(Music) - Good evening, everybody. Welcome to yet another
blockbuster event. This is gonna be a
very exciting evening. On behalf of Stern, I
want to officially extend and welcome to our two guests,
both of them are Stern alums, back to campus this evening. Dr. Alan Greenspan first. Dr. Greenspan holds
not one, not two, but three NYU degrees,
he's, this is the 70th year of his anniversary of his
completing his undergrad, undergrad in 1948,
a Master's in 1950, and his PhD in 1977. Of course, his
record and his fame need no further introduction. I just wanted to mention
the multiple NYU degrees. (audience laughing) John Paulson, also a Stern
alum, undergrad 1978, president of Paulson
& Co., NYU trustee, a very generous donor
to NYU, and also important team
member of the Stern Board of Overseers,
his proudest office. And of course, welcome
back to Mervyn. Mervyn King is, you
all know, served as the governor of Bank
of England for 10 years during some of its
toughest times, and now I'm proud to say he's a
colleague and professor at NYU. Today's in many ways an
extraordinary coming together, not just because
of the imminence of each of the three
people on stage, but because of the extraordinary way in which they're connected. Mervyn currently sits,
currently has the Alan Greenspan Chair of
Economics at Stern. The Alan Greenspan
Chair at Stern was endowed by John Paulson.
(audience laughing) John's generous
gift to the school, we endowed a chair in
Dr. Greenspan's name, in John Paulson's
name, also provided us with significant
facility, with money for facility's
renovation, as you know, from the Paulson
auditorium and others. One last point before
we begin this evening. Matter of housekeeping,
we will, as we always do at these events, be taking
questions from the audience, after about 30 minutes
of conversation, the last 15 minutes
will be devoted to questions from the audience. As always, questions,
please write them down on your note cards,
people will pick them up and then they will deliver
them to the, to the speakers. A selection of your
questions is all that we will have
time for, but when you write down your
questions, please remember to write down your name
and your affiliations, student, alumni, whatever
your affiliation is, please remember
to write it down. Thank you, and over
to Mervyn King. (audience applauding) - Thank you very much, Raghu. Hello, good evening
and welcome to all for this In
Conversation With event. It's a great privilege for me to share the platform
with Alan and John. Before I became governor
of the Bank of England, I went to see Alan
in Washington, and the advice he gave me then, was the most valuable
advice I ever had before I took up the position. When I left the Bank of England, of course I became unemployed. And I'm deeply grateful for John for endowing the
position, an honor (audience laughing)
to give his name to it, so that I could once
again be employed. (audience laughing) Thank you for that. Now there's a twist
on the event tonight. As you know, to these
events, I normally put the questions to
the invited guests. But there's a change
tonight, because John wanted to be able
to put questions to Alan and myself, so he
will moderate the questions. Alan and I will try
to provide answers, and we hope that you
will also, when you put your questions, put
some to John as well, so he has to answer
at some point. So thank you very much
for all for coming, and let me handover to John. - Well, thank you for having
all of us here tonight, I wanna say what it is
is, it's a great honor for me as well to be here
and to be interviewing both Mervyn King
and Alan Greenspan. I think two of the greatest central bankers in our lifetime. Every time I have an opportunity
to either meet with them or talk with them
or read about them, I always learn something. And I'm sure we will
learn, I will learn as we all will, something today. I'll start off with Alan. By the way, Alan has not three,
but four degrees from NYU. He has two doctorates,
one of which he reminded me is honorary.
(Mervyn and audience laughing) But I think that
probably holds a record for any of our NYU alumni. Starting with Alan, in a
recent interview with Barron's, you highlighted several
threats to the booming economy. Among these were
a booming deficit, potential for soaring inflation, falling US savings rate,
and a bond market bubble. Starting first with the deficit, the principal cause
of the deficit is, as you outlined
in the interview, was the rapidly rising
entitlement spending, and that's been a concern
of yours for a long time. Is there a solution
to this problem? - I think there is. The Swedes in 1991 were
farther down the road than we were, and
the system collapsed. Sweden as you and I remember
was a quintessential socialist economy in
World War II in the West, more than any others. And essential theme in the
Swedish economic structure, so to speak, was what we
would call social benefits. They were very much
where we are today, which is a period of
where they ended up. They eventually came to
grips with the problem because long term interest
rates temporarily rose to 500%. An extraordinary number. The whole thing was
unwinding, they brought in a new government and they
managed to stabilize it by the types of things we
ought to be doing today. I said in a book
that just came out in conjunction with
Adrian Woolridge, that we would be far better
positioned on ourselves if we'd look at the
experience of Sweden and recognize there
were two critical areas where they fundamentally
turn themselves around. I don't know how many of
you follow the details, I hope you don't have to do it, social security system
in the United States, but one of the crucial
issues is that our system is a defined benefit
system, meaning that there's a legal obligation
of the federal government to make certain payments
as specified by the law, but the funding of that is
not automatic by any means, and as you might
understand very readily because we see it all the time, that the basic position
of the political system is always to spend
more and tax less. I find it fascinating
and tells you more than you wanna know. But in the 2018 annual
report of the actuaries, and governors of the
social security system, is the usual discussion, then
on page 299 or thereabout, they say that
actuarily, the system that we've just
discussed is unsound. And that to make it
sound, we could short, for short, in some
of their suggestions, you'd have to cut
benefits 25% starting now and forever into the
future, and have regretted at that point what we
did, we put it in the book is if you wanna know what
the most important thing in the whole structure
of this year's report, is that they stuck
it so far in the back that hopefully
nobody would see it. And that tells you
all you need to know. Our suggestion is that
they convert from, we convert from this defined
benefit to defined contribution which is like the 401k
is, where you cannot run out of money
because you can't pay your benefit
unless you have it. And so you don't
get as we have now a major contributor to
the federal deficit, and indeed, when you're
talking about the ballooning, blooming deficit, it is
primarily the entitlements, not only social
security, but Medicare, and a whole series of others. We recommend that something very drastic occur in
today's politics. I don't foresee it happening. - Let me ask you two
questions on that. Did Sweden switched to
a defined contribution from a defined benefit plan? - They did.
- They did. - And that was the major change. The argument that say,
well Sweden is very small compared to the United States. But remember what
we're talking about is a process where
size is not relevant. It's merely the relationship
between each individual's receipts and expenditures,
and whether there were 1,000 or a million, doesn't
change the principle. So those who say, well yes,
Sweden is working fine, but that's 'cause
it's a small country. That's a true fact,
but irrelevant. - I think that's
very good advice. Most companies today,
almost all companies today are defined contribution plans. Those that kept the
defined benefit plans, the big steel companies,
the big auto companies ultimately went bankrupt
because of the unfunded liabilities that defined
benefit plans created. Really the only sectors
where defined benefit plans exist is in
public service sectors, either state and
local utilities, which also have big issues, as well as the
federal government. Regarding inflation,
inflation today is still relatively muted, I think
the numbers came out was around 2% using the
preferred Fed inflation measure. You mentioned a number in
the interview of four to 5%. Is that where you think
inflation could go in the future and do you have any
estimate on timing? - I was using mainly as a
measure, when does the political system respond
against inflation? And I think American history
says it's about four to 5%. Richard Nixon invoked
wage and price controls when the consumer's price
index was I think around 3.5%. Under that, it has
no political impact, and this whole discussion
is 95% political. I'm saying 4 or 5%
seems to be in the few examples we have,
where all of a sudden you get a political response
and despite the fact that wage and price
controls have no reward, that does not prevent people from continuously
trying to do it. 'Cause that's the only
thing they can do. Except do the right thing. - Regarding the
low savings rate, you mentioned that that's
one of the contributors to the low productivity
growth we've had recently. Can we reverse the trend
of low productivity growth? Or is this something
that mature economies like ourselves are doomed to? - Let's first, let me
tell you where the issue first came up much
to my surprise. Not in this part,
but the previous part about five years ago, I was
looking at a set of data and I observed something
which struck me as extraordinarily peculiar,
namely that the benefits of recipients of social
security and Medicare as a percent of gross
domestic product and gross domestic savings
as a percent of GDP. If you add them
both together, they, starting from 1965, it's
a very, fairly stable flat line, which
automatically requires that one is driving
out the other. It's very simple to
decide which it is, because one is a
political issue, the other's an economic issue, so the question of
what is mandated and on the social security
is the driving force, which is another way
of saying that the data unequivocally so,
that entitlements are
driving out savings, but savings plus savings
borrowed from abroad is actually very close to
gross domestic investment. Gross domestic
investment is the key determinant of productivity. It's actually the capital stock, but that's essentially
accumulating the expenditures. So we, sitting with the
situation, which is pretty clear at this stage, that
entitlements are crowding out investment and therefore
slowing down productivity. Productivity is now at the
lowest level it's been, productivity growth,
I should say, to the very lowest
level it's been in quite a substantial
period of time. What that tells you is
you get a level of GDP, 'cause it's obviously
related to productivity, which is at levels that
politically create populism. How we got where we
are today, I attribute essentially to the 1935
Act and what happened subsequent to that, and
so we're sitting now with the situation
where we have very low productivity increases,
and indeed that is true in all the developed
world at this stage. And that means that
you get a lower level of GDP growth which is
exactly the condition that generates populism,
always has and always will. Populism, finally,
let me just say, is not a philosophy like
communism or capitalism. It's a cry of help, a
populist is suffering, they don't know where
the collective cause is, and they're saying so somebody
will jump on to the stage, I know what the, I
know how to solve this. That's the standard way
it happens all the time, it's happening in the
United States today. - Just one clarification. When you said the entitlement
spending plus savings reaches a number that's
been relatively constant, what is that number and how
are the components shifted? - Well, the point is, I've
forgotten the exact number, it doesn't, almost
doesn't matter, the important issue,
it's the same number. - Yeah, okay. - And so if you look at the
entitlements as they grow, the remainder which is saving,
domestic savings, slows down. - Alright, let me
switch to Mervyn. - Can I, one comments?
- Yeah. - All central banks governors
have to deal with finance ministers, not always
a happy experience, but I will never
forget the G7 meeting, the finance ministers and
central bank governors, and seven finance
ministers, all powerful men, would look like adoring
first year students at Alan as he talked about
the world economy. You could see them
all writing down, page 299 of the annual
report, in order to go back and home and impress
their colleagues at home, that they'd listen
to the maestro and they'd learned
and understood something from that meeting. The rest was, were terribly
envious of the power that Alan had over all
these finance ministers. - You should've told
me, I didn't know and therefore I didn't stop. - And now you know. - Well, I think Mervyn
made a good point that we reached a mature
state in our economy that productivity
growth is slow, and that's resulted
in lower GDP growth which is causing
populism to rise. The question is how can we get back to faster rates of growth? And the issue is that the
savings which is a combination of price, savings plus
entitlement spendings is a certain number
and to the extent entitlement savings
crowds out the savings, that will lead to lower growth. So he's pointing us to
what we have to resolve, and we have to resolve
entitlement spending. And the biggest component
of that is social security and he's proving the solution, it's switching to
defined contribution
from defined benefit and that makes all the
sense in the world. Pensions are a form of
saving, you should get in what you, you should get back
what you ultimately put in. But if you get back
more than you put in, it creates problems
for future generations. So I think that's, it's a
model, it worked for Sweden, it worked completely in the
private sector here in the US, and likely over the
long term, it's gonna be the solution we
need to implement both at the federal level and
the state and local level. - Can I make a point on this? I think the United Kingdom
shares with the United States the problem that
Alan identified. We save too little. As a share of national income,
we just don't save enough. But interestingly, countries
like China and Germany, or even for that matter,
the monetary union area in Europe as a
whole, save too much. And they will need to
reduce their savings ratio in order for us to get back to a healthy world
economy, I think. So there's the making
there not just of issues for domestic policy,
but of the opportunity for a degree of, if not
international cooperation, at least understanding,
that we need to make some quite big structural
changes in the world economy. It's not just a question
of interest rates, not just trade measures,
there are some patterns of spending that
are unsustainable. - Good point. Moving to Brexit, which is
right now front and center not only in the UK
but in all of Europe. Just to back up a moment,
perhaps you can explain what would the concerns
about EU measurement that led to the referendum
initially and the exit vote? - I think it's just important,
because it's very easy for people outside
the United Kingdom just to assume unthinkingly, that all right thinking people know that this is a
terrible thing to do. The question's why was
it that if you take England as a whole, which
has nine standard regions, eight of them voted to leave, and only one, London
voted to remain? I think in part it's because there was a degree of both
complacency and arrogance about successive
British governments that believe that well, this
political project in Europe, it's obviously a bit highfalutin and this is the kind of
thing that continentals do. They talk about
philosophy and politics. We're pragmatic, we'll keep
them feet on the ground by just discussing economics. And in doing that, we
completely ignored the fact that the rest of
the EU were serious about the political
project, and they did go ahead and create
a monetary union against the advice
of most economies, they went ahead and did
it for political reasons. It's a project to ensure
greater political integration in Europe, and of
course the key point is, which something which
Winston Churchill stressed after the second World
War when he was keen on European integration, he
adjust it shouldn't the UK. (audience laughing) The fact is, he was right. Because this project
is one that most other European countries want, but is not one that the people or political parties
in the UK want. And so the two big
issues that arose in the campaign, one was a
loss of national sovereignty, which was obvious to anyone
who thought about it, but with successive
British government had denied it was happening
instead of arguing that there was a case
for sharing sovereignty, in particular policy
areas, they simply said no, there's no loss of sovereignty. And we ended up in
a position where 2/3 of the detailed
laws and regulations that apply to daily British life were being determined
in Brussels and not in the houses, in
the House of Parliament. That was one area. The other of course
was immigration where it was Britain
that pushed to ensure that Eastern European countries could join the EU, there
was an exesion agreement, there was a
transitional arrangement which France and Germany
took advantage of, which meant they
didn't have to allow free movement of people
from Eastern Europe into their countries
straight away, they could bring it
in over 15 years, but UK didn't take
any notice of that, we just said, yeah, come into
the UK whenever you want. The government predicted
that a total of between 10 or 30,000
people would come in, turn out to be over a million. All the way through
the British government was either denying that
this was happening, or promising that
they would stop it, and they had no ability
to stop it at all. We culminated with a total
loss of trust and confidence in the electorate in
the British government in respect of issues
to do with Europe. And in the end, since
these split both parties down the middle,
they didn't raise it, they didn't form any feature
of a general election. There was never an opportunity
to vote on these issues, and it was the United
Kingdom independence party that rose from nothing
to single issue campaign to have a referendum
on EU membership. Nigel Farage who started
the party and promoted it, not most people's
favorite politician, actually he's
achieved more in terms of British politics
than almost anyone else in the post-war period. That's a condemnation of the
rest of the political class, that they didn't
tackle these issues. In the campaign itself,
what you could see was that the leave campaign said
we want to regain sovereignty, we want to limit
immigration, and we simply cannot do that as
a member of the EU. Those were facts. The government had
no answer to this, so it simply said,
gosh, we have no answer to these questions,
so what we'll do is to assume that people
vote with their wallets, and we'll tell them all
that they're all gonna be much worse off if
we vote to leave. And no one knows the long
run consequences of this. I think it's hard to believe
that in the long run, once we've adjusted,
it'll be that significant. Trade will carry on. Both sides were on a
free trade agreement. The current deal does nothing to bring that about, of course. But it, this attempt
by the government, called Project
Fear in the press, to say to everyone,
look, you don't really understand these issues, we do, we're in government,
you're all gonna be 4,300 pounds per family worse
off if we vote to leave. And there'll be a recession
if you vote to leave. Well people voted to leave,
there wasn't a recession. No one knows what the
long run effects will be. But this, this attempt
to treat the electorate with a degree of contempt,
the election campaign was not one in which
the government said, look, of course there are
arguments for leaving, there were also
arguments for remaining. My judgment as
prime minister is, that on balance, this
is not the moment to make that leap into the dark. That sort of, honest, open
argument was never put. - Well, let me ask you. Do you think the UK would be better off inside
or outside the EU? - I don't know in
the long run whether we'll be better
off or worse off. As I said, I don't
actually think it's likely to make an enormous difference, and I don't think joining
the European Union made an enormous difference. The big changes to British
economic performance since the second World
War were first adopting a macroeconomic policy
framework which regarded monetary policy as the
answer to high inflation. Remember, inflation in Britain
touched 27% in the mid-1970s. And taking public
finances seriously, I think a coherent framework
for the public finances, which became a
bipartisan approach. It wasn't just one party,
both parties committed to it. And on the other hand, a
recognition that competition was crucial to the success
of a market economy and we've privatized a lot of
the state owned enterprises. I've never forgotten that
when, in the late 1970s, I went to Birmingham to my
first chair in economics, moved into my apartment,
I went to the telephone. No mobile phones at that
stage, no one has heard of a mobile phone,
all landlines. Went down to British
Telecom said, "I'd like a telephone." Complete state monopolist. "Of course, Sir, you
can have a telephone." "Well how long will it take?" About six months,
was the answer. "Six months?" "There's a shortage
of numbers, Sir." State monopoly is not the most efficient provider of services. And no young person
today has any idea how bad those state
services were at that point. These are the things that
transformed the British economy, not actually joining
the EU, and I think it's the British failure
to face up to the fact that this is a political
project which the other countries take seriously,
that we don't share. And the big weakness in
the British approach, I think David Cameron's mistake was not to say,
look, why don't you and the EU create two
categories of membership? One for those in
the monetary union, and one for those outside it? Because you in
the monetary union has to go to some degree
of political integration, fiscal union or whatever,
in order to have any hope of keeping
this thing going. But there's no reason
why the rest of us have to join the
political union. And indeed, all we will
do if we stay in the EU, is to try and make
your life difficult. There's no point to that. Correct the categories
of membership. I think if that had been
done, and if more powers over migration had
been repatriated to
the national level which every other
country actually wanted, then the UK would be in the EU, well we are in the
EU still today, but next March we
wouldn't be leaving. - Let me ask you
the Brexit, the UK expressing its dissatisfaction by voting to leave
the EU, other fissures are developing in
the European Union, perhaps more serious than
Brexit, notably Italy. Because the UK is not part
of the monetary union, they can leave, while
it's disruptive,
it's not cataclysmic. However Italy leaving
the currency union could be potentially cataclysmic
for the financial system. So let me ask you
first and then Alan, do you think it's, Italy
will avoid a default? And do you think they can
or will be able to stay in the Euro monetary union? - I think the monetary
union will try very hard to avoid
an Italian default because the path on
which they're embarked is one where they
would like to see some, there'll be a fiscal union
at the end of the road. But Italian debts, the
third biggest bond market, I think there's a
massive issue here. Many German monetary
economists would like to go back to the original
conception of monetary union in which each country is
responsible for its own debt, and if Italy needs to default,
well that's Italy's problem. There's a no bailout clause
in the European Treaty that has not been enforced. The European Court
of Justice has basically just
ignored it altogether. So I think they have real
tensions and real difficulties. But I don't know,
politics will determine where this goes,
and the question is whether people in
Southern Europe are prepared to put
up with enough pain in order to keep
this project afloat. The thing that always strikes
me is if you ask people, not just in Italy, but
around the monetary union, are you happy with the
economic consequences of what's happening? A resounding no. That's why new part is
arising in popularity. If you ask them, do you
want to be in the Euro? They say yes. And it's a bit like, I
remember my father once saying, he's saying, "This Euro thing, "it's not a bad idea, I wouldn't
mind if we have the Euro, "provided we had our
own interest rate." (audience laughing) - I don't think most
people will agree that this, the Euro has
not been good to Italy. I think Italy is essentially
flat lined in GDP since they joined
the European Union, and it's per capita
income on a relative basis has declined considerably. Now their debt to GDP outside
of Greece is the highest, it's like 135%, and
they continue to run with a deficit and
very low growth. So let me ask the
same question to Alan, if you think is a
sustainable situation? Or if Italy will
eventually realize that the best solution
for them is to go back to the Lira, which would
in effect be a default on their Euro
obligations, again, which would have very serious consequences for the
financial system? - I think the system
is inherently unsound economically and I'm surprised
it's lasted this long. I don't think you remembered
but on January 1, 1999, implementation of
the Euro, I for those two or three months
prior to that summit, it's an infeasible,
unstable system. I was shocked when
January 1, 1999 showed up and nothing happened. Smooth adjustment. Of course, 10 years
later, it fell apart. And it fell apart for
the right reasons. I think that it's
a problem which the individual countries
within the Euro zone are pulling apart, have
been doing so for years, but the numbers as such is
they're getting too large. It got to a situation
where for example, the Bundesbank has a net credit against the rest
of the Euro zone of 900 billion Euro. Luxembourg is the
second creditor, but remember, Luxembourg
is a steel company, and the German
are, German banks, that's sort of irrelevant
to the situation, but if we ever went back,
we broke up the Euro, and Germany went back
to the Deutsche market, its unemployment rate would run into some serious
trouble politically. Whereas the perception
is that, but, the system continues to
seem to work, it shouldn't, but you can't go against
the reality of it. I don't think it was a
good idea to begin with. I still don't think it's
a good idea, but remember, its roots go all the way back to the end of World War II. World War II, we came out
with two major confrontations occurring on European soil
in a single generation. What you could have in
a situation such as that is considerable fear and
Adenauer and de Gaulle, representing French
and Germany saying, we were the combatant, if
we now go into the post World War II period in
some form of harmony, which basically is where the
Euro ultimately comes from and the whole structure
of European organizations. What everyone may say about
how Europe has handled itself, it seems to have worked. As a consequence, it works
because of France and Germany by themselves essentially
running the system. - Hmm, we wanna open
this up for questions, so we will pass around a card. If you like to ask a question, please write your name and
affiliation on the card and then we'll answer as
many questions as we can. While we're waiting for
the cards to come forward, let me ask you another question. We had many sovereign
debt crisis in Europe. I think in 2012, when
Spain and Italian yields exceeded 7% and both
countries had difficulty financing themselves, at
that point Mario Draghi in the ECB stepped in
with the EU's version of quantitative
easing and that drove yields, it was a
rather massive program, the ECB buying sovereign
debt from these countries and other countries,
and that caused yields to plummet to historic lows. But with, there's always
when there's an action there's a reaction,
obviously if printing money where central bank's
buying sovereign debt had no repercussions, they
would do it all the time. Let me ask first Mervyn,
then we'll go to, Mervyn, and then go to Alan. What do you think
will be the long term repercussions of
quantitative easing? - Can I first go back to
2012 and the statement that Draghi made, "We'll
do whatever it takes "to keep the Euro together." At that point, they
didn't actually engage in significant purchase
of government bonds. The markets believed that
the commitments of Draghi and the political
leaders would be enough. Later on, they
engage, of course, they came out with a
proposal for outright monetary transactions,
with is a euphemism. They chose that because
it made it sound as if it was something
that central banks did. But actually what
they were proposing was that they would
buy Italian and Spanish and Greek bonds, but not
German or Dutch bonds. And they were not,
they never did any transactions of this kind. The German Constitutional
Court raised some questions marks about it. The European Court of
Justice produced a ruling which basically said,
well if the ECB thinks it would like to do it, then
it's gotta be monetary policy because that's what
central banks do. Which was actually a
pretty hopeless way of answering the
question, is this action within the remit of the
ECB given the treaty. I think, on any common
sense definition, it's not within the
remit to the ECB, and what they've been
doing subsequently is buying government
bonds in proportion to the capital key of
the ECB, essentially GDP. What about long run
impacts of all this? I think that in all
the retrospective on the financial
crisis, we haven't given enough weight to the fact that
in the two decades before it, long term real interest rates
were gradually declining from what had been pretty steady long run historical levels
in an ex-ante sense, basically towards zero. I don't see how you can
run a market economy for very long with zero
real interest rates. And we've not really
managed to escape from it. And of course, quantitative
easing, it perpetuates that. One of the phrases that I
liked about the response to the crisis was
that of Larry Summers, the former treasury secretary. Larry said, "How do we
get into this crisis? "Too much borrowing
and too much spending. "And how are we
gonna get out of it? "Even more borrowing
and even more spending." Now of course, this wasn't,
this was a good response for the Keynesian
short run action. For a period of 18
months to two years, this made some sense. But his very phrase,
too much borrowing, too much spending,
made it pretty clear that there had to
be less borrowing and spending at some point. This goes back to Alan's
point about the fact that some of the
Western economies, certainly the US and the UK, have simply not
been saving enough. And we need to make
adjustments in our economy to raise that, and it's
very difficult to see how you can persuade people
to raise the saving ratio if the real interest
rate, long term real interest rate
stays close to zero. Somehow, we gotta find
a way through this. There's no good central
banks just pushing up rates for the sake of it, we've
gotta get to a situation where other measures
are taken which allows central banks to return
rates to more normal level. - Alan? - Well, let me just bring
a slightly unrelated issue, but something which
has puzzled me and worried me
for quite a while. If for example Federal
Reserve in the United States were to go bankrupt in
some form or another, there's always the
sovereign credit of the United States
to back it up. What would happen
in the condition, hypothetical, granted,
if the Euro area broke down under
those conditions? There's no backup
and where the levels of debt of central bank
now emerge to a point where it is of
considerable concern, and I don't see this issue
raised in any formal sense. But it's clearly out
there arithmetically. Let me just ask you
with regard to the US, what do you think are the
long term implications of the QE we did here? - Remember that to
reverse QE, is the old classical memory of how the
federals are with tight money, by squeezing the
balance sheet down, they found out in 1922 that
much to their surprise, it has the effect to
which that it became monetary policy, open
market policy, rather. Up to date, we're using
that same set of principles, which actually does work. It's strangely
enough a replication of the gold standard adjustment, because the process is one
which causes equilibrium to occur very much
like what would happen when gold prices started to move in the days of
the gold standard. So the system is
working in that regard. I don't see at this stage
that we're gonna deviate from that pattern, though
the things that bother me is the European effect on global
system should Europe fail. - Hmm. Okay, well, that's again-- - Can I just add
a point to that? I absolutely agree
with Alan, and I think it's very important
to stress that QE is not some completely
new monetary policy instrument that's
been dreamt up. This is and old, traditional
central bank instrument, open market operations. It's on the scale that is in
somewhat sense, unprecedented, but it's not different. And I remember Ben
Bernanke saying, "The thing about QE is,
it works in practice "but it doesn't seem
to work in theory." To which my reaction was, well
you've got the wrong theory. (audience laughing) - Okay, here's our first
question from the audience by Patrick Leary, a Stern
MBA '18, it's for Alan. Who is the most interesting
person you've met? - I wish I had met Alexander
Hamilton, but he's not around. Other than that, I'll
just lose friends. - Okay.
(audience laughing) Ivan Zheng, a Stern MBA 2019
on Emerging Market Economy. China's GDP growth fell to 7%. How do you think the
economic growth of China will be in the
upcoming five years? - Oh that's for Alan I think. - First of all, it's now
down to 6% growth rate. (audience laughing) You have to realize
that China is a very significant part of
the global system in so many different respects. But let's remember
that per capita GDP in China is 1/3 of where we are as difficult problems
that we have, nonetheless the notion
that somehow China is gonna run ahead of
us in all respects, I think is a mistake. I think that the policies
that we're involved with the tariffs and
the like is insane, and why we're doing it,
probably is very deep in the psyche of somebody,
except unfortunately it's an element in
the constitution of
the United States. Remember the original
source of all funding of the American government
was basically tariffs. We sort of, to all of
us in the constitution, how can it be bad? It's an excise tax,
people think of tariffs, other than what
it is, it's a tax. And everybody engaged
in warfare of this type, it would mean that
you're withdrawing credit or purchasing power from a
whole series of countries and that means that
they all go down. There aren't, there are victors and there are losers
in a tariff fight, but that doesn't say
that more important issue is both are losing,
it's just, one, the winner loses
less than the winner, but it's, they're taxing
their populations, they're withdrawing
purchasing power, have this any validity
at all to the Keynesian econometric model then
one would shy away from that life to pray. It's not what happens. - This one, this question,
I think, you both will like. How should we respond to
populist political attacks on central bank policy
and independence? This is from Josh
Black a Stern, Block, a Stern undergraduate student. - I guess this
gotta be to me, huh? I'd nearly get a
whole set of earmuffs and give it to central banks
and suggest they wear them. (audience laughing) - Mervyn? - I think I'll give a slightly
different answer to that. (Alan and audience laughing) Depends on the source
of the attacks. As Alan said earlier, much
of what we'd call populism is a cry for help,
and I think the most important thing that we need
to stress to politicians is that there's no point
going round deploring the people who seem
to vote for populists, and there's certainly no point
calling them the deplorables. You need to understand
why they are asking this? Why are they making
this cry for help? And I think that in
both our countries, there's been a big
failure of politicians to understand why
people weren't happy and why they were losing out. - I agree with that. - And I think the answer
therefore has to be, let's do what we can
quietly and calmly to explain to people what we
can do and what we can't do. There's a very interesting film. I forgot what it's
called now, but it's about the first Clinton
presidential campaign and John Travolta plays
the part of Bill Clinton. He goes in to a textile
factory in New Hampshire, and the first thing he
does is to empathize with the suffering,
the job losses, the loss of incomes, et cetera, and the destruction of
their local community. And he talks about
his own background and how he suffered
and how he understood why they felt like that. And then he said to them,
having got their attention and empathize with them,
"But I want to explain "to you why I cannot
bring back your jobs. "Even if we had a tariff
on it," he would say, "you're not gonna
compete in world market. "The markets you had in the
rest of the world have gone. "What we have to
do is to find a way "to make sure that
the next generation "doesn't suffer in the same way. "We need to improve education,
training, and so on." Now it's easier to say that,
but the lesson of it was, unless you empathize
first, then you'll never get an opportunity
to explain to people. My experience has always
been, that if you could empathize first,
people will listen to a calm, rational argument. You can't just say these people are xenophobic,
uneducated, ignorant. They're not. They do actually understand. And the challenge for
central bank is to explain things clearly enough in a way
that people will understand but do it in a way
that's based on empathy. That ought to be
for politicians, but I'm not sure they're
being very successful at it, and I think this also
explains why the one thing I'd say that's common between
the political situation here and in the UK, the issues
are completely different, totally different issues, but what is common
to both countries is that the political elite
has failed to empathize, and as a result, they've
completely lost touch with voters, and
voters just wanna vote for anybody else other than
the people they've been living under for the
last couple of decades. - Okay, this question
is from Gautam Natarjan, a Langone MBA 2019. I guess it's for Alan. You mentioned it's important
to control entitlement spending for social security. You suggest should
go into defined contribution from
defined benefit. But how would you propose
modifying Medicaid and Medicare, healthcare spending so patients
get appropriate treatments without excessive
burden on the economy? - Remember, you put both
issues on the table. They must be equal, in
other words, you cannot have Medicare or
Medicaid funding without the revenues
arising somewhere. And so the question is always
what I find disturbing, is politicians are playing
single entry bookkeeping. That is, they gotta
understand in budgets, there are two sides,
there are revenues and there are expenditures. If you spend too
much for too long, you will engender inflation, and everybody loses
under those conditions. I find that what has to
happen is a much better understanding or maybe even
some form of another endeavor to try to make every
expenditure program carry with it the
means of financing. We do that periodically,
and but even though it's a sound thing to do
and a necessary thing to do, it invariably breaks
down politically, or at least to this date. - Perhaps you have some
lessons from England on how the US could better
control our healthcare spending? - Well, of course in
England, we have controlled our healthcare spending
so successfully that people think we should
be spending a lot more. 'Cause we spend a lot
less, and we do it through having a
monopoly essentially for the National Health Services and that there is
private healthcare. But we've been quite
successful at ensuring that when the National Health
Service acquires drugs, it does so at a much lower price than would be the
case elsewhere. But the real cost to it,
I've never forgotten that, my wife who comes from
Finland said that, in Sweden and Finland,
they started with what you might call
socialized medicine, but they realized that actually you had to charge
something for it. And when you go to a GP
in Sweden and Finland, you pay a very small amount,
but you pay something. In Britain, you pay nothing. This has an enormous difference. When they introduce
the charge in Finland, then when men woke up in
the morning with a hangover, shall I go to the doctor
or shall I buy a beer? I'll buy the beer.
(audience laughing) And so you cut out completely a lot visits that
were unnecessary. - That's a good suggestion.
(audience laughing) I think we have time
for one last question. This is from Matt Robinson,
NYU Stern undergraduate. Many of the current
stresses in today's world are being driven by
the proliferation of
income inequality. Are central banks in
any way responsible? If so, can monetary
policy address this? First with Mervyn. - I think the
simple answer is no, they reflect much deeper trends. I think, if you look at the
measure of world's inequality, that's clearly been
affected by the movement of asset prices, but my
believe is that the so-called increase in measured
wealth inequality that arisen over the last 25
years will go into reverse as long term interest rates
go back to more normal levels. But I would like to use
this as an opportunity to say to everyone that you
ought to read Alan's book. Alan Greenspan and
Adrian Woolridge, it's a history, it's
not just economics, it's a history of
the United States. There's no country
really whose history is not more bound
up with the history of its economy than the US. It has a lot of
politics in it as well. Put it on your Christmas
list, and give it to all your relatives as well.
(audience laughing) - I will echo that
recommendation. I have started reading the book and it's quite engaging. It's a page turner.
(audience laughing) Surprisingly if you can think
the economic history can be, but this is, so I
do recommend it. It's called
Capitalism in America. Last, any parting comments? Alan?
- On what, particularly? - I think the last question
was if central banks are responsible for
income inequality and if so, can they
do anything about it? - I just like to leave
that question unanswered. (audience laughing) - Alright, well thank you. (audience applauding) - So thank you. And I first want to
begin by thanking the audience for being here. I just wanted to acknowledge
many lovely supporters of NYU and Stern here that
I should have acknowledged in my opening remarks,
Howard Meyers, Martin Lipton, Shelby White. But I wanted to acknowledge
one very special alumnus whom I've had the pleasure
of meeting several times since I became dean, and
that is Alfred Abraham who graduated in
the class of 1941. (audience applauding) Thank you. Thank you, Alfred. Finally of course, thank
you for a wonderful, wonderful evening,
to our speakers. May I please request the
audience to remain seated till they've left the room. Thank you, good night. (audience applauding)
