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Welcome all of our speakers and our attendees to the 1st 7th Circuit Educational program of the American College of Bankruptcy. A number of people worked very hard to create this program, and I'm not one of them. I'm just here

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to say hello but we hope that this will be the first of many programs that we do. We think the college is uniquely positioned to provide this kind of programming in this kind of forum, and so we're very excited at

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the great response we got at this inaugural effort. My name is Bob Fishman. I am the regent for the 7th Circuit of the American College, and it is my honor to greet you all. I would like to thank our

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co-sponsors for the presentation of this event, Jenner & Block and Mesirow Financial. We thank them for their support, for their logistical assistance, and for their financial backing. And without their contributions we really couldn't have put on a program like this. So thank

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you very much to both Jenner and Mesirow. Before I introduce our speaker, we only have one rule for today that I know about, and that is everybody please turn off your cell phones. I know, I know how important everybody is. I know there's calls coming

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in. I know there's money to be made. Please turn off your cell phones. We don't want the program interrupted by somebody getting a call to pick up milk on their way home from work. Our first speaker today is someone who we're really

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delighted to have the opportunity to come and present to us. Diane Swonk, the chief economist and senior managing director of Mesirow Financial will be our opening speaker. I don't know how many of you subscribe to the

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daily email that Diane sends out, but I, for one, read my Fed flash from Diane Swonk every day. And she talks about and brings a little bit of sense at least to many concepts that I know I hear on the news

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and I hear people standing on street corners talking about things like retail sales data and the impact of Chinese currency and housing starts and unemployment data. These are all things that we know about and we hear about and we know impact the way

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the world works but Diane is able to bring those things and present them in an organized fashion and make a little sense out of a lot of numbers and statistics that otherwise just look like numbers on a page. Diane

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is an advisor to the Federal Reserve Board and the regional reserve banks. She has just completed her second term serving on the Congressional Budget Office's panel of economic advisors. If you read national and international publications. Or watch TV you often see that

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Diane is a guest on financial reporting shows and writes articles on financial issues for publications and so with no, further delay Diane, we welcome you to the podium. Thank you for joining us. Well, I can honestly say this kind of

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audience is one of the only kind of audiences that welcomes talk on the economy these days. It's not been, it's interesting is today, I've already been on CNBC 3 times today and I have a 4th hit on another network,

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at 4:10, so we've got until 4:10. I started, they're supposed to show up at my house at 5:45 a.m. so I could do an outside shoot, so I don't have to get up so early, but instead at 3:30 a.m. My doorbell rang and

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they decided to set up inside of my house instead of outside of my house and I said I could have come down to my own studio if I was going to be up this early so I apologize if I already feel like it seems like I'm

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fading a bit, usually once I get started talking about the economy I get going a lot because it gets my adrenaline going to know how hard the economy is today. In case you didn't know it the National Bureau for Economic Research

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finally declared it the recession ended. They declared that it ended in June of 2009, and they were very careful in their commentary, which was two pages long, exceptionally long commentary on what that they declared it ended. There's two things that are

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important. One is that it took them so long to declare an end to the recession because they weren't sure. The other part was that they did, they said just because it ended, it doesn't say anything about the strength of the recovery. Fair enough, and

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that any subsequent recession would be double dip now. So now you know the term double dip would be official term to if the economy were to slip back into a recession. I'm sure all of you are well aware of in this room

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in particular the unevenness of the recovery, you know, in some parts of the economy we still have enormous struggling going on, particularly the housing market. Consumers are continuing to delever mostly because they're just not paying their mortgages and slow down their

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pace of credit accumulation because they can't get access to credit although I did hear one of the loopholes in the consumer protection laws is that business cards are not considered consumer cards of your business actually have a business visa and it turns

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out those do not fall under the consumer protection laws so it means that business cards are now gonna be issued to subprime borrowers. I knew that I had escaped the banking industry just in time in 2004 when my dog Buddy, he's since passed,

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a beagle with not - he was about as smart as a doorknob, but nice dog, but as exciting as a doorknob as well, but my daughter loved him. Buddy, you know, was a, he was a nice dog, but not the sharpest knife in the

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drawer, and he got a pre-approved credit card in 2004, and I thought, boy, am I glad I'm leaving banking. Also there's some little pamphlets about getting a luxury dog house and things like that, but we didn't want to upgrade him since he spent

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most of his time in the dog house anyways. I didn't think it should be that fancy. I think what's important to understand about the economy is a couple of things right now, and that is the number one issue, and today the reason I was

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on TV for so often was that the president was having a town hall meeting with CNBC and they wanted to have commentary going on through it, and he was sort of trying to issue a bit of an olive olive branch to Wall Street, I think by

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doing it via CNBC and kept his rhetoric pretty neutral in terms of not inflaring anything and trying to talk about working with both sides of the aisle and coming up with things like that. There wasn't anything new in his comments, nor

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should we expect anything new because he's gonna have a whole new set of issues to deal with come November because there will be a lot of change. The problem is nobody is quite sure even what that change is, and the one thing that is consistent across

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the board is how much uncertainty there is and I think that is, you know, from every in this room as well because the uncertainty is the economy has healed in some ways, healed so much at the front page of. The Wall Street Journal has

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something I'm sure you all hate to see is how easy it is for many companies to issue debt without any covenants, without junk bond debt, and, and be able to get financed even when maybe they shouldn't. Maybe there should be some restructuring going on in

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there, and that makes it more difficult for you. On the other side of it, it's probably easier to get a junk bond loan than it is to get a small business loan because small businesses were dependent on the consumer credit market, of which $10.5 trillion

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in credit disappeared in the shadow banking industry. That was its peak value in 2007. It overshadowed the banking industry at that point in time and it's now gone. So I think it's really important to sort of understand the unevenness of the recovery to understand where

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we're at. And I guess the good news for you is that we're a long way from healing. The bad news for the rest of us is we're a long way from healing, but the difficulty is the unevenness where it does look like some of

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our financial markets are in somewhat of a bubble where risk is not being priced appropriately, which I think you would like to see some more accurate risk pricing out there and certainly it's a dilemma that brings up as we go into this next phase of the

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cycle at the Federal Reserve, we are in an economy that I would argue is kind of like an economy that's in a traffic jam. We stalled, we haven't completely stopped as the public sector went to go hand off the baton to the private

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sector. The handoff has not been smooth. We've not dropped the baton yet. We're still growing, but we're not growing enough. And it's like being caught in a traffic jam where every inch you move forward, it adds rather than takes away from your anxiety in the

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economy, because you don't know if there's an accident ahead, there's a detour and you've got to turn around and go back from hence you came, which is also not a very pretty place. And so there's a lot of uncertainty. We know we have a

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lot of cash on corporate balance sheets. What's unique about the economy today and one of the reasons to be hopeful is that we have a lot of cash on the sidelines. The problem is nobody's willing to deploy it and until they can get to deploy it

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and get over this uncertainty about how fast the economy is growing and what hurdles they face and challenges they face in regulation, you're not gonna get a lot of activity and one of the things that I think is - you know, I hear

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a lot of people say, well, it's regulation, it's reform, it's this, it's that. Well, a lot of things happen to our economy that did trigger some reforms, health care reform, huge legislation and a lot of uncertainty about that, but frankly all of this would be

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nothing but noise if the economy was doing what one would expect it to have done after the depth of the of declines that we endured. And the depth of the losses that we endured. If we were growing closer to 6 to 8%, frankly, this would be

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noise, real, 6 to 8% real nominal, you know, if we were growing closer to 10% nominal, this just wouldn't matter. The regulatory reform changes wouldn't matter, but when you're growing at 1 to 1.5%, which is closer to where we're at today, it does matter. You're

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closer to zero, and all of a sudden everything takes an outsized importance on the economy. I think it's important to understand uncertainty as well is that you know I've written a lot about it and it's not

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a pleasant place for me to be right now, but how uncertain we are not only about the economy and about policy making in Washington but also how uncertain we are about the Federal Reserve and although I have an enormous amount of faith in Ben Bernanke's understanding

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of the Great Depression, I do think he's a very important person to be leading the Federal Reserve today. I do think he helped to avert a repeat of the Great Depression depression as depressing as this economy is. I heard, you know, the partisanship and the

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ideology. I just hate listening to politicians on the economy because both sides so uniformly offend me somehow. Nancy Pelosi came up with some number that said that we had generated more private sector jobs since the beginning of the Obama administration

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than we did during the entire Bush administration. It was interesting how she came up with that calculation of a number. On the other side of it, I heard you know Orrin Hatch today say, every new job has cost us over $400,000 from

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the stimulus package, which is equally false. The bottom line is, you know, the best we could do is stem the bloodletting. You know the stimulus package was by no means perfect, and I wish the lame duck President Bush

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and the lame duck Congress would have taken Ben Bernanke up in November of 2008 and put together a $400 billion stimulus package at that point in time that would have been less politically laden with things and more efficient and into the economy sooner than what

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then got handed off to the Obama administration and then got more politicized, but that didn't happen and the reality is that to sort of say that, I mean it really is, it's sort of ridiculous for people to. I don't understand both sides.

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Both sides are being equally ideological and ridiculous and I I will - they annoy me. It's just lying. They're lying about the economy and we're not having a healthy discussion about some really tough decisions we have to make,

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and I find that offensive as you can see. So that said, where are we? This is one of the most disturbing things is how little even economists agree about where we are and where we should go and how we should get there. And

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I'm being honest with you because the worst thing for me to do is come up here and tell you I'm certain when I'm not. I'm not certain, I have a high level of uncertainty. I'm gonna give you my best guess on what I

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think the most probable courses, but the fat tails are out there. There's a lot of fat tail risk at this stage of the game and what's really disturbing is how much the debate on the economy has now gotten surfaced more publicly recently. I was at Jackson

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Hole, Wyoming Federal Reserve meetings. The Kansas City Fed hosts these meetings every year. And this year they had central bankers from all over the world. And Ben Bernanke was slated to give a speech. He always does - the chairman of the Fed always gives a

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speech. The reason they originally picked Jackson Hole was they started having these speeches. The Kansas City Fed hosts it, but they started having these speeches when Volcker was head of chairman of the Federal Reserve, and it turned out he liked to go fly fishing - and

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when they found out that - and then he would go to Jackson Hole, but he wouldn't go to some of the other locations. They started, and he would come back to Jackson Hole. It started in Jackson Hole, and so that's how they have these Jackson Hole, Wyoming

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meetings, always at the same lodge, you know, with the Grand Tetons, and we go hiking and a lot of central bankers go fly fishing, what hence means a lot of reporters have learned how to fly fish now as well. I just go hiking with them. I

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found there is one tip I will give you if you're hiking in the Gran Tetons and you're hiking you - it's not hard to get lost for me anyways. And so I find if you're going to get lost, make sure you get lost

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with someone that's high enough ranking in the Federal Reserve so that the Secret Service comes and rescues you. They do come and that is a useful thing to have because your cell phone doesn't work and you don't have any bars you're like, oh my God, it's

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turning dark and you're starting to wonder who, you know, there's 7 of us and there's 1 that kind of drank all our water and shouldn't have been with us in the first place and you're kind of thinking, OK, I can outrun her. The bear comes and,

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you know, I can run a lot. I run really fast and so I'm running. But anyways, kind of hard to start thinking of your colleagues as bear bait, but she deserved to be thought that way. What's most disturbing is I wanna

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talk a little bit about the economy and what I think the likely scenarios are, and I also wanna talk about the descent on, that view, and my view is not the only view out there by any means because it's important to understand the spectrum of

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debate. I do think that at this stage of the game, the only thing we know for sure is what we don't know about the economy, and it really annoys me when people arrogantly say, well, we've got this benchmark on history, we've got this benchmark

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on history, and frankly, Don Cohn put it best. Although the past financial crisises, and we have 800 years of them, there's a famous book saying this time is different, which is supposed to be an ironic, it's not truly all that different. We often have bubbles and

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then we have aftershocks after the bubbles, and so this should be expected. And you have a period of at least a decade of subpar growth here we are if you don't have a contraction outright. And so far there's not a lot that's different. That's a

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very loose, you know, sort of looking at the crisis. What is unique and I think really important is Don Kohn, who is vice chairman of the Federal Reserve. By the way, the Congress has decided - Shelby recently blocked the most recent appointee.

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We do not have a quorum on the Federal Reserve Board if they need to do an emergency action. Say like what happened in 2008, they would not be able to do it right now just because they've not approved enough members to the Federal Reserve Board of

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Governors, isn't that disgusting? I mean, I, I just find that appalling. I don't understand it and Shelby's blocked 80 nominations as a deficit hawk for pork bill spending in the state of Alabama. Again, you will hear a lot of my disgust with Washington.

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They have - there's ideology but not a lot of truth in what they say. But within the Federal Reserve it is amazing to see the spectrum of debate, and I think it's one of the interesting things is Ben Bernanke really believes in debate. He

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really believes that financial markets and the public are best informed when they can see the spectrum of debate within the Fed so they know the subtleties of the decisions that they're making. That's fine and good in what we would consider normal times. I think it's

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very difficult when you're going to fight a war on further weakness in the economy or even a double dip when you see your generals fighting and not sure about whether or not you should even shoot off any bullets, let alone whether you should charge

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forward and it's very difficult to not have a leadership that can corral the cats in what I believe is now become a lion's den in the Federal Reserve and what I do worry about is that when you don't have a quorum on the on the Federal

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Reserve board and you've got chairman that is being challenged. In the pages of the Wall Street Journal by his own colleagues rather than an official means in terms of expressing their dissent to him and undermining him, literally stabbing him in the back two days before

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the Jackson Hole, Wyoming meeting started on August 24th, the Wall Street Journal displays the leak from the Fed saying, oh, by the way, the dissent at the last meeting when we changed, and I'll get into the August decision in a minute, when we changed policy to

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maintain the balance sheet rather than just let it fall off. More rapidly than we had expected it was not just one dissent. There were 7 of 17 members that didn't really want to go that way, but only 1 voted to dissent. Now anyone who watches

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the Fed knows if someone votes to dissent in the official framework, which Tom Henning, who's hosted the Kansas City Fed meetings, has dissented at every meeting since January. He hasn't liked, he hasn't agreed with the process, and that's fine with Ben Bernanke, and you know. No

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one votes to dissent unless he's representing more than one view around the table. They're not just a lone, you know, sort of you know, loose cannon. They actually are reflecting more than one view around the table, and that's important to understand. But then to go

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out and say, well, I'm not really happy, and I know Ben Bernanke's going to give a speech on Friday, so on Tuesday I'm going to go to the Wall Street Journal and tell them that it was really much, we really don't agree at all with what

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Ben Bernanke did. And then expect him to stand up and defend that decision on Friday morning. You can imagine Thursday night dinner was a little uncomfortable. I had never seen Ben so uncomfortable ever. This is a man who's had to go through an

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interesting last couple of years but he was very shaken that his colleagues had stabbed him in the back so badly, and on the other side of it, I never saw such peacocks walking around and happy and proud of themselves to have done what they've just

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done, which to me was sort of an insult to the institution of the Federal Reserve, which is one of the few places where politics in the normal sense of the word in terms of Republican and Democrat, are really irrelevant. But now politics and what we've all

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known in corporate life, which we like to see less of, and certainly since I've left banking, I see a lot less of it because I work in an environment that's much less like that, and I appreciate that. I am sort of disgusted to see

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it rear its early head and in the Federal Reserve because it is, it's disturbing. And to think that we might lose a Fed chairman by it. Do you really want to go there right now? You guys want disaster? I can give

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you one. You'll lose the Federal Reserve chairman. You want uncertainty, that'll give you a lot of uncertainty. Who's going to replace him? What are their policies going to be? I don't wanna go there. We got enough uncertainty. Let's, we wanna eliminate, do no harm. It's the

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best we can do right now, and maybe try to do something a little bit good. We're not sure how it's gonna go and, and Don Kohn, who, after 40 years serving in the Federal Reserve System retired on September 1st, he delayed his retirement because they

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were so understaffed in the Federal Reserve Board. He was the vice chairman of the Federal Reserve, Bernanke's right-hand man, and he said it best when people started debating the economy before the Fed Chairman actually got up to speak at Jackson Hole Wyoming meetings, and

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he said there really for all the precedents you want to put on this, there is no precedence for where we're at. Not only did we experience the worst financial crisis that we've ever experienced in this country. We also had the most coordinated effort globally to deal

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with it. Which delivered us from another Great Depression into this no man's land of the Great Recession and the aftershocks. And that there isn't a precedent for. We don't have easy rules of thumb, and I have to admit I myself have shifted as the economy weakened

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in the spring and the summer. I've shifted in my own views about what I think the Fed should or shouldn't do mostly because I trust in Ben Bernanke, but also because I really do believe if there's one lesson of the Great Depression that we

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should go home with, it is that doing less is what gave us worse than trying and failing, and in fact, at many times during the Great Depression, and one of the things Ben was very concerned about in August, which I'm gonna get to is

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that the Fed actually added insult to injury to the Great Recession and made it worse. And certainly an expert on the Great Depression doesn't wanna go down in history as being that Fed chairman who did it again, and he's worked so hard to avoid

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doing it again and he now has colleagues around the world. The Japanese bank, when Japan decided to intervene, usually doesn't work, and they decided to intervene to burn some, you know, speculators in currency markets because China is buying too much Japanese bonds now and

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it's forcing an appreciation of the yen, undermining their competitiveness. We're asking China to, you know, depreciate their currency. Against or depreciate the dollar against their currency so that we can have a more equal level trading field with China, they turned

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around and kicked Japan and Japan got really upset about it and they started buying bonds and instead of buying dollars and instead of just sanitizing those purchases, they decided the Central Bank of Japan started to resume quantitative easing and allow their balance sheet

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to grow again. As they did that over the last couple of weeks, last week and a half, and I think that's very interesting because it means that they're moving back into quantitative easing at a time when Jean-Claude Trichet, the head of the European Central Bank,

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has also re-engaged in quantitative easing, buying things like Greek debt. Now people are worried about the kind of quality of assets that the Fed might be buying. Greek debt isn't considered the top on my list of quality assets to buy, you know, it's one

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of the reasons the problem with the with the European banks is when they did the stress test, they stress test the banks, but they said, OK, you know, now that foreign debt you have, we'll just assume you hold that to maturity. What is the maturity of

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a Greek bond? Could be quite sooner than many people think, depending on how you price it so anyways you know, we now are seeing central banks around the world reengage in crisis policies and I thought it was really notable that Axel

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Weber, who's also a member of the European Central Bank, said something that I firmly believe is that we are still in a crisis. We've not actually emerged from a crisis yet. We've emerged from a recession but not very robustly. We're in an economic no man's land

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and we still have very uneven healing of financial markets which raise the risk of sowing the seeds of future bubbles, which is the primary concerns of those who don't wanna do anything more because they're afraid of things like the junk bond market being too cheap, things

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you are very concerned about in this room as well, and they have every reason to be concerned about that and I'm concerned about it too. That said, we ought to weigh those risks off against other risks that the US economy could fall into a double dip

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and dip into a vicious cycle of a deflationary spiral, which is much more difficult to combat than inflation, and there's many ways that we try to think about that. The most likely scenario, and I'll tell you why, is that the economy does re-accelerate. The question is,

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will it re-accelerate enough. To deal with any of the imbalances that we have enough to deal with the political instability that this has created enough to take the pressure off the Fed and off the federal government to do anything about it, and

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I don't think it will be enough, and I think understanding the magnitude, it's easy to think of reasons why the economy will accelerate and this is the good news that silver lining of corporate profits, the cash on the sidelines, that did not exist in Japan and

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it did not exist during the Great Depression. I talked to one of our clients recently, just last week, and he was telling me, he says, you know, I'm really sitting on the edge of a, of a tipping point. He said, I've got 3 production shifts

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running full out. He's an auto supplier. He's doing great, accumulating cash. He's one of the survivors, winning in the losing industry. He's doing fabulously well, he said, but I can't keep running 3 production shifts full out. We're tiring people out. We're gonna lose productivity and we've

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got to repair the plants, he said. The problem is, in order to expand capacity beyond where I'm at, I have to open idle capacity. I have to open another production plant, which means I have to make a big commitment, not just a small commitment. And if

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the economy doesn't re-accelerate fast enough, it's not enough to justify that kind of an outlie of investment and employment that we're gonna see come back with that kind of investment you have to upgrade all the equipment. It's been idle for several years now. Some of

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it's no longer relevant. You need to replace the equipment entirely. That'd be great spill over to the rest of the economy. He's even told me that, you know, his banks are clamoring to his door because his cash flow is so good and he's in such a

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good position they're willing to give him loans. Now that's an interesting position to be in. I'm really glad for him, yet he's unwilling right now to pull the trigger because he's still uncertain about the rate at which the economy re-accelerates. So that's a reason to think

00:26:08.079 - 00:26:21.810

that we should see some re-acceleration of growth, because at some point in time. We've got to do something with this money on corporate balance sheets. And that's a good thing. We've also seen the correction in housing has been fairly severe. The housing data will come out

00:26:21.810 - 00:26:35.359

again tomorrow. It'll be awful again. The question is, will we get a double dip? There is sort of a point we're at such a low level of housing starts, record low. They've only been keeping a records since the early 1960s, so it doesn't go

00:26:35.359 - 00:26:51.060

back to the Great Depression. But, you know, we're running almost 25% of what they were during their peak. Housing starts are, you know, really closer to depression levels and recovery levels. They deteriorated after the tax credits wore off, and the housing market is

00:26:51.060 - 00:27:04.209

being hit with a whole new another wave of foreclosures. One of my issues is, I think foreclosure is far too easy, particularly in this state. I have a friend, soon not to be a friend of mine, who recently told me her divorce judge, as

00:27:04.209 - 00:27:18.760

she's going through a very nasty divorce, told her, the judge told her not to pay her mortgage because it takes 18 months to kick you out in the state of Illinois. Of course she did use that extra money to go to Neiman Marcus and to service

00:27:18.760 - 00:27:29.760

a brand new BMW loan, and, you know, I'm afraid that she's gonna end up with her two kids in her BMW if all, you know, doesn't work out at the end of it, but he said you can save the money for rent down the

00:27:29.760 - 00:27:39.849

road. Well, what's she gonna do about her credit rating? And what is she doing to her neighbors? And even though it would be a short sale if she was forced to sell it. You know, what is she, you know, what's she doing to her neighbors now,

00:27:39.989 - 00:27:50.689

you know in 18 months? Well, it's actually - now she's 3 months into not paying, so in 15 months or however long it actually takes them to kick her out, what is the collateral damage of that? And I think it's

00:27:50.790 - 00:28:05.050

something that I just don't understand. There's a lot of options out there that don't include taxpayer money to forgive principal, to restructure a lot of foreclosure debt. There's ways of making Wall Street firms money that Washington doesn't want to

00:28:05.050 - 00:28:17.094

do either in terms of financial restructuring of mortgages. We don't wanna do that either. We don't wanna bail out what we see as deadbeat homeowners. Turns out a lot of these homeowners are not deadbeat at all. If we forgave their principal, they might stay

00:28:17.094 - 00:28:29.814

just fine, but I think these are all issues that we're not willing to sort of deal with, and those don't involve taxpayer money. So the housing market is weak, but it's at such a low level that if employment picks up even a little

00:28:29.814 - 00:28:42.454

bit at these record low mortgage rates, we could see a little bit of activity. Now you don't need very much if you sell one house a month down from 100,000, you know, it seems pretty awful, but if you move up to 2, that's a big percentage

00:28:42.454 - 00:28:57.819

increase. And that's kind of where we are right now in housing. We had seen a lot of the tailwind of economic activity come from investment in inventories. Inventories overshot the already lackluster demand and we had to rebuild inventories. Now we're at pretty good levels.

00:28:57.869 - 00:29:12.109

We don't need a lot of additional inventory rebuilding, just incremental inventory rebuilding to deal with the very weak demand we see out there. We've seen the saving rates soar, and I say soar very pointedly because although we're moving back towards post World War II levels.

00:29:12.290 - 00:29:25.650

On the saving rate, certainly higher than we've seen this decade. If you exclude the amount of income that goes to transfer payments, which is not largely paid, saved, in fact, it's at a record high share of income today. It means the rest of us

00:29:25.650 - 00:29:36.619

are saving all that much more. And in fact, someone came up to me recently and they said, you know, usually I just refinance my home again, and I got a lower rate, saved a couple extra 100 bucks a month, and usually that make me spend more,

00:29:36.930 - 00:29:48.969

but this time around, it made me spend less because I got the appraisal with it. And I'd lost so much more of my value, my equity in my home, I felt a lot less wealthy. And so, you know, I think that's kind of an interesting issue

00:29:48.969 - 00:30:02.739

that's going on is we are seeing spending has come back after contracting a bit in the spring. It's come back a little bit. We've got a little bit of income growth heavily supported by transfer payments. And if we were to see employment growth come back

00:30:02.739 - 00:30:14.209

a little bit, which it should because the big headwinds, of course, employment growth, who would have thought the best jobs program over the last year would have been the 2010 census? 45% of all jobs created up to, I think it was June, were created by the

00:30:14.209 - 00:30:28.020

US Census, 2 to 6 week jobs paying $20 an hour. So I think we need a 2011 census as well. On the flip side of it, the census went away, and that was a big headwind to jobs. We also had the first really draconian cuts

00:30:28.020 - 00:30:42.579

in state and local government spending. Now, a lot of that was cuts, particularly in teachers. Some of that was saved by the 27 to $24 billion dollar transfer to the states by the federal government directly to save teacher jobs and vital fire and police jobs.

00:30:42.900 - 00:30:55.760

So the headwind on all state and local taxes are gonna be going up, not to say anything about the state of Illinois, but pretty much count on it, but at the end of the day, the draconian cuts that we've seen from the state and

00:30:55.760 - 00:31:09.120

local sector, although they'll still be there, they won't be as big and they'll abate, and they'll be a smaller headwind going forward. And if the private sector, since it is still generating jobs, can pick up even a little bit from where it's been, that would help

00:31:09.120 - 00:31:23.302

to offset that. But we're still talking about an economy that if it re-accelerates to say and the trade situation also exports have held up extremely. Well, we had some of the weakness that we saw over the last sort of 3 to 5 months

00:31:23.462 - 00:31:38.291

has been because the Chinese did something we asked them to do. They removed export subsidies. They expired on July 15th ahead of those export subsidies on some things being removed. There's a lot of stockpiling done in the United States which worsened our trade deficit quite

00:31:38.291 - 00:31:54.883

dramatically, and now that's coming off again and it looks like you know, one way or the other, whether it be through protectionism which - I would not embrace in any form - or through a more gradual appreciation of the yen or appreciation of the yen

00:31:54.883 - 00:32:07.762

or the yuan which I think would be much more productive either way Chinese goods are gonna get a little more expensive and that's going to slow down the pace of imports from China. You put it together and you should see a trade deficit that at

00:32:07.762 - 00:32:19.624

least in the near term improves and as we move into next year, if I think that there's an upside surprise, it's gonna be in trade. It's gonna be an ex. Sports in particular, it's been one of the silver linings to the US economy. Another place that's

00:32:19.624 - 00:32:33.663

been strong and robust and looks like it's gonna continue to be robust is investment in technology. The problem is there's a double edged sword to that investment in new technologies. I really think we're entering a new next phase of the technological revolution. We're reworking entire business

00:32:33.663 - 00:32:47.564

models out there. The problem is those kind of investments don't generate many jobs. The jobs they do generate are fairly highly educated and very well paid, but they're not a volume of jobs for people who don't have a lot of skills and so you get

00:32:47.564 - 00:33:00.844

a real mismatch between the jobs you're creating and the jobs you can fill and of course that causes its own problems but you can see ways in which the economy you sort of get cyclical factors where you go so low there's nowhere to go but up

00:33:00.964 - 00:33:12.505

but there's not a lot of upward momentum. I mean unless you create a lot of jobs you're not gonna get a lot of income and without a lot of leverage you're not gonna get a lot of consumption. Consumption will re-accelerate with incomes, but actually. I think

00:33:12.505 - 00:33:24.926

the saving rate is going to continue to rise now I could be wrong on that. The Federal Reserve is more convinced that the saving rate may stabilize, that maybe we've moved enough on the saving rate, moved more rapidly than everybody thought, and we'll have a stabilization

00:33:24.926 - 00:33:37.546

in the saving rate. And in fact, people may start that the fact that it's no longer moving up will free up some additional income for the rest of the economy and to spend, and consumers could spend a little bit more, but until you can really

00:33:37.546 - 00:33:49.636

leverage, I would argue that the saving rate is not as much by choice. It's by force, it's by choice by the person who got shocked by their mortgage refinance and the equity value of their home going down they're saving more because they feel less wealthy.

00:33:49.646 - 00:34:01.307

We've also seen a real hit to wealth. It's not just, you know, they're just realizing it now, but also, I believe that part of the reason consumers, I was in consumer credit for 19 years in the banking industry. I was in the credit card industry

00:34:01.307 - 00:34:14.988

people would, you, I mean, the one thing you couldn't stop, I mean, you know, in this room, come on, people want it, they will spend if you die in debt you've gamed the system. You live beyond your means your entire life. That's it. The problem

00:34:14.988 - 00:34:27.708

was none of us died soon enough, but you know, the reality is if we could, we would, and we can't unless we all get those subprime business cards now. So that might be a loophole that gets us back into consumer credit again. But, you know,

00:34:27.897 - 00:34:37.187

everyone is shocked. I mean, I kept saying be careful what you wish for in the consumer protection laws because the slugs were subsidizing the rest of us. I mean, you know, the fact that they're paying really high interest rates made it really cheap for me to

00:34:37.187 - 00:34:48.208

get credit on. Monthly basis that I didn't have to pay any interest on, you know, that's something that is getting more expensive now and that's because we're taking the slugs out of the system and so, you know, now that we don't give credit to everybody,

00:34:48.248 - 00:35:02.607

it's no longer a right, it's becoming more of a privilege again. You are going to constrain your ability and you're continuing to deleverage your ability to leverage going forward. The housing market also in particular has one issue to it record low mortgage rates. Yet it's

00:35:02.607 - 00:35:15.239

very hard to qualify for a mortgage today, much harder than it was even a few months and that's something that's really important as well because as easy as it is, it's probably easier to get a junk bond issue than it is to get a mortgage,

00:35:15.429 - 00:35:27.370

and I think that's a real problem when rates are low they're low because demand is low and we are creating, we do see pent up demand. This is a silver lining to the economy as well in many of the areas that were worst affected by

00:35:27.370 - 00:35:41.219

the housing market bubble, you're now seeing rents above marginal ownership costs. Well, that means it makes sense to start moving into buying, right? But you can't buy if you can't qualify for a mortgage or if you don't have that hurdle of the 20 or 30% now

00:35:41.219 - 00:35:53.699

you now need for a down payment. And so what you're seeing is the market being inhibited by the fact that credit markets have been very uneven and they're healing, and I don't think it's any coincidence, although it's hard to prove it in the spreads, but

00:35:53.699 - 00:36:08.540

I just don't think it's any coincidence that we've seen the mortgage market tighten since the Federal Reserve stopped buying mortgage backed securities. Because when the Federal Reserve stopped buying mortgage backed securities, Fannie Mae stopped buying mortgage backed securities. That has a very, since they

00:36:08.540 - 00:36:19.699

account for Fannie and Freddie account for 95% of that market today. They are, of course, the behemoths, the elephant in the room. They do have to be dealt with, but you get rid of them now, you have no home sold whatsoever. You can't do it

00:36:19.699 - 00:36:32.050

right now. We wanted to do it in the early 2000s, but, we didn't, and now we're stuck with it for a while, and the bottom line is there's very few ways. Getting the mortgage market back short of one, I do think we do

00:36:32.050 - 00:36:44.250

need major changes in foreclosure. Now, I am told by many politicians, particularly here in Illinois, that once we get past the elections, you will see a lot of changes in foreclosure laws. I'm not holding my breath, but I would like to see that. You will also

00:36:44.250 - 00:36:58.540

see one of the only things you'll see movement on the deficit on is an increase in retirement age at the federal level. And they also are gonna increase the age at which you can be qualified for early retirement because that's one of

00:36:58.540 - 00:37:08.800

the most costly parts of Social Security today because anyone who's close is saying I'll take Social Security since I can't get a job, and that's gonna be a tug of war but that looks like that's. Also going to be changed and that will come out

00:37:08.800 - 00:37:21.760

of the bipartisan commission and the commission that's nonpartisan because they're not none of them are in office anymore who are actually working on ways in which to reduce the budget deficit but we've only got, this is really disgusting, we've got about 6 months from

00:37:21.760 - 00:37:33.439

December to June. To do anything on the deficit because then we ramp up again for 2012 elections and it's not that we have to reduce the deficit in that period of time, we just have to plan to reduce it in the future. That's all we need

00:37:33.439 - 00:37:45.895

to do. We need to come to some agreement about what our priorities are as a nation, where we want to spend money. Where we wanna tax, where we wanna get revenues from, we can't continue with spending outpacing revenues that just doesn't work. We also can't just

00:37:45.895 - 00:38:00.860

say raise taxes and keep spending because that would mean we'd have to raise taxes faster than the overall growth rate in the overall economy forever. That's not gonna work either. That would implode our entire economy. That's stupid. You gotta hit this problem from both sides. But,

00:38:00.870 - 00:38:12.870

what I think it's important to understand is there is some good reasons to believe there's a re-acceleration where the debate comes in and although there are a few minority who believe we definitely will go into a double dip, I think we won't because I do

00:38:12.870 - 00:38:27.360

think the Fed will intervene, but the Fed itself is divided on the degree of the re-acceleration. And this is what's really important is when you're talking about when shades of gray really matter when you're in such tepid waters. I mean we're, this is not

00:38:27.360 - 00:38:40.812

a really hot economy here as we all know and the last thing you want is to freeze again and recede and that's something that is of the primary concern of Ben Bernanke and I wanna turn to just a couple of things with that meeting because

00:38:40.812 - 00:38:54.413

I think it puts a perspective on the economy today that we're in a good position to see some re-acceleration. We could even, it's not hard looking at those factors that I looked at a slight rebound in the housing market, even if the housing market were

00:38:54.413 - 00:39:05.746

to suffer a double dip, it suffers a double dip in the sec in the, which would be two consecutive quarters of contraction if it falls further and there's just not much. I mean you get to 0, there is a zero boundary in housing when you

00:39:05.746 - 00:39:17.865

stop building houses, there's not a lot more to go, and we're close to that now. Oh wow, I guess the world is really falling apart. This is the 2nd time that's happened to me in a speech in a week and a half where

00:39:17.865 - 00:39:28.800

the lights went out in the middle of my speech. It gave me kind of an eerie, maybe a feeling about you're trying to tell me something, I don't know. But I think it's important to understand that, you know, even if you were to

00:39:28.800 - 00:39:40.040

get a double dip in housing, you might be able to skirt a double dip in the overall economy, but what does it matter all that much when you're not growing enough to accommodate not only those new workers entering the labor force, but those workers who no

00:39:40.040 - 00:39:53.689

longer can afford to leave. And I think that's really important in understanding is that I've got an economy that re-accelerates a little weaker than the Federal Reserve forecast, a little weaker than consensus, and I hope I'm wrong, and there are some upsides where

00:39:53.689 - 00:40:07.479

we could see a surprise in exports, we could see corporate profits deployed more aggressively and so I'd rather hedge my downside and, that has the economy re-accelerating by the end of 2011 back up to 4%, which is not hard to do. We've already exceeded

00:40:07.479 - 00:40:21.800

that over the last year, you move in fits and starts, but at the end of the day that still delivers us an unemployment rate well above 9%. And that's just not acceptable, and that's very costly as well, whether it comes in unemployment insurance or you

00:40:21.800 - 00:40:33.520

cut that off and put it in welfare, you're going to pay for it one way or the other, or early retirements in Social Security. So it's certainly not a very happy scenario out there. In the Federal Reserve, there

00:40:33.520 - 00:40:47.570

are some who see the slowdown as much more transitory than I do, as a much more robust re-acceleration and growth, or even if they don't, they really don't feel that there's anything the Fed can do. Even if they do something, and then if they do

00:40:47.570 - 00:40:58.639

something, the Fed may risk complicating an exit strategy down the road, and they're thinking down the road, I mean, these are legitimate debates to be having, and we should be having these debates, it's just I don't think we should be seeing them. I feel like I,

00:40:58.719 - 00:41:08.409

you know, when I went to Jackson Hole, I felt like I walked behind the doors of a five star restaurant, saw the chef working, and all the rats running around on the floor around him. It just kind of ruins your appetite, you know? I'm sorry,

00:41:08.570 - 00:41:21.945

no Federal Reserve, I can swear with the best of them, which my children know quite well, but I don't think a Federal Reserve president should be walking around, you know, behind, right with the within, you know, a couple feet of the Federal Reserve

00:41:21.945 - 00:41:38.104

chairman and using explicatives about what they blanking don't know about the economy and how they blanking don't care what anybody thinks about them. I just think that's disrespectful, you know, call me old fashioned, and I'm clearly not, but I just think that's just,

00:41:38.264 - 00:41:50.179

not appropriate. But the debate is, and it's a legitimate debate. Do we do more and will it do nothing and will it just be a waste of money and is it really something we shouldn't be doing? And then on the other side of the

00:41:50.179 - 00:42:05.820

debate is maybe if we do more we're still in a crisis it's appropriate to continue crisis actions. Maybe we should do more and there's a list of options of what we could do and even if it helps a little bit, even 3 or 4/10

00:42:05.820 - 00:42:21.899

on growth, when you're talking about an economy that's growing at 2% or less, that's a big. Big difference on growth and it's worth it for even 2 to 5/10 on growth, maybe more, maybe we'll be lucky, and I think that's where, you know, the

00:42:21.899 - 00:42:33.739

heart of the debate is. What's interesting to me is that, it is legitimate. We don't know for sure. What's interesting to me is how many people are so sure that if we do something one way that there will be a reaction. We don't know.

00:42:33.820 - 00:42:49.840

We're in uncharted territory. There is no precedence. That said, there's one other thing that's really important out there that some of these Federal Reserve presidents seem to be ignoring, and it's called the law, something people in this room would understand. There's something called the dual mandate.

00:42:49.879 - 00:43:09.949

The Federal Reserve is mandated. That if inflation is not stable or unemployment is rising or too high, it is mandated to move the economy towards full employment and stable inflation. Right now we're violating both of those mandates. So if they do nothing, Congress could technically go

00:43:09.949 - 00:43:23.570

after them. And mess with their independence, which is not lost on the Fed chairman, I might add. So there is pragmatism in the middle of all this as well. You can have your theoretical debates all over the place, but if the Fed doesn't do anything, they

00:43:23.570 - 00:43:37.580

may be destroyed anyways because Congress just gets mad at them for not doing anything. That's entirely possible. There is a law, and we're not adhering to the law right now, so then comes around the August meeting. In August, in the days leading up to the meeting.

00:43:38.040 - 00:43:52.439

The board is getting notifications from the New York Federal Reserve that the balance sheet, because so many consumers are restructuring their debt much more rapidly than they expected because interest rates have come down, that the runoff of mortgage backed securities has been much more rapid

00:43:52.439 - 00:44:05.159

than they thought, and the balance sheet is now shrinking much more rapidly than they thought. Now remember, why did the Fed step into the commercial paper market? Why did the Fed start buying mortgage backed securities? They made markets where they didn't exist, right? During the

00:44:05.159 - 00:44:20.830

height of the crisis, they also believed that they'd hit the zero boundary when you take interest rates to zero. The only way to compensate for that is to start pushing liquidity into the rest of the economy by buying assets, right? That's the other way. It's

00:44:20.830 - 00:44:36.719

called quantitative easing, and they decided to deploy these methods, learning off the mistakes made by the Japanese who were slow to do that in their own situation. The mistakes made during the Great Recession, who didn't, the Fed actually tightened, and the fear was that if

00:44:36.719 - 00:44:49.689

the balance sheet came, it was a $2.5 trillion peak. It's come down to about $2 trillion and it was rapidly falling in the days leading up to the FOMC, meaning the Fed's the board is getting these notifications, the chairman himself is getting these notifications. Oh, and

00:44:49.689 - 00:45:01.145

by the way, we thought it was going to recede by another $200 billion next year. Now it looks like $400 billion it may be even. And the numbers were getting ratcheted up about how rapidly their runoff would be on their balance sheet, and the fear that

00:45:01.145 - 00:45:16.534

the Fed chairman had, not everybody agrees with this, but the fear that the Fed chairman had was that the accommodation they had put into the system would inadvertently turn into a tightening of monetary policy, an inadvertent tightening of policy at the very moment where the economy

00:45:16.534 - 00:45:29.080

was already slowing down. And that was something to be avoided at all costs. Now, the problem was everyone coming into that one day only meeting rather than a two day meeting didn't have a lot of time to digest that information. They were sort of hit in

00:45:29.080 - 00:45:41.639

the, you know, face with it all of a sudden at the FOMC meeting in August, and as a result, they weren't really prepared to make a decision on it. Yet there was a real sense of urgency in Ben Bernanke's view about what was happening, that if

00:45:41.639 - 00:45:55.639

we don't do something today to block that runoff, buy more Treasury bonds now, because that's the easy low hanging fruit. We want more Treasury bonds in our portfolio anyways. That's what we tend to buy. Let's move towards our historic average. It's more neutral. It's not industrial

00:45:55.639 - 00:46:10.800

policy. It's not deliberately helping the housing market. It should be helping all of the economy by bringing rates down, that there would be an inadvertent tightening in policy if they didn't do that. And that's why they engaged and decided to go ahead and both

00:46:10.800 - 00:46:25.290

extend. The extended period language, they said, you know, we're going to keep interest rates low for an extended period of time, which many in the Fed don't like because they feel it's contributing to excessive risk taking in places like the junk bond market, creating a bubble

00:46:25.290 - 00:46:39.395

there, it's sowing the seeds of a future bubble. On the other side of it, those risks are being weighed off against the reality that it does look like. Gaps by the Fed saying that they're not going to move anytime soon and that disinflation is

00:46:39.395 - 00:46:55.610

a real concern. Inflation continues to be well below the Fed targets and very likely will further decelerate before the end of the year, raising the risk of deflation. That those two things, you know, you want to offset that by saying you're not going to raise

00:46:55.610 - 00:47:10.020

interest rates anytime soon and have markets understand you will combat inflation when you need to, but right now that's not your primary concern and so that's what the rationale is, and most of the people, everyone, except for one person voted for it.

00:47:10.100 - 00:47:21.320

There are some people who can't vote, and the person who dissented, Tom Henning, who's dissented since every meeting, you knew he was dissenting for more than himself, and you could even name off who else he was dissenting for, you know, I know who on the Fed

00:47:21.320 - 00:47:36.810

feels different ways, and that's OK, but that wasn't enough. They were really angry. And they really didn't want to see the Fed's balance sheet stay at 2 trillion, they wanted to see it run off, and the division is pretty deep in terms

00:47:36.810 - 00:47:51.399

of one. They really feel there's a sense of, and I find it interesting to come from people who were previously tenured professors who's never faced actual unemployment. I was sitting next to the University of Chicago free market. I spent 4 hours at

00:47:51.399 - 00:48:02.600

the Fed of Chicago last week for a briefing in between 10 speeches last week, and I can't tell you how many other things going on, and I'm sitting next to this guy and I said, you know, have have classes resumed? And he said, well yeah, they

00:48:02.600 - 00:48:14.739

have, but I'm not teaching this quarter. And I said, he goes, actually I'm not teaching again till January, and then I only have to really teach two classes, it's no big deal, and I said, oh I said that's nice and I said you're

00:48:14.739 - 00:48:25.669

tenured, right? He said, yeah and then he went on to argue why the Fed, of course he never really thinks the Fed should exist in the first place, so it was kind of interesting to see this guy giving advice to the Federal

00:48:25.669 - 00:48:37.510

Reserve president of Chicago, a friend of mine, Charlie Evans, who's actually telling me, he says we shouldn't do anything and Charlie says, well, let me just clarify, did you ever think we should even exist? And he said, no. And he said, OK, we do

00:48:37.510 - 00:48:47.797

exist, so now that I exist, what should we do? He said, you should do nothing. He said, you know, let everything, you know, just let markets correct, and Charlie said that's how, you know, Charlie used to teach at University of Chicago. He said that's

00:48:47.797 - 00:49:02.116

all good, I understand your argument and letting things correct, but we do have a dual mandate. We do have this law we have to accommodate and two, you know, isn't there a role perhaps, because he was arguing that whatever the Fed did, it was

00:49:02.116 - 00:49:13.644

wiped out, you know, eventually because people would expect it to go away. It's a rational expectations hypothesis, so therefore if you expect it to go away, it has no effect. Well, the reality is it takes people a while to figure out if something's gonna be permanent

00:49:13.644 - 00:49:25.743

or temporary or how long it's gonna hang around, and in that while if the economy is allowed to heal a bit, you might get on a stronger footing by the time you have to take it away. And that's how monetary policy, all policy decisions are made,

00:49:26.003 - 00:49:41.321

and also the reality is that markets only work when they're transparent and when they're allowed to work, and we did a lot to make them work in a very dysfunctional way. And not a clearing way, over the last 3 decades I would argue,

00:49:41.331 - 00:49:54.811

and that so it's sort of irrelevant to talk about a market solution when there wasn't an ability to see what clear market pricing was even about. So anyways, I have a huge disagreement with that despite my University of Chicago background, I think it takes

00:49:54.811 - 00:50:07.219

it to an extreme and I find it somewhat hypocritical when tenured professors who have never faced the prospect of unemployment talk about how easy it is to be unemployed. And they do talk about how easy it is. In fact, one of the professors is a labor

00:50:07.219 - 00:50:20.300

professor, very brilliant man, and I respect him very much, but when he started talking about how much time people who are unemployed have to watch TV and sit around and not actually job hunt, you know, I know people who don't belong on unemployment insurance that

00:50:20.300 - 00:50:32.459

are bums. I think we all could probably find one. I know one that's one of my friends, my best friend, her brother is 60 years old, living with his mother, and he's a drunk, and he's using his unemployment insurance to drink, and he's being subsidized

00:50:32.459 - 00:50:45.110

by his mother. He's 60 years old. He lives with his mother. I mean, come on, and you know, there's no question that, you know, if unemployment insurance wasn't there, he'd just be subsidized by his mother. It's irrelevant, you know, but those are not

00:50:45.110 - 00:50:57.189

the majority and in fact, you know, the majority of people I know that are unemployed, you know what's really sad is how many people have been unemployed since the start of the crisis. They've got most people over 40% of those people who are unemployed today

00:50:57.189 - 00:51:09.879

lost their jobs in the fall of 2008, in the beginning of 2009. And a good majority of them are really looking to find a job and can't find a job to replace it and it's not just because of extensions to unemployment insurance that

00:51:09.879 - 00:51:24.635

they can't find a job. In fact, the, the empirical research is that less than any other recession, despite the fact that we've extended unemployment insurance longer than any other recovery, less than any other recovery, unemployment insurance, a smaller role. In terms of keeping people unemployed than

00:51:24.635 - 00:51:37.225

it did in the past because there's just not enough churn in jobs out there or match in jobs in terms of the skills levels and also there's a mobility factor although that seems to be smaller people can't sell a house when they

00:51:37.235 - 00:51:49.610

they usually you could move around to get a job and move to another region and the housing market has been one factor holding it back. So anyways, there's this huge disagreement. They go to the Wall Street Journal, and now they come around to the Jackson

00:51:49.610 - 00:52:02.010

Hole, Wyoming meeting. The reason I'm spending time on this is because the chairman was very clear in his remarks at that meeting and very clear about what he would do and I believe him when he says that. He basically said there's no consensus

00:52:02.010 - 00:52:14.729

in the FOMC. He said it outright. He says there's no consensus about where we are. About the economy, about the magnitude of the slowdown, and it's whether or not it's transitory or more permanent, and there's no consensus about where the course of policy should be

00:52:14.729 - 00:52:35.929

going forward, and reading between the lines using my own language, he said, however, if inflation further decelerates or if the economy continues to disappoint, you don't need a contraction in growth. If the growth rate fails to perform and reaccelerate enough. The committee will

00:52:35.929 - 00:52:53.689

vote to further stimulate, and he laid out four areas of where the committee could vote. The only one that he came up with that made any sense, he sort of negated them all, is not practical was large scale asset purchases, mortgage backed security purchases. And

00:52:53.689 - 00:53:04.729

what was interesting is he also made it very clear that if they were going to do it, they had to do it by a lot. Now talking amongst the Fed was, and this is, there's a lot of resistance to this. So this meeting that we

00:53:04.729 - 00:53:19.919

see tomorrow is going to be the Fed trying to corral the cats in what's now become a lion's den, and letting those people who object really voice their objections out there about, this new policy, but, I was a little stunned as the

00:53:19.979 - 00:53:32.689

numbers when I first thought, the Fed would go reengage in quantitative easing, I thought, well, they'll probably go up to their previous peak 2.5 trillion, then another half a trillion or 500 billion, and you remember we used to think

00:53:32.689 - 00:53:48.439

those numbers were small, 500 billion in mortgage backed security purchases, and I actually had someone, I can't quite, you just know where I was last week, I had someone ask me, well, what about another 1 trillion? Would that be considered big? And I sort

00:53:48.439 - 00:54:00.820

of blanked and I said 1 trillion, you did $1.2 trillion the first time during the middle of a crisis. A trillion is a big number. Do you think it's a big enough number? I'm like, well, you got a $2 trillion balance sheet, another $1 trillion. That

00:54:01.280 - 00:54:18.250

seems big to me. I know we've kind of, you know, regauged ourselves, but that still seems big to me, and it got me to thinking about what they're really thinking about. Another $1 trillion purchase of assets, mortgage backed securities most likely from moving

00:54:18.250 - 00:54:31.310

out of the treasury market. Why is it mortgage backed securities? Because they can. If they could, they buy houses, just buy them all up. They can't, you know, but they can buy by law. They can buy agency debt and they can buy mortgage backed

00:54:31.310 - 00:54:45.060

securities and most likely, and they've been making a ton of money on it so far and turning it back over to the treasury, but it seems to me that is where their argument is. Alan Blinder, who's former vice chair of the Fed, said, I

00:54:45.060 - 00:54:55.219

would predict by the end of the year, the Fed will be back in that game, so I think they will be back in that game. And frankly, if the Fed doesn't get back in the game, although I do expect the economy to re-accelerate, you're again talking

00:54:55.219 - 00:55:07.179

about shades of gray. And if you take it down from my average for next year is about 3.5%, accelerates towards 4% by the end of the year, you start taking it down towards back to 3%. You really, I mean this is, you're talking about

00:55:07.179 - 00:55:15.729

a close to a 10% unemployment rate because you gotta raise the the unemployment rate will go up before it goes down even as the economy begins to expand as jobs would come back in and people rejoin the labor force because we've got a lot of people

00:55:15.729 - 00:55:30.800

who've given up. So you know that that's a really tough situation and frankly at the end of the day, whatever the theoretical, how much will it help? I don't know. We don't know. It might help a lot more than we think because we are still

00:55:30.800 - 00:55:46.060

in a crisis. It might not help at all. We don't know the answer to that. The issue is, if you're Ben Bernanke, do you want to try and fail or not try at all, and if there's a path out of this. Any chance

00:55:46.060 - 00:56:01.340

out of this? If there's a chance of averting a double dip, what are you gonna do? You're gonna do something rather than nothing, if nothing else, because it's a law, and because you believe in it. And I think that ultimately is the most important issue is

00:56:01.340 - 00:56:13.179

that we will see the Fed step up to the plate. What we're gonna see on fiscal policy? Well, today Obama made it clear he didn't want to see high income taxes extended. I actually think that it's going to be extended. I think the high

00:56:13.179 - 00:56:26.254

income tax rate for one year. I was not in favor of the 2003 tax cuts. I would like to see an overhaul of the higher tax system to make it more simple, get rid of a lot of deductibility and lower rates, but effectively raise

00:56:26.254 - 00:56:38.330

tax revenues by doing that, but that's what, you know, I spent a lot of time with people like Alice Riven and the Congressional Budget Office people, and I worry about deficits, but I don't wanna have taxes go up infinitely. I think we need rules.

00:56:38.510 - 00:56:54.320

The reason that the 1990 budget accord worked was that there were rules that accompanied it called PO, and those PO rules allowed five years to pay for anything today in tax cuts or spending increases with offsets over the course of five years, and that allowed

00:56:54.320 - 00:57:09.209

for a lot of negotiation. Oh, something we don't really have cooperation in Washington DC where people could get outside of their term limits and have the consequences kick in when the economy was actually in firmer footing and we did see as

00:57:09.209 - 00:57:23.889

the economy moved back in. To surplus we also saw things like investment surge, a boom in the economy, a lot of redeploying of resources and it's not very efficient to have it all in the government sector, but we've got to decide

00:57:23.889 - 00:57:38.399

as a society where do we wanna cut because the major part of the deficit is not discretionary spending, you know. I love it when the Tea Party says, you know, don't touch my Medicare, but I don't want government. It's a government program. In fact, it's one

00:57:38.399 - 00:57:50.560

of the fastest growing government programs, you idiot. I'm sorry that that's not acceptable. You can't just have one side of the debate. You gotta both sides of the debate. You gotta have a more reasonable debate out there. And if you're part of the Tea Party

00:57:50.560 - 00:58:01.639

and I just offended you I'm not even sorry because you gotta think about these things. I'm sorry. It's my job to make you think about it all, OK? You know, it's not my job to come in and be fun, although I try to make

00:58:01.639 - 00:58:14.489

you laugh sometimes because it's not a very fun I'm talking about. So at the end of the day, we do have a lot of hurdles to face. This economy is a long way from healing, and the one thing, the only thing we do know from past

00:58:14.489 - 00:58:27.659

crises is it takes a really long time to get out of it. If we're lucky, we're 3 years into a 10 year cycle. If we're lucky. We also, if we're lucky, we're going to have growth during that cycle, if we're lucky, we don't have a double

00:58:27.659 - 00:58:43.340

dip, and it looks like we've done just about everything we could. To avert a Great Depression, but we're not done yet doing what we can do to avert a double dip fiscal policy, our hands are somewhat tied. I've actually come out in support of extending

00:58:43.340 - 00:58:56.520

the 2003 tax cuts for one more year because right now the distortions, I don't, we are in unprecedented times and to just say we had a boom when we had higher tax rates in the 1990s is irrelevant. It was against a different backdrop of an

00:58:56.520 - 00:59:10.250

economy. And yes, the top 2%, I'm sure quite a few of them in this room, although they tend to save less and not, affect consumption all that much when you see changes in tax laws, why do you wanna see it right now when you could

00:59:10.250 - 00:59:22.139

see a lot of distortions in how much income is taken this year versus next year, next year and how many games are being played and distortions to financial markets as well? I just don't think it's willing. I'm not willing to risk that for a year. I'd

00:59:22.139 - 00:59:34.020

like to see us think more holistically about our tax policy. About what should be done, but right now I'm not willing to take that risk and frankly I think a lot of Democrats just aren't willing to do it because they don't wanna be saying that

00:59:34.020 - 00:59:46.500

they raised taxes and a still fragile economic environment going into November. So I think we will see an extension of the tax cuts, the 2003 tax cuts at least for a year, and that will cost us something on our deficit, but ultimately we're gonna have

00:59:46.500 - 00:59:57.189

to come to terms with what we really care about in this economy, where do we really wanna spend? What are our priorities as a nation, and we're gonna have to sit down. And figure that out and that's not an easy discussion to have, but that's more

00:59:57.189 - 01:00:08.739

productive discussion than just saying yes or no, black or white. I think the world is much more colorful. I'm encouraged by the technological revolution. I think we're all, I mean, it amazes me what my kids can do in the palm of their hand with

01:00:08.739 - 01:00:20.550

their iPhone. It amazes me every single day to see how it's changing the way I do business, how much it's increased my productivity beyond a level that I can possibly stand because of course a lot of my productivity seems to be hours worked during the

01:00:20.550 - 01:00:35.919

day and not getting paid an additional hourly pay for those hours worked, which I think we all know what that is about, but nonetheless, I am encouraged by our ability as an economy to reinvent ourselves. I'm also encouraged by the shifting that I see

01:00:35.919 - 01:00:51.389

going on the restructuring of the US economy more towards investment, more reliance on exports, you know what, it's no fun. It means the consumer is left out. The consumer as a share of the economy as the economy recovers needs to fall. It's gone to unsustainable proportions.

01:00:51.469 - 01:01:04.520

Frankly, this is 30 years in the making. I could talk to you for another hour about how we got here, how we decided to stop educating people in the 1970s. Educational attainment in the United States reached a peak in the 1970s. We used to be number

01:01:04.520 - 01:01:17.379

one in the world of getting people from high school into college. We're not even the top 10 in the world today. That's ridiculous in an information age, just at the very moment the technological revolution hit in the 1980s, at the very moment that the bottom 50%

01:01:17.379 - 01:01:31.614

of wage earners started stagnating in their wages, we stopped educating people. The top 90th percentile of income earners is the top 10%. They accelerated. It isn't just the top 2%. The top 10% started seeing multiple returns to education. You didn't get returns to education until

01:01:31.614 - 01:01:44.395

the 1980s just in time for me to get to graduate degrees, and that was really important because you started to see returns to education, but we stopped supplying workers that were educated. Now we don't even if you get an education here and you're from

01:01:44.395 - 01:01:54.969

a foreign country, well go home and earn your profits abroad and do your innovation abroad because we don't want you paying taxes here. It's ridiculous what we do. We ship people, we educate the world and we ship them home. I don't understand

01:01:54.969 - 01:02:11.149

that at all, but that's what we do. So there's a lot that could be done that said we are in this boat together. The world is showing synchronimity again. We're seeing synchronous movements by the ECB, the Japanese bank, and the Federal Reserve in quantitative easing. We

01:02:11.149 - 01:02:25.959

know that we are greater than the sum of our parts. And that is encouraging the fact that we're willing to work together again, not all the policymakers, but some of the most important ones, the central bankers who at least for now, still have some independence out

01:02:25.959 - 01:02:40.659

there. I think that's very good and so I'm encouraged to see that because I do think it was amazing. If you would have looked at the numbers going into the week, a week ago, what's day, the 21st is when Morgan Stanley, this is my

01:02:40.659 - 01:02:59.320

stupid human tricks, when Morgan Stanley and Goldman Sachs became bank holding companies in 2008, Sunday, 21st of September. That week from September 15th, September 14th, Merrill got merged into Bank of America. Lehman fails at 1 a.m. in the morning, they finally released it, the

01:02:59.399 - 01:03:15.139

news release on September 15th AIG, the run on money market accounts. And by the end of the week, Morgan Stanley and Goldman Sachs, who said they didn't have any problems, because the panic had gotten to such a heightened level, had to become bank

01:03:15.139 - 01:03:27.770

holding companies so they could have got access to the Federal Reserve discount window. And that was only the beginning of the crisis that peaked in November and December of 2008. When you look at the magnitude of that and the fact that we

01:03:27.770 - 01:03:43.250

were able to avert it, I think our power is pretty amazing. We should be looking at 30% unemployment rates today. The shadow unemployment rate could be about that, but it'd be 50% otherwise. That's a big difference, I grew up in Detroit. Let me tell you, it's

01:03:43.250 - 01:03:56.659

ugly. You don't want to go there. I grew up in the Michigan militia. You don't want to meet them, they just got arrested, they're just, you know, they're getting big again. These guys carry guns, and they all, you know, they went in the 1980s, they

01:03:56.659 - 01:04:10.889

went and joined the army, and that was their way out, and then they didn't have anything else to do but play. Games in the woods of Michigan, and Michigan's such a big hunting state, my husband's a hunter, it drives me nuts, but anyways, 3rd

01:04:10.889 - 01:04:28.590

time's a charm, by the way in Michigan, Ford actually moved the day of Veterans Day. One year, I'll never forget this, they moved Veterans Day from a Wednesday to a Friday, because Friday was the opening of deer hunting season and they knew no one

01:04:28.590 - 01:04:44.189

would show up anyway, so they just decided to move a national holiday. You can't - I mean, reality is just stranger than fiction, isn't it? But I wanna leave you with this economy that is, shifting an economy that requires China to shift as well. We're

01:04:44.189 - 01:04:56.879

in this dysfunctional dance where for most of the post-World War II period we were the consumer of last resort for the world. We're the buyer of last resort. We cannot fill that role anymore. The rest of the world's having a hard time with that because they're

01:04:56.879 - 01:05:09.929

used to exporting a lot of stuff to us, and we're not gonna be able to continue with that. We have to move towards a more investment driven export driven economy and the rest of the world has to adapt. That's a big shift. That's a major change,

01:05:10.040 - 01:05:21.959

and it's not very fun. We started to do it in the 1990s, and we actually were very good at it. The problem was it doesn't get people re-elected in election cycles, and so we said, well, you know, let's just liberalize credit markets more so that consumers

01:05:21.959 - 01:05:31.719

can just fill that gap that's coming between the bottom 50th percentile and the top 90% with debt. And when we stopped educating, we said, oh, we'll give you a house, we don't care if you're a lot, you know, if you're not working, we'll

01:05:31.719 - 01:05:43.229

give you a house anyways, just so you are happy. You know, we'll give you a house and that's what the policy got sort of ratcheted up in the 2000s, but I can tell you, the only thing I can tell you

01:05:43.229 - 01:05:57.399

that I know for sure right now, I am highly uncertain. I'm making educated guesses. I'm willing to roll the dice. Not all economists are. I'm willing to roll the dice in the Fed. Unfortunately, the Fed is now shouldering the burden of being the stimulator of last

01:05:57.399 - 01:06:09.879

resort because we don't have a lot of options left because of our fiscal position, and I do think that matters. I think Greece should have been a shot over the, you know, the warning bell, that at some point in time when you run up deficits

01:06:09.879 - 01:06:23.000

really large, it matters, and we're getting, we're not that far from that. We need to think about it a lot more aggressively. But that said, I did learn something at Jackson Hole, and the last night there, I'm sitting around the table with central bankers. And I'll

01:06:23.000 - 01:06:35.080

tell you, you know, there's a central banker, well, first of all, there's a central banker from Greece, he is a little quiet, but really hungry. He went up to that buffet about 3 times, so I'm like, oh, you're not being fed back there. I

01:06:35.080 - 01:06:48.379

see public worker now, I understand, then there was a central banker from Hungary. And they're not doing very well either, so he didn't wanna talk too much, although he was a former partner at Deloitte, kinda interesting central banker, and my husband's a partner

01:06:48.379 - 01:06:58.510

at Deloitte, so they had a lot to talk about, and then there was a central banker from Sweden. Now they had their own crisis and they said how did you get out of your financial crisis because now you're being heralded as the, you know, the

01:06:58.510 - 01:07:13.100

country goes, well first of all we're small, we're homogeneous, and we just paid a bunch of consultants to come in from Wall Street and fix us. Not gonna do that here in the United States obviously that was before Wall Street contributed to the problems although

01:07:13.100 - 01:07:23.699

they did exactly what we incented them to do you can ask me about that later and on the last guy was this central banker from New Zealand and I spent a lot of time with the Australian central banker and Australian and New Zealand

01:07:23.699 - 01:07:33.229

are doing really well and they're not used to doing really well. They're used to doing really poorly, but they're doing really well right now because they're sending a lot of commodities. In fact, they had to cool off their economies a bit. They didn't even have

01:07:33.229 - 01:07:46.389

a recession, let alone a great recession. They're doing, they're just like, wow, and the guy from New Zealand's like, I wanna go home. It's scary here. Tall guy named Alan Bullard, you know, and in fact, he later did say in the Wall Street Journal, he

01:07:46.389 - 01:07:56.350

goes, I just want to get back to New Zealand now because it's a lot better over there, you know, they even had, he went back and they got an earthquake. He's like, nobody died, it's OK. We got shaken up, but nobody died. It's OK. And

01:07:56.350 - 01:08:07.669

he said, and we looked around the table and I said, What? I was walking around feeling like I had more questions than answers. I said, what do we all learn? What's one thing, just one thing we can all take away that we know

01:08:07.669 - 01:08:22.969

conclusively. About the economy today and everybody just kind of look at each other kind of like deers in the headlight. And Alan Bullard, he's a real tall guy, and he said. Well, I'm not sure about this conference, but recently, I learned something from some floods in

01:08:22.969 - 01:08:43.240

New Zealand. We said, well, go ahead, tell us what it is. And he sort of stood up, held his head up high, and he said. Cows float. Sheep sink. And um we're looking at him, and he goes, and of course the Hungarians being central

01:08:43.240 - 01:08:56.479

bankers that they are, he goes, how statistically are you sure that those sheep didn't just paddle away and go away from New Zealand and maybe they're just still out there to see somewhere and and he said, no, literally, he said the cows, you know, they

01:08:56.479 - 01:09:09.040

got a lot of gas. And they're very buoyant, and then they get waterlogged, they get more buoyant, they get like sponges or something, I don't know, they float down, and they come back in, they after 3 days, some of them come back and they're still mooing,

01:09:09.410 - 01:09:25.930

went out to sea and they come back, and he said, but the sheep, you know, shearing. And he said, again, how do you know he goes well, we have 40 million sheep in New Zealand, 4 per person, we kind of notice it when they're gone.

01:09:27.870 - 01:09:43.870

And he said, we've got some very, very good sheepdogs, honest to God, he said this, we've got some very, very good sheepdogs, and they're still barking at the water, come so the one thing I can tell you I know about the economy

01:09:43.870 - 01:09:56.149

today is the next time I'm in a flood, I'm gonna find the closest cow and hang on for dear life and given the way this economy is going, I can't guarantee we won't have another flood, but I can guarantee there will be a lot of cows

01:09:56.149 - 01:10:18.240

with a lot of economists hanging off of it. Thank you very much. Diane, thank you very much. I'm glad you cleared everything up for everybody. We're gonna take a very short 5 minute break and then our next panel is gonna go.