How to reinforce the international monetary system
How to reinforce the international monetary system
What will the world be like after the crisis? What rules will make it possible to avoid the excesses that caused it? The response of someone who has spent her life in between top positions in multilateral organisations and academic research in development economics.
and Krueger is professor of international economic economics at st. Johns Hopkins in a university in Washington since 2007 before taking on that position she held a number of very senior position in global economic policymaking including the position of first deputy managing director of the International Monetary Fund from 2001 to 2006 in the 1990s she was a professor of economics at Stanford University in the 1980s she was chief economist of the World Bank and in the 1970s she wrote a number of very very famous papers the most famous paper I recall was one in which she coined the term rent-seeking which is a term I'm not sure whether she invented it or whether she popularized it but it's certainly a term that that is of extreme relevance to our discussion this evening my name is Wolfgang Mancha I'm an associate editor of the Financial Times and I will be asking and a number of questions about the financial crisis we will go on for just under an hour and then we will open up the debate up open up the forum to to you and before we talk - before we try to predict the future let us start off predicting the past let us talk about let us talk about what what caused this financial crisis do we really do we really understand at this point why why this crisis came about is this really as we were led to believe a crisis of some dysfunctional financial markets a dysfunctional banking regulation system bad capital adequacy ratios which can be easily fixed or is this a much more fundamental crisis that might have you know might might might have something to do not just with the financial sector but also with the you know our global economic system our global monetary system those are important questions and ones to which I don't think any of us can really claim that we will or that we know the answer now we're learning we're thinking about it we've got some pieces of it I think it's going to be several years at least a good academic research and some retrospective before we're really on top of it so anything I say tonight is tentative and based on what I think now and I reserve the right to change my mind within the course of the discussion anyway no I do not think it was simply financial I think that the deep underlying cause if you want to call it that was the so-called global imbalances which led to the both the Chinese very large current account surplus and then the rest of the world had a choice it could indeed have tried to keep its books in order in which case the world would earlier have had a recession or it could have done what in fact happened but the u.s. did most of it which was a current account deficit to offset the Chinese surplus now that in turn did lead to very low world real interest rates and very low world real interest rates lead financial people to do some things and they lead real people do some things real people are more likely to borrow for houses when interest rates are low businesses in fact are more likely to take capital intensive investment but the financial sector is going to go on a search for yield they're going to go into more risky efforts simply to try and regain some of what they otherwise would have had had real interest rates been hired now that said there were a lot of things that happened that made things worse than they would otherwise be for example it's quite clear I think that there were a lot of financial institutions that did misjudge the situation Congress in the United States in 1998 passed an Equal Housing Opportunity Act that mandated that a fraction of all mortgages should be to low-income people and the banks obeyed in part because otherwise they couldn't have lent at all a lot of these things contributed and obviously if the margin made things worse but once the housing price increases were going up people did begin speculating housing there's no doubt mortgages were free in the sense that you didn't have to put anything down to get a house and many people were buying on pure speculation all of that contributed to the whole thing and quite clearly the banks did not keep track of what risk was on their books many of the CEOs I am told thought that they had much more of the risk off their books in the in fact had so a number of factors contributed both on the real and the financial side the fact that there was an increasing supply of unskilled labor intensive goods in East Asia basically meant that the policymakers in the industrial countries did not perceive the inflation they would have perceived in earlier run ups so that took away one of the signals that would have been there and other things went on to so obviously it was a perfect storm in some sense but to get away ahead of ourselves right now in the longer term this crisis is going to solve the long-term imbalances it seems to be precisely I think well let's see what happens next I mean we know that a current account deficit is the difference between saving and investment and we know that in the United States what's going to happen in the short term is the fiscal deficit which is public diss saving is going to go up greatly as I think it probably should but I suspect that we're what has happened so far which was a healthy running down to some extent slowly of the imbalances will probably be your first over the next year to that much said though quite clearly whatever else anybody thought we were at what you would call full employment certainly from 2002 for in 2007 and I think every elementary macroeconomics book talks about having a counter-cyclical fiscal policy whereby in the good years you at least balance your budget and maybe run a surplus so that in the bad years you can in fact run a deficit the United States was running a deficit in the good years so were many other countries and so it's hard not to blame well I think there are separate parts to that the first thing is the next or you know the first question is when will we hit bottom when will the turning point come the next question is quite clearly what will be the nature of the upturn and then finally what will be the longer-term and I think they are not they're interrelated and depending on what you think will happen in one you may have a different view of what will happen in the other there's a lot of evidence for green shoots in the United States right now and also in a few other countries East Asia Korea is announced much better figures just I think in the past couple of days and and some of the trade credit that dried up that made some of the exporting countries go down so dramatically so quickly seems to be coming back and that's going to affect a couple of other countries positively too but I think the u.s. probably will need the upturn and if it turns out that as things now look sometime this summer early fall the u.s. hits bottom that could order well for then getting some help to other parts of the world where things aren't so good that does assume of course that we get that turnaround and one of the things that I judge to be absolutely critical for going getting out of the bottom is whether the housing prices bottomed out as long housing prices are falling in the United States there will be incentives for more people to send their keys in the mail it's called jingle mail they just send the keys to the bank and that's the end of that u.s. bankruptcy law is different from anybody else's in that personal bankruptcy is quite separate from what you do with your house and as long as people are finding that devout the face value of what they owe is greater than what they can get for their mortgages there is an incentive that's much greater in the u.s. than other places which is intensified in this case because many of the foreclosures are on either second homes or homes were but for pure speculation and never lived in so that I'm prepped I guess I think that we will see the bottom of the housing market not uniformly throughout the country and not all at once but enough so people regain confidence in the near six eight month range and when that is clearly in sight then we will be can see the beginning of the upturn I think but we're already seeing him in the swimmer case on the Shiller case index we've had we've seen a fall since the peak of 30% houses that passed on past relationships which suggests that a period of plastic-lined would continue for at least a year if you look at the trend line that was the trend line of of house prices you know you would you would assume some forty to fifty percent a fall in peak to trough house prices we see extreme stress and the commercial and the commercial real estate is this not from the latest data as well is we not really being on the on the housing side a little too optimistic that we can see I mean what is it that would would actually you get the housing market up is it interest rates well there is some policy move in that direction how strong it is is subject to debate there is the four years the estimate has been that we need about one and a half million new housing units a year to replace excuse me ones that indeed are just falling apart plus new family formation the current last year's and this year's rate of new New Starts is four hundred thousand so we're working off that inventory at a fairly rapid pace prices have fallen there are already reports in a number of communities where indeed buying is picking up I have a small place in Florida and all the tourist agencies are now busy advertising and they bring people on tours they meet them on a bus and they don't even take them where they're going to stay first they take about a tour for the first day where they're going to show them 15 houses that have been for units that are fit for close it up for sale and the next day they go for 30 more the next day they go for 30 more and approximately one in three persons on those tours is buying people are looking and they're shopping for the low prices that does seem to be starting to kick in so I think you have this different charts which will be a little slower from the housing price bottom and that goes to the used housing market and what happens with that overhang and as I said we don't know but the judgment could be made that that's coming later this year let's stay with your scenario let's say there is a he might upturn in the housing market later this young recovery led by the United States what is your outlook beyond this is this going to be are we going to go back to growth rates ex-ante oh is this the long-term are we going to stay below potential growth or whatever you be defined to be well no what I said is we do at the bottom of the housing prices into the housing market and they've stabilized they're still in the discussion in the US a lot of questions about what the shape of the recovery will be where where one kind of argument is that we saw a fairly sharp downturns so we'll see a fairly sharp up tire and so it's a V the other argument is that know for whatever set of reasons it's going to be a much slower recovery and because it's going to be slower it's going to be much more than you shaped recovery and you might even call it the L shaped recovery if you really want to get pessimistic where you bounce along the bottom one of your ft correspondent said another one yesterday too anyway there is a question about that and I don't think the answer is and what's happening I think quite clearly the aggregate demand stimulus is going to be strong and it's going to be kicking in later this year and early next the stimulus bill itself plus the other things the administration is doing our pouring enormous monies into that and if indeed the bottom of the housing market comes then banks will be willing to lend again and then you get the flow of credit you got those two things demand would be picking up on that score but we also have the balance sheet effects and obviously a lot of people are going to spend a lot of time wanting to restore their balance sheets meaning that they will spend less than they otherwise would on consumption or investment or whatever for a while and that would auger the slower tottenham I read is that aggregate demand will outrace balance sheet effects over the next let's say year partly because people who cut back their expenditures have cut back very sharply much in fear of what would happen and some of that will be reversed even as others are restoring the damage and so on so I tend to be out if it's optimistic in the short run that the upturn will be fairly sharp in the US I'm not I think we talked about the rest of the world because that's more uneven but certainly and I'm not certainly but certainly I think that next year aggregate demand stimuli will be enough that that would offset balance sheets a longer term I'm not so optimistic and how longer-term on the balance sheets are in the United States before we turn to the rest of the world how long will it take for American households to repair the balance sheet goodness knows it's what some of them can't I mean some of them retired already when they're taking the hit and that's one argument way looking at the total loss does not tell you what can happen because there are people who just have to pretty much take it and that's it there's a second factor involved too in addition to how long will it take and that is how far they'll go and that's hard to say to the truth quote normal is the saving rate for consumers out of disposable income was about 6% yet that's worse when we there were home equity loans and everything flying it was down to minus four it's now back up to about plus 3 and the guesstimate is that coming in this coming quarter will be again up to four and how much higher will it go that's one of the unknowns the bigger worry I think over the next year or so is inflation the Federal Reserve has poured liquidity into the system like mad as to some extent was certainly appropriate but nobody knew how much then we have the stimulus package 13% fiscal deficit is a size not really seen in an industrial country before and projecting that two years running is at least a little bit scary all those things I think are very likely to lead to inflationary pressures and the big question over the intermediate term is can they withdraw that liquidity from the banking system and can they get the fiscal difficulties under control the US public debt to GDP or public debt as a percent of GDP at the beginning of 2008 was 41 percent on current projections it'll be up over 70 with by the end of the fiscal year 2010 and the debt servicing on federal deficit will have gone from 8 to 16 percent of GDP in that shorter time and if you believe that President Obama would stick to his present budget projections despite all that the u.s. goes to a hundred percent by the end of the thirteen decade when we hear from more and more economists that only inflation can save us now and my question to you is what is your or what is your assessment of how the present team at the Federal Reserve in particular would would face a situation in which you get price price price pressures I'm not obviously there are policies choices to be made the Fed has a dual target sum so that could be could be legitimate debate about letting inflation how what do you think they will react well first off I have not looked at the Fed minutes but I'm told by those who have but in every meeting there's a long discussion of how they'll start with throwing liquidity and how they'll exit and all that and there are strong statements of intention that they will do it and as of right now I'm quite sure you could bring every Fed governor into court they would swear and mean it that they were going to bring that liquidity back in under control as soon as they could now in fact when they should do it probably is not when we get back to full employment because there's always the lag between when monetary policy is put in place of winner tax they should probably be getting but withdrawing liquidity especially if you have trimming it strong and what your earlier than that but that's going to bring howls from the politicians and the politicians will indeed be putting extreme pressure on the Fed not to start with your own liquidity for a lot longer period of time then it should be which is what makes me quite pessimistic about the likelihood of getting that aren't the hot fiscal and monetary house in order in time if we didn't get the fiscal and monetary house in order in time what do you think would be the consequences on financial markets well the more the first question is what's the consequence just in the United States of getting close to a point where there's no fiscal space the u.s. hasn't been there before and it could get very close to fiscal dominance within a frightening lis short period of time especially giving given the health and the demographic pressures that are coming so I don't think we need to worry about relations with China because we'll have to worry about our own it's high I mean it's either inflation or high real interest rates in that scenario and probably both and if you have both of those that quite clearly is low growth and that sets off even more problems in the fiscal dimension and so on important with China it's hard to say the Chinese that you know have been making noises about wanting to get away from the dollar as the reserve currency so in the sense it would be reinforcing that settlement on their part okay we'll talk about the Chinese proposal for about banking one of the lessons we've learned from Japan is a lesson served in Japan is that a recovery could not be engineered through fiscal monetary policy at alone and there are some economists I'm not speaking loud enough but there's some economists who will argue that it was the resolution of the banking crisis in the late 90s in the early part of this decade that allowed Japan to recover finally and that the United States and Europe Europe even to an even greater extent is now repeating the same mistake by not forcefully making a resolution ring-fencing of bad assets recapitalisation of the system if necessary through nationalization and that that would basically prolong the prolong the crisis how do you see that well that's where I got to the bottom in the housing market being necessary because until we get to the bottom of the housing market no matter how much equity you pour into the banks when more foreclosures come about there's more loss of nor more non-performing loans and therefore more loss of equity and you get dragged back into it so that's why the housing market is so very important I think there was was an is well there was certainly I don't know the administration for the moment may have gone too far another direction but there was certainly a strong case for creating a bad Bank and putting the toxic assets in there instead of leaving them out as they have done there certainly is a case for recapitalisation but as I said in at the same time as some of these other things are happening and I think there was the case for shoring up the mortgage market earlier than they did redoing bankruptcy laws and personal bank and household bankruptcy our housing bankruptcy which is not quite the same thing and a number of those things which could have sped up that part of the process and would have been important so what do you actually make off the Geithner plan is this going to work well I don't know what it is I mean it's really not clear I mean I'm not joking in this that I think they have been making policy as fast as they can but it's simply not clear what they're going to do in some of these issues and I don't think there's any way that anybody outside can judge it I'm not even sure they agree and what they're going to do from one day to the next one one element of the white garden plan as we know is that they that it's it's it's not going to they're not going to Congress to ask for new money that they're trying to do this within the existing budget top and maneuver of the of the FDIC so the Germans have just launched a bank rescue plan which is completely cost free to the taxpayer can be basically solve this problem I mean assuming that the housing market behaves in the way we in some reasonable way that it will bottom out at some time you know later this year early next year is this reasonable to expect that that we can get this for free or is it going to cost us a lot of money well it's certainly gonna cost or already has cost so thinking it will cost more so the real question is how much I don't think that there's any way that this is going to be one that is cost free let's talk about the International the International dimension of this of this of this crisis governor Jew has as you mentioned made some noises the noise he made was that he talked about the dollar Chinese dollar trap and he advocated the use of Special Drawing rights as an alternative global currency you would be in a very good position to answer that question so tell us how unrealistic well I mean they're diverse the answer the first of which is that the SDR is composed of a bundle of currencies the dollar the pound the euro the end a few more and if they want to create their bundles like that there's nothing to stop them right now from doing it they could go and they could you know get that same bundle and use that currency bundle and that's no problem at all no sdrs as a legal entity or something else because they're issued by the International Monetary Fund and they are exchangeable only between governments that is if you somehow got a hold of an SDR you would not be able to spend it you could the only thing you do is give it to your government and your government could only give it to another government so that's I think a very different issue because what's going to be an international currency is something that has the faith and trust of the users of that currency and it has to have convertibility among above all else and the SDR does not have that convertibility period so assuming the we run with your scenario potential increase in inflation in America a problem arise and real interest rates possibly some tension and bond markets that could be could be expected in this scenario China having invested over trillion and in US and various US dollar in such a scenario be unchallenged as a global will there be others some in the euro obviously being being the second one moment everybody thought the dollar would depreciate as a result of the crisis and as you know it appreciated at the moment the world is still one where the dollar is the currency in which people have more faith than any other there are some currencies that might be attractive to hold in small amounts Australian dollar and so on but I don't think you want to carry that too far the euro has picked up as an international currency I think the reserves are now 15% in Euros room such as erm are growing and maybe one or one and a half percent a year I think that'll keep one for a while so the dollar will be lessened well the Chinese you know Keynes old comment about if you owe your bank a thousand dollars you've got a problem if it's a million they've got a problem well this is one of those the Chinese have trillion and in that sense they're not going to bring the house of cards down any more quickly than they have to and they know exactly what the problem is so I don't think that I see any massive pull out at all from them let's talk about the future of monitor of international economic institutions in your role as first deputy managing director of the IMF the IMF is really an institution that has a lot of things to do in now that you know that the IMF at the moment know about the IMF what do you think is the is the IMF will the IMF come out strength of this institution well there are two roles the IMF should be playing or three I suppose one is the surveillance role in the normal sense and it does that very well as it's got a core confidence there it's a pretty good firefighter and when countries get into crisis it's been reasonably good on that score the third thing it should be doing is the global imbalances and all that and that's where the key players are the United States the euro area the UK Japan China India I suppose maybe the oil exporters to Saudi Arabia they are all very big players and they are going to do what they want to do until such time as there's some kind of an international agreement which I think is going to have to be rules-based that somehow addresses some of these issues in a way that could be handled I don't think it got very much attention in the press I think the FT did pick it up that Rodrigo Toronto did try multilateral consultations and saw the need for that and the fund was right on it there was no problem there everybody meant at the assistant deputy level at the deputy level at the ministerial level everybody agreed at all three levels that something needed to be done everybody agreed that what it was was that the US should cut its deficit that the Chinese should cut their surplus etc and everybody went home and did nothing and the story and right now the ax fund obviously like any Fire Department when there are more fires is busier the surveillance role continues they can make sensible statements and if people want to listen they can but beyond that in terms of the global balancing I don't see how they can do it all right so you're pessimistic on the question of global global global rebalancing we've seen you know governments ignoring ignoring their their advice it's the fact that Europe is not fully represented there by you know several several players rather than a single player also an impediment that that one you know the world's second largest or in fact if you take the EU the world's largest economy is is actually not not pulling pulling pulling its weight well there's no question but that some of the emerging markets feel that they should have more say in the institution than they do and that's probably right in fact almost all decisions that the funder made on basis of consensus and I think it makes less difference than they think it does I think they need to have more voice and I was very encouraged to see governor Joe zuri proposal simply because it's the first time the Chinese have really participated in the international debate at all actively and that's a positive even if I don't think the STRs will fly I think it's still a step in the right direction but I do not see really at the moment how we're going to get there as you say Europe is over represented by lots the US according to the traditional formulas is slightly under represented because the US actually did give up some votes to do something which was I suppose almost token in the smallness of it but it was in the right direction something is probably going to have to give in that regard but I think it's going to be up to the Europeans to decide that if they are a union or they are act like one if you if we look long-term on this on this question what would you if you had to given the task to resolve the question of global imbalances you know for good and the dictator at the IMF and you could basically implement a policy totally unrealistic assumptions of course but what what what actions would you recommend in terms of in terms of currencies would you recommend a system some some people are saying we need we need to go back to a system of complete free-floating shape I don't say we need to complete a system going back to a Bretton Woods type arrangement the problem some say is the fact that's half of the world is totally up to the dollar the other half is free-floating is this an issue at all or should this be an issue well you can't look at an exchange rate alone you can't look at macro alone your fiscal alone you can't look at monetary that's how the three go together which is why I'm not at all sure you can approach it that way my guess is that this is really if I said we don't know about other things we really don't know about this we're gonna have to have a rules-based system and it's going to have to be some kind of formula if you like that people get together and agree on outcome so that China for example will stay in a range of I don't know current account surplus of two to five percent of GDP the US will make sure its deficit doesn't get out of the range of whatever etc etc and gonna need a rules-based system much like we do and trade much like we do in other things and there would have to be penalty functions and a legalistic procedure to deal with those who do not behave according to it which would have to take into account things like rags and so on so that what I've sketched is the barrister sketches and it would have to be fleshed out but it is in my thinking it's the only way that we can do it and it will and will have to involve the central banks as well monetary policy well if you look at the outcome ie the current account deficit how you get that within that range is up to each individual country I mean that's why I think you can't do it on the others because you can't do it on monetary you can't do it on fiscal and you can't do it on exchange rate because it is the conjunction of the three and how consistent they are with each other but you can observe a current account deficit it's an observable outcome and you know what goes into it and countries would then have a choice right now we have Latvia having decided that they will maintain their exchange rate taking a 25% nominal cut in wages in the public sector because they're choosing to do it by domestic deflation I'm not sure that they should have made that choice but it's certainly a choice that a country has the right to make and doing it on the basis of what you need to achieve rather than underachieve it seems to me would be more likely to get somewhere in the process right on your assessment of what is likely to happen in the future do you think we will get some new of the process that you described some new Bretton Woods type global agreement on balances will it take another crisis thinking among the economists I know is swinging more and more toward the underlying global imbalance problem it's sort of being the underlying thing leading to the low real interest rates and so on down the line that's come up strongly only in the past year and I think as that goes on there may or I hope there could be some move in that direction in the near term but truthfully I don't see governments or the thinking as yet far enough advanced there I fear that what will happen is we will get out of this crisis however we get out of it for better for worse and for 10 or 15 years things will go along and then pretty soon we'll be back moving in the same direction again unless we do something now but if people aren't convinced enough and if there's not the political will it won't happen I mean the focus of policymakers at the moment is on regulation it is on on immediate firefighting as we've seen with the decision by the g20 summit to award funds to the IMF for crisis management to increase the SDR do you believe that these measures taken by the g20 will at least solve the problem insufficient as they are we be able you know we agree to sort out the problem in the long run will we are we basically out of the out of the worst part of the crisis in terms of you know potential currency attacks in East Europe other emerging markets coming under under under pressure no that was ten questions okay well first off I'm not as sanguine about the g20 as you are you may recall their first Heads of Government meeting was last November they had no other positive action they could take they couldn't think of anything else to do so they all swore that they would have the standstill on any trade protection for the next year nobody have those g20 and they're really twenty two of them was going to do any protectionist measure the World Bank did a report in March seventeen of them had already undertaken new protectionist measures and these were not always trivial things Argentina going to more much more strenuous import licensing India cut off Chinese imports of a number of goods I will not even mention the United States and the automobile industry by American and a number of other things but I mean lots of countries have been guilty you know if this is g20 commitment I'm supposed to depend on it then what they committed to come April or was a series of things which will see whether they do or not they haven't as yet done most of them and some of them didn't cost anything I'm sure those will get done the SDR allocation will be there and in the SDR is 250 billion that they're talking about allocating my back-of-the-envelope number says that arguably fifty billion will go to countries low enough if an income and it need enough so they'll actually spend it so that's a fifty billion dollar benefit for low-income countries which is not a bad thing but it doesn't really address the magnitude of the crisis I think the US Congress was going to vote early this week on a defense appropriation I don't know what happened on that because the amendment that would have given the fund the additional funds you talked about was in that bill and it was quite contentious when I last wouldn't be just a sign of the state so I don't know what's happening there regulation is an interesting one everybody agrees we there it was does anybody in this room think we need regulation that is not sensible and what they was in the GD well the committee cases they want sensible regulation I mean how could you disagree with that now what that is they'd be in the eye of the beholder and I think the ideas as to what it is are very different between different people in different countries and again there's a lot of discussion going on this whole big bank issue is a huge one if you keep big banks that are too big to fail the argument is they need tighter regulation and I think I've got quite a bit of sympathy with that argument but that's one way of going higher equity requirements counter-cyclical equity requirements subordinated debt or alternatively preferred stock the banks have to convert if their equity falls there a number of these things all of which could make sense but how we get there I don't know internationally I'm even more skeptical the efforts in international regulation so far have consisted largely about a 1 and Basel 2001 was the one that said that short-term borrowing was not to cut very much against risk so then when developing countries for a short because they can't borrow log that's risk free the banks that doesn't make any sense and then helped in the 1980s get us where we were and so on and so forth so now this time we're going on risk weighted capital in another sense that doesn't make any sense either and if that's what international regulation is going to do I don't think it's very sensible so I would be against that they doubt that we will be we will be able to agree on or impose hefty regulations on the financial sector except for some national measures some revenge medicine on pay but nothing of great substance no fundamentally different regulation on for example make making markets would make sense Jake checking bank pay is one of the ones that I regard as unsensible regulation though the best the best you can do is you could either drive good bankers to other countries that are so stupid or if that you don't do that then you'll drive them out of banking if all the countries do it together out of banking into other and here we want a better banking system so we're gonna drive the best people away which doesn't seem to me to do it so that that's not what I would have regarded as part of the sense of apart some of these other things I think can be individually done in countries but there are needs for cross-border things I mean Europe does that better than anybody else with the Irish guarantee deposit scheme which took everybody else right away and there are measures like that that require it but how you get there is something else and the US administration has stated although they say that other things are then back down that they will not go for international regulation when they did not give a reason so you basically predict that the future finance will be pretty much the same as the past of finance except a little bit more dysfunctional well I'm not sure about more dysfunctional I mean I can well imagine that getting variable and counter cyclical liquid equity requirements would make a lot of sense I can see getting rid of some of the bigger banks would make a lot of sense getting a market in some of these I don't think you could regulate off financial instruments because if I lend you a dollar am i a financial institution you know you just can't be done money is fungible but you can have markets in mortgages and things like that when they're split up you could people can tell what they are and you can have much more transparency and that would help you mentioned briefly and let's change subject let's focus on trade you mentioned that countries have imposed trade restrictions is is trade are we going to see in your expectations gonna see more of it or is this not as bad as we expected and some people say okay it's gotten a little worse we've seen we've seen some some measures but really we haven't seen anything like we saw in the 1930s this isn't really as bad and so as long as better than 1930s it's okay first off I think it depends a bit on how long the whole situation lasts but and what has come up is a lot of new forms of protectionism the auto industry is a classic case in point of course where the United States decided that it would bail out its companies and of course then we had the Canadians immediately doing so the Koreans immediately doing so the French the Brits and so on and so forth so everybody's lending and the world we taxpayers in the world as a whole are paying an awful lot more than we need to for the auto industry which does need restructuring but not of the kind we're doing and other industries I fear we may see some of that same kind of thing the buy American provisions are still there some of them are actually quite shocking and other countries are no better in that regard if if we get the turnaround as I hope this summer I would hope we could get back from that somehow although if the g20 wanted to do something more useful they'd get that Doha round completed very quickly and they would exude me bring bound tariffs when applied tariffs closer together another wise shore up the system so there's plenty to be done on trade but the evidence seems to be the trade credit froze more quickly than any other kind last fall and is actually increasing again now so that's one form of credit that's flowing more and there are some positive results from that and the trade numbers for this year may not be quite as bad as the WTO is forecasting but that doesn't make them good okay I would like to opportunity to drink any question from the audience to work to him to me over there and then over them do we have a microphone how does it work sorry we'll get a microphone in a second just a min I'm getting nothing but the static that George didn't want oh okay thanks static same thing George enter something I can send up a circuit so can I so you can see me okay the question was about is about unbalances in particular as far as I know three-quarters of American golf in the last many years has been due to consumer spending so and this consumer spending was financed by motorcade mortgage home withdrawal some other kind of debt so the problem is that if there is no other source of spending power for consumers that will be not any sizeable recovery the question is don't you think that there should be some kind of increasing of a consumer powers increasing of a consumer spending power in the future in order to be able to have a more sustainable and better coffee well I consumer spending clearly went up and consumer saving clearly went down as I said it got down to minus 4 percent of disposable income but it's now back up to +4 it has changed quite quickly and quite markedly so there's that but the second thing is the part of the reason that happened was because of these global imbalances and that was part of the u.s. current account deficit and one of the things that needs to happen if the u.s. is going to cut its current drought devis is that we need more exports relative to imports and that will be something of an offset to somewhat dampen to consumer spending so no I don't think at the moment that we need to do more on that one we do though obviously need to get out of the recession and get back to a higher level of real income and that in itself would request give consumers more spending power it's only body if the government didn't use the the Canadian politics use politic economic politic more libertarian possible well good evening what could have happened if governments instead of applying the Keynesian policies can you hear me 1 2 3 this is static go ahead well of us happier say my question the US government and the other governments in Europe with the exception of Italy did not provide cash to the banks so the question if the US government had not used huge funds to support the demand by financing banks might have been guilty of using the wrong way if they had supported the economy by using the same funds but giving the funds using funds to stimulate consumption to support households or to support small enterprises what would have happened do you think that maybe a multiplier effect could have happened or what could have happened maybe that could have hampered recovery if such a huge amount of money could have been given to households and the second wave of the crisis with the issue of credit debit card is that second leg of the crisis coming is it true or not did make impacts release too many debit cards or not and to do will wouldn't the US have been better off to spend more giving consumers more spending power instead of putting to the bank's I think the I don't think one can look at it quite that way the financial system is the lifeblood of an economy no modern economy can function without a good well working financial system in fact the economic history of the West is an economic history where you had real advances but they always took the financial system going along to support that and the history the Great Depression in fact the conclusion as to why the Great Depression was as bad as it was was because the policy mistake was not to maintain the flow of credit they'd let it collapse when they shouldn't have so I I think I think the government of the United States and probably others has a very hard time explaining why they should do something with the banks and not for those quote poor auto workers but on the other hand you know an economy can thrive without autos being produced and it cannot thrive without the financial system so that just had to be part of the solution so that was your first question your second question was on credit cards and how was that going the delinquency rate on credit cards is up but not astonishingly so yes it's if in fact the turning point comes sometime this summer there's reason to think that that may not happen but it's a worry there's no doubt seamen telemetry I'd like to congratulate you for the importance of the housing markets distressed indeed that's a key element you said that this is one of the key factors the real estate is one of the key factors for the crisis but you also said that there are opportunities to come out from the crisis because of the real estate market I'm a bit concerned and I'm concerned because survey conducted by The Economist a few years ago estimated that between 98 and oh-6 the the household real-estate moved from 30 to 70 trillion dollars in less than eight years it is as if the GDP of those countries had doubled that means that we used we took a lot of resources from households the crisis is going to be solved by stimulating the wish to buy houses from families I had expected that one could come out from the crisis with a slightly a slightly different economy from that of the past as a matter of fact this is not the case why can we speak of producing wealth through the production system of Western countries have we given up to spend for research and development thank you so far there has been no support for how construction support has been to help families stay in their homes and other things that would make whenever there are foreclosures what that means is the banks are going to resell the houses that means more supply on the market that means more price downward pressure on the prices that makes sense for the government to try and help people who can re or who can refinance their homes in a way where they can pay their mortgages over a longer period of time or something to do one and that's good because they could stay in their houses it's good because then there's less overhang in the market and it's good because the turning point will come sooner that does not mean there's more construction of housing at the moment it does of course mean the turning point will come sooner but that's I think a different issue so I don't think there's been that now the increase that you cited in The Economist is the increase in the value of the housing not the value of new construction over that period and there's a big difference because part of the reason we got in trouble was because the prices went up so much and the concern was that the relative price of housing had increased so I think that but as I share your issue that the policy has not been quite as foolish as you think it's been in that regard grazie come a template Edina man come in mr. Torre also as local administrators we have appreciated what is said about large financial and banking institutions what he said about g20 and the World Bank and the International Monetary Fund you also stated that some measures have been stated or declared but then they have not been turned into reality by individual governments what is the case it would have been possible to reduce the crisis so my question to you is the following which measures discussed during the latest g20 meetings could have partly prevented the crisis from being generalized and then what do you think of some economists who support the reintroduction of protectionism to avoid the American economic defeat on the g20 obviously well they said they wanted to do sensible regulation but they can't agree on what that is so that's why they're not doing anything I tried to say that I think there are things individual governments can do along with regulatory side that would make things better in individual countries I hope that there will be a way forward on some of the things that could be done internationally but I don't see action coming there right now on protectionism I think it's crucial that we not go into a protectionist spiral now the worst I mean the United States like it or don't like it is too large to leave out of the world trading system and unfortunately if other countries start taking protectionist measures against the United States the United States citizens will put pressure on their congressmen even more than they do now and they do it now for more protection and I would be very much afraid then of a trade war and with a trade war I would be afraid of this sinking back into a 1930s style beggar-thy-neighbor situation so I think that's horribly dangerous it's bad enough you hurt yourself when you're protective in this side of environment the retaliation possibilities are truly frightening and not something that anybody we should wish on this poor world we have enough problems without having it's much easier to impose protection than it is to get rid of it just is not symmetric in that regard at all we now have I'm gonna take three questions in a row because we only have 15 minutes left we won't be able to get everyone in but there was this gentleman over there and the gentleman at the back in the blue shirt excuse me already how I was having the microphone I just wanted to ask I'm sorry I'm I'm deciding who's taking the questions I'm sorry you know if you're not starting with the gentleman over there yes I have just one little quiz questions do you think that this position taken by the u.s. stablishment in in order in the China proposals is risky or could have some diplomatically problems in a next or some future and then if in the deflation inflation cycle there is some generational component and if like in the thirties it could be at a time for new theoretical proposals in economics no no excuse me over there hello thank you very much for your remarks I like you and all I'm also a former staff member at the IMF I was there earlier in a much much lower level than you were my question has to do with your point about a rules-based system and I'm interested specifically and what if anything you think that the Obama administration might be able to do to encourage putting in place a rules-based system of the sort that you mentioned Thanks Thanks my name is Francisco annecy and I guess I still consider myself a student from the University of Cambridge I would have two main questions the first is actually it follows your or your concept of global imbalances in the sense that yesterday too many cosiness calcio are former finance minister and a professor stress the fact that we we're living in a world of imbalances but we are now moving towards a more balanced world at least him for aspect the first is we are moving into a world where the US is consuming less and you do have China that is saving a bit less you do have you do have a world in which politics still counts so you do have Washington counting a bit more than than the new york stock exchange the relationship between the order discrepancy between the real economy and the financial markets is going to be rebalanced and the degree of inequalities that we used to have in the 90s so the fat cats of Wall Street versus the normal people are going to be addressed so he was saying we are moving now towards a word of towards a more balanced word and I wonder how you would react to those to that point I mean he's he's also a banker because he's a vice chairman of Morgan Stanley but and he needs to be an optimist but the second quick question would be simply I mean you live in the best of the two words of Washington DC both the World Bank and the IMF and can you give us some practice the practical dimension of the reforms that will come out of the crisis for these two institution some of the tendencies were already present if I that we now have the last head of the IMF who's an European but I guess that there are a lot of questions I mean relating to reforms and international financial architecture things okay what do I think of the US government and the policy right now with regard to situation in China proposals I do not think the current administration has communicated what its policies will be I think secretary of the Treasury Geithner was arriving in China today we'll know a lot more about that the end of this week he made some unfortunate statements during his confirmation hearing to the effect the Chinese were manipulating the currency that cannot have helped anything since that time he's made several obvious efforts to back away from that statement which I do not think will hurt a thing I'm sure he's going to try and convince them as I believe they should be convinced that it's in their own self-interest to increase domestic consumption our relative to GDP etc but how far he'll get is another question but I don't think we know how the Obama administration will deal with that issue yeah let's see the second question was in flow yeah would we get new policy proposals as we did in the 1930s but with regard to inflation etc I do think that a lot of academic work is going to come out of this and from the policy community too I don't think we're yet at the point where we will see a lot of brand-new thinking because we're not quite there but I think already we've seen quite a bit in terms of in Jews for bankers we seen quite a bit in terms of bank structures and how you might modify them and I think more along those lines is coming quite quickly so certainly there's that and of course we can always hope that there'll be more it seems to me that the dichotomy between people who considered themselves financial economists and those who considered themselves real economists has been far too great and if anybody didn't think finance was part of macro this crisis should convince them to the contrary so something will be happening there almost for sure okay what do I think are the prospects for the rules-based system well as I said I'm not at all optimistic but I think like anything else if today one of you could go and persuade your prime minister that this was the greatest thing under the Sun it would still get nowhere it would get nowhere because first off there needs to be a lot of discussion there needs to be a lot of thought about it there need to be a lot of people thinking about how you might do this getting some rules that might make sense would be relatively hard work it would not be easy and the kinds of changes that have come about in the world economy have not been because somebody had a great idea one day and sold their prime minister on it the next it normally takes quite a bit of filtering of ideas through the system before they get there and that has not even started in this particular case I think that's something where we do need to do a great deal of work and where the academics among you and the policy want someone you can be very it can contribute usefully okay we're rebalancing in such a way that between the real economy in the financial markets maybe I don't know I did I don't know how you would measure how much power the financial markets that ahead of time err afterward darn do I know you know how you'd ever measure this balance certainly it is was true in the 1930s that the bankers and the financial people were somewhat discredited and their voice went down that may happen again I don't know and what if it does happen again I don't know whether it's a good thing or a bad thing I think on some of these regulation issues we very much need the inputs of the financial community and if people go ahead and a vindictive style because they think those bankers were so bad I'm sure that will get us nowhere I hope that whatever rebalancing there is will be constructive and not otherwise the next one you have I'm having trouble reading my writing here the increasing inequality I don't have any comment on then finally the World Bank and the IMF reforms I don't think we see very much yet will we will there be no nationality requirement for a new managing director a new president of the World Bank I suspect there will not be what worries me is and that goes to the identity subject of this conference that what worries me is I hear I read that some African has after a conference where they talked about getting rid of the national interests and now we can have an african as president and so now we can have an Asian it's their turn and the nationality issue as it has come up in the United Nations strikes me as one of the major if not the major reason why that organization has not been effective you cannot have people working side by side where the accident of birth is going to determine who gets promoted the bank and the fund have been far more not completely but far more meritocratic than the other institutions which is one of the reasons they've been able to do something and I would hate to see that destroyed so going to a system where you choose the best qualified guy I am all for going to a system where we don't have a nationality issue so this type is the turn of East Asia next time it's the turn of Africa then we'll go to Latin America then the Middle East that's that really would be I think very unhealthy so that one I'm schizophrenic because I like the I do getting away from nationalities but I'm not sure it does it and I think you'd have to or I would like to see some really ironclad understanding to get away from the nationality issue if you went that far on other reforms it's hard to say I don't think enough has happened yet the fund is very busy with what it's doing its financing base should be reformed and and I think will be reformed and that was coming anyway but this will speed it up and that's a good thing on other issues I'm just not sure so I don't think I can say anything important thank you well I think I thank you and for the for this marathon of Q&A and I think the audience I'm sorry I couldn't take everybody to ask the question thank you very much