 My name is Richard Parker. I teach macroeconomic policy at Harvard's John F. Kennedy School of Government. And we have a distinguished panel with us here today. I'm hoping, especially having listened to the morning's presentations, that we'll talk more about the politics behind the policies as well as the policies themselves. It seems to me that, in a real sense, earlier comments by several panel participants underscore a dilemma, which is that we lack an imaginative framework for actually launching policies that would seem politically plausible not only to American voters, but to voters worldwide. And that the challenge for the United States going forward is not to continue to think about how to execute unilaterally constructed policies, but how to begin to negotiate more meaningfully in a multilateral world, whether this is around finance globally, whether this is around income inequality domestically, whether this is around military spending domestically, or the wars globally that are entailed in that spending. It strikes me that too often Washington is the place where politics goes to die and that we need to change that equation. And part of that is by removing ourselves from the comfortable range of policy options and beginning once again to discuss the political opportunities and political risks that are entailed in moving our country forward. We've lived through two long presidential eras since the Second World War, a long Rooseveltian era that ended with Richard Nixon, and a long Reagan era that began with Jimmy Carter. These eras all come to an end, it seems to me, when one experiences either major economic dislocation or failed war. And we seem to have had both in the near recent past, and yet a third era is having a great difficulty being born. More policy will not in fact help give birth to that era. More courageous politics will. And so I welcome our speakers, who would like to lead off? Would you like to? Sure. Step up. Sorry about that, I will have a PowerPoint once somebody teaches me how to use it. In the meantime, I'm Josh Bivens on the Research and Policy Director at the Economic Policy Institute in Washington, D.C. I'd like to thank the organizers of this event for having me speak here, it's a real honor. Maybe it's good that I go first, because I think I am going to give the 40,000 view from 40,000 feet and allow other people on the panel to probably add a lot of nuance to this. But concentrating probably way too much on just the U.S. economy, I just want to make a couple points. The first one is we are much, much further from an actual economic recovery than I think most people recognize and we're surely a lot further away than most policymakers seem to acknowledge in Washington, D.C. And these are just two measures of economic slack. The light blue line is the ratio of actual to potential GDP and this is potential as defined I think too conservatively by the Congressional Budget Office. And the second is the share of adults between 25 and 54, prime age adults, not people who are retiring out of the labor force, who actually have a job. And the punchline from this is pretty easy. Both these measures fell off a cliff during the Great Recession, which is that shaded gray area. And we've made stunningly little progress in getting them back up to pre-recession levels. When you wonder why people think a recovery has not happened in the U.S. economy yet, it really hasn't. We stopped a free fall and then we stabilized at a much lower level of economic activity, a much lower level of employment. And there's been very little progress. We're about 20% recovered at best by these measures. And this failure to recover keeps puzzling policymakers and this is just sort of the CBO forecast for how long and deep the recession was going to be. And basically the punchline from this is each successive year's forecast from the CBO pushes out how long actual recovery is going to take. Basically pushes it out a year each time. Basically recovery is always two and a half years away. It's two and a half years away in 2009. It's two and a half years away starting in 2012. And so basically policymakers, and this is not unrepresentative. This is not picking on the CBO. This is just how too many policymakers and people in the economics profession look at the economic crisis. It hurt, it was bad, luckily it will end. How it's supposed to end? They're a lot murkier on that one but we're going to make policy as if it's going to end in two years. And my punchline is going to be it will end when we make it end. When we actually take the policy measures that force it to come to an end. This is the clearest thing that's holding back recovery. I think, and this is basically just comparing real government spending over business cycles since World War II. I think the level of austerity we have undertaken in the current recovery is really underappreciated. I think it's mostly underappreciated because the Obama administration came in and passed the Recovery Act which was a large piece of government spending. My mind, totally appropriate if far too underpowered. And US policymakers have gotten a lot of traction in recent years by going, yeah, we've cut some spending but we haven't done what the Eurozone has done. I mean, we haven't done austerity like that so we should get some credit for avoiding that kind of disaster. Well, the past two years we are really converging on sort of Eurozone levels of austerity. And the really amazing thing is most countries in the Eurozone that are really being damaged by austerity have had it foist upon them in least in some ways. The individual countries, Greece had very little choice about whether or not to undertake the austerity it did. The US, this is completely freely chosen. There is no economic or political mechanism making us choose this path. This is the one policymakers have chosen. And then two other things. Basically another problem besides the really savage degrees of austerity that I think are underappreciated, something else holding back the recovery I think is rooted in the declining bargaining power of labor that has been going over the past couple of generations in the US economy. And that manifests itself in a couple ways. One, it manifests itself in growing inequality and slow wage growth even in good times. It also manifests in slower recoveries because the last two recoveries, this happened in the recovery following the 2001 recession as well. You see a huge increase in the share of income claimed by capital owners in the early parts of recoveries. And you see that in this one. This basically shows in the corporate sector growth in capital and labor income. The net operating surplus is basically capital income. It's profits plus net interest plus some other things. Then you've got labor compensation. And we have just had a very profit biased recovery so far. I think we'd have a much stronger recovery if lots of the income started showing up as workers wages that they could actually spend instead of showing up as income to corporations that is piling up more and more on their balance sheets and not being sent out to undertake productive job creating investments. And so I think this sort of declining bargaining power of labor shows up in a lot of ways and how it shows up in more and more in recoveries following recessions is it makes the recovery very, very sluggish because it takes a long time for that spending power to reach workers and be filtered into the rest of the economy. And then this is just another variant on that theme. This is the change in real inflation adjusted wages over the years 2010, 2011, 2012 for various points of the wage distribution. And basically the thing to focus on is everyone from the 80th percentile down, the 80th percentile wage earner, the one who makes a higher hourly wage than 80% of the workforce, everyone from that person down has seen real wage declines in each of those three years. And even people at the very high end of the wage distribution have not seen sort of steady great wage growth over those three years. And so this is again, a manifestation of the very long trend of declining bargaining power for labor. And it also just shows the terrible sort of vicious cycle we're in. So eroded bargaining power of labor impedes the recovery because more income goes to capital which doesn't filter through the economy and productive investments the way it would if it went to workers' wages and sustained consumption. And then of course the high rates of unemployment and the low rates of economic activity make it really hard to generate wage growth. And so we are stuck in this sort of very bad, vicious cycle of poor recovery and poor bargaining power. And until we do something ambitious on the policy front, I think that's where we're at, that is where we're at for quite a while. Thank you. I am Bruce Bartlett. I was asked to talk about tax reform and I'm not really sure what to say in the context of this group or this conference. I mean, usually when I talk about tax reform to other audiences, they're thinking about, well, something like the 1986 tax reform where there's a lot of give and take and we get rid of some tax loopholes and we use that money to reduce rates and at the end of the day we congratulate ourselves on having done something bipartisan. I don't see that happening anytime soon anyway but it's not really, it doesn't really fit in very much with the topic of this conference. What I'd like to do is think, talk a little bit off the top of my head about what a progressive tax agenda for the future would be. And I think a lot of times it's very narrowly focused, too narrowly focused. For example, there's now a list of tax expenditures that the Democrats in Congress are talking about, you know, stuff like getting rid of the carried interest loophole and going after deferral and, you know, a lot of other things that have been kicking around forever that, you know, we call dogs and cats, cats and dogs here in Washington, none of which I think are ever gonna be enacted or at least not in this particular context. But I think there's another point which is that I think the administration is, I'm not sure if the administration officially endorses this proposal, although they've talked about the need for higher revenues in order to keep the deficit on a downward track and to restore some money and get rid of sequestration. And that's okay, I guess, philosophically, but of course there's no way the Republicans in the House will ever agree to a single penny of tax increase. They simply cannot and will not do it. And so therefore this is really just, you know, just a complete waste of time as far as substance is concerned. And I think unfortunately the administration thought very, very poorly in a strategic sense about tax policy among lots of other things since day one. The President had one card to play against the Republicans, exactly one card, but it was a really powerful card and he gave it away for virtually nothing. And that was the expiration of the Bush tax cuts, which he, you know, that was the one time he had them over a barrel where they had to agree to some form of tax increase because the alternative was a really big tax increase. And Grover Norquist even gave them a pass. He said, it's okay to vote for higher revenues as long as you don't vote for much higher revenues or something like that. And he just gave it away. He said, oh, let's make them all permanent and, you know, I'll take a little bit of an increase in the top rate and that's that. And once they were over that he had no cards left to play. There's nothing left to bludgeon the Republicans with to force them to agree to raise revenues. And it's the one issue they will never give in on unless a lot of creativity is used. One idea that I think has to be worked on is the idea of earmarking taxes. There's a lot of evidence that taxpayers and maybe even Republicans will support higher revenues for a very specific purpose that they agree with. And one is that I think everybody in this room agrees with is we need higher infrastructure spending. There's a lot of demand for new roads and bridges and highways and repairs and stuff like this. And there's a perfectly easy and sensible way to finance it, which is through the gasoline tax. We should raise the gasoline tax and use that money to fund infrastructure development. That's a deal I think you might be able to get Republicans to agree to. And I think people on the progressive side are gonna say, oh, there's a regressive tax the poor will pay. I think that's a dumb argument. We need the infrastructure spending a lot more than the poor need to be able to pay higher tax. And the price of gasoline goes up and down anyway. So 10 cents, five or 10 or whatever cents you can get out of Congress is a price well worth paying and not complaining about. I think we also have to think more about a broader sense of what means revenue. And there's a very easy deal sitting there on the table for dealing with the current budget situation that I'd appreciate Stan's comments on, which is let's raise Medicare Part B premiums, okay? When Medicare Part B was established, the law said the premiums should cover half the cost of the program. The other half will be paid by the general taxpayer. That percentage has fallen to 25%. So the elderly are getting a 75% subsidy. And I think progressives have to get out of their heads this idea that they've had since before the Johnson administration that all the elderly are all poor. We must give them more. Well, we don't need to give them more. That's why they're all in the Tea Party because they're doing so well financially. It's everybody else that's doing poorly. So I say we need to get the elderly to make a contribution. And here's the benefit of raising Part B premiums. In the budget, they are counted as what's called an offsetting receipt, which means they are counted as negative spending. So they're not counted as revenues. They're not counted as taxes. They're counted as entitlement spending cuts. So you've got the potential of a win-win situation where you get higher revenues by raising Part B premiums, but they're counted as cuts in entitlement spending, which the Republicans are obsessed with. So it seems to me that this is the sort of thing that needs to be thought about and not waste the great deal of time going after dead horses. I mean, John F. Kennedy proposed getting rid of deferral back in 1963, and nothing happened. And it's not going to happen now either, although it's theoretically possible. And so I'm just suggesting, and here's another thing, why, I wish somebody would explain to me, why progressives didn't demand that the wars in Iraq and Afghanistan be paid for. I don't remember a single Democrat, maybe one. Yeah, OK, well, it was an isolated voice. They certainly didn't have a lot of support in the party because you don't want to throw roadblocks in the way of war when it's popular. But I mean, every war in American history prior to the Bush wars were paid for to a very large extent. The Korean War was almost 100% paid for with higher taxes. World War II was very substantially paid for with higher taxes. Before the war, only 3% of the population paid any federal income taxes. By the end of the war, that number was up to 40%. We even had the Vietnam War surtax to pay the big chunk of the Vietnam War. But this one was put 100% on the national credit card. I think if somebody had stood up and said, yes, I mean, if that's what they believed, yes, we need to invade Iraq for whatever reason. But we got to pay for it. Let's put in a special tax. Now think about the political dynamics. If you had a tax that was dedicated to paying for a specific war, all of a sudden you'd have a massive constituency out there of saying, let's end this damn war so we can get rid of the tax. So I think that this is the kind of thing that has to be thought about going forward to use opportunities to raise the tax issue, perhaps in the circumstances where it might not otherwise arise. So that doesn't really say very much about tax reform, but I think my time is up. And perhaps we have some more. I can talk more in questions. Thanks. Good morning. I'm Stan Collender. Nice to meet you all. Forgive me, I'm about to be rude to my audience. Got your attention, huh? Let me start with a brief, personal story. To my friends who know me outside of work, I'm the eternal optimist. The guy who's always sees the glass half or three-quarters full. In any situation, I see the positives. So when I tell you that I'm known as the equivalent of a doctor doomed when it comes to the federal budget, understand that it doesn't come naturally to me. Just the opposite. I've always wanted to think, and in my 40 years in Washington, I've tried to think of what the positives could be. But as I had the privilege of being here through most of the program this morning, as I listened to the program and all the presenters, I have to tell you that what I heard from the presenters about what needed to be done and from the questions that were being asked is that as a group, this may be the most unrealistic folks I've heard in Washington in a long time in terms of what's going to happen and what's possible. And I apologize for that. But for all the protestations about how bad sequestration is, and I agree with everybody about it, you need to get over the fact that it's happening, because it's the most likely thing to happen each of the next 10 years, or nine years now as it goes on. It is the default. We may not like the fact that it was put in law, but the prospects of it going away anytime soon are relatively small to close to non-existent, at least through the 2016 election, which means the 2017 budget. At least it is the default. Think about what's going on currently. We have a budget conference committee that has till December 13th to come up within agreement. What are the prospects of this conference committee doing any better than the anything but super committee? Super committee had exactly the same situation. What happened if they failed? The answer was immediately nothing. What happens if this budget conference committee fails? The answer is the government doesn't shut down, the debt ceiling doesn't explode. The sequester doesn't even happen immediately. But to riff on something that Bruce mentioned, what happens if we don't get a deal? What is the incentive for House Republicans in particular, but Republicans in general, and some Democrats, to agree to revenues when if they do nothing they get spending cuts. Yes, you say to me, but it'll be defense cuts. Remember Carl's line, he likes half of it. In fact, it'll be $20 billion in defense cuts. But the Republicans have already shown the willingness to throw defense under the bus if it comes to defense cuts versus tax cuts. Tax increases, excuse me. So why does anyone think it's gonna be any different anytime soon? In fact, the only way you could probably get rid of the sequester or the threat of a sequester anytime soon is for the grand bargain that everyone talks about. Well, let me burst everyone's bubble here. The grand bargain anytime soon is a fantasy that we should all stop talking about. There is no way, no how, by grand bargain, by the way, I mean tax reform that produces additional revenues sufficient that would allow Democrats to talk about cuts in mandatory programs all at one time, right? Leaving the appropriation, the discretionary side alone or maybe even allowing some increases. But what's the incentive for anybody to do this anytime soon? Does anybody really think that House Republicans can, not will, but can agree to an increase in revenues before the 2016 election? All right, ask yourself, how can they do that and go back and face their constituents before the next presidential election? If that's the case, then serious tax reform and serious entitlement reform or changes, let's call it. Therefore, the grand bargain doesn't really get started until after the next presidential election. If you remember back to 1985, the last big comprehensive tax reform program, it took three years to enact that and that was pretty easy, relatively speaking. It was gonna be revenue neutral from the start. It was never gonna raise more revenues in the current system. There was no Tea Party, there was no Fox News, there was no Rush Limbaugh, right? There was no, the number of one-party congressional districts was much smaller than it is today and that took three years. Every member of Congress had to be heard about this multiple times. The bill almost died multiple times along the way. It finally produced something. Bruce and I have a good friend, Pete Davis, who was on the Joint Tax Committee. Pete tells me it took two years to basically agree on everything in a year to write the transition rules from the old system to the new system. Now, fast forward to today. Now we're not talking about a revenue neutral program, we're talking about something that's revenue positive, that is raises revenues. You're talking about Tea Party, Rush Limbaugh, cable television, Twitter, Facebook, social media. Does anybody really think, and let's add the one-party congressional districts, does anybody really think it's gonna be easier to enact that next time than it was this past time in 1885? That it's gonna be able to fight you do? I'm impressed. We'll talk later. Right. So I'm thinking, in fact, what I've been telling my clients for months is that the earliest we're gonna see a quote, grand bargain is 2019. No, I argued with Judd Gregg on television yesterday about it. He says, oh no, they're ready to do it. Yeah, well, Baucus being ready to do it is different than the rest of the House Republicans being ready to do it. But the best you're gonna see over the next couple of years is a small deal. Unfortunately for everybody, the small deal may postpone some of the sequester cuts, may provide the agencies with a little bit more room to maneuver, but it will also extend out the Budget Control Act beyond 2021. So what it will do is create the biggest threat to the economy of anything I can see. Yes, we need more infrastructure spending. Yes, we need to invest in education, but the big macro picture is very simple. We have a fiscal policy that is completely unrelated to the economic needs of the country. And will continue to be that way, I suspect at least through the next presidential election and maybe through the end of the decade. Fiscal policy will play very little role in the ability of the government to deal with economic issues. We've got the deficit that's right now is gonna decline on its own under current policy through about 2018. And I suspect that in spite of the willpower that everybody seems to have in this room, this is what's gonna continue. So I will stop here and take questions later. Thank you. I've just come back from Ireland and United didn't bring my suitcase, so you get the Irish look. It is green, it rained all the time. And I have a two o'clock flight, so it won't be a walkout, it'll be a runout. In my part, I'll have nothing to do with what my colleagues are saying. So this is a perspective, very different perspective of a criminologist and a former actually successful financial regulator, God forbid, about why we suffer recurrent intensifying financial crises. And our answer is that we have created an incredibly criminogenic environment that is producing these scandals. And that this has three primary components, perverse executive and professional compensation and changes in ownership structure, getting rid of joint and several liability, eliminating private market discipline. The second one is the regulatory race to the bottom, which is occurring globally. And the third is crony capitalism and the rise of the systemically dangerous institutions, which we won't even call by the right name. We call them systemically important like they deserve a gold star. To have a recurrent crisis, of course we have to be getting the causes wrong and we have to not be responding appropriately to past crises. And that almost always does and means in this case, recurrent ideology that prevents us from learning. I can tell you from, I teach economics, but that is not my first discipline, but from being in government that economists rule and they rule very badly. So we keep producing great disasters and it's really interesting in terms of the current crisis. So in the savings and loan debacle, we had the Inevitable National Commission and it reported that at the typical large failure, fraud was invariably present. That's a direct quotation. And they were referring to fraud from the CEO. And we prosecuted successfully convicted of felonies over a thousand. And that was hyper-prioritized, the top 100 list. Roughly 300 fraud schemes, roughly, I'm sorry, 100 fraud schemes, 300 savings and loans, 600 individuals. They were virtually all prosecuted. We had a 90% conviction rate against the best criminal defense lawyers in the world. All right, and then we went into Enron Era and no one doubts that the Enron Era frauds came from the C-suite, but we got to this crisis and Economist framed the crisis. And it became the first virgin crisis, conceived without any sin in the C-suite. And we have the story, which is the Tea Party story, adopted by the FBI as I'll describe, that this is all about the cunning hairdresser who was able to defraud the poor geeks at Lehman Brothers and such. It's the most amazing story that has ever been presented and it is treated with utter, yeah, of course, that's what happened. All right, so I'm asked to focus on the three Ds. Deregulation, DSupervision, and the de facto decriminalization. Deregulation, everybody's focused on Glass-Steagall and the Commodities Future Modernization Act, but I will tell you that far more important was the removal of the loan underwriting rule, which I would guess no one in this room is conversant with, because this is what allowed liars loans, right? So the old rule used to be you had to underwrite before you made a loan, duh, you had to establish that the borrower had the ability to repay the loan, duh, and you had to keep a written record of this. And if you think through that, you'll realize that creates a trilemma if you want to cheat as a lender, where you either have to destroy documents or remove documents or actually forge documents, or you're creating a paper trail that establishes that you knew you were making bad loans. And in any of those settings, we trained our examiners to ask intensive follow-up questions to document the answers, and as people have often said, the cliche, it's often the cover-up that gets you, so they would lie to us about these things, and we would successfully prosecute them. That occurred in stages, but basically 1993 to 1995. Okay, that's deregulation. De-supervision is actually far more important. De-supervision, as you all know, it doesn't matter what the rules are. If the person in charge won't follow the rules, won't enforce the rules, the rules effectively don't exist for the worst element. So let's take it at the Clinton Gore administration and their, of course, major effort, which was reinterring government. That's supposed to be a riff on reinventing government, but hey, that's too much of an in-joke among economists, apparently, political scientists get it. Okay, so we have Mr. Rigo, Rigo standing for reinventing government, who has actually written a book about how he got his job the first time he ever met Al Gore, who was in charge of this initiative, reinventing government, and Bob Stone told him one substantive thing, and I will quote it exactly, don't waste one second worrying about fraud, okay? Then they told us, and I personally witnessed this, that they instructed us as regulators that we were to refer to and consider banks to be our customer, quote, unquote. They, of course, crushed Brooksley-Born, and they crippled Art Levitt's efforts to reform. They slashed the FDIC and the Office of Thrift Supervision that's continued under Bush, but mostly occurred under Clinton Gore. The FDIC lost more than three quarters of its personnel, the Office of Thrift Supervision, more than half of its personnel. In its first meeting with banking regulators, the OCC, the Office of Controlled Occurrency, President Clinton greeted them with, when I was fighting for the nomination, I got more complaints against you folks than any other branch of government, and as you may recall, he did not have reason to love savings and loan regulators, something about white water and such. Reg Neg became a big deal. This is regulation negotiation. We were told not to impose rules on the industry that we had to negotiate with them, and enforcement was viewed as a regulatory failure. Can't we just all get along? Under the Bush administration, the competition in laxity grew much more intense and it became, we will compete at the federal regulatory level by how much we promise to preempt state regulation. So we will not only shut down federal regulation, we will shut down state regulation. Securities and Exchange Commission, the leading opponent of reform, Harvey Pitt, was put in charge, his first major speech, which quite deliberate, he moaned to an audience of accountants that the SEC had not always been a kinder and gentler place, I'm quoting, in its dealings with accountants, and he proceeded to make it kinder and gentler. This is the era of Chainsaw Gillerin. This was the head of the Office of Thrift Supervision, who came with the three leading bank lobbyists in America. This is in, you can find this in the 2003 annual report of the FDIC because they were proud of it. So Gillerin's holding a Chainsaw, the three leading bank lobbyists in America are holding huge pruning chairs and they are all poised and posed over a pile of federal regulations and if that's too subtle for you, they're tied up in red tape. Chainsaw, of course, was designed as a symbol. It's not exactly a precision instrument that they were going to destroy regulation quite deliberately. Greenspan, there are two classic parts of the Financial Crisis Inquiry Commission report that you should read. Two cases when the supervisors used their limited political capital to get a major briefing of the leadership of the Federal Reserve, who at first was over the Enron-era bank frauds. How many people remember the bank fraud element of Enron? Exactly. That's what happens when you don't enforce and you don't prosecute, even under incredibly group that follows many of these things, but the largest banks in the world avidly assisted Enron's frauds. So the staff thought that was kind of significant and they briefed them and Greenspan came away furious at his supervisors. And the second time is they actually couldn't get permission because Greenspan blocked permission to send the examiners in to get the facts on liars loans. But they did an end around eventually and they just sent a letter out, right? And they got back to this horrific answers on the largest banks. Again, you can read this in the Financial Crisis Inquiry Commission. Siddiqui was the staffer who did it. And so they were so horrified, they asked for a full briefing and they again were attacked by the board for doing this. It talks all about how it got really personal. This is just data, right? This is X percentage of loans have this characteristic and they didn't simply reject the message. They didn't simply refuse to act. They actually got vicious at the messenger and tried to shoot the messengers, right? And let me tell you one success. The FDIC fought an epic rearguard action against the Federal Reserve on Basel II. How many people know this? Okay, but for that, we would have had A, Basel II would have been implemented two years earlier and B, without the floor that the FDIC got, which means that U.S. bank leverage would have been twice as large. Now think what that would have done to the crisis. In other words, some unknown people at the FDIC saved us trillions of dollars and millions of jobs. And, you know, they simply won't even investigate how that is happening. Under Obama, we promoted Geithner, the leading failure as a regulator, who was then asked by Ron Paul about his role as regulation, said, I have to stop you. I have never been a regulator, quote, unquote. One of the few absolutely candid statements Geithner ever made, but you're not supposed to admit it publicly. And the D.C. Circuit has reestablished substantive due process if there are any lawyers in the rooms and is being used to destroy regulation left, right, and center, which is why the Republicans are desperately blocking the appointment of new members to that court. Decriminalization, no prosecutions. This crisis is 70 times larger than the savings and loan debacle. We have no prosecutions of any of the elites that actually drove the crisis. We had the head of the criminal division and the attorney general of the United States of America, things I worked for the Justice Department. I would tear up my idea if I still had it, actually say that there were institutions that were too big to prosecute. And they didn't just say they wouldn't prosecute the institutions, they refused to prosecute any of the officers. And they refused to prosecute even former officers, even foreigners who were former officers and such. In addition, there are no elite civil defendants who have had to give back the money. So places like, people like Mozilla, head of Countrywide, walked away. Yeah, he gave 45 million mostly from the insurance company, but he was left with the vast bulk of his wealth. Steve Cohen in this great victory for the Justice Department and the SAC, the only question is going to be whether you walk away with $7 or $8 billion, right? Fraud doesn't simply pay, it pays, it is a, in the words of George Akerlof and Paul Romer, it is a sure thing. So let me leave you with just the three largest frauds. Each of them individually would be the most destructive financial frauds in world history. All three of them happened at the same time. One, appraisal fraud, right? The appraisers in writing, talk about politics, sent to the US government starting in the year 2000, a petition that eventually had 11,000 signatures alerting the United States government that the lenders were extorting the appraisers to inflate appraisals. Now no honest lender would ever do that because that's the great protection against loss. So this is one of the clearest signals you possibly can have of a fraud epidemic. This is the deliberate creation of a Gresham's dynamic in which bad ethics drives good ethics out of the marketplace. The second is liars loans. People still call this a subprime crisis. First, liars loans and subprime are not mutually exclusive categories. Subprime means you have known credit defects. Liars loan means that they don't verify the borrower's income. By 2006, half of all the loans called subprime were also liars loans. 40% of all mortgage loans originated that year. 2006 were liars loans. And the industry's own estimate, not estimate, a study, was that 90% of liars loans were fraudulent. That means over two million fraudulent loans originated in 2006 alone by the lenders and their agents, the loan brokers. And then, hey folks, there's no such thing as a fraud exorcist. Once they get originated fraudulent, they stay fraudulent. And contrary to what you may have heard, everybody had skin in the game. They all had to make reps and warranties to be able to sell, which is why we got all these suits, putting back hundreds of billions of dollars a product to them. And the only way to sell a fraudulent loan is to engage in further fraud. We have evidence again from the Financial Crisis Inquiry Commission that 46% of the time the reps and warranties were fraudulent. Thank you. Ending a session on the risks and dangers with a Greek economy takes a certain mixture of irony and humor. Thank you, Jamie. Thank you, Richard. My name is Janis Zorofaikis. I'm from the University of Athens and from the University of Texas at Austin. And I'm here to talk about the dangers and risks for the world economy and the United States, in particular, from Europe. Now, the U.S. Treasury Department a couple of weeks ago issued a report to Congress raising several eyebrows by, not in so many words, but effectively describing Germany as a perpetual net exporter of recession to the rest of the Eurozone. And as a result, turning the Eurozone into a perpetual net exporter of recession worldwide. I'm here to concur with the Treasury Department, but actually to say that, if anything, it has understated the nature and magnitude of the problem. The way that, after 2008, following our own kind of banking disaster in Europe. In Europe, we feared very much the Japanization of the Eurozone, the lost decade of Japan afflicting Europe. It was far, far worse than that, of course, because not only did we end up with a zombified fragmented banking sector, but we did that without the quantity of easing that Japan had, without the expansionary fiscal policy, without the integrated banking sector, and with the rather toxic principle which I describe as perfectly separable debts, which is effectively setting up the domino before it starts unfolding. Recently, last week, the ECB, the European Central Bank, reduced interest rates belatedly in response to the news that we are in the kind of deflationary environment. Inflation in the Eurozone as a whole is 0.8%, which of course means that places like Spain, Italy, Greece are in the grips of debt deflation. More recently, I looked at some figures which are very disturbing. Loans to non-financial firms in the Eurozone as a whole are minus 3% in October. In Greece, they are minus 20%. In Italy, they are minus 11%, and in Spain, minus 15%. This is a catastrophic environment, which nevertheless, the great and the good in Europe are describing as stabilization and the beginning of a new phase and crisis over. Now, very briefly, the way that the Eurozone is moving, with there are two possible scenario, possibly a third one joining these two scenario. The first scenario I call the cost ofization of two thirds of Europe. And what I mean by this is anyone who has been to Kosovo knows that if you put your credit card in an ATM machine, you get euros out, you go to a restaurant, you pay in euros, so it is effectively de facto in the Eurozone, whereas without being the euro in the Eurozone. The economy is stable, but stably comatose. The only serious export except for some minerals that are controlled by foreign firms are the young people who are exported to mainly Northern Europe. This is, Greece has already been cost of ice, so you'll excuse me that I'm not going to mention Greece, Greece is finished, to all intents and purposes. What I will do is I will concentrate on two case studies, cases, Ireland and Italy, because they are the stronger cases, cases with the Eurozone. Ireland indeed is being hailed as a country that is going to exit its bailout. If anything, it is the example of the German blueprint for recovery for the Eurozone. Ireland's exports are 108% of its GDP. Now, there can be no greater Americanist beast than a country that has that kind of performance, and yet, despite its amazing exporting performance, we have a thousand young people leaving Ireland every week. Overall, 16% of young people between 18 and 35 have left the country for Australia, Canada, United States, elsewhere. We have a situation where the deficit is 7.3, the budget deficit, and debt to GDP has risen to 123%. So if this powerhouse of mercantilist posture has not managed to decoservise itself, what can we say about Portugal, let alone Greece? But Italy is also quite interesting because, looking again at the figures, we have an economy that has been crushed by a political failure. The recession in Italy is totally artificial. It was imposed by Brussels. And we have the latest figures. Industrial production was down 4.5% last month. Orders 7% down. The debt, debt to GDP ratio in the last 15 months has gone up by 15%. In the last 15 months, I shall repeat that, it has gone up by 15%. The result of the European Central Bank's attempt to stabilise the financial markets and the bond markets, successful attempt, nevertheless, the result of that through the two programs, LTIRO and OMT, was that the average maturity of Italian bonds, government bonds has gone down by a year and a half, therefore raising the risks and the dangers of a refinancing crisis there. And yet, Italy has a primary surplus of almost 3%. It has a very high ratio of domestically owned debt. And it's got an almost balanced Canada account. So this is a country which has been squeezed, the most significant country of the most significant countries, the one in the Eurozone, the one that is being squeezed and crashed by artificial austerity, and the one that can get out tomorrow. That gives rise to the second scenario, because ofization was one, break up is the second one. And a break up, if and when it happens, is going to happen along the fault lines of the Rhine and the Alps, creating a recessionary region, Deutschmark-based east of the Rhine and north of the Alps, and the stagflationary region throughout the rest of the Eurozone. Summing up, we're not having a German Europe, we're having a Chinese Germany, which is creating a Eurozone that resembles the period of the Grapes of Roth, where the permafrost are building up in the periphery. And the only rationale, and this is where I'm going to try to respond to our Germans plea for politicizing this discussion, the only explanation of why Germany is doing this is that it is very jealously trying to retain its exorbitant bargaining power within the Council of Europe. There is no financial and no economic rationale for what is happening. Germany is paying for the crisis. Most commentators falsely argue that Germany is refusing to pay, Germany is paying. It is effectively, as we speak, funding the building up of new kleptocracies in the periphery on the basis of the bailout funds, bailout funds that the German tax page is not going to see back. And the German authorities know that. The result of squeezing almost two thirds of the Eurozone's economy, including parts of Germany, into this austerity posture, which is effectively poisoning that dynamics, creating a humanitarian crisis and poisoning democracy. The result of all this is that we have a combination, a negative feedback effect between increasing the case of authoritarianism, because the only way you can keep imposing these policies which are failing so, obviously, is by squeezing the authoritarianism's will further and further. And that leads to losses of democratic legitimacy. At the moment we have a situation where the European Union is reporting that 64% of European Union citizens do not trust European Union institutions. Debt deflation is getting worse. And now we are having a permanent bankruptcy in the whole of the Eurozone, especially the periphery, bankruptocracy being the regime where the greatest capacity to extract rents from the rest of the economy is afforded to the most bankrupt of banks. This, what I just described, is the greatest and most sinister incubator of the serpent's egg. And I'm not just referring to the golden dawn Nazi party in Greece, but I'm referring to general tendencies and trends within Europe. The two scenario, gossipization and the breakup along the fault lines that I described, the Rhine and the Alps, will probably both materialize if we continue along the present path. And that will prove a present and clear danger, a threat to recovery prospects in the United States, to the development of emerging societies, I don't like talking about emerging markets, to the chances of promoting peace security and environmental policies globally. Now, so let allow me to finish by asking a very simple question. What should the United States support? What policies should Washington recommend to Europe's great and good? Tim Geidner, who was mentioned before, tried to advise the European Central Bank and European finance ministers to go into QE, to monetize debts. This will never happen. It's, there are political constraints why it won't happen, and constraints that have to do with failures of perception and the imagination. So I would not recommend monetization as one of the recommendations to Europe. I would not recommend that federal steps are advised. Europe is in the grip of centrifugal forces that are pushing our peoples apart. A federal plan now would simply fail politically, and I would not support a breakup of the Eurozone even though its design has been catastrophic and a lesson for the next 100 years of how not to manage integration of different economies. What I would recommend is that we should very simply redeploy existing European Union institutions like the European Investment Bank, the European Central Bank, the European Stability Mechanics which we have created recently, the European Investment Fund, in a manner that simulates the automatic stabilizers that a federal economy, a federated economy has. Jamie Galbraith, myself and another colleague, Stuart Holland have put together a plan. We call it a modest proposal. This is another reference to Ireland. And I won't bother you further with this, but the very simple idea here is you have four or five existing institutions in the Eurozone which could be coordinated and redeployed in a manner that homogenize, Europeanize as I put it, the banking sector, a proportion of public debt, aggregate investment, and uses the accounting surpluses that are slashing around within the European system of central banks in order to fund a food stamps program in order to put into effect an EU-wide Eurozone minimum safety net that will actually restore a little bit of hope, a modicum of prosperity amongst the people in Europe who were never responsible for the debacle and who are now carrying on their shoulders, on their very weakened shoulders, the greatest burden. Thank you. I'm willing to take like one or two questions, although I'm keenly aware that we're running behind schedule, so if there are to be questions, I'd like them to be succinct and non-editorial to the degree possible. Over here. Yes, I'm Perkerowski again. We heard previously that the US was saved by FDIC not agreeing to Basel II regulations, so would not that be helpful for Europe to get rid of the Basel II regulation, which basically is the most incredible inequality driving machine because it requires banks to have little capital for what is considered absolutely safe and a lot of capital what is considered as risky, which makes the banks actually financing the future and not financing the future and only refinancing the past. Thanks. Bill, you want to take that? Oh, he's gone. Sorry, Yanis, you want to take that one? Any of the rest of you? If you're simply talking about Europe, I think that we have another priority at the moment and the priority we have is to affect the banking union, which is now being proclaimed in name in order to be denied in substance. Without that, we are going to see this very cozy relationship between corrupt politicians and corrupt bankers eating into the flesh of the European Union. Hey, since you, I believe, asked a question about the reserve currency, I think the previous speaker pretty much put an end to the idea that the euro's gonna replace the dollar as a reserve currency. We're making that x3 into five centuries. Yeah. One more? Over here. Sorry that Mr. Black is gone, but somebody else, please. There's one agency in the 24th that has never done an audit of its books and still doesn't. What kind of problems and corruptions does this lead to? Not the least of which is it violates the constitutional, US constitutional provisions that there will be regular audits and accounting of expenditure. It's the defense department in case you're not sure which of the 24. I don't believe there's any constitutional requirement for auditing. I can talk to you about that after, okay? Giannis, you come from Greece, is that correct? Gildi has charged. Yes. I mean, it's your home country, it's very oblique for us to hear it's finished. Could you speak a little more to that? Well, very, very briefly, we've lost almost a third of GDP. We have youth unemployment pushing towards 70%. We have negative investment. And to boot, we have a brain drain, a mass migration of highly skilled people, and absolutely no prospect of a reversal of this trend under the present mix of policies that are being introduced. It's bleak. Yeah, and then on a darker note. I wanna thank the panelists for what I can't say is an uplifting conversation but certainly a sobering and a useful one. And I think for me met the test of saying something about the politics behind the policies, both in terms of the politics and negotiation in Washington but the larger global politics or at least the politics that encompass the North Atlantic, which for many of us used to be the globe, and that we hope that these conversations will continue. And I've returned this now to our chairman, Jamie Galbraith. Thank you.