances are unsustainable. Now within the Eurozone, the adjustment process is complicated by the fact that you have a common currency, right? You need a real depreciation in the periphery country and you need a real appreciation in the core to have an adjustment of the trade balances because you have both a stock problem, too much debt private and public in the periphery but you also have a stock, a flow problem, lack of economic growth, lack of competitiveness as there was massive real appreciation in the periphery and large external balances and these external balances are not anymore financeable because the private sector decided to pull the plug that has been a sudden stop and therefore the current account deficits of the periphery of the Eurozone cannot be financed anymore. In the US-China relationship those current account imbalances are still financeable because China and the other emerging market have decided not to pull the plug on the financing of the large US current account deficits but in the case of the Eurozone there is also a problem of financing not just a problem of real adjustment. Now the trouble within the Eurozone is that you have the stock problems excessive amounts of private and public debt, you have the flow problems, lack of growth, lack of competitiveness, large external imbalances and the adjustment that the core German and ECB is imposing on the periphery is essentially one that's gonna lead not just to recession but to depression because while fiscal austerity is necessary, while structural reforms are necessary in the short term that austerity is gonna make the recession worse. You have to raise taxes, you have to cut government spending, you have to reduce transfer payments, those reduce aggregate demand, they reduce the disposal of income and make the recession worse and even the structural reforms in the short term make the recession worse. You have to fire private and public employees, you have to shut down thousands of unprofitable firms, you have to move labor and capital from declining sector to expanding sector and what are the expanding sector in which you have a comparative advantage unless you have a change in real exchange rates. So the point is that right now there is an asymmetric adjustment that is deflationary and recessionary in the periphery of the Eurozone and it's not gonna work, it's not gonna work because if output is gonna keep on falling first there's gonna be a social and political backlash against austerity. Secondly, you're trying to stabilize private and public debts, domestic and foreign as a share of your GDP. If your GDP keeps on falling, your debt ratio becomes unsustainable. And the same thing with deflation. First of all, deflation is gonna be associated with more recession and even if you could reduce prices and wages by say 30% over the next five years to restore your competitiveness then the real value of your debt is gonna go up. So you get the process of debt deflation becoming exacerbated. So in the Eurozone, you don't have only a problem of financing. The financing of these imbalances is not there anymore, there's been a sudden stop and unless you have a recycling through the official sector of the surpluses of the court to finance the deficits of the periphery then you'll have a essentially disaster default. But you have also an adjustment problem not just financing because you cannot maintain these external imbalances forever. The adjustment implies that the deficits of the periphery have to shrink to zero and the surpluses of the court have to shrink to zero. But for that to happen, you need a real depreciation and the way that can happen or should happen is through a massive devaluation of the Euro. Should fall towards parity with the US dollar in order to restore the competitiveness of the periphery because deflation is not gonna work. And if you're not gonna have a depreciation of the Euro then the only other option is exit from the Eurozone with all the collateral damage that that exit of the Eurozone a breakup of the Eurozone is gonna occur. So that's the challenge that you're facing both adjustment on the real side and financing and dealing with debt levels that are unsustainable. In my view, unfortunately, eventually restructuring of private and public debts of the governments of the financial system in a number of these periphery countries Eurozone is gonna become necessary and avoidable. Even that's gonna deal only with a stock problem not with a flow problem and therefore to restore the competitiveness you're gonna need maybe essentially exit of a number of member states. Now if a small number of them exit the small Greece or Portugal, the Eurozone survives. If Italy and Spain, they're third and the fourth largest economy Eurozone exit that's the breakup of the Eurozone. And that's one of the risks we're facing right now. Now in the case of the United States in balances relative to China and emerging market the financing is still there. These emerging markets starting with China are still willing to intervene aggressively to prevent their currency from appreciating and therefore finance the imbalance. The problem is that the imbalances are maintained and the US to restore potential growth with domestic demand being anemic for the years to come because there's gonna be a deal averaging the private and public sector is gonna need to have a real depreciation of the US dollar. China is shadowing the US dollar letting small appreciation everybody else in emerging markets from Asia to Latin America says if China doesn't move I don't want to let my currency appreciate because I'm gonna lose competitiveness and market shares to China. And therefore that adjustment of relative prices that should occur to rebalance also the imbalances between US and China and emerging market is blocked. For now the financing is there but that's a situation of course is unsustainable and it's not gonna restore economic growth in the United States. So the point is behind all this accumulation of private and public debt there are global imbalances. You need an adjustment of these imbalances or reduce them but those implies sacrifices and policy changes both in the overspending country and the over-saving ones that are being postponed and we're not allowing the adjustment of relative prices. On the fiscal side by the way the critical point is the following one. In a world economy in which there is not enough aggregate demand and which there is excess supply because of the overinvestment by China and emerging markets we have problem of global aggregate demand, right? And therefore if everybody's gonna go along the path of fiscal austerity as even the IMF and Lagarde have pointed out recently if the US is gonna do front of the fiscal austerity if the core of the Eurozone, if the periphery of the Eurozone, if the UK, if Japan is gonna be doing it in a world in which there is not enough aggregate demand the problem is gonna become exacerbated. So if the markets are imposing necessary fiscal austerity on the periphery of the Eurozone where you have lost market access so there is no choice for Italy, Spain, Ireland, Portugal, Greece to do the fiscal austerity in order to prevent a risk of a severe hard landing in the Eurozone and globally the countries who can borrow cheaply should be actually doing fiscal expansion in the short run and postpone the fiscal austerity in a credible way to the medium term. And of all the forms of fiscal stimulus that we can think of for the case of the United States investing in infrastructure we point out is the most productive and efficient one and you could make the same argument in other parts of the world there should be a postponement rather than a front loading of the fiscal austerity and try to find the forms of fiscal expansion as long as you have a credible plan towards medium term fiscal consolidation to have a situation which domestic demand and is maintained so that you don't have this lot of supply with a lack of aggregate demand. So that's the kind of conundrum that we're facing right now. So there is a need for adjustment of the imbalances there is a need of financing for countries that have lost market access those are the Eurozone countries but globally there are some emerging markets are weak there is the MENA region is weak and so on so financing has to be made available we have to recycle the surpluses of the surplus country we have to make more funding available to the international community not just to finance the imbalances of the periphery of the Eurozone but increasing gonna need to finance also crisis in emerging markets, crisis in the Middle East that's our part of the proposal of increasing the envelope of global resources available you can do it a number of way increasing IMF resources more quotas, more NABs, lending bilateral by surplus countries, sovereign countries to the IMF or other facilities to be able to provide a larger envelope of official resources you could do it through issuance of SDR there are many different ways of doing this but we have a need for financing globally given the imbalances and given the fact that if adjustment occurs suddenly then that's recessionary but we cannot just finance imbalances over time we have to have a shrinkage of those imbalances but shrinkage of those imbalances in a way that is consistent with economic growth if the current account deficit of the periphery of Eurozone goes to zero because you have a depression and Eurozone that's not an adjustment that is feasible you want an adjustment in which they go to zero to a change in relative prices to a nominal and a real depreciation so those are the fundamental key issues they need globally adjustment of the global imbalances financing to make that adjustment more gradual and more sustainable with maintenance of economic growth in the different regions of the world and that's part of our policy proposal Thanks Nuriyo I think the bottom line of what Nuriyo was saying was very important that we still have a long and very difficult challenge ahead of us I want to now bring in and expand the conversation by bringing three additional voices into our discussion and conversation each of them will add their own comments and thoughts in six to eight minutes beginning with Leacott and then Bruce Bartlett and Leo Hendry of Leacott Great, thank you Does this work? Okay Well, first of all, let me say that I think this is a brilliant paper I agree with almost everything in it I mean, I agree with the diagnosis of how we got into this mess the prescriptions of what we should do now The problem, of course, is that two of the three pillars require Congress to spend a very large amount of money and the third pillar requires other countries to do the right thing in a way that they don't seem to want to do at the moment So I've been asking myself, is there a plan B? And here, I think the authors are just are too negative about the potential for monetary policy And I really draw that because of my knowledge of what happened in the 1930s So what I like to do is just spend a little time talking about the recovery of the 1930s The 2933 depression was remarkably similar The lead-up, you had an imbalance you had bubbles The bubble bursting led to a domestic banking crisis and led to a combination of a banking and sovereign debt crisis in Europe The response has been somewhat different there they truly killed the patient we just kept the patient alive without getting it back to health But then after 1933, or in fact earlier if you take Europe after 1931 in the case of the UK you began to get a substantial recovery So contrary to what a lot of conservatives say the 1930s was actually a period of very strong growth In the eight years from 1933 to 1940 five of those eight years you had over 8% growth Industrial production doubled in the four years from 1933 to 1936 Secondly, that recovery had almost nothing to do with fiscal policy The new deal was a lot of things but it was not an expansionary Keynesian type fiscal policy Roosevelt was actually really quite conservative on fiscal policy The federal budget deficit expanded somewhat that was offset expenditures of rose somewhat that was offset by increases in taxes and by curtailments at the state level So what got the economy going? It was essentially a global monetary easing of gigantic proportions and it essentially occurred because they left the gold standard and what that did with the stroke of a pen was do three things completely reliquified the banking system because suddenly all this gold was worth 100% more Secondly, changed inflationary expectations or changed expectations from deflation to inflation and got spending going again and got raised asset prices and got spending going again That is very similar to what QE2 was trying to do And I suppose my response to Dan's point on QE2 is I think we're making an assessment based on a very short period of time based on a very short experiment in monetary easing During the 30s, there were three criticisms of this whole getting off the gold standard and gigantic monetary reflation The first was that the US by doing it was sort of exerting a predatory influence on the rest of the world and that was in part true because the US was running a very large surplus at the time So the US devaluing in 1933 would be a little bit like China devaluing now The difference now is that the US easing in a very substantial way and devaluing would be promoting global rebalance, not hindering it Secondly, the argument was that it led to competitive devaluations My view is that competitive devaluations have a very bad press Competitive devaluations is another name for competitive easing of monetary policy The third criticism is that the competitive devaluations led to a climate of sort of retreat from globalization countries protecting themselves by hunkering down behind tariffs and capital controls and you basically got it was the worst form of nationalism and populism I think the world is a very different place now The forces that go for I mean, the striking thing about this last this last three years is the dog that hasn't barked as protectionism We've had very modest increases in protectionism and the question why not? And it seems to me, one by and large, we have money we exchange rates are largely flexible The reason we got severe protectionism in the 1930s and the biggest increases in protectionism was with countries that refused to change their exchange rate So the most protectionist country was Germany because it refused to change its exchange rate and had to do everything through import controls Now we have a group of countries that by and large are willing to that have floating exchange rates and those that are unwilling to change their exchange rate are essentially currently surplus countries who have a very strong vested interest in an open trading system So if anything, I would make a plea as a plan B for aggressive Fed easing Thank you Thanks, Lee-Cut. Bruce Thank you very much I don't disagree with anything that any of the previous speakers have said So let me just put a little bit of different emphasis on a few points I'd like to call attention to Figure Four in the paper That's the one household net worth because I think this is really central to understanding the whole economic problem that we have As you can see, the net worth reached something like 70 trillion dollars before the crash and fell to close to 50 trillion dollars 20 trillion dollars of wealth just disappeared Now this is extraordinarily important for macroeconomic purposes because we know from a great many studies that there is a wealth effect that people will spend a certain amount of any perceived increase in wealth There's some debate about how much this is but we'll say it's about 5% for the sake of arguments So a 20 trillion dollar drop in net wealth is going to take something like 1 trillion dollars a year out of spending in the economy And that is a sufficient explanation for every single thing that has happened Now the question is, what do you do about it? You can't create wealth out of nothing You don't want to create another bubble just for the purposes of getting people to spend What you have to do is the government has to step in to keep spending up Basically, it's just very simple Keynesian economics And I think that we could have done filled that gap with the kind of public works programs that the paper talks about God knows we have a tremendous need for rebuilding roads and bridges and schools and a wide variety of things And if we could borrow at 0%, the social rate of return has to be considerably higher I think we will look back years from now at this being a tremendously lost opportunity to take advantage of excess capacity in the economy Now, where I think we got off on the wrong track And by the way, I wrote up an article pretty much explaining all of this in the New York Times in January or December of 2008 The problem was that it appeared on December 24 So absolutely nobody read it But anyway, what I was trying to put forward is that the new administration needed to have a theory And I had some association with the Reagan administration And I think a lot of their political success came from the fact that they had a theory You can argue with it You may say it was a crackpot theory But they had a theory that fit their policies And so, and I think that part of the problem is this administration has never had a theory of how we got into this mess And therefore there's never been any connection to its policies that the people could understand And I don't know why they never did this But all we ever really got was that one paper that Christie Romer and Jared Bernstein put out in January of 2009 that had the famous unemployment chart that now makes the administration look rather silly But everything in that paper was more or less correct except that the numbers were all too low We now know from various reportage that the Council of Economic Advisers and Christie Romer in particular were looking for a stimulus package in the neighborhood of one and a half trillion dollars to fill a gap of lower spending that needed to be filled to get us over the hump And what came back, of course, was $787 billion because the political people said that's the most we're ever going to get out of Congress And they were probably right But it was half of what we needed So to make an analogy suppose you had some illness and you went to the doctor for the correct medicine and for some reason or another he gave you half the dosage that was necessary The half the dosage was just enough to kind of diminish the symptoms a little bit but it wasn't enough to cure you You needed to get a full dose of the medicine And until you do, you're still going to be sick And that's basically the problem we've had We've never gotten a full dose of the medicine And we're certainly not going to get it today Another part of the problem with the stimulus is that a great deal of it went into was of a form that was of absolutely no value And in particular, the tax cuts were a complete waste of money And that took up something like 40% of the budgetary cost of the package Now, while Obama put all so many of his eggs into this one basket that his advisors certainly knew was not of any great value, I don't know I can only assume that he was looking to buy Republican votes which was stupid They were never going to vote for this package no matter what was in it And so anyway, the problem was the package was too small It was not properly structured Virtually little, very little maybe somebody knows the precise proportions but a very small proportion of the money went into direct spending that is to say, public works, hiring workers taking purchases of goods and services That's where all the stimulus comes from All this other income transfer stuff has no value So, and let me say another thing about Federal Reserve policy Now, when you take something like a trillion dollars of spending out of the economy what happens is the velocity of money falls The velocity of money is simply the money supply divided or the GDP divided by the money supply And normally it's about 1.9 But because people cut back so much in their spending it fell to something like 1.7 So that has exactly the same identical economic effects as a shrinkage of the money supply by 10% And what we know about the Great Depression these days mostly from Milton Friedman's work is that the main cause of all our problems was that the money supply shrank by about a third and this caused the price level to fall by about 25% And what we needed all along was for the Fed to just pump up the money supply and it didn't do it and we have the same problem today The Fed needed to fill that gap but the problem is at the zero bound the Fed normally operates through interest rates but when interest rates reach zero they can't do anymore You've got a barrier, a floor through which it cannot go And at that point you need to have fiscal policy to pull the money out into the economy and get it circulating And so the failure of fiscal policy led to the failure of monetary policy And now we're, and basically we're still stuck in the same situation we were three years ago and we haven't made any progress at all except that our problems are much worse because of political reasons because we now have a crazy party in charge of one of the houses of our Congress and they won't allow anything to happen because it's in their vested interest to make things worse And plus they have a theory that is completely nuts But so anyway, where we go from here I think is, I'm very, very depressed I mean, I'd love to see some program like this enacted I see zero chance of it happening The most we can hope for is a complete crazy person like New Gingrich gets the Republican nomination the Republicans lose so badly that they lose control of the house and don't get control of the Senate And then maybe in a year, we can finally talk about doing something rational such as what is discussed in this paper Thanks You have the floor, Leo When Joe Nacerra describes the paper as the most clear eyed view he's ever seen and Lee Kwot is pretty enthusiastic I'm wildly enthusiastic Let me make one comment about the paper and then perhaps in the form of amplification address the paper The only place in the paper itself that I thought you missed a bit of a point was the staging of the in the global rebalancing you seem to imply that there was needed to be a staging between the European side and the Asian or Chinese side I think the magnitude of the problem has obviated that and that was literally the only textual change I would have made in terms of adding to it I do think the paper would have been advantaged by dwelling more and I know that you're space limited but the imperative of a national manufacturing policy we continue to be the only one of the nations that are addressed in the paper that doesn't have one and I don't find a solution for our predicament short of one It comes up, Dan, in some of your earlier comments about the quality of employment in the United States but I think that it had the paper moved more specifically into the imperative for our own national manufacturing policy is the women and men in the room know we're at about eight or nine percent and every surviving nation is closer to 20 or 25 percent the one piece that we're very enthusiastic about we became such all the way back in 06 when we saw from the domestic perspective the degradation of employment that Dan alluded to we think the solution somewhat to where Bruce was trying to take you and certainly Lee Quad as well is the bank the bank at 1.2 trillion of capability is short in my opinion at least 800 billion I think it needs to be in the two trillion range and how we get there is our multiplier effects off of the expenditures are not as fulsome as yours they're good, they're just not as fulsome as yours I think a solution to how you might jump from 1.2 trillion to 2 trillion is an involvement of the pension community the markets, the aging population of the pension beneficiaries the difficulties they have in achieving rates of return that will meet those expectations we've spent a lot of time Don Regal and Alan Platt, Pat Malloy and I are sitting down there with the state pension community the larger states and I think that might be a place for us a place to plug it the one thing that I would do more of is rather than sort of tax strategies in the paper and I think they were sensitive and very appropriate I haven't had the privilege Bruce just handed me his new book on Fundamental Tax Reform but I think the paper at least has to lay out some prescription that's more elaborative of fundamental tax reform Bruce, maybe when we get back you could jump in a bit on this but it's far past an economic issue it's a moral issue you do a nice job and I am very grateful for the job you did on income inequality but the resuscitation of the economy the obviation of the income inequality is going to be a function of very dramatic tax reform and I like everybody else I'm anxious to read Bruce's new book on that the last situation that I would have stuck right right alongside the bank are special employment initiatives we have dug some holes for women and men over the age of 50 and for the out-of-school unemployed youth that are they're simply unprecedented and while the bank would address the core unemployment issue I think respectfully and well I don't see it being a particular opportunity for these two aggrieved groups women and men of color are over-represented in both of them but we have about five million out of school unemployed youth that won't be a beneficiary of either Bruce's tax reforms or of the bank and Don Regal better than nobody anybody I know has written about the predicament of the over-50 under-employed unemployed part-time necessity worker the bank again will do nothing for that the last comment has to be China, China, China I'm numb that this administration has wasted three years of diplomacy Pat Malloy on the China Commission has done an amazing piece of work as the whole commission it's the lost years it's just stunning we need them you fellas who wrote the paper to be part of this exercise we've now been so ineffective so passive, so tepid that they don't believe us I think we've, Cheryl I think we're looking at a full year now before they'll readdress our needs because they don't believe us and the election is going to be their excuse not to believe us for yet another year so thank you, amazing paper I think Joe's comments were right on and Bruce, I got a minute left on my time if you have anything to offer on tax reform I just want to say that thanks for the plug I'll be making a payment to the payment that you and I discussed earlier the book will be out in January by the way Leo, you kept referring to we I think you meant your task force do you want to just say a word about that? Yeah, that was by the way that also has a New America connection Well, I do and I'm sure you're right we is more than just the royal we we is 20 of the most amazing women and men that I've ever had the privilege of working with Don Regal, Alan Platt, Pat Malloy, Cheryl Mike Lynn, we're certainly part of it we formed a task force on jobs under New America that put out I think a pretty attractive piece of work about six weeks ago a couple of us will be in Iowa tomorrow rolling it out there and in Ohio later in the cycle it's just a belief that if there is Lee Quatt and Bruce if there's any hope for nonpartisan bipartisan initiatives these were Pago provisions Cheryl was a big part of that aspect of it we actually found through tax initiatives that we could pay for the creation of roughly 20 million jobs over seven years which is kind of the hole we have to dig out of so thanks Cheryl, I apologize for that it's called task force on task force on jobs and then jobs first 2012 and again these folks here at New America were real angels in helping us put that together Leo Gerard and Don Regal were co-chairs Yes, if any of you want to copy that report you can write to Sam Schraden at New America Schraden at newamerica.net and Sam who largely responsible for everything that goes on in New America we'll make sure you get that report I was originally going to give work the original speakers back in but we have about 30-35 minutes so I did want to move the I know Dean Baker is anxious to ask a question and there are others who have comments and so I think the only point that at some point Dan and Nury Allen Bob will perhaps have to say a few things in response to Lee Kwot's plan B and that was a major point of discussion debate within the group but let's get a few questions and then we'll go back to plan B Dean I had raised my hand so that I was showing you that I really appreciate first Bruce with the graph I really wish we could make everyone who spoke in economic policy remember the wealth effect I mean this was pretty basic and I would just add also we did lose about 4% points of GDP in residential construction going from 6% to 2% about 600 billion a year I'd also point out there is something with the taxes I mean we beat up on that a lot and we get somewhere around 50 to 70 cents on a dollar so you don't get nothing from the taxes but my real thing I want to go with Dan I think you know if we look at the politics as to why no one would make kind of these obvious points about the imbalances I see a little bit different picture than you do I recognize obviously there's a huge change in the world economy with the collapse of the Berlin Wall and China coming into the world economy but I really date this to 97 because if you look at the big imbalances the US trade deficit was somewhere around 1.5% of GDP until 97 97 of course you got the East Asian financial crisis the solution imposed by our Treasury Department through the IMF was that the currencies of East Asia fell through the floor and they were going to repay their debts by exporting like crazy I see that as really being the origins of the major imbalances that we subsequently had to deal with and this gets back to the political issue the Obama people don't want to say anything because guess who did it you know so you have a problem that obviously the Republicans aren't going to raise this issue and the Obama Democrats have no more reason people don't know I mean it's Larry Summers Robert Rubin that's who did it so that really is the source of the imbalances I see that as the momentous event not so much the which are of course important but I see the imbalances coming directly from the East Asian financial crisis very very super first of all I want to point out that Dean was the only one out there in the world in the third quarter of 2007 when I was a lonely guy trying to draft some things that everybody told me I was nuts about and I emailed him and I said you're the only one who's not crazy could you look at some of my early work and he was very very kind to respond Dean really deserves along with Nury L and several other people credit for being one of the earliest folks in this area who were right in any event we had a very interesting seminar as part of our World Economic Forum with Yeshank Hwan I hope I pronounced this name correctly he was a professor up at MIT and one of the things that we talked about that day was really what spurred exactly what you were talking about and I don't disagree by the way that the Asian currency crisis had an enormous impact on it but what I drilled down on with him which I wanted to make sure he was what I heard correctly so I asked him a question a couple of different ways you know people look back at the fall of the iron curtain and the bamboo curtain and they say okay well let's draw a line the Berlin Wall fell in 1989 that seems like a convenient point Tiananmen was 1989 seems like a convenient point to sort of start things there's another school of sinophiles who look at China and they say well this all really began in the 1985 five year plan and it was the need to boost urban development as opposed to the agricultural reforms that had succeeded pretty well up till then and so what I asked the professor which I thought was very interesting and it was really taking off on what he said it wasn't really my question but he said listen what really happened in China was prior to the Asian currency crisis really about 1991 as a response to Tiananmen and the disruption of that cost was you had the enormous resurgence or surgeons I don't know the surgeons at work whatever it is of the Shanghainese politicos the folks that really run China today who advocated enormous urbanization and enormous dedication to manufacturing and exports so to a certain extent and I said listen I asked the professor where would you peg this he said well certainly the political difficulty that occurred as a result of Tiananmen was what caused this in the first place he said but by 1981, 1982, 1983 the die was cast so yes I agree with Dean that had a lot to do with it but China was moving on this trajectory in any case they had an interest even if the Asian tigers hadn't collapsed and the currencies hadn't collapsed China had an interest in providing jobs for urbanizing population and they still do and that's really what's driving the boat Senator First of all I want to thank everybody for the thoughts that you've said today if you take this quote this is writing these trend lines and there's pretty much consensus here that whether there's smart things we could be doing and should be doing they're probably not going to happen because of the political gridlock and what have you I don't think that's an acceptable answer even if that's the reality of the moment so I think we've got to think outside that box and I think we have to find a way over the next 12 months speaking in that period of time not just thinking about the presidential race and shortly thereafter to force a reassessment of where we're heading because what I didn't hear if nothing more is done or where will we be in 18 months I mean how long is the fuse particularly if Europe blows up in some form or some other event happens where are we likely to find ourselves if nothing major is done in this interim and I think that's a risk we shouldn't run and I think maybe the answer to it is we need to think our way to some new leadership that isn't present on the scene right now and I was thinking to myself business leadership now that may sound like an oxymoron because I don't see a lot of leadership out of the business community the big overarching business community relates to this discussion in other words how to take this sort of roadmap or plan and roll it into place somehow in a matter of months and not over a period of five to seven years to get at it a lot faster than that because time isn't our friend and I guess my point is this and it's my question really and that is can we find a way to take this intelligent thinking and argumentation to a group of stakeholders who really are not going to benefit if things start to cave in even more and to get them energized with practical answers that can lead us to a national economic strategy for America and that having a national economic strategy for the country is really a good thing and companies as they're pursuing their own individual objectives and EPS goals and so forth can also be part of being actively engaged in a bigger strategy and if Obama can't produce it or didn't produce it in time three years ago wasn't thinking that way I mean we can't produce it and we've got to enlist more people and so I would ask you to think about how we take this conversation out of this room to a group of people who have power together in combination and start to force this change a whole lot faster than we're otherwise likely to get it I've got three quick things I can say in response and then maybe the others as well so the first is that we think that Bruce is spot on in the early years of the Obama administration there just wasn't a theory as to how we got here what went wrong hence there wasn't really a theory that one might offer by way of justifying any specific proposals let alone a coherently put together package of proposals one of the things that the paper is meant to do is to begin the process of supplying something in the way of a theory that then can articulate and render coherent what otherwise might look like a diffused bunch of policy proposals and initiatives that's the first point is we thought well we're not on mindful of the fact in writing this thing that we do have an election cycle commencing and we thought well perhaps we are offering here at least part of what might become the platform of some political party and then finally thirdly we have sort of thought this is maybe a little bit sanguine this is sort of paradoxically sanguine sounding on the one hand and sort of Dr. Doom sounding on the other hand but to some extent we thought that really this is going to end up being a kind of self-recommended policy if our diagnosis is correct because if the diagnosis is correct things are going to get pretty bad pretty fast pretty soon right and if that happens that might very well have a galvanizing effect and might induce some who are currently sort of still ideologically prompted maybe to sort of abandon some of the ideology and to sort of think more pragmatically again and among I think maybe a fourth point is I think you're singling out the business community in particular to sort of get behind this is very much on our minds as well we gave the sort of New York rollout presentation of this back in October hordes of investment bankers actually approached us and said hey we would like to get behind this we'd like to actually the only place you're going to find yield in the near term future probably is going to be in infrastructure investment we'd love to get behind this and my guess is that if a sizable portion of the business community gets behind this that might actually have an effect on at least another party who the paper might not otherwise affect Bruce you wanted to get it I just want to say that I think the possibilities of doing anything positive over the next 12 months are non-existent completely zero nada I think we're going to I think we're going to have to expend every ounce of resources that we have to prevent things from getting worse by getting worse I mean the adoption of negative policies that both parties seem to be inclined to to adopt you know all you ever hear about these days is deficit reduction deficit reduction that's all we ever hear and there's a little bit of discussion around the margins as to how that should be done and I would remind people that 75 years ago we were probably having in the same identical rumours at the same identical discussion and what happened what happened is that across the street Henry Morgan thought talked to Franklin D. Roosevelt into saying we need to increase the confidence of the business community and they are very upset by the budget deficit if we balance the budget this will increase confidence and growth will be restored well that's what they did and what happened we had a big recession 1936 37 and terrible recession that set back our progress by several years and that's what's in the cards that's what's that's the most likely thing to happen is it will do something to make things worse not that we're going to do something to make things better thank you thank you yes Marilyn G. Wex with NPR for Professor Rubini I just wondered if you could give us your best predictions for in the next 2448 hours or so what's likely to happen in Europe I know you're fresh back from there what do you see happening in the next couple of days and what will be the global market reactions please well I would say they're going to do something of a compromise but the compromise is not going to be sufficient in two dimensions first the envelope of official resources not going to be as large as needed because some people believe there'll be a quid pro quo between the periphery accepting binding fiscal rules and the German accepting some form of e-bonds or mutualization of that the Germans are not yet ready for that so that's not going to happen some people say there'll be addition of the ESM over the EFSF even that's not sure it's going to happen probably if they'll be binding fiscal rules the ECB might do more but the ECB is not going to become a full-end of last resort they'll do a little bit more of SMP they're going to do a little bit more of credit easing but the eurozone is going into a recession and the recession is becoming deeper which a community eventually might provide more resources you know there might be bilateral loans from the national central banks of the eurozone to the IMF so they can be lent back to the IMF there may be NABs or more quotas some SDRs so the envelope of official resources is going to be larger but not significant to backstop Italy, Spain and the periphery of the next three years but more importantly fiscal austerity and reforms as I pointed out the recessionary so right now the market is saying to Italy, Spain and the others cut spending, raise taxes, have a primary surplus, balance budget, balance amendments and grudgingly you know these countries are doing it but look what happened in Greece where the recession is becoming more severe as they're doing massive fiscal austerity and tomorrow the markets in the month or two they're going to sell at this country good effort kids on the fiscal side but guess what your output is collapsing your debt ratios are going to the roof and therefore you're still insolvent and then spreads are going to widen again meaning unless you have a strategy in the eurozone to restore growth to restore competitiveness to reduce the external imbalances and nothing else on the financing side is going to work and I think that what's missing in the eurozone right now is a strategy for economic growth that will imply massive monetary easing by the ECB not just cutting rates but QE credit easing and if the eurozone is doing a recessionary austerity then the core and German should do fiscal stimulus to try to avoid this severe recession restore growth and what's the joint probability there'll be a massive monetary easing by the ECB there'll be fiscal stimulus in the core and the euro's going to fall to parity and the ECB is going to become a full end of last resort I would say the joint probability is zero that a session in the eurozone is going to become worse and worse and eventually that's going to imply another panic and a disaster down the line I want to bridge off of Bruce's comments the chance of anything positive happening or virtually non-existent and also Nouriel's comments to come back to Lee-Quart's plan B and to get in particular Dan and Nouriel's comments in terms of what just how much we may be dependent on a form of fed activism over the next year to maintain some modicum of financial stability and growth and so I want to come back and give you an opportunity to either answer Lee-Quart or to join in on plan B.5 you're asking me to take on a guy who's smarter than me and that's not very pleasurable but I will do my best the problem I see of course with monetary expansion is the degree to which you believe in the magnitude of the excess if you really believe as I do that this imbalances of a magnitude that makes it fundamentally almost impossible to push domestic wages then you would see why I don't believe that that's necessarily the way out of this I do believe that monetary policy is a way of actually articulating or handling the amplitude of decline I think that there are three transmission mechanisms that I can credit Norel with finally explaining to me years ago but those transmission mechanisms are obviously protectionism which is the thing that dare not speak its name in a globalized country, a globalized world right so let's just chuck out that for the time being the second one being devaluation which would be typical the devaluation that creditors countries appreciate and as Norel just explained to us that's just not likely to happen right now unless it's done in a coordinated global way the third and the least attractive of all is deflation in the debtor country and inflation in the creditor countries and in fact that is the direction that but for the intervention the monetary intervention that we've seen is the preponderance of forces bearing down on the United States at least and to a certain extent parts of the Eurozone so I think that it's our only defense with a fiscally unwilling to act congress it is in fact our only defense whether or not you can use it as the the string that you can push on so to speak I don't know I have my doubts that obviously protectionism is a way out if you believe that the current geopolitical stability or instability can be maintained in a protectionist environment I have my doubts about that as well and so consequently if we can't devalue or correspondingly if everybody devalues at once the same outcome then we are going to need to try to use monetary policy but it's not necessarily in my opinion going to be a positive driver towards real expansion recovery and one of the concerns I have and I agree with Liakot that absolutely the slide that we flashed up there showing the little parabola was a bit of a cheat recently but the truth is that is what happened from the moment that it was announced and I would just as a market observer right now I'm looking at oil and I'm looking at commodities especially non-precious commodities and certainly looking at at least the last what four or five trading days, six trading days in the stock market and you have to scratch your head and say what is the market telling you about the prospects for additional easing going forward they're telling you that everyone's going to monetize they're telling you the ECB's going to rush to monetize they're telling you the Fed's going to provide whatever supported can to monetize and everyone's going to be monetizing because that's the only way out and in fact I believe the drive of oil from the low 90s up to where it leveled off in the last few days is in fact it's going to be monetizing to a certain extent anticipated monetization, future monetization so that of course had a negative effect it had the effect effectively stalling the economy because discretionary spending was impacted Dan I wanted to bring Nouriel and Bruce and Bob so but Nouriel, Bruce, Bob well, Leacott's point by the way your book is brilliant lots of finance and you can do it, or few of you have not you should say most thorough analysis of what happened to the global economy in World War I and the cause of the great depression but think that you know in some sense on the monetary policy issue we learned some of the mistakes of the great depression or even of Japan the great crash became a great depression because we had the constraint on monetary policy of the gold standard we had the monetary contracture at the easing we didn't have Keynesian economics and we had fiscal contractions that liquidate, liquidate, liquidate and then we let thousands of banks collapse and then massive banking crisis runs and then a credit crunch so the lessons were learned and this time around the fact that the great recession did not become great depression 2.0 yet is because we had massive monetary easing policy rates at 0, Q1, Q2 credit easing with massive fiscal stimulus and we decided to backstop offering funds guarantee bailout banks and other financial institution of course the side consequence has been a massive re-leveraging of the public sector to the point in which some countries now have lost market access like in the Eurozone so we have a sovereign debt problem we have to face in some parts of the world but we have done some of that but if I think ahead on monetary policy more and I'm sure the Fed, the CBN everybody else is going to do it the credit channel is not working anymore because I'm zero and the US has tripled but then 1M2M3 credit growth are zero if not negative because velocities collapse banks because of either credit supply or credit man constraints are not lending out but they are hoarding all that stuff in terms of excess reserves they are now over a trillion dollar so that channel transmission doesn't work to a real economy the wealth effect as a reflection has worked twice but if the economy remains dynamic at this point around when the Fed announced the market fell 5% in today so that channel is not at work anymore if the economy remains weak and the only channel through which monetary easing can work is through the exchange rate but the point is that it's a zero sum game because the US needs a weaker dollar to grow its exports since domestic demand is anemic the Eurozone needs a weaker euro because otherwise the periphery is going to implode and eventually exit the UK needs a weaker pound because they are going into a recession the Swiss were so worried about the Swiss franc being so strong they decided to pack to the euro the Japanese needs a weaker yen because domestic demand is anemic and they are going to intervene if the yen becomes stronger than 75 China wants to maintain its export-led growth model with a quick currency and they are shouting US dollar and everybody else in emerging Asian Latin America says if China doesn't move I don't want to let my currency appreciate we are going to lose market shares to China so Chinese shadow the US dollar everybody else shadows China through forex intervention, easier monetary policy capital controls or any combination of those things and therefore the adjustment of relative prices is not occurring so this is zero sum gaming currency if my currency is weaker somebody else has to be stronger if my trade deficit is smaller somebody else is smaller so the sum of all trade balances in the world is equal to zero we don't trade with the moon or mars and we are in a world in which overspending country had their deficit but the over-saving ones don't want to reduce their trade balance and have a structural adjustment towards domestic demand and that's the fundamental problem we are facing right now so suppose we had and that's the global imbalance problem suppose the euro falls in value by 30% so that the periphery doesn't have to exit the eurozone, euro store competitiveness think about the implication on US economic growth the euro not being at 135 but being at party with US dollar and what's going to happen to China since China is shadowing US dollar Chinese exports to eurozone are already collapsing if the euro falls another 30% to RMB that's the risk of a hard landing in China we have barely positive economic growth and we're going to have massive fiscal drag next year and we'll have the leveraging of the private sector and the only thing we can hope is that the dollar should become weaker rather than stronger the eurozone should fall by 30% that's a disaster for growth in US that's a disaster for growth in China what's the solution probably the solution will be the adjustment within the eurozone should occur with the periphery exiting and going back to national currency and then the core and the German, Deutsche Mark whatever appreciating sharply so you have an adjustment within the eurozone rather than adjustment of the euro relative to dollar or the RMB but if you're going to do that the US went off gold and they valued what did they do? they decided to do a conversion or a appeal of the gold clause that essentially converted all the contracts that were denominated in gold into dollar depreciated that's why you avoid the balance sheet effect so the day where Greece is going to go off the euro and they're going to go to the drachma the real value of their euro debts overnight goes up by 100% and therefore they have to convert those euro debts so imposing a massive capital levy on your creditors in Argentina Pesified in 2001 their dollar debts the United States decided to repeal the gold clause Italy, Spain, Greece are going to have to leave and then to convert their euro debts into new lira and new drachma imposing not a massive capital levy on the creditors so you'll have another round of of defaults that tells you that at the end of the day you're going to have massive debt restriction as well so we live in a world in which there are fundamental imbalances and adjustment is going to be very painful so it's not going to be easy and monetary policy alone is not going to do it Bruce Yeah, just to make the situation appear even worse Worst scenario Yes, yes Keep in mind that we always talk about the Fed as if it's Federal Reserve Board but it's not, it's the Federal Open Market Committee which includes five additional members to the board among the Regional Federal Reserve Banks and these banks are very heavily dominated by people who are absolutely opposed to any kind of monetary expansion whatsoever I don't know the exact membership of the board right at the moment but you constantly hear the presidents from Minnesota Minneapolis and Philadelphia and Richmond and a number of others saying we need to be tightening we need to be tightening because inflation is right around the corner this is what we've been hearing for three years inflation hyperinflation is right around the corner just look at the money supply and well where's damned inflation you know it ain't there but these same people keep saying the same thing and you keep hearing the idiots at the Wall Street Journal say we need a strong dollar and they rant and rave at it and they're weakening the dollar no matter how sensible and obvious the necessity is you know admitting that there's a lot of constraints political to be able to do that and the guy who's probably going to win has a very good chance of winning the Iowa caucuses thinks the first thing we should do is abolish the Federal Reserve and go back to a gold standard I mean you have to deal with the fact that crazy people aren't charged of policy and a great many of our most important institutions at the Fed and the Congress and we have to accept the reality that we can't we have no scope for action unless something is done to change the political environment and I don't know what that is Bob you should acknowledge your New York Fed credential yeah so I have to sort of preempt a possible problem so some of you might know I've read the sort of invitation when I'm not over at Cornell I'm over at the New York Fed so I promise I'm actually speaking in my own capacity at this point not in any sort of Fed capacity that being said I'm not quite as pessimistic about the open market committee as Bruce is but I'm on the other hand a bit more pessimistic about the efficacy of future monetary easing than is Leacut basically the same reason that I'm pessimistic about the efficacy of tax policy right and it's just pushing on the string problem right so in so far as again you've got lots of individuals out there delevering and retrenching and hence reluctant to spend I don't think that you're going to have enough desire to borrow in order to make monetary policy very helpful unless you've got demand generation taking place in a serious way in other words in so far as our problem is an oversupply problem an under demand problem increasing the money supply further is bound to be of limited efficacy I think it's a remarkably resourceful open market committee and I think it's a remarkably resourceful Fed I'm also a little bit less pessimistic about future commodity inflation as a result of more easing policies than is Dan because I think that this particularly resourceful and if not brilliant Federal Open Market Committee could always start shorting commodities in order to sort of compensate for those kinds of effects if it were wanting to get even more sort of innovative but I don't think it's likely to happen I'm quite I don't think that they'll ever go quite that far and indeed in so far as they don't then Dan's concerns about rising commodity prices or more commodity speculation I think are all the more poignant but again quite apart from all of that I just think that in so far as what we're faced with is effectively a collective action problem lots of people not willing to spend individually you've got to have a concentrated addition to aggregate demand in the economy otherwise cheaper money just isn't going to be sought no matter how cheap it becomes nobody wants to borrow while they're delivering I'm going to take one more question Hedrick Smith here and Thanks Hedrick Smith PBS I'm also writing a book on this topic and so much of what you all said brings home so thank you for your ideas I wonder if you'll forgive me if I raise a political and a diplomatic question diplomatic China everybody thinks we should get China to do something about their currency and we should devalue the dollar relative to China just wonder whether not anybody here on the panel has a good practical idea how we're going to go about that and the second question is you all are all talking about growth and the dominant debate in Washington today is about austerity it's about dealing with the deficit in the long-term debt any ideas about how to change the nature and thrust of the debate let's start with Leo who hasn't weighed in recently I think that the bank is the most opportunity we have to sort of move away from the fiscal austerity argument Rick I think that the infrastructure bank if thoughtfully conceived could be a debate and a inquiry apart from fiscal austerity to seed it would be debitimous monies in a relative sense and again brought in the pension community and had good structure good governance I think you could obviate some of the concerns about austerity in terms of China I thought we had an amazing shot three years ago I think we've blown the shot for a full year they're now in the midst of their own transition which is largely going to coincide with ours and so I see nothing happening for a year but I think that we've spent way too much time on the currency of China and not nearly enough on the structure of China the subsidy market the subsidies the intellectual property theft and I think we could at least use this year to broaden the debate beyond currency so that when there is a new president whether it's Mr. Obama's reelection or somebody else they pray God that at least there's a foundation to go forward on China the I mean my only suggestion is that making it a bilateral thing between the US and China is I think would be disastrous and will be completely counterproductive and that the only way to tackle the China issue is on a multilateral basis within G20 because everyone's got a problem with China and if we make it us against them we won't get very far there you go well you know until now I would say while the US was unhappy with China that started to let their currency appreciate five six percent per year their inflation was a bit higher than ours so there was some nominal and real appreciation they were talking about all the reforms are going to increase their financial savings so I think the Treasury had taken the view let's see if they do it it's not ideal we'd like them to do more like ten percent but we can live with it I fear that what may be happening however is that China is now slowing down and with Europe in trouble it's going to slow down even more they already decided last few weeks to slow down the rate of appreciation to a crawl they might all together if their economic growth starts to weaken further US economic growth is very anemic you'll have a fiscal drug next year unemployment rate is going to be higher our bilateral trade balance with China is as large as ever the Chinese trade balance is shrinking only because their exports to Europe is falling and because oil prices have been high this year so they can claim their trade balance is reduced but bilateral is not I think that you know the Republican side of it is making noises on how tough you have to get you know with the Chinese and that's going to be the politics of the election at some point even the rhetoric from the White House has to become a little more kind of at least the rhetoric if not the action so if the US goes back to stall speed the same thing is happening in China and Europe is in a recession I think that the trade tensions could become next year quite severe and the administration has in their pocket a whole bunch of ideas about how you can do things that are WTO legal and kosher that will put pressure on China the usual argument has been you know if you put pressure on China they're going to instead bulk and not do anything and we've tried to do that and that has not been counterproductive the reality however has been also that you know if you go soft on them then they don't do much as much so the question is what's better to become tough from them and force them to do more at the time when they have their own political transition next year and they're going to do less or to go soft on them when they have these trade tensions I think that the trade tensions are going to escalate next year the political transition in China the political transition or the election in the US the economy is going to be weak in the US and China the imbalance is going to stay there and that tension is going to remain and it might reach actually a boil before I bring bring us to an official close I wanted to thank a couple individuals I mentioned Sam Schraden who is the senior program manager at the economic growth program who virtually single-handed makes all this happen I think Sam is probably organizing the reception now I also wanted to acknowledge Cameron Callan King and Spalding who has been one of our principal sponsors of our World Economic Ground Tables out of which Dan Bob and Ariel's paper emerged also Aaron Stopak who is a charter member of that group as well again thank you to the authors of the paper thank you to Leo Hendry Bruce Bartlett for the valuable comments and we do have a little reception hope you'll stay around if you feel like it and avoid the rain for another half hour 45 minutes and talk to the authors and the panelists thank you