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Looking Towards the London G-20 Global Growth Summit: Laura D'Andrea Tyson and Martin Wolf

March 26, 2009 |

The Hon. Laura D'Andrea Tyson, Former National Economic Advisor to President Bill Clinton, and the Financial Times' Martin Wolf spoke at New America's March 26 Bernard L. Schwartz Economic Symposium. A full transcript of their conversation, moderated by American Strategy Program Director Steven Clemons, is provided below.

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Steven Clemons: While I'm doing the next part, let me invite Laura Tyson and Martin Wolf to join us up here. We'll put Laura at this chair and Martin here.

First of all, I would like to thank all of you for being here. I know today will be crowded. We haven't arranged medals for all of you who make it to the very end at about one o'clock, put I wish we did. But we should have fun. This will be a journey for all of us.

We have quite a few number of people watching online, and so I want to say a special hello to those that are watching with us. We've provided primers, if you will -- materials, charts, information that is all available on the Internet. And those watching at home can have it. I think we've distributed them today.

And we've also put out some various materials from Martin Wolf's piece yesterday. We also have Martin's most recent book, Fixing Global Finance. We have articles that are not yet out -- Leo Hindery's in the Nation will be out in a few days. We've gotten permission from them to issue under embargo to 300 people the piece thanks to Katrina Vanden Heuvel.

But I do want to thank everyone for being here. What we're going to do today in this conference, looking towards the London G20 Global Growth Summit, what will replace the American consumer.

Start out with a discussion with Professor Laura Tyson, who of course was National Economic Advisor to President Clinton. She's continuing to play a role on the so called Volcker Commission right now. And as I learned last night, she's the person in charge in America of tax policy.

Laura D'Andrea Tyson: Oh, as a group. As a group.

Clemons: She is, of course, also Professor at UC Berkeley in the Haas Business School.

Martin Wolf, who hardly needs an introduction as well, is one of the most influential and prominent and read economic commentators in the world, with his regular column in the Financial Times. And we're going to start off with a discussion with them entitled, "In the Wake of Collapse -- What the US Consumer Left Behind."

After we finish, and I should forewarn you, we don't take breaks at New America conferences like this because we'll never get you back in your seats. If you'd like to take a break, you're welcome to. We have restrooms and others in the side -- food and whatnot. Just slip out. We're going to keep this going though the entire time.

And we'll move, hopefully, seamlessly, into the next session on the search for domestic drivers in an economic recovery with a very distinguished panel. Then, of course, we're going to move to another panel on the international drivers -- thinking about the international climate. How do you generate consumption?

I was mentioning at a dinner we had last night that I found notes from 1999 in an economic summit in which then in Hachioji, Japan very important economic people -- this was ten years ago -- said the world is dangerously over dependent upon an American consumer that is under producing and over consuming.

And that was ten years ago, so it sort of raises the question of what will happen next.

And we'll finish with a conversation with George Soros, and then closing comments -- again from Bernard Schwartz on the day that we've had.

So we're going to start first with a conversation with Martin and with Laura. And what I'd would like first is to thank you both for being here. And say "hello" so we can make sure their mikes are working.

D'Andrea Tyson: Hello.

Martin Wolf: Hello. Not very well, is it?

Clemons: There you go. I think it's fine. Great.

Wolf: OK.

Clemons: Martin, why don't we start off with you? We're tilting towards a major economic summit that's happening in your real hometown, over in London. You haven't been effusive and optimistic about the chances of this. If you were to change your demeanor from being somewhat slightly -- what's the good word? -- negative just about the entire...

If you were to see something that really buoyed your belief that the global economic planners were about to get it right, and you were to wake up and say, "Ah ha, this really went well." What would happen?

What would need to pass the Martin Wolf test to show that we're back on a credible planned economic recovery?

And I should add, when we asked Martin Wolf to do this conference and I said, "What will replace the American consumer?" Martin wrote me back and he says, "I'm happy to do your conference but I've got one word. Nothing."


Wolf: Well, the problem with that's unimaginable, because I think we have to separate what they can do to deal with the stupendous mess they're now confronting, which is effectively what they're going to be doing. They're going to doing rescue operations.

I've got to distinguish that from having some confidence that they have a plausible and agreed understanding of how we got here, which in my view has to do with systemic failings in the international financial and monetary systems, going back to KADs. This is not because a few regulators screwed up in the US. I think it's extremely important to understand that.

It's the end game of a series of massive bubbles, which we have needed to balance the whole world economic system during this particular globalization episode. So this is a very profound, systemic problem that they have ultimately to resolve.

Now, since I don't expect them to either agree on this because the surplus countries, in particular simply don't agree. They simply don't recognize the problem they caused. I don't expect them to come forth with a full understanding of this.

So let me say what I think is the minimum program, and I'll leave aside what use to be called the maximum program for the moment. The minimum program, to be reasonably confident we'll get through the next year or two would consist of two parts.

A credible commitment across the globe, with the biggest commitments in the surplus countries, to expand nominal demand -- important in the inflationary environment -- to a point at which a large part of the burden of generating incremental demand over the next few years does not fall on deficit countries.

Because I am very concerned what is happening now is exactly the opposite of that, and we are going to recreate the imbalances problem, this time with the US government, US fiscal system, as the borrower of last resort with consequent pressure in the long run.

Clemons: Surplus countries -- China?

Wolf: Above all China.

Clemons: Germany.

Wolf: Japan and Germany. The other exporters are not in the same situation. They are the most important structural surplus countries. You need a commitment from them.

Second, it is clear that at the very minimum, in order to deal with the immense problems emerging economies -- in this case I'm leaving aside the very big ones -- face because of the withdrawal of funds from them, consequent upon the financial disaster.

And the guaranteeing of all the loans of all our major banks, which has pulled capital from all the world into the major banks in the major developed nations.

The emerging countries need funding, and that can only be done at the minimum with a very large increase in IMF resources. Tim Geithner's proposed $750 billion. I think that's sort of the minimum.

It's important to remember that the world has generated, almost entirely in the emerging countries, an increase from $1.5 trillion to $7 trillion of reserves over the last ten years. And that expresses how much insurance they want in order to play in the global game. So $750 billion of IMF resources is pretty small.

That's the sort of minimum that I would want to see. The chances of achieving both are, I think, very small, but they're not zero. Beyond that, I want them to start getting to some sort of agreement on why the international financial monetary system has been so consistently unstable, and what needs to be done to fix it. But I'll leave that for the moment.

Clemons: Laura, you help advise the Obama administration at this point. As you sort of sit in there and you sort of look at the team that he's got there, how would you outline the priority of tasks that they've just got to get right?

And without compromising yourself, what do you think needs to be added to the package in terms of them getting it right? What do you think is sort of missing, not happening? Or would you give them an A+ in how they've been performing?

D'Andrea Tyson: [laughs] Well, I should say something in advance, which is the President's Economic Recovery Advisory Board, is a totally independent organization. So we don't speak for the administration. So I think that's important to start with.

Clemons: That means your answer will be better.

D'Andrea Tyson: That just means that it is.

I think President Obama has said it right. This is a new team. It's now just about 50 days. And they face an economic crisis of the proportions that we haven't seen since the 1930s. We enter this, the US enters this not in an ideal state.

The previous administration had added $5 trillion to the debt. We had, and I think this is very important since we're going to talk about consumption today... We had a situation where from 2000 to 2007, the median working family household had their income decline in the real terms, by approximately $2000.

And that median working family was, if you look at how they were overspending their money, what they were using their house to borrow against -- in most cases it was not for frivolities. It was for the things we consider middle class Americans -- all Americans -- should have as part of their life.

It was for the education of their children. It was for healthcare. It was for transportation. It was for insurance. And it was for their home.

So I think that is really important because a basic guiding principal in the administration's policies, whether they are financial market policies or long term deficit reduction policies or immediate stimulus policies, is to keep that fact in mind.

There is a sense that the erosion of the US economy is tied deeply to the erosion of the income and spending power of that middle class family.

Now, as far as the things they've put together to do it, they've been amazingly consistent. I did work on the campaign. And I would say, if you look at the stimulus package and you look at the long term budget that was put out there, they have clearly said stimulus -

The important thing is to put in programs that spend out quickly or that help those that are most adversely affected. The unemployed, the people who lose their insurance because their job, the people who are on food stamps.

But they have also said, where we are spending money, we want to spend on essentially priorities that will also be part of our long term budget plan. So you see it in the area of the environment and energy. You see it in the area of healthcare. You see it in the area of education.

If you look at the big spending priorities in the stimulus package, they are exactly the same spending priorities as in the long term budget, which is exactly right. And the idea is to try to use the stimulus... A key challenge Bernard, and it's really a challenge, is your trying to get money into the economy quickly -- quickly.

And I tell you, it's really going to be hard to get that health information technology into the economy quickly, that spending. It's really going to be hard to get smart grid money into the economy fast. It's really going to be hard to get energy efficiency money into the economy fast. So they tried to find a bundle of packages that will do that.

So as far as the budgetary and stimulus packages, I think they really worked together. And I think the basic problem here is, the longer term budget and the sustainability of that, depends very much on the pace of the economic recovery.

And sadly, the historical numbers here are not on the side of the administration. These kinds of banking crises last longer than a year or two. The unemployment effects last through about five years. The housing price effects last through about six years.

So the problem is going to be these long term deficit and debt numbers, and what Martin is worried about if the US government goes down this route. Is it sustainable?

Is it sustainable? And by that I think he means, will the rest of the world finance it? Because let's be clear here, the financing will be exactly the same as it was in the past several years. It comes from the surplus countries. So their willingness to finance it is very, very important.

On the area of the financial market -- and here I'll stop -- I personally don't know whether to give him an A, a B. I don't know what to give them, and I think that is very reflective of a reality.

A majority of economist from the left to the right might agree, and indeed do agree, that economic stimulus in this kind of setting is absolutely required -- that deficit spending is absolutely required.

The majority of economists might even agree, I think, "Yeah, we've been under spending in the United States on infrastructure. Yes, we have a long term under pricing of carbon." They might agree on that.

Economists are very confused about what's the right thing to do for financial market crisis. There isn't a clear answer, because in fact it's very much tied up to confidence. It's also very much tied up to what the US government can afford to do.

Some of the plans out there let the banks go and solve it, let the government nationalize them. The government, the Congress is not going to give the administration money to do that. That was one of Martin's concerns in that piece yesterday.

Part of getting a resolution to the banking crisis that some people recommend is simply not right now in the cards politically, in the United States.

So they have come up with, I think, a very clever plan to leverage private money, to try to restore some confidence by pricing some assets and taking them off the books of the banks. There hasn't been a plan like this tried before, but you can see how you get to it.

And so I give them, certainly, an A for trying. And we'll see what happens. And I daresay, I don't think there's a clear cut "this is what they should do" idea out there anyway.

Clemons: Let me ask you one question about that last point. One of our program directors here, Doug Rediker, jumped on this the other day -- and a friend of yours.

D'Andrea Tyson: Yes.

Clemons: And said you're seeing an opportunity the administration provided, essentially to subsidize holders of wealth to regain an investment in very dilapidated and eroded price structure, and then enjoy the bounce back.

Why not create instruments for those individuals who have seen their 401(k)s and whatnot fall out to sort of participate along with the big money guys?

D'Andrea Tyson: Doug should speak to his proposal. I think right now the idea is we cannot get the financial system functioning again, until we get the key in parts of it functioning again. The only way to help the 401k affected is to basically help revive the equity market values and the housing values.

The only way to do that is to restore the functioning of the credit market. And the only way to do that is to deal with the regeneration of the securities market, and finding a way to convince confidence in banks and to increase their lending capabilities. So I think that's so essential to get done first, that I can see why they focused on that.

Clemons: Let me read the last bit of a Martin Wolf article that came out on Tuesday. He writes, "The conclusion alas is depressing. Nobody can be confident that the US yet has a workable solution to its banking disaster.

On the contrary, with the public enraged, Congress on the war-path, the president timid and a policy that depends on the government's ability to pour public money into undercapitalized institutions, the US is at an impasse."

"It is up to Barack Obama to find a way through. When he meets his group of 20 counterparts in London next week, he will be unable to state he has already done so. If this is not frightening, I do not know what is."

Wolf: That's a pessimistic fellow.

Clemons: Yeah.

Wolf: I don't want anything to do with him.


Clemons: It seems to me... And I think that there's a couple of fascinating things about this period we are in, as we tilt towards April and this meeting.

One is whether or not the general strategy that Tim Geithner and others are putting together essentially assumes that the US economy can bounce back to what it was -- largely have sort of the same contours, the same design, and the same social contract. Consumers will somehow into a confidence that they can over consume again and move forward.

Or, you are aware -- Martin Wolf is -- that fundamentally -- and frankly where Bernard Swartz is -- that you've got to somehow reorient and rebalance that economic system for longer term survivability and get to these issues.

And so I do have this question for both of you. Do you think, when we're talking about the American consumer...? The American consumer lived in a world of such confidence, whether they were spending money frivolously or not... It was the Alan Greenspan line, that yes jobs are getting torn up in the American society, but they're being created just as quickly.

And so you had just-in-time jobs, just-in-time money. You could just-in-time opportunity. And so there wasn't a savings that was needed because opportunity would just happen. When you compare that to Japan and China and other states that other people who don't trust their government's institutions or their futures, they save like crazy.

And so I'm interested in whether or not this shock in this institution what we're seeing unfold, will fundamentally change the way Americans look at their position, and whether we'll ever get back into the economy.

And that thus undermines the very foundation of what Geithner and Summers and others are trying to organize. Martin?

Wolf: OK. First of all, obviously this conference, quite rightly, is about the US. It's in Washington. It is important to remember that the US wasn't the only country that had a large housing bubble, and in which both residential investment exploded and borrowing by households exploded.

In aggregate, probably the economies concerned accounted for something between 35-40% of world demand.

So, it depends on exactly who you include. So it's a much bigger problem even than the US. And it's important to remember, also when we think about the solutions, that the US households alone spend twice as much as the GDP of China and India together. So we're talking about something very very big.

This means, what I thought or hoped would be a relatively slow transition from what I think of as over-consumption, overspending, and overspending on residential investment, would as a result of the shocks of the last six months, looks now as if it's going to be a very swift transition.

Already it's quite clear. We don't know the figures. But it's actually arithmetically absolutely clear, if you do the GNP accounts for the US, and you look at the likely current account deficit this year, the fiscal deficit, as a matter of arithmetic, the private sector financial surplus this year in the US is going to be at least 15% of the GDP.

This is staggering. From the private sector financial balance was negative a couple of years ago. So this is a massive swing. So much of that, I presume, will be in the corporate sector, non-financial corporate sector. But quite a bit of it will be in the households.

So we're going to see this adjustment very very quickly and brutally. And that's implicit, actually in the GDP forecasts of your own governments. It's just not put out in that way.

Now, the biggest question, then is whether that lasts. That is to say, are we shifting?

And the countries which had the characteristics of the housing bubbles, the very elastic credit systems, oriented to supporting household spending. We're thinking in particular the English speaking countries, Spain is one of them in this way to some degree; will they remain frugal for the indefinite future?

And I think there's a very good chance of that. If you look at the Japanese story, though it's slightly different in some details, they have one central common element which is not discussed enough here. And that is the staggering overhang of debt in the context of collapsing asset values.

Last year household net worth in this country declined by 11 trillion dollars according to the fed.

It is important to remember that over the last 20 years, roughly 25 years, the ratio of private sector debt to GDP in the US has almost tripled to a level never seen before in US history. The UK is worse.

Therefore it seems to me, just to conclude this, very plausible, though we can't be sure, that households are going to be trying to spend down their debt and accumulate wealth in this context over a long term.

It's very plausible that this could go on for many years, indeed very simple back at the envelope calculations suggested we could go on for a decade. If that's the case, it's a perfectly plausible case. It might not be that. Then of course, the demand and the structure that we are familiar with will disappear.

I have one friend, very well known economist at Harvard, who told me flat out US consumption is going down from 72% of GDP to 62%, which was where it was three decades ago before all this started. So then the question of what replaces it is absolutely central.

There are domestically, you could have corporate investment. I think a massive boost to corporate investment in this context is very implausible unless supported by government.

You could have government spending or consumption investment. And you end up then with huge structural government budget deficits, which can be better or worse used, and I agree completely. If you're going to have very large structural government deficit for a long time, the sensible thing is to invest. There's no doubt at all about that.

And the final thing you can do is hope for the US that you have a massive improvement in external balance, so you move into surplus from the current account deficit.

That can make a big difference. But of course, by definition, that means somebody else moves into deficit. If the economies that are moving, making this switch are at least a third of the world, the rest of the world has to make a very big adjustment. And that has to come from the surplus countries, because the deficit countries out there are all bust!


Wolf: Every last one. The central and eastern Europeans, are the last region of the merging world to have run significant current account deficits. There have been a series of them, Latin America, East Asia, now the emerging markets. And every one of them has ended up bust. So they're not going to do it.

So if we don't get adjustment in surplus countries in a big way, there isn't a way out of this except, coming back to it, this huge fiscal burden.

So I think, I really do think, but I'm not completely sure of it, that this set of possibilities that I have just spelled out seem to me obvious, but maybe I hope I'm wrong, but the basic logic is not something that the people in the administration want to think about, because it's too horrible. It really does mean operating a very different environment.

There's a small footnote to that. If this macroeconomic story that I've been trying to tell for many years, many many years, is roughly right, then the financial problem is largely, I'm not going to say any more, largely a symptom of this past failure, macro-failure.

And clearly it makes cleaning a necessary condition for recovery is not sufficient, because the problem, as the Japanese experts will tell you, you don't have the borrowers.

Having a perfectly fixed financial system is wonderful if there are vast numbers of willing enthusiastic credit-worthy borrowers. And the problem of the world is, the only willing enthusiastic and credit worthy borrowers in the whole world now are governments.


Clemons: Before we go to Laura, and then before we open to the audience, would you grade for us, Martin, how you see thus far those surplus countries, particularly China, Japan, and Germany, admitting and picking up their responsibilities as we go toward the G20?

Is Japan doing what it should do? China? And what about Germany?

Wolf: OK. OK. Let me describe how I see it. First of all, none of them are [inaudible 26:18] except the announcements I've given, which is a problem. That's to say they see themselves as entirely innocent victims of the irresponsibility of over-spenders.

And that's a problem, the unwillingness of people to recognize that the general equilibrium system is a problem.

So that's a difficulty. And we haven't got anywhere in persuading them of this obvious thing. The second question, nonetheless on a soft [inaudible 26:52] basis, they are on the whole, reasonably credit-worthy countries, so they could do something even without admitting that they are in any way at fault, or are any way even responsible for this situation.

It seems absolutely clear that overwhelmingly for domestic reasons, in the way that China can do these things, which is through the fiscal system and spending, and the banking system, the Chinese are taking stimulus very very seriously. That's increasingly obvious.

My worry about the Chinese approach is that they are not addressing the causes of the structural under-consumption, which, by the way, are not because households save so much.

They don't save so much by developing countries. It's because household disposable income is 40% of GDP. You've got the median income problem in the US. This equivalent in China is much much bigger. The problem is the income distribution.

This is the most capitalist country in the history of the world. If you judge it by where income goes, it goes to the owners of capital. Who are the owners of the capital? The government.

Now, this is really really important to understand in the Chinese case, but they are making a big effort. Nonetheless the current account surplus of China will certainly remain very very large.

Japan is in complete disarray. Its current account debt surplus has, of course disappeared, because its markets have completely disappeared.

It's the most severely affected G7 nation by far. And I don't think we can expect anything from Japan at all.

My perception of them is they are in the most terrible crisis now at the end of 19 years of great difficulty. And I really really feel sorry for the position they've now got themselves into. And of course, their government is very weak.

Clemons: Do you think that Barack Obama invited Taro Aso to be his first guest because he felt sorry for him?

Wolf: I have no comments on that.


Wolf: But I think the Japanese difficulties are now very very large, because they got out of their crisis in significant measure through an export boost coming via China indirectly from the US, and it's gone, completely imploded. And the declining GDP is now forecasted at close to five or six percent this year. This is a massive recession, just incredible.

Germany is being pushed in the direction of stimulus. Its actual stimulus package is not that small. Starting from its baseline, its fiscal deficit would increase significantly.

But it is important to remember that even so, it will remain an enormous surplus country. It has never seen its demand boosting obligations as related to its surplus position.

And as I've tried to argue, here and will be more in the paper, because of the enormous current account surplus, which has been almost $300 billion, which is incredible for a country which is up around a quarter of the size of the US.

It's simply sucking out demand from the whole European system, and it's putting its partners on the most incredible pressure in this situation, because they can't, say Spain, for example, or Ireland, or the Eastern Europeans.

They can't export their way out of their problems, which is the natural way for countries with serious problems in accessing foreign capital. They need to export their way out of their problems. And Germany's their biggest credit partner.

So I would say Germany is trying. But it doesn't recognize that it has to move towards balance. Otherwise the European system doesn't work. In all, no agreed analysis. Quite a lot happening in China in the short term, though no structural change I think yet foreseeable. Japan is in great difficulties.

And I think Germany is fundamentally, despite what will not be a bad seamless effort, in denial about its responsibilities within the European system. I'm not talking about within the global system.

Clemons: Thank you. Laura?

D'Andrea Tyson: What's the question? No, no. [laughs]

Clemons: The question was is Tim Geithner protecting Wall Street too much.

D'Andrea Tyson: [laughs] No that wasn't the question.


D'Andrea Tyson: I know that wasn't the question. I'm trying to think what I could add to Marin. First of all I do want to say a little bit more about government spending and government debt here.

Because, while I agree with Marin that we are systemically in a situation where the huge danger is that the main country that seems to be able to, at least for the foreseeable future, borrow a lot is starting with a relatively large debt to GDP ratio and a scary deficit.

But still I do not want to leave the impression that I don't think there is a role for government deficits and government debt in the US and other countries that can build it up. Again the historical record of financial crises suggests that the government debt tends to go up by at least 100 percent.

The government has to, because it has the only balance sheet, the only borrowing capabilities. It has to fill in while it tries to correct, modify the collapse.

So there is a real question of what you don't want, and I think what you're worried about is that that becomes a structural solution. If it's just the temporary solution to throw demand into the world economy when demand in the private sector is sinking so badly, that's the right thing to do.

And if we have an additional 10 trillion dollars on the debt, if the net worth of households has gone down by 11 trillion in the US, I think the latest number I saw was 13. Larry used 13 now in his latest speech. Maybe it's gone down an additional two since the end of last year.

So 13 trillion dollar hole in the net wealth of the household sector. That basically is a hole, which the government can try to fill to some extent by essentially building on its own debt.

So say 10 trillion. 10 trillion is at interest rates of four or five percent, it ends up being an interest burden that the US can endure. The US can endure that in the future.

After all, if you invest the money properly, you're generating income and wealth and productive capability in the future out of which you service that debt. So I just want to say that we have to give some room for this, understanding it's not the structural solution. I do agree with that.

Wolf: My own view, as you probably know, is the deficit should be bigger now.

D'Andrea Tyson: Yes. Yes.

Wolf: So it's not saying that anything is it? I'm just worried we'll be here ten years from now.

D'Andrea Tyson: Yeah. So that's the only thing that will happen, is basically right. I think it's very important for the US to put together a structural plan to say it won't be that way in ten years.

So the challenge for the administration and for the Congress working with the administration is to define a path off that gets you to a ten year out debt to GDP ratio or deficit to GDP ratio that looks reasonable.

And also how do you get to the 20/50 solution? Because I want to say, if there had been no financial crisis at all, nothing, the panic of 2008 didn't occur, we were exactly a year ago, and we didn't know this was going to happen, we still knew that by 2050 at current spending projection lines in the United States, the debt to GDP ratio would be approaching 300%.

If something can't last, it won't. That's an impossible position. It was an impossible position a year ago. It's even more impossible now, because we're going to build up some debt now. So we actually have to focus on these long term issues. And of course, the major long term issue is health.

So it's funny to talk about health in this context. But it's absolutely essential.

Because if you're trying to find a systemic solution to the world economy, and a systemic solution to the organization of every other man in the United States and the systemic solution to the government deficit and debt in the United States, you actually have to start with health. It's a very big issue for the US.

Clemons: I want to go the floor but I want to ask Laura just one very quick follow up.

You've been critical of the Clinton administration for which you worked and the Bush administration for not doing more to recognize and then to reverse the slippage or actually the working middle class family being left behind in the growth and gains that we have had.

As you just sort of quickly grade what the Obama team is doing, are they embedding in their plan something that will fix that? And that's what I was really getting at with my Wall Street question.

Are you basically loading the deck again so that one sector of society disproportionately benefits in ways that were not characteristic of the past?

Or do you see them rewiring a social contract in what they're doing that will solve this very strong criticism that you even gave your own team?

D'Andrea Tyson: Well, I think again, they're trying, if you look at where they are trying to spend money longer term, they do recognize that a significant burden on these families and a significant source of their long run problem is the extent of their income being gobbled up by health.

They do recognize the problem of another costline in the United States, which has always been rising faster than GDP is education.

So if you had to look at, OK, where do people have to spend their money, and why is the price of the thing they have to spend their money on rising much faster than their overall income? Education one, health is one.

I think they recognize that we need to consider how to deal with the middle class if we actually do pursue a policy, either a carbon tax policy or a cap and trade policy, which does increase rather sharply the price of carbon intensive activities.

If people do a lot of work on this, it is not an evenly shared burden. So you can actually do something there as well. And that's of course, the proposal on their middle class tax relief.

I just want to point out something that struck me when Martin was talking about the rest of the world. Let's take the hard-pressed economies, not of Eastern Europe, but clearly the economies of Continental Europe. Even the developed economies are in difficulty. Japan is in dire straits, as you said.

Think about it from the point of view of the citizen of the country, however. I would say that the American citizen feels in more dire straits, much more dire straits. We're the ones that are going to have, and we already have, a huge increase in homelessness.

We're the ones that are going to have a huge increase in people not with healthcare. We're the ones that are going to have a huge increase in people without adequate unemployment compensation benefits, either the amount you get or the duration.

We're the ones who are going to have people who can't afford to get the education they need. Those are all public sector services.

The Europeans are right to say, and Japan doesn't say it but they could: We have a very strong, automatic stabilizing system in effect. So from the point of view of the citizen, going through this massive, global structural crisis-disaster, it's worse for Americans. It's worse for Americans.

Not only did they enter this under-capitalized and over-leveraged. But they actually don't have a safety net. That is, a serious safety net in the key things that Americans have to worry about: where they live, their healthcare and their education.

I think that's something that we don't talk about, but it is a major difference.

The Japanese households all this time -- a decade, a decade and a half -- I don't think... My impression, from what I've heard and talked to people, is they've never experienced quite the way the economists looking at Japan experienced it.

Oh, my God, Japan is in serious, dreadful shape. You ask the average Japanese consumer, "Are you in dreadful shape?" The answer isn't quite as dire as we're suggesting.

In the US, it is quite as dire; it's quite as dire. Outside of Sacramento now, there is a Hooverville. There is literally a tent city, which is growing every day. The City of Sacramento is now talking about making it permanent: moving it, but making it permanent, a permanent tent city.

We are developing a Mumbai. You know, there's this road leading into Mumbai, and parts of that population... I think it's just dreadful. That's a real difference in the US.

Wolf: Can I just, since you...

Clemons: Yes.

Wolf: First of all, the point about automatic stimulus, that's the technique of body's automatic built-in stabilizers, is correct. The Europeans particularly, since they have very generous welfare states, constantly repeat this, and it is completely correct.

D'Andrea Tyson: [laughs]

Wolf: Even in the UK, the budget deficit is exploding, and a significant part of that is for this reason. The more interesting thing for outsiders always is what countries take for granted and what countries don't take for granted. In other words, what the implicit social contract is.

The implicit social contract in the United States, to an outsider, has two components. The formal one is: We don't look after you too much. We don't insist that you pay taxes at anything like European levels. They've remained relatively low. And if you take out defense spending, the spending on other things is very modest. But if you fail, you fail.

D'Andrea Tyson: Fail, yeah.

Wolf: There is however a sub-clause to this in my view, which is: unless you're really rich. Now this is not really true. But what I mean by this, and it is related to what you say, the language is concerned about the median. The median is only half-way down.

D'Andrea Tyson: That's right.

Wolf: Nobody talks about the poor here. In the UK, at the moment, everyone talks about the poor. This is a really different language.

And of course, it's perfectly obvious that the rescue efforts of the US government are about preserving and helping elite structures. That's perfectly obvious. There's no question about it. The language implicit here is absolutely clear, and the European way of thinking about this is very different.

Now, the reasons for that are absolutely clear, too. It's where we came from. We came out of feudalism. This country didn't. It's a country of immigrants, far more individualistic and all the rest of it.

This is the only footnote. It does seem to me that what's been going on in the last year or two, in the way the financial system is being rescued, is obviously making a lot of perfectly ordinary Americans very, very angry. I have to say I fully understand this.

It is surely possible that one by-product of this crisis will be to shake some aspects of the social contract in the US as it has been in the last 30 years, and one might say even longer.

Clearly, this administration -- no doubt, if you look at what he wants to do -- is trying to move it in a somewhat more European direction. Equally clearly, there are very powerful forces in this country which want to prevent that. This, to an outsider, is a fascinating thing to watch.

D'Andrea Tyson: [laughs]

Clemons: Yes, I'm going to take about 15 minutes, now.

D'Andrea Tyson: It's not safe to live here.

Clemons: What do you think about 15 minutes? Start the next panel at 10:15. We're going to take some questions. I'm going to ask each of you who pose questions to identify yourself and ask the one question of the three questions that you have.

Brevity will be rewarded with cookies or something. Bob Kuttner "American Prospect" magazine... I will not just call on those people whose names I know.

Audience: [laughter]

Clemons: Bob Kuttner...

Bob Kuttner: Thanks, very much. I totally agree with what Laura just said. I want to question Laura on the political assumption behind what you said previously.

This was that because Congress would not appropriate the money for a more direct government intervention, that the only way to do it was to bring private capital to the table by something like the Geithner plan.

I would question that on two grounds. One, this isn't mostly private money. This is the Federal Reserve putting up well upwards of 90 percent of the money. And I think, secondly, this was a policy of choice; it wasn't a policy of necessity. It was probably baked into the cake when Obama hired the team that he did.

So, you have Wall Street disgraced but not defrocked. I just wonder if there wasn't a road not taken that would have been something like an RTC or an RFC, where Obama could have capped the political anger and said, "We're going to do this directly." And lastly, if they had done that, they might well have got the money out of Congress.

Rather, it's being done in a very opaque way, so that the people who brought us this mess can profit from cleaning it up. That's just going to stoke more populist anger. Was that alternative course ever taken seriously as a possible policy, do you think? Thank you.

Clemons: Thank you. Laura?

Bob: And if not, why not?

Clemons: Brief responses can get cookies, too.

Audience: [laughter]

D'Andrea Tyson: Yeah. The answer to the question was it ever considered is -- I don't know. I don't know. I think the situation deteriorated very dramatically for them.

You remember, before the outrage of the last few weeks, when they first came in, Congress already was enraged and already didn't want to even allocate the additional -- the remaining -- TARP money to the president.

I really don't think now, and I don't think even then, that if the government had essentially made it clear that, in order to do an RTC-like solution, the amount of government money... This is really what Martin was saying a couple of days ago.

So, what if the government needs two trillion to do that? Do you think that this is going to be a possible way? The president goes to Congress and goes, "We need two trillion dollars to save our financial system.

We're going to nationalize it. We're going to run it. We're going to create a big, huge RTC. By the way, we have to." This is another thing we could debate, but what they have decided...

The lesson of Lehman has tied their hands in a very important way. The lesson of Lehman has led them to conclude that creditors must be protected 100 percent. So, a whole solution here, a whole solution here, of swapping the debtors out for equity is gone.

Because, these institutions are considered to be too big to fail. So around the world -- the US isn't the only one that's done this -- we insure everything. We insure everything. OK?

We essentially say the moral equivalent of a run on bank deposits, for which we stopped, is now the equivalent of a run by the creditors, so we have to stop that. We have to keep them whole.

Well I have to tell you, the size of the budgetary implications of that for the government are enormous. And I think if you're going to assume that as a constraint, then you're going to have to find another way to mobilize capital.

Yes, the government does put in all the financing in the sense that it puts in 96% of the financing. But it gets a dollar, the upside is a dollar 50/50 share. So the government would get something.

Would I prefer, would I think that somehow an RTC like solution or a Sweden like solution is an easier solution? Or a more obvious solution? Probably. But we do have this problem. And I think the political problem is very real, and it was very real from the beginning.

And finally, let me say, because this was the major thing we discussed last night, the major player here is actually the Fed.

The provider of insurance, the provider of the lending capability is the federal reserve outside of the current political system, and correctly so. But we have in the United States now, essentially a crisis which is big enough to be the financial equivalent of war. We have a war-like situation.

And because it's not a war as perceived by the administration and Congress working together, we don't have the capability in the executive and legislative branch to work together to handle a problem of this magnitude.

So in comes an institution which does, the Federal Reserve working with the treasury. So I think you have to look at it that way.

Clemons: I'll go to Martin here, and there are so many hands up. We're not going to be able, because we've got a speaker on our next panel. We'll have to leave early, so I do apologize to people in advance. Martin? Quickly.

Martin Hutchinson: Thank you.

Clemons: Writes the Bear's Lair, a blog.

Hutchinson: I'm Martin Hutchinson, the Bear's Lair columnist. Since 1995, we've had very rapid monetary growth, much faster than nominal GDP. As an addition in 2008 you had accelerating velocity.

And so, therefore, that has kept interest rates very low, created the credit bubble, and indeed increased everybody's reserves. My question is, shouldn't we be looking at higher interest rates rather than lower ones in order to rebalance the system?

Because we hadn't looked at monetary at all. But isn't the Fed largely responsible for the mess? And isn't the solution to change Fed policy?

Clemons: Thank you. So, quick question on interest rates and monetary approaches. Martin?

Wolf: Trouble is there's no quick answer to this, because you'll have to start dealing with the whole theory of how you think central banks operate?

Clemons: Which is what you've managed to do right?

Wolf: Which, let me say two things. First, my own view is that it's quite easy to blame the Fed, and perfectly reasonable. But I think the Fed was responding to a situation rather than creating it. And this now gets back to fundamental theory of how you think a capitalist economy actually works.

Obviously, if you have an Austrian view, you would have your view. I don't. And therefore, there are many others. You could have a monetary view, which I don't think money is the thing that was fundamentally driving this.

I think it was accommodating it, so that you could then say the same thing, it's ultimately responsible for this. Now once you get a situation at the end of this process, which is huge creditor money overhangs, I think we agree on that, then the really big question is how you deal with it. And that was the core debate, I think, in the 30's.

The one view is jack up interest rates; you'll create lots of bankruptcies, because you will liquidate lots of banks. The money supply will collapse. You will liquidate lots of paper wealth. Lots of companies will disappear. And it will be a healthy purge, which in my view goes via 50% unemployment.

Now I don't think that's a sellable proposition, and of course, you can have other theories about the economy. So I think once you've got here, you have to grow out of it. Now I can't have the time to discuss what that means.

It clearly does mean that the present policies of the Fed have to be credibly reversible. And it's not at all clear they are. And it's fairly plausible that the end game of all of this will, in fact be a lot of inflation. That seems to be plausible.

But given where we are now, I think for the government deliberately to pursue policies whose premises at the right resolution upon our successes is an economic collapse, is not a functional policy in any developed country today.

Clemons: OK, let me take very last question, Martin Walker in the very back. And Martin, really brief. We've got to change the stage.

Martin Walker: The G20 meeting in November instructed the trade ministers to proceed with the Doha round, not justice stick by the free trading system. Do you think, and Laura, I'm asking you as the author of Who's Bashing Whom, do you think that the traditional free trading model is going to service this crisis?

D'Andrea Tyson: Well first of all, I never really quite liked the concept of free trading model, because I think we've always had a system with a lot of rules and regulations.

I personally think, I'm an optimist here. I actually think that it will. I think, and I don't know if maybe I'm being too optimistic here, I think we have in place a lot of agreements and a lot of machinery and a lot of people who support that system.

It's very hard to unwind something that is that significant and substantial. And we have large companies all over the world that have systematically organized the way they do business to include a very significant amount of cross-border trade.

And we know from the numbers that a lot of cross-border trade is, really driven by a relatively small number of players who are very large relative to the global economy.

So I find it hard to see how we do a significant reversal. However, I'll say two things. I think it's a very unlikely climate for any significant further liberalization for the foreseeable future.

So we're in a holding pattern where there will be violations. There will be violations. There will be signs that country would like to contain the demand generating effects on employment at home.

We've seen those in the United States. We've seen them in other countries. But I'm hopeful that those will be marginal backward steps. So not all forward progress, it's very hard for me to see that. Marginal backward steps, but not an unwinding of the tremendous investment in the system that has occurred over the last 40 years.

Clemons: Martin?

Wolf: To be very brief, I think if we get out of this reasonably cleanly within the next two years or so, got back to reasonable world growth, where we are is very far from that, then Laura is right.

If, as is possible, we are entering into a lengthy period of sub-trend global growth and remember that the natural rate of growth of the world economy is probably in the neighborhood of 3-4% or so, and it'll be minus two at least this year I think. No. Yeah, I think it's moving in that direction.

If we don't get back to that, so unemployment becomes chronic. And the imbalances remain very large. I expect countries, particularly deficit countries to start saying we're not spending all of this money to generate jobs somewhere else.

So I think for the first time, we will be looking at protectionism as a macro-economic course, not as micro-economic course. And that is happened in the 30's. And that is what's really frightening. We can manage it as a micro-economic issue for a few years.

We cannot manage it, generally if we live in a world of chronically deficient aggregate demand, which is unfortunately where I think we are. But it's a great misfortune, unfortunately, for such a large part of the American Economic Professionals decided that everything Keynes said was irrelevant, when we actually happen to live in a Keynesian world.

Clemons: Please join me in thanking Martin Wolf, Laura Tyson for an excellent exchange this morning.


Clemons: I'm going to ask people to stay in their seats, ask Martin and Laura to join us off stage...

Transcription by CastingWords