- Hello, good afternoon. My name is Chris Paxson. I'm Dean of the Woodrow Wilson school and I'm very happy to welcome all of you here this afternoon. Some of you may have been loyal followers of what has been a really
incredible lecture series that we've had this semester. This is the sixth and final event panel that we're having on different aspects of financial market regulation and reform. And I wanna introduce the panelist, but I really wanna start by thanking the person who has been responsible for organizing this over the semester, and that is Jon Corzine
who is visiting the school as the John L. Weinberg/Goldman
Sachs & Company visiting professor. He does not need long introduction. I think all of you know that
he has served New Jersey as a senator and as a governor and we are incredibly fortunate to have him visiting here this year and I just wanna thank him
for everything he's done. (audience clapping) I also would like to introduce
our other visiting professor, Joshua Bolten, class of
'76, who is here teaching this year and will be leading off some of the questions after
we have our main lecture. Josh is also a John L.
Glenberg/Goldman Sachs & Company visiting professor. We have more than one right now 'cause of some overlap and
as many of you probably know, Josh was the Director of the Office of Management and Budget. He was George W. Bush's Chief of Staff and he is currently co-chair of the Clinton Bush Haiti commission and he's been just a tremendous asset to individuals in the school community over the past year and a half and we're fortunate to have him here. It's been really wonderful. So finally, let me introduce
our main speaker who, again, I'm only gonna give
him a short introduction because I think people know
him very well, Paul Volcker. He is Professor Emeritus of International Economic
Policy at Princeton, so we get to claim him as one of our own. We also could claim as one of our own because he graduated from Princeton, he was in the class of 1949. And in between those things, he did some other kind of important stuff. (audience laughing) He was Chairman of the Federal
Reserve from 1979 to 1987. That, as many of you will recall, was a difficult economic
period for the U.S., was sandwiched in the middle of there and he steered the economy
through a very difficult period of stagflation and he just
has a wealth of experience. He has been very influential
in recent policy debates about financial market regulation, and I'd like you to
join me in welcoming him so he can give some remarks
before we have Q and A. (audience clapping)
So welcome. - I'm not quite sure I'm
supposed to stand up here and give something called a speech. That was not part of the deal. (all laughing) In true Princeton fashion,
I was asked to sign my life away before I
know what it says here. You're gonna have all the copyrights and recordings and photography. I don't know what you're gonna get, but let just make, spend
five or 10 minutes maybe, because coming down here currently, the contrast to when I was
entering Princeton in 1945, this building did not exist and this auditorium did not exist, but the Woodrow Wilson School did exist. But it was such a different period. The war was just ending,
and of course the war, when I say the war, I mean Word War II. (audience laughing) And the United States, of
course, came out victorious, Europe or England was in a way victorious, but Europe was shattered, Japan was shattered. It was a different world in
which the United States was still the dominant and the leader. We had political, potential
political problems, security problems with
Russia a few years later. But it was a world in which you came here and either taught at
Princeton or came to Princeton and you thought you were with the world's leading power or you were
gonna be part of a world in which the United States was dominant. And let me tell you, that
it is no longer true. And I've been in some
meetings the last few days and it just impressed itself upon me. In a visit to Asia a few weeks ago, it impressed upon me even
more that the United States was not in the position that it was in, not just in 1945, it's not in the position it was in when I was chairman
of the Federal Reserve in 1980s or what the position I was in in, the country was in in 1990. I was at a meeting where they had, I'm not a PowerPoint guy, I always. (audience laughing) Not a PowerPoint, but they, you won't be able to see this, but these nice colored charts. (audience laughing) I showed you relative
position, economic position of different countries and
different continents since 1990. And there was United States, no longer 50% but 21%, and Western Europe just about the same at 22% altogether. Those were the high, 1990. I actually wrote a book here at Princeton when I was a professor with my Japanese friend Toyoo Gyohten. The name of the book
was "Changing Fortunes" and the changing fortune
we were worried about, I was worried about, he
was probably triumphant, was the rise of Japan. This was when Japan was number one and years and years of
lows of six, seven, 8%. But the United States has been
through a difficult period. The economic challenge and
the challenge was from Japan, and Japan then had 9%. A relatively small country
people, 100 million people, 9% of the world's GDP. And then we come to 2008, just after the crisis. This is in purchasing
power, power there in short. But the United States is still at 19%. Western Europe has slipped a bit, 17%. Both of those numbers are lower. Japan is only 2/3 relative to where it was dependent immediately as
soon as we wrote the book about how it was speeding up and set the road bump for 20 years. Maybe a lesson for the future. But China, which in
1990 was 8% is now 18%. Not so far from the United States. This is obviously per capita, the income is much lower, a fraction of ours per capita, but when you have a billion people, it does add up. And in purchasing power terms, their country is now pretty close to where we are, by these figures. But the startling number,
is the projection ahead to, no Power Point, but I
can turn the page over. Here we are in a projection
for 2030, 20 years on. I won't be around. Miss Pittens will be in midlife. You're not gonna be in a
world in which United States is just automatically
the leader of the world, according to this projection. China economically will be twice the size of the United States. India, will have come from
a fairly small fraction to close to the size of the United States. Now those two countries together accounts accost for a third of
the world's population. Japan, which was 9% back
when we wrote that book, is squeezed back down to 3%. So it is quite a different world, Europe was, according to this projection, unless you're the United States. Europe's only about a third of
the economic weight of China if you believe these figures. So it is a different world, and it's not only a
different world in the size and whatever that indicates about power. But I'm not telling you
any news when I tell you it's not only a complicated
world, but a difficult world. Here we are in the midst
of the greatest recession we've had since the 1930s,
right on top of the biggest financial challenge,
the recession's on top of the financial challenge. What would you call it? We have had, what can only
be called the collapse of the financial system
that we were so proud of a decade or so ago, it collapsed. I think that strong word is appropriate and there is all kinds of
evidence that the combination of a recession and not
completing our financial collapse spells troubles for some years. A very slow recovery. Our latest figures that we saw
for the unemployment number just on Friday and the
growth in employment, another confirmation, that
this is a very slow recovery which means we're not
gonna go back to the level of importance we had before
the recession for some years. We will not retain a strong growth path. I've only checked one but
it's not gonna be very soon. You can get into all that in the later discussion if we want to. This has been a period
these last 20 years or so, particularly of globalization. It's not new, but it's
increased to a point that we haven't seen for decades and decades at any rate. Particularly a globalization
of financial markets. Interesting thing of course, is we have this wonderful
references of financial markets around the world and here in the middle of the
world's financial system, we have this breakdown of the market. There is a, I was hesitating to say this, but a globalization was looked at with a matter of great promise,
open markets, complication, all the rest. Certainly
the financial markets, glorified in globalization. And we have had an enormous
benefit from globalization in other countries. So called emerging economies, that's a very worldly experience. While we have had a slump economically, had recession, and a not
particularly favorable economic performance
earlier in the century and an economic performance
marred, in my view anyway, by the fact that typical
household income in real terms has not increased for 10 years or more over an enormous increase in compensation at the top of the income scale. And this isn't a matter
of the top 25% doing well and the bottom 25% doing poorly. It's the top two or 3% doing well, the top 10%, which includes
the top two to 3%, is going up, but it's really a very
concentrated phenomenon with 1% or less of the population,
however engaged in income that is just without precedent. So you wonder a little
bit about the stability of payoff of this globalization if it's been very favorable
for some countries. It's not necessarily more favorable by the United States by today's evidence and certainly not very favorable in terms of the income distribution
that's accompanied it. Well clearly we have a big
imbalance in the world economy. I didn't see any economic analysis, any talk, even as
recently as 10 years ago, that the emerging world would
be the economic trial story of this particular decade,
of this particular century. It was in the mid 1990s when
we had a very bad economic collapse in Asia. Asia financial crisis
spread to Latin America, spread to China, to Russia, for a while. That was, it was a bad crisis, but it was kind of typical crisis. The developed world was
called upon to assist the American world. We got a call and we lent a lot of money. We marshaled official
funds and private funds. Well that was 15 years ago. What's happening now? Oddly enough, the emerging countries are financing the developed countries. And that is most evident in
the case of the United States. We've been consuming. You've been spending, you
haven't been investing much. Until the recession, we were
saving practically nothing. And those poor Chinese,
all a billion of 'em, some of them anyway were
indirectly or directly financing the United States. A very strange phenomenon that I think it's something we have to worry about it. It's an imbalanced economy. Not only are we in recession
and the whole developed world to some degree is in
recession with few exceptions. But it is an unbalanced world and that needs to be corrected. Let me just say, and (chuckles) it's not very optimistic, I guess, opening remarks, but we have a future. You are the future. My future is shorter than yours, but, I don't think this
world works very well. I come from a particular era, but the United States has
been, I think a constructive, relatively benign leader of the world and opening markets and
developing technology and innovation, and
broadly speaking growth, even though in the the last decade or so, other countries have done
better in the rate of growth and are rapidly catching up to us. But, how do we manage
this world economy now? A much more difficult situation. You're not sitting down
with 50% of the world and you still have a military force. It looks like we did in
relative terms back then, but economically, I'll tell you this, when you go to an
international conference now, it's no longer the United
States automatically at the head of the table, kind of suggesting to others what to do and hoping you get some cooperation. Right now you don't know where
the head of the table is. United States is there. China is there. I tell you, I experienced
it a few weeks ago. China isn't just blindly
saying, "Oh, what do you want " in United States? "How's your financial system? "How do we run our financial system? "Should we use your financial
system as a model for ours?" Not anymore. They say, "We think your financial system "has got lots of problems. "We'll talk to you about that." Look at this meeting in Seoul, happen to be in Seoul at a meeting. I won't get very complicated,
but the United States would enter that meeting, thoughtfully thinking that
they had presented an analysis of the world economic imbalances and particularly the
need for Asian countries, and especially China,
to make some adjustments in the exchange rate or
otherwise to help balance things. Because under the rather
sophisticated analysis, that said this is a multi-lateral problem. We're all gonna get together. The finance ministers had met and there were some consensus
on a general approach in that manner. what came out of that G-20
meeting, a few days later, was China, together with Germany, triumphantly telling the
United States what to do. And why was the United States flooding the world economy
with excessive amounts of liquidity and stop talking, in effect, stop talking
about what we should do. We the rest of the world are
looking to the United States to change their policies. It tells you something about, not just the state of the world economy, but the state of the
world political situation. It is gonna be a situation
that's a lot more challenging, I think, in the sense of getting
some coherent leadership, with these very severe economic and indeed political problems we have. Having said that much,
I wanna express my faith it better be the United States
that gets us out in orbit so that it has a little more influence than it has at the moment, because I don't see any other country or group of countries or whatever, that are gonna take their constructive, I think, relatively benign goal that we had in most of the days, since I was entering Princeton,
the Woodrow Wilson school. I probably talked twice
as long as I promised, but I will sit down. Are you gonna assault me, Josh? (all laughing)
(man speaking off mic) Thank you. (audience clapping) - No assault Mr. Chairman, you're still a lot bigger than I am. (all laughing) Mr. Chairman, thank you
for those if not uplifting, at least clarifying
comments about the state of the United States positioning. You mentioned your work on
Japan when you were here. Some economists see Japan
as a, the Japan situation, as a harbinger of what the
US may ultimately be facing. Albeit, coming from, from very different kinds of salvations. What lessons should we take from Japan's miserable experience over
the last 10, 15 years of profound stagnation, even while the rest of
the world was growing? And what should US policy makers do that keeps us from becoming
the Japan of the future? - Well, actually, the
first thing I'll tell you, I think there's been some misleading of the Japan experience. It's not been terribly
uplifting in the last 15 years. But it's not really as bad as a lot of the commentary suggests. And the reason I say that is, you forget the Japanese
population is declining. Normally that doesn't happen
very often in peace time and I don't remember the numbers exactly, but I think it's been declining
maybe roughly 1% a year. And the growth has been,
let's say the growth during this period averaged I think 1.5% or something like that. which is bad, when that happened. You say 1.5% growth, and
1% decline in population and 2% plus per capita growth, which isn't very far from what we had. When you correct, 'cause all populations growth is 2% a year, or
certainly 1.5 anyway. So the Japanese economy
has not been great, but also proven fact some
people have resented it. And remind you and it's reflected the fact that while
their unemployment is up, which is up, it's ranking four or 5%. That looks pretty good by
our standards currently. Now typically in the past
their unemployment rate has only been 3% so it's
off, but it's not as bad. Fall out to kind of disparity for what we, where we draw the lessons. I know a lot of talk that's
the problem with Japan is prices are not going up. The prices have actually gone down. The average inflastion. And it's true for most of
this period, not all of it, the prices is going down. You say, "Well why
didn't they just look up "1% a year or so?" but I think it's a misleading
of the kind of sluggishness in Japan as a reflection
of the price level. That's not the usual interpretation. Japan and the United
States share a similarity. We both had huge bobos
excesses in two markets. The stock market first and
the housing market later. Ours came with a little
separation of time. Theirs came at the same time in the late 1980s and early 1990s. They're very similar in a way, but our stock market went
down 50, 60% at the bottom. Theirs went down 75 or 80%. Our housing market went down 30%. Their real estate market went down 75%. Like I say they were very similar shocks, but theirs even more severe than ours. And maybe not such a
complicated financial system, but these events basically
bankrupted their banks. The banks were cheated
because the government, as in our case, protects them. And you're guaranteed their liabilities and in some case per capita
in, they can still run. It's messier in Japan because
the whole financial system is largely banks. And that made it in a way,
a little easier to handle. So they had several agreed precautions. It was a great shock to
the financial system, we had a great shock to
the financial systyem. Both financial systems
stopped running for a while, for understandable reasons. And it gave rise to economic sluggishness. And actually a big recession
in the United States and the overall sluggishness in Japan. But I don't think anything to that, that don't have all that much to do with the fact that probably
various depressions was going on in the US. This region, and the trouble with Japan, the proverbial Mrs. Guananafi, is waiting to see budgets
go down 1% next year. So she didn't buy anything,
it's kind of phony. I mean I was like you,
putting off many purchases because she thought the price index might be down 1% next year. (coughing drowning out speaker) It's probably 1%. If it is you better go buy it now. So I think some people misinterpret things which is not very important, because I think it's been misinterpreted by American policy makers in fact. - Let me ask then about Japan's bigger and much more important
now, neighbor China. Where I think you will find that that is at the crux of the policy problems that policy makers face and was it the crux of the Seoul G20
meeting that you mentioned where the one thing everybody seems to be able to agree on, both at those meetings and
in the academic context is that we have deep
imbalances in the world economy that need to be addressed
before the economy is healthy for any of us. Too little consumption in China and too little savings
in the United States and the developed world. How big a role does Chinese
currency manipulation play in that? I.e., would you be
willing to say that China is a currency manipulator, number one, and number two.. - [Panelist] If there
was a running record. (audience laughing) The cameras are running. - That's why the chairman
had to sign that release. (audience laughing) And number two, even
if you don't wanna say that they are manipulating their currency in a technical fashion, what if anything, should US policy makers do to address what most people perceive is a, is an overvalued Chinese currency that is contributing to the imbalances in the global economy? - Roger this business about
oh that's their currency-- - [Lady] Who's the buyer? - Currency manipulation in this context is a obviously ugly word. What we do know is that they
are actively maintaining reasonably stable exchange
rate with the dollar. Actually it's very troublesome
that while the Chinese RMB has gone up against
the dollar, not very much, but it's gone up against the
dollar in the last year or two. It's actually gone down compared
to many world currencies including most particularly
the Japanese currency, which is biggest developed
country trading partner. Now it just so happens I
can answer your question because I spent 15
minutes just this morning listening to the explanation
from the Chinese point of view from one of the Chinese leaders. And their argument, first of all, is China is a big country in population. They've been growing very rapidly, but they still have
about 300 million people living in poverty. They are rapidly trying to
bring into the 21st century, but still have a long ways to go. And it's important that they maintain this enormous structure of growth. Now that growth is too
dependent on exports, that we say that this point, but it takes us a long time to make the necessary
adjustment that's concerned and we don't see much evidence. So that's interesting intellectual today. We don't see much evidence of
changing the exchange rate. A wall is gonna do very much about speeding up the adjustment that we and the Chinese must make. And we encourage relatively
greater consumption and the counterpart to us saving. The contract numbers are wonderful. Consumption in the United
States at the peak, beginning of the crisis
got up to 70% of our GFP. Traditionally it's been about 65%. At 5% an increase in
consumption is about equal to what our trade deficit
was, which was a lot in part, Chinese exports to us. Chinese consumption is unbelievably low, relative to the economy. This great burst of growth
consumption in China is just that 'cause
the rate of consumption in the United States. We have 70% they have 35%. That represents a considerable imbalance, which is reflected as an
international imbalance. It has to be corrected. But they are honestly quite
resistant to moving faster. On the other hand, you know it's all kind of symmetrical. Thee other countries look at us, including in Seoul. We didn't expect the
spotlight to be turned on us, but they're saying what are you doing to increase your productivity and particularly what are you doing to correct the financial excesses that we still see coming
out of the United States as epitomized by a
deficit of 10% of the GDP? We don't see any evidence of your talk and your moving any faster
than the Chinese are moving to deal with their imbalance, to deal with your imbalance. It's some truth to both of our imbalances in certain terms. (laughs) But it's indicative of how typical this situation isthat we're in. I think the Chinese aren't interested in moving the exchange rate more reapidly. We need to help the adjustment process. I don't think it's going
to bring in itself, any (speaking faintly)
external (speaking faintly). The rest of the world is doing things in a complimentary way. - [Audience] We can't hear you. - Get close. Oh, maybe I didn't wanna
express that on camera. (audience laughing) - That was extraordinary insights. - I have a few folks. Let's actually start
with students at the mic. The Woodrow Wilson students, if you would like to pose a questions please come forward. By the way, before it is all over, one of the passions of
Chairman Volcker's life has been the promotion of public service and work in public service. And I think that it's
appropriate that someone who has been dedicated to
the Woodrow Wilson School and public service life is here today. Hopefully these kinds of
interchanges will encourage the kind of high quality young people going into public life and public service. That I think that we're,
that Chairman Volcker so eloquently epitomizes, please. - [Audience Member] Hi, thanks
for coming chairman Volcker. I was wondering if you could talk about the financialization of
the United States economy. A much greater percentage
of corporate profits going to financial companies today. What you view as the causes of that trend, and the consequences, whether you think it's going to reverse as itself in the wake of the crisis? Or rather it'll persist and be a permanent feature of our economy? - Well, I have to confess
in answering that question. But it's not a great
secret that I had not been a primary admirer of the governments in the American financial
system in the last decade or so. You are right to peek again, profits, and fairly now you find a definition of the financial sector got
to be 40% of all profits. There's a wider measure of contribution or lack thereof in the financial system. And we're talking, it's a
little more complicated. If we look at so-called value added, in terms of value added,
we presumably mean what a particular sector has contributed to the total GDP. And it's basically made
up of wages and profits. You can say high wages,
high profits, high income, that's how value added. I won't recall the exact years, but if you look at that in nominal terms out your adjustment in crisis in a 15 year period or so or maybe a little longer, the financial contribution to GDP, measured by value added almost all, if you look at it price adjusted, and I know how you price
adjusted transition, but it's interesting. If you look at the deflated
figures didn't make, didn't increase very much anyway. I think 80% is all and
might've gone from seven to 8%. The other figures went form
six to 12 or something. But our range is a question
to know whether the activity and the enormous profitability
of the financial market, how much it really contributed
to the growth of the economy. We have a few PhD students here, I guess maybe one or two economics. I have offered a prize (audience laughing) to first PhD student that
can produce a dissertation that convincingly tells me that the expanded financial markets contributed to greater productivity and growth in the American
economy during this period. (audience laughing) So far there's no takers.
(speaking faintly) I know this dissertations
to be riveting and so forth and it's a difficult question. But I do think, we have a little entiresis in the financial system. For, I don't know, a variety of reasons, which is a period of enormous innovation. There's absolutely no doubt about that. And this enormous innovation take off and high profitability and high incomes for some people participating
in the innovations. But I think the question
remains is to how much the generation really
led to a better economy. I know the story about all the generation was necessary to manage
risk more effectively and to reduce the risk and often you're trying
to find a fail safe. (coughing drowning out speaker) and all these various techniques for maximizing profits is
what I'm telling myself, to protect the economy. But when we got in trouble,
we found out the risks weren't so diverse at all. It's no so far there's
nobody contemplated. The markets got so complex
and so interrelated that they kind of fell
apart under pressure. Which obviously we saw a need for reform. But you know it's a
fairly attractive period. I think anybody would say now that bright people in
every business school and I'm certain that graduates
of the Woodrow Wilson School and law students. So then public service. I remember I had talked about. And I came to Princeton to teach at first. In the Federal Reserve
I had a cubicle office in the building across the street, which I forget at the moment, but I remember I was
in the federal office, somebody knocked on the door and I answered it, good day. "Can I talk to you a minute? "I'd like to get your advice." And I said, "Okay,
what's your background?" No, I said, "Oh, what's
your question then?" He said, "Well, I want
to go to Wall Street "and I just want to know
which firm is best?" (audience laughing) which one, I said yeah, a couple office. I said, "What's your background?" He said, "I just got a PhD in
aeronauticall engineering." (audience laughing) he said, "How are you today?" I said, "Well, why are you making "a development to Wall
Street for him to go, "you just got a PhD in
aeronautical engineering." He looked at me as if I
said the moon or something. He said, "Don't you understand? "If I go to Boeing," of
course this was 15 years ago, "if I go to Boeing, I
got a job right away, "it'll be for $40,000 a year. "And when I machine
your engineer at Boeing " 25 years from now I'm
making $80,000 a year. "And if I go to Wall Street, "I'll make that in the first quarter." (audience laughing) The point was just, aeronautical
engineers was everybody. And you really want to know my lecture about financial markets. They had attracted a lot of very confident I guess, this engineer, but civil engineers, other engineers and particularly
mathematicians and phycisits who were adept at the mathematical
analysis and techniques. And they thought that they could
apply to financial markets. A lot of good companies took analysis that are familiar to mathematicians and physisits and so forth. And they made a lot of money
to some extent in doing it. And maybe well presumably a fail safe, but they risk managed the techniques and you suppose to
analyze what's going on. And set allowance for risk and how probable certain events were. And then you increasingly found out as the thing collapsed,
you know all these events were happening that were
only supposed to happen every hundred years or every 50 years according to the analytic approaches. And began to raise some questions about whether the honorary appraches were based upon the eright premises. I think the answer to
that is they were not. Because for all their sophistication, they forgot a simple fact, that financial markets are
not a physical phenomenon. It's not like flipping
coins, you get a possibility of how often heads are gonna
come up and tails and nice. You know, a mathematician
mind you, he raises his head, the whole world looks like
a frequency distribution. (audience laughing) They falter, and that's how
the financial markets were. The financial markets
are human institutions and the characteristic
of a human institute is they look at what happened yesterday and decide what to do tomorrow. (coughing drowning out speaker) They go see what happened at 12:01 to see whether thy can make a deal by rapid trade before 12:02. But this is all a human reaction that leads you to ups
and downs that leads to other instances of following the leader or following the market. You gotta use those extremes and falter in the other direction,
so you got a degree of fluctuation that the
analyst put into their mouth. And (coughing drowning out speaker), all the human, as long
as they're accountable contagion in the market. It became very dangerous
and obviously you got your (spaking faintly). But nonetheless, I figured
out financial markets are perhaps doing pretty well. And they're making more money again. I think you get a necessary adjustment that has not been completed. Nothing in the world of financial markets is not all that sophisticated. It says a lot of work needs to be done. Very well in the financial markets, it's gonna have a rate
of return of 20 or 30%. You know a lot of more basic stuff, we should have a nice regular return of 10% or 8% or something. And the effort to make all the returns 25% and we go into a kind of activity that in the end, breaks down. I guess I won't resist then, (mumbles) I tried a year or so
ago, I had some intention for productivity, it all
contributed to productivity. - [Audience Members] We can't hear. - [Lady] They can't hear you. - [Panelist] This ones a
private joke, let's say it. (all laughing)
(man speaking faintly) - I'm sorry, I'll hang
on to the microphone. - [Panelist] You might repeat though all the financial innovations. - You know all this stuff about the whole financial advisory. I told you about my skepticism. A lot of the financial innovation. If you wanna worry about
financial innovation, credit default swaps were
only invented in 1995 or so from scratch, nobody ever heard of a credit default swap. And they were invented by, I would say, some very clever people who had a particular problem in mind. Number one, how do we hedge
against a particularly corporate loan or corporate security? And if we develop this
so-called derivative, the value of which is kind
of an insurance protection, how much are you willing to pay somebody to protect you against an adverse movement in that credit? Sensible idea. And it was developed, as they say in 1996 or something like that from nothing. By 2008 the nominal value of these debts being protected was $60 trillion, and the volume of the debts, that were there to be protected, was more in the order of $10 trillion. So you wonder what use is being made of this instrument, kind
of an insurance instrument provides six times the amount of insurance on the value of the
security to begin with. It may have been some excess in that. (audience laughing) - [Lady] Hi. - On the automatic teller. I had a meeting, was
griping about all this. It happened to be a pretty
well reported meeting. And people at the meeting
were talking about, this is a couple of years ago, talking about the need for reform. And these were a bunch of
financial market people. And the reforms they were talking about in the milk toast. When you put it that way they said, "Well we're gonna have
better corporate governance." And the chairman heard,
"The board of directors "ought to do a better job." And I didn't think that was
gonna answer all the problems and I gave up on it. And it might have run
about financial markets. They also, "You don't
appreciate the importance "of all the innovations we have "in making the world go around." I was kind of irritated and I said, "the only invitation in financial markets "in recent years that I have any sense "it contributed to the real
productivity of the economy, "was the automatic teller machine?" (audience laughing) - [Audience Member] I was just wondering if you could give you,
give us your reaction to the Feds policy of quantitative easing. - Well, I know one thing I don't do, microphones on a roll. I mean kind of common courtesy
among thieves or whatever. (audience laughing) And certain people not to try to outguess the president incumbent. Let me say what I will say about that. We obviously, you know deep
down the situation of America. Very difficult to prospect,
the very (mumbles), I don't know how many
heard (mumbles) last night on "60 Minutes." I avoided going on "60
Minutes" like the plague, because I know how they can cut you up, if they wanna cut you up. But he decided to take a chance, and she did very well explaining what he was doing. And what I will say is, to
be consistent with this, you got this QE2. I am so old I went on the QE2. (audience laughs) This is when Japanese term,
it was meant to convey, we've got interest
rates down towards zero, or we're still gonna
pump up the money supply, and that was called quantitative, I guess because you couldn't get
the interest rates lower. I didn't object to the policy, 'cause I kind of liked the term,
we've adopted it obviously. And this is from a lot of anticipation, big headlines and so forth, but what it is in this federation anyway, they're buying long term treasury bonds. And the whole (drowned out by coughing) is to get the longterm
treasury bond rate as low as they can possibly get it in the hope that the mortgage rate will then go down, and then mortgages will
be a little cheaper, and more available, and
they're doing what they can to try and speed up the economy. Now I don't know how
effective that will be because there isn't much
leverage left in interest rates. But the idea of the federal
reserve buying treasury bonds doesn't bother me because, my particular history anyway, I joined the federal
reserve back in New York when I got out of graduate school. Actually, (mumbles). And in those days the
federal reserve bought treasury bonds, as kind of a matter of, not in the volume that
they're talking about, but it was part of normal
policy, if you wanted to get mortgage rates down a little bit, you bought some bonds. You didn't wanna get
them down a little bit, you didn't buy bonds. It was kind of an ordinary thing. So the idea of buying treasury
bonds is not shocking to me, and it's understandable. It's a question of how
effective it will be. But it's been dressed up in this package, and they wanna announce
it over a period of time. But I think it all comes, compared to what the federal reserve did in the midst of the crisis. Where they were taking
actions without precedent, way beyond any normal
central banking action, this is nothing. You might say it's a reasonable
debate back and forth. But the amount, going back to Seoul, it was unfortunate I think in the timing because the foreigners and
the Chinese most of all, wanted to interpret this
as a deliberate effort to push the dollar down, which I did not believe that it was. - [Man] Well it didn't work very well. - It didn't work very well because the interest rate died either. I know enough about how
federal reserve operates to know that the concentration is not manipulating the dollars, to try to get the American economy moving. But when we got into it, the Chinese, part of it is Germany's in
the same position as China. China in the world economy, and Germany in the European economy of being accused of being too efficient, too disciplined, too much surplus. So they were feeling under pressure from our European friends, but we were getting more criticism about trying to manipulate the dollar or depress the dollar,
then they were getting from having an old value currency. It kind of slipped around I think. - [Male] Please. - [Audience Member] I
have a question regarding China's currency appreciation issue. I've read an interesting
article on professor-- - I can't... - [Audience Member] I have a question on Chinese currency appreciation issue. I've read an interesting article
on professor Becker's blog about China's currency appreciation and he said that the US and
China should have been arguing opposite positions on the
currency appreciation issue. Should they have been
arguing opposite positions regarding the China's
currency appreciation issue? Because, China by devaluating its currency is actually benefiting American
importers and consumers, whereas the target that's
been hit most dramatically by a Chinese devaluation of it's (mumbles) are American exporters. So, and in an opposite and
China by keeping its value down, China has been hurt by expensive exports. And China, by buying a
lot of foreign reserves have placed itself at the mercy of the United States
inflating away it's asset. Inflating away the debt for China, and I was wondering what's your take on that view, that they
should have been arguing opposite positions on this issue. - You kow that's an
American criticism, right? I say it's an American criticism, because we like to consume. And it's true. If China maintains an
undervalued currency, and have a lot of exports, but
keeps their currency cheap, the consumer who might
benefit from imports at a cheap price are being hurt. That's true, but, it doesn't
seem to be a particular worry of the Chinese economic managers because they have other
priorities in mind. I think an argument we
do make and should make is that it is consistent with the Chinese professed objective that over time to bring up their consumption,
and up their consuming, an appreciation of the
R&D would help that. I'm not sure they would deny it. I don't think they
would deny the analysis, but it comes down to all kinds
of arguments, how you do it, when you do it, what else you have to do. And just to give you, now it's
kind of a technical question. When it comes to revaluing the R&D. A lot of economists would say
there is considerable economic opinion that can really make an impact, be able to talk about
something that's 20% or more. And if you're doing it gradually, you might make things
worse because people will keep expecting that it's gonna go higher, so they'll be speculating more and more. Once they said they will
accept some revaluation, it will only encourage the speculators and make their job even more difficult. And I think that is a problem for them. Now they are maintaining
controllables on investing in China, at least
investing in the currency, and we told them to get
rid of those controls too. And they say well, that's... You want us to appreciate R&D, why don't you get rid of the controls, or we're gonna end up in a mess. Because you see, I think you
can have some sympathy to it, we did it all in 20%,
all in one big chunk. It would create, that's
enough, so it'll create real problems for some
of the export industries, and impaired their growth rate, and all those 300 million people that they wanna get more
productive and deployed. And I think that is a legitimate
concern on their part. So this is not a huge question. (audience member speaking of microphone) (audience laughs) - [Audience Member] Is this on? Thank you for coming, and also
a thank you for your service to the Obama administration and, your service to the federal government in America for decades. I would like to talk particularly
about some of the ideas that you put forward and you've
seem to be rather critical of the role of finance in the economy as a closed-- - What are you saying? - [Audience Member] Sorry,
critical of the value added role of financing the economy,
the financial sector. - Oh yes.
(audience laughs) - [Audience Member] I'm
just trying to be... Is that a fair kind of position? - I'm not gonna answer this. - Oh no, no, so sorry. So a lot of people, when the
financial regulation bill was being debated and
a lot of ideas of yours such as the Volcker
rule and your influence was very helpful a lot of
people were, the political... the political like process
looked to academic institutions like the Woodrow Wilson School, for guidance about our policy. However others have noted
that just as there are, there's a large interchange of people from these investment banks
that are being regulated in and out of government. There is also an interchange
in and out of academia. You have Frederick Michigan at the Columbia school of
Business that got money from the Icelandic bank,
banking, chamber of commerce in exchange for papers written about their banking sector. On the far more innocuous side,
you have regulated invest, you've banks that you have
professors investigating the regulations, investment banks holding a professorship sponsored
by those investment banks. (audience laughs) I don't mean to offend,
but do you see any, do you see any of the
legitimacy in those criticisms that beyond the academic
research there might be a conflict of interest
or harm in the influence of regulated financial institutions on the academics who research
them and advise policy makers? - Well. (audience applauds) First of all, I think,
due to the complexities, there are lots of conflicts of interest. International markets and
inevitably in the relationship between people have a lot of
money and academic institutions you just have to do the
very best you can too. I must say I think business
schools in particular got caught up in, in an academic theory about the economic society and financial markets in particular. They were efficient, self regulating, somehow possessed of rational foresight. And that was a very persuasive view, promulgated by a lot of
academic institutions. I think it wasn't which
way the influence is going. I'm sure it was a nice
convenient rationale for financial institutions or regulators. We got caught up in that kind of approach, that the market could take care of itself, and counted on the
market to protect itself, so you wouldn't have the
kind of crisis that you had. And I think that it's kind of been, people don't argue that much anymore. I think business schools most of all are caught up with that, because it's been very
popular with business schools. Business schools wanna attract students, they charge a lot. It's a very profitable
enterprise for universities, it can help pay the bills for the rest of the university like the football team. (audience laughs) So this was kind of an attack of doctrine, because they wanted to get
consciously consistent, they were training people who wanted the financial models. (mumbles) And I remember, personal anecdotes, but a
friend, not a close friend, but an acquaintance and teacher from the Harvard business school, wrote me a very plaintive
email six months ago or so, kind of worrying about what was going on in financial markets, and
whether people have lost their sense of, in some
cases, ethical sense, concerns about conflict of interest, and what was going on here. I just sent back a short
note, I shared his concerns but what was Harvard Business School doing over this period? And he sent me back an equally short note. (audience laughs) You've touched a sensitive point, and I think it is a sensitive
point for the educational establishment, and
particularly business schools. They did their part in
propagating an economic doctrine, and it didn't turn out so well. And now I think it's being corrected. The saving grace here is
economists always like to criticize what the previous generation thought. So we're now at a stage where
the newest crop of economists will break down the theory
that we had 20 years ago. But all that takes time. That is going on quite visibly. - [Audience Member] First I
wanted to thank you for coming. I'm a senior and I'm not an econ major, but when I took a macro,
the way they taught it is they said chairman Volcker
broke the back of inflation and caused the great recession, and now they admire you for it. (audience laughs) But I'm sure at the time
it wasn't so popular. I wonder if you could talk
about your personal experience during that time, what it was
like dealing with the pressure and then also institutionally
and personally, how you dealt with it. Well, personally I convinced
myself rightly or wrongly, I think rightly, that the United States, which was having economic
trouble when I became chairman, it's no great secret, I mean
it was a general feeling that the economy was in real trouble. And in real trouble
most explicitly because the inflation rate was
high and accelerating, and the economy was not doing well. The theory that the economy
is assisted by a feeling of inflationary expectations may be true, in some limited instances, but that story had worn itself out by
the end of the 1970s, and people, including me
were pretty well convinced that unless you dealt with the economy, you were gonna have an economic breakdown, a recession of some sort. So I don't accept the analysis that the federal reserve policy
created the recession. Obviously it contributed
to the particular timing of the recession and all the rest, But I think we would have
had an economic problem, whether or not we had these
extremely high interest rates. I will believe that to my dying day. But I happen to think it's true, but, we survived that period, I survived that, federal reserve survived
that period, I am convinced because there was a lot of angst, and a lot of pressure,
a lot of complaints, threats and all the rest. But I think I would not have
wanted to run a beauty contest where the whole country would have a vote. But there was a kind of
common sense core of opinion, and my feeling that people
recognized something was wrong. They kind of had a sense
that the federal reserve was trying to deal with it, so they gave us a certain
amount of rope, so to speak. So (mumbles). It was helped, they talked
about president Reagan, and they didn't have close relationships with President Reagen, but
he did not criticize us, he did not personally
criticize us, his people did, he didn't. But I think he had this
kind of gut feeling that inflation was bad and
rising inflation was even worse, and he understood, without
being very complicated about it the federal reserve's trying
to do something about it. And he wasn't gonna think about it, when he thought we were trying
to deal with a real problem. Of course I think he was right, but I think that's what happened. You can't conduct a
difficult public policy, difficult monetary policy if you don't have some understanding in
the part of the country. And yet you don't have to
have a popularity contest, if people clearly don't understand
what you're doing at all, and why you doing it,
you're in big trouble. And I think we had that kind
of common sense, support. - [Man] Sir. - [Audience Member] Yes,
Chairman Volcker I'd like-- - [Man] Speak up. - [Audience Member] Yes,
thank you very much, again, like everybody else I've been coming here, I met you 28 years ago in
DC as a Princeton student, and you were as candid
then as you are now, and I appreciate that. My question does related
to a current president, and it's related to one of your successors who said that you really
don't know you're in a bubble until it pops. A bubble, you don't know you're
in a bubble until it pops. - Oh yes, yes, yes. - [Audience Member] And I was wondering if you could comment on that, whether maybe you
might've been able to tell that we were in a bubble. - Well, I can tell they
had a couple of speeches, where I could suggest
they were in trouble, almost before it popped. It's a hard thing to, in
retrospect it's very easy, but at the time things are going well. There's always a plausible explanation as to why it's happening. Don't prick the bubble
'cause you don't know it's a bubble. In our case it's a wonderful thing to have home ownership,
and stable for society. And isn't it wonderful
that we found techniques to expand home ownership
for people who otherwise couldn't afford it. So, this is one instance,
early with the high tech bubble in the stock market you know. Well it's a new world,
this is no bubble, this was DOW Jones, (speaking off microphone). You're full of anecdotes nowadays. The visiting professor at
MIU and the Stern school, the business school,
which I occasionally went to the classes, and attempted to teach. I was in this class, and
these were second year MBA students, and the Stern
school they are likely to have had some considerable
experience in finance, when you were at that
stage, so these people were probably in their late 20s. It was right at the end of the semester, it was the end of the
class, and I was just trying to think of something to
do before the clock rang to get out of there, and I said all right, How many of you here
think, the stock market is going up at an annual rate of 15% for the previous 15 years,
it was 17% actually. Looking ahead 10 years,
you're all going out, looking at 10 years, how many of you think the stock market will go up more than, and I pick out a figure out of the air, that I thought was ridiculously high. How many of you think
in the next 10 years, the stock market will continue
to go up at a rate of 10% or more per year? Every hand went up, every
hand in that class went up. I expressed some surprise, and they said, well we didn't say it
would go up every year, but you asked us on the
average what it would go up. (audience laughs) Well it so happens,
we're just about 10 years from when I asked that question, and the stock markets gone up zero, which tells you something
about how hard it is to appraise a trend, and what's excess, and what isn't excess. But we're not gonna cure all these things by traditional monetary policy, Many people have said,
take the housing thing, could you have ever killed
the self growing mortgage and the housing bubble by monetary policy? You probably could, but
giving the mood at that time it would take a very stiff dose, arguably the monetary policy to do it, it would've been saying, oh you can make it on
the stock market earlier, so maybe you need another
tool, and I think that's fair. I think a lot of the
discussion of financial reform and regulatory policy accepts
now it's become something of common wisdom that
there can be bubbles, but you got to be careful about them, and you ought to be able
to use regulatory policy, to moderate the tool more
directly, then you can by a combination of monetary policy. But why didn't, in retrospect,
somebody go in there and say, this business is 3% down and no checking your credit
standing is ridiculous. And if you're a bank, you're
gonna put you in purgatory, if you continue to do that. But nobody did it. But I think that's a
lesson that's been learned for the time being anyway,
other than this Vogel be something you haven't dreamed up yet. I'm sure it would still
be difficult to tell. I think we've learned
something about hopefully making it less likely to
make it so bad in the future. More important, and most of
the talked about reform is, how to strengthen the market
so that when it happens, you don't have the
disaster, we had this time. - [Audience Member] In the
news lately, we've heard them talking about, extending
president Bush's tax cuts. And I'm wondering, what do you
think would create more jobs in this country, extending
all of the Bush tax cuts or going back to the
industrial and tariff policy that we had for the first
150 years of our democracy? - Well I will tell you, my
personal feelings on this has no influence on anything. I would say, okay Congress,
we're going go too, given the fact we're in
the middle of a recession, we'll probably have to
reverse this before too long, but I think we need much
more profound tax reform. But given the present situation, middle income people and below, and I don't exactly know
what that number is, but the president stuck 250,000. I said they can keep their tax deduction, but these rich guys don't really need it. And hard to see the connection between, their behavior and
changing the tax rate there for the very rich people. And I would take that money
just to make it persuasive, and say if we're gonna
extend it to the rich people, it's gonna cost us X million dollars. And given the whole
problems of the economy, you're willing to spend
that X billion dollar, they'd rather take that X billion dollars, and do some of the infrastructure that we sorely need in this country. (audience applauds) (speaking off microphone)
(audience laughs) - [Audience Member] Do
what extent do you believe the synthetic investment vehicle, the extreme derivative,
the credit default swaps contributed to the downturn
of the problems we've had in the past three or four years? - Well, I don't think there's any doubt that whatever the value of the (mumbles), credit default swaps under
the protection of somebody. The volume of that stuff,
the complexity of it, mind numbing, and the inter connections, and inter dependencies that arose in that complicated
structure of the market. The obscurity that was inherently, greatly complicated the financial
(drowned out by coughing). - [Audience Member] Would we
be better off without them? - I hate to be so radical. (audience laughs) It's all a matter of
did they get over used. You get a little academic about it, but there's some analysis that I think has a lot of truth to it. There's a show called
principle patency problem, where the people ultimately
making the investments are the people in pension funds
or mutual funds or whatever, doing it through an array
of financial intermediaries, that are presumably
working for the investor, but they have a lot of interest in doing a lot of manipulation
that provide a lot of fees in the process and all
those fees mount up, 2% here, 1% there, half a
percent the other place. Makes New York city rich. - [Audience Member] Thank you. Well, yes, thanks. Thanks very much. I was wondering about the
right hot on the heels of the G20 at Seoul when, China
and Germany were scandalized about the $600 billion being
printed up for our purposes. It came out that the federal
reserve lent lots and lots of money to European banks,
and I don't think that's bad. and I just wanna ask you in a way, is the fed kind of like
Princeton no longer just being in service to the nation, but the service to the nations? - Well they lent a lot of money, there's no question about that. They thought they were saving the world, clearly they thought it was
necessary to pounce in there with all the army, and all
the strengths that they had. They did so, and it's
hard to question that. Now what you're describing
points to some needed reform. The fact that they
protected European banks, these big banks now are
very much international. American backdrop moving forward, European backdrop rating here, and there is no established doctrine, there's no established rules
as to whose responsibility it is when one of these big banks, goes bad in terms of the operations that it has outside of its own country. In the midst of the crisis, a
decision was obviously made, it would've been nice
for the bank of England to bail out the Royal Bank of Scotland. But the Bank of England,
wasn't about to do it, and here it is on our doorstep,
or whatever bank it was. So we better do it, I understand that. And it was, according to the institutions cooperating in the United States. But one of the unresolved,
totally unresolved problems, are the financial reform
is precisely sorting out this question, who was
responsible for what, when you have complicated
international institutions. Now another aspect, is all this question about moral hazard and bailing out people, and calling upon the tax payer
to rescue big institutions that are making a lot of money. Big central problem of financial reform. And here, the design is pretty clear to me anyway, but I don't know if the
public understands it. The effort is to say let
us develop the ability to let the financial or even
the nonfinancial institution in effect go bankrupt without
disturbing the market at all, with a minimal disturbance in the market, because we will arrange an
institution that has the capacity to take the institution overall overnight, and we meet any immediate
obligation that's necessary to keep the market
functioning, but basically, liquidate the institution. The stock holders lose,
the management loses, the creditors are put in jeopardy but to handle this through a
government process and control. Now, we didn't have
that in this situation. So we had to deal with
the situation as it was, as they saw it, and they thought that they couldn't let these
institutions fail without spreading panic. They clearly had good reason to fear this. But you ended up with some
very odd names, I agree. I not so much of the
names of those big banks where clearly if they went
broke we'd have a problem. But I mean, at the
extreme General Electric, a great AAA manufacturing
company in the United States, has a finance company that
almost bankrupted them. And the government rescued them. I mean, we should not, in my opinion, have a system where the
government have to rescue the financial arm of a
strong AAA financial system, industrial firm. The government had, and
they felt they had to respond to it. Now I suspect that the
future General Electric will not have such a big financial arm. But they ought not at
least have expectation that the governments gonna bail it out, if it gets in trouble. Now in general, financial
intuitions should not have an expectation that now we're better off not dealing with it. (mumbles) Not everybody's convinced
of the workability of that system. And particularly you gotta
have some kind of federal state arrangement for the really
important financial institutions. Now I'm getting into my own policy, at this point those financial institutions that must be preserved are
the basic banking system, the commercial old fashion,
it used to be old fashion, because that provides a
service to the economy that really is essential. So we've built through the
years a real big apparatus for protecting banks. And I think quite possibly
that's gonna be strengthened, it is being strengthened,
and new rules for the bank, more capital reforms. I just wanna make a
distinction between those that we wanna protect and save, and those that we don't want too. And that's why (mumbles) business about the so called Volcker Law. I don't want the banks dong
things that other people can do, it's all right, but nothing about the activity, but it shouldn't be by
a protected institution that's relying on the tax payer. So we'll see how that works out, but that's, all these things become clear during the crisis, that the extreme was the Icelandic banks. Iceland has 300,000 people. A couple of their banks
grew to some big size, I don't remember the
number but mostly the UK, and in some other European countries. And the banks were all out of proportion to the size of the country, and the strength of the country. And they were very aggressive
and they went broke. In the short run the British,
and I guess the Dutch were worried, and they said, we're gonna have to make
good on liabilities, at least the deposit liabilities of these Icelandic banks
because they happen to be operating in extreme (mumbles). And then they said, we
spent all this money to rescue your banks
Iceland, you pay us back. And Iceland said that's very nice but we haven't got the
money to pay you back. And the bank was operating in Europe area, and I don't know what's happened, how they ever resolved it. I think they maybe promised
to pay back something, but some limited fraction
of what the loss was. Now you have that all in spades, what's going on in Europe
is very interesting. But you have this pattern,
and you repeat it, and it's only one letter different, Iceland, Ireland. (audience laughs) It's about two and a half
million people difference but I (mumbles). The problem is very much the same, the aggressive Irish banks,
that they got an investment, took a lot of money from abroad, and when they basically,
I don't know whether they're technically
insolvent or what they are, but they're obviously are not liquid, and can't maintain themselves, without government assistance, and the Irish government
decided that they would protect. That's a lot of money for Ireland, and Ireland did not have a
particularly large amount (drowned out by coughing) before the crisis, but
they sure have a big government debt now because
they agreed to protect the deposits of these Irish banks they became bigger then the country. In terms of their activities. So now Europe has to come
to the rescue of Ireland, and the Germans don't like that much because their the principle
strength in Europe. So it's a very interesting,
I think they will come to the rescue, (mumbles). Greece, and Spain. (speaking off microphone) (audience laughs) - We are over time and I wanna thank Professor Volcker for coming. (audience applauds) I just wanna second what the governor said about thanking him for his
support of public service, with something that's very
important to the school. (speaking off microphone) Yeah I know, we didn't get into that. And finally also thank Governor of course for the support of this lecture series, and thanks to all of you for coming. (audience applauds)
