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The Financial Crisis: Long Term Implications

A Council on Foreign Relations Panel Discussion

Panelists: Greg Ip, U.S. Economics Editor, The Economist, David Leonhardt, Columnist, The New York Times, and Sebastian Mallaby, Director, Maurice R. Greenberg Center For Geoeconomic Studies
Presider: Kevin Nealer, Partner, The Scowcroft Group
October 3, 2008
Council on Foreign Relations

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KEVIN NEALER: My name's Kevin Nealer, and on behalf of Sebastian Mallaby, Kay King, Emily McCloud (sp) and the Washington Council team, I'd like to welcome both those in the room and our New York and corporate members joining us domestically and internationally by phone for our discussions on the long-term implications of the current financial crisis.

I'm very fortunate, in addition to Sebastian Mallaby, who is the director of Geoeconomic studies program at the Council and a regular contributor to his (own tome ?) at The Washington Post, we've got the two other legs of the political economy triumvirate here -- The Economist's U.S. Economic Editor Greg Ip and The New York Times Economic Scene and Economix -- that's with an x -- columnist David Leonhardt. If you haven't tuned into that website, you need to.

In the past month these guys have been -- spent more time on major TV and radio outlets than has anybody with a possible exception of Governor Palin, so we're delighted to get them all together here -- (laughter) -- to talk about this exquisitely complicated issue as the House vote is happening.

I'd urge you all to turn off your cell phones and anything else that rings or makes a noise, understanding that you're probably going to want to go short or long but you'll have to do that in the dark, I'm afraid. (Laughter.)

I was trying to think of a way to kick this off and I was reminded of a story by our ambassador and former trade negotiator Bill Brock. He tells a wonderful tale about his fellow Tennessean, Jimmy, who's taking the oral exam to be a railway switchman. Now let me explain at the outset that my uncle used to work for the Pennsylvanian Railroad and being from western Pennsylvania, it's pretty much the same kind of culture.

Now, Billy (sic) did very well in identifying (semifore ? ) colors and which switches did which kind of thing in the yard. But then the examiner asked him, "Now, you've got the 8:15 freight coming in from Memphis on track four, and you've got the 7:45 passenger coming in from Johnson City and she's on track four, too. And you look out from the wheelhouse and you don't have time to go down that yard and throw a switch. What do you do?"

He thinks about this for a moment and then he says, "Well, I'd straightaway call my cousin Charlie."

"Really? Is Charlie an engineer? Is Charlie a brakeman?"

He said, "No, sir, but Charlie ain't never seen a train wreck as big as this one's going be." (Laughter.)

Let's stipulate at the outset that ain't none of us ever seen a train wreck as big as this one might be. (Laughter.) But the work that we're trying to do today is to understand its impact on U.S. interests, economic standing and power in the world.

And I thought I'd first throw the burden to David. We saw a jobs number today that I think is the worst in five years -- like, 160,000 people off the payroll. What does this mean, do you think, for the trajectory of the crisis, and can you give us any ideas as to what message House members might take going into the chamber and the vote as they think about this issue?

DAVID LEONHARDT: Absolutely. Earlier this week I was working on a piece trying to explain what was going on to people and talking about how one of the reasons it's hard is that the effects of this actually haven't reached most people yet. Most people haven't gone out and tried to get a loan and been unable to get it.

And as I was working on it, I read a piece that a colleague of mine was doing about how state governments are now having trouble getting funding and I read -- in our internal computer system that was going to run the same day as mine -- and I read another piece about how auto sales were about to tank, and sure enough we got the horrible numbers this week. And I realized that, sort of, I think we're actually right now at this moment where they're really just starting to affect many, many more people away from the financial market -- I mean, this week. And this is by far the most tangible evidence of that.

So, as you mention, we had a net loss of 159,000 jobs last month, which is the worst number in five years. It's more than twice the monthly loss from the last two months. It's significantly worse than forecasters were expecting.

And here's the really bad news: The Bureau of Labor Statistics doesn't do its survey at the end of the month; it does it on the week that includes the 12th of the month, which this month means it came out before -- they did the survey before the worst of the financial crisis. And so I think we're now likely -- not certainly, but likely heading into a new stage with the job market and the consumer economy that's going to be significantly worse.

And the thing that's tough about this is that this had been an unusually weak economic expansion for most workers. Job growth has been relatively mild; it's been fine but it hasn't been good. And pay growth has been less than fine. Most families' pay has either just barely kept up with inflation or not quite kept up with inflation. And the idea that we're now heading into a period in which we're going to have job losses and we're going to have almost certainly pay losses -- we're already getting pay losses relative to inflation -- really I think sets the stage for some more worries about how this ripples across the consumer economy in terms of people's ability to pay for their mortgage and to pay off other kinds of loans. And so it's definitely worrisome. I normally like to try to find a silver lining in things; I didn't find one yet in this month's job report.

GREG IP: (Inaudible.)

NEALER: Let me invite you guys -- this needs to be highly iterative. You don't do this with three journalists but that you expect that they might have questions, so to the extent you want to interrogate one another, I'll let you do that. Is there anything you want to add?

IP: Well, you know, as you were speaking, David, I was thinking of what period does this feel like? This reminds me a lot of 9/11 actually because even in the wake of that, we were -- even running into that event we were getting signs that the economy weakening. And then after 9/11, of course the markets were shut for a week and when they reopened the Dow promptly plunged several thousand points. And the next few employment reports were horrible -- I mean 3 (00,000) or 400,000 net loss.

But what was kind of interesting was how the scent of urgency in crisis galvanized the policymaking apparatus. The Federal Reserve reduced its interest rate by about 150 basis points over the next two months. We had new fiscal stimulus. We just had massive, massive financial policy response to that event in -- quite apart from the massive, you know, a national security response. And when we look back -- and actually November marked the bottom.

Now, I'm certainly not going to go out on a limb and say this marks the bottom, but we have seen coincident with our own financial 9/11 -- the closeness of the dates is actually rather striking -- a massive, massive policy response -- things that we have never seen before. I mean, it's not just this $700 billion bailout which looks like it will hopefully pass today, but I mean, the Federal Reserve's balance sheet has expanded by -- it's doubled. It has gone from 800 billion (dollars) to $1.5 trillion in three or four weeks. All that extra $700 billion has gone into new lending of all sorts of new and creative forms that the Fed has never done before. And it's -- and then just throwing off all of the, you know, all the other stuff that was thrown into this package. You know, I mean it's great for the (wooden heirloom street ?). Do you know that? It's like a lot of jobs (out of that ?).

So I'm not about to sort of, like -- sort of say this is the turning point, but there is something about the environment which galvanizes a response which when we look back we might say was the turning point.

LEONHARDT: I agree with that. And I think we are seeing likely, a similarly aggressive response. I mean, central bankers have gotten very good at trying to prevent deep recessions.

I think the worrisome thing about that parallel is that a lot of what helped us get out of the 2001 recession was the housing boom. And there is this wonderful paper -- you'll probably remember who the author is -- by Don Kohn, the vice chairman of the Fed, and one or two other Fed economists.

IP: I know the work; I don't remember the coauthor.

LEONHARDT: In which they tried to -- it's not fair to quiz the panel; it's not a panel about coauthors -- (laughter) -- in which they tried to put some numbers on just how much the housing boom contributed to spending. And it really contributed a ton to spending.

IP: Yes.

LEONHARDT: And so not only will we not have that -- maybe we'll have something else; maybe we'll have a great biomedical revolution -- but that's not just a sort of push that's lacking. It's going to be something that's going to restrain the economy because housing prices are going to be falling and people are going to have to save more.

NEALER: You're both kind of celebrating this government activism and I think for good reason, but I was thinking about the conversation I had earlier with Sebastian and -- look, as you look at these events and this -- the role of government, the accretion of responsibility for economic security by government, you've written a lot about globalization. What does that do to the storyline on globalization? I mean, the secular trend here was supposed to be that the liberal market story triumphant, governments matter less in the economy and indeed that's -- seems to me an essential part of the American economic narrative that we've carried forth were really the hood ornament on globalization for the markets. What next? I mean --

SEBASTIAN MALLABY: I think we're at a very interesting moment for that question. I mean, in the sense that (the consensus ?) from the 1990s and up to, you know, just recently was that globalization was a project around which you could build a majority could support. I think it was a contended issue but there was a majority in favor of it because it was a liberal project. It was a pro-market project. It was a project that basically said we can rely and open ourselves up to foreign trade, foreign capital flows, movements of people, movements of ideas, because these ideas are basically -- they're liberal. They're individuals who are essentially profit seeking. We understand their ideas. They want to improve their own lives either by exporting to us, by moving to our country, by moving capital around. It's not political agenda that anybody's going to thrust on us -- not if globalization changes character -- and this was going to happen before the crisis -- because state-owned enterprises become more important, because sovereign wealth funds become more important, because central banks have huge reserves which have grown up in the last couple of years with the commodity boom. And these reserves are being concentrated in -- (inaudible) -- authoritarian governments, whether we're talking about China or the Arab Gulf or -- (inaudible) -- Russia.

And so there was already a question about this liberal premise on which globalization has been built. And if on top of that now you have, first of all, a growth of government because government is stepping in to help with bailouts, a retreat from market mechanisms, as evidenced by clamping down on short selling in the financial market and not believing in the mark-to-market price of assets, which is a phenomenon in the Treasury's bailout plan. It seems to want to buy assets above the, quote, "fire-sale prices" -- i.e., not the market price.

So you have some policy retreat from belief in market signals. And on top of that I think the, sort of, Main Street response is going to be, "Gee, if this is what globalization brings us, I'm not sure we like it." So I think there's a lot of things coming together both at a sort of popular and political level. I would anticipate that the next Congress will be, you know, even less inclined to pass trade agreements.

So I think there's going to be a time, you know, when we come through this when one has to reengage the debate about globalization -- make the case for us in a new way.

NEALER: Greg, picking up from what you said before, can you play out for us where you think we are in the trajectory of the crisis? Sebastian's, you know, teased ahead the idea of that the fact that whoever is president, we're going to have a new and probably very different-looking Congress -- maybe a 20, 25-seat House Democratic pick up.

IP: Yeah. Yeah.

NEALER: Charlie Cook's talking about a nine seat Senate pick-up. When they step into this -- to this picture, what are their incentives? How do they act? Is there anything left of the Washington consensus for them?

IP: Well, first of all, on the cyclical question, I'm with Davi -- that even if this does mark something of a turning point, we are not in for a V-shape recovery at all. I think that, you know, the exhaustion of the consumer, you know, the balance sheet -- the trauma we've suffered now means that it's going to be a very weak recovery; we'll probably see the unemployment rate head up towards and perhaps above 7 percent in the next 12 to 18 months -- and that's a positive-case scenario, by the way. That's assuming that we cut off some of these tail risks of, like, a really severe contraction.

So what does that mean for the incoming president? First of all, I think that it's different for whether it's President Obama or President McCain.

Let's start with President McCain. I think that, first of all, you (fake ?) a population and a Democratic Congress which is not of a mind from the starting point to trust market mechanisms and of a mind to do more. I mean, we've already got the Democrats loaded for -- (inaudible) -- to do more fiscal stimulus and so forth, to do more for the middle class, and definitely to -- one of the, sort of, unattended consequences -- not that crises ever have intended consequences -- but one of the at least predictable consequences will be the extent to which people sort of take the narrow case of regulatory failure that brought us here and expand it into a broader narrative about regulation in general. So we saw Barney Frank say, "Well, not only are we going to limit the ability of companies benefiting from the after-purchase program to pay large salaries, we'd like to do that for all companies, frankly." You know, which has been a priority of his for a long time.

The position of McCain I think actually will be, because his underlying philosophy is to be more pro-market and less interventionist and because he is a courageous person -- you know, at least, you know, on average throughout his career -- is to sort of stand against that and to try and use the veto pen and stop some of the more egregious things there. And I would hope that he would also still have enough of the bipartisan lawmaker in him that he can then take some of those more interventionist impulses and haul them back significantly. I think that he would -- it's hard to be optimistic that we will make much progress on new trade agreements in the next four or five years. It will be more like, can we preserve where we've gotten thus far?

With a President Obama it's quite different. I'd actually love to hear what David thinks about that -- about this. But I sense that notwithstanding that he's a very thoughtful person -- we had a poll that was published this morning's Economist: We asked some of the -- we polled the top academic economists in the country and we asked them questions like, who do you think has the best grasp of economics? It was like 10 to 1, Obama. We asked them, who do you think will have the best economic team? Again, it was like 10 to 1, Obama. And actually even once you take out the people who are self-identified Democrats, it's still a very strong margin -- even among Republicans -- (laughter) -- and they agreed by a very tiny plurality that Obama did economics better than McCain. That's a troubling statement for McCain.

All that said, the thing that bothers us a little bit about Obama is that he has not been great about standing up to his party on really anything in the last four or five years -- certainly not on trade. And I worry that an interventionist Democratic Congress, especially one that's close to being veto-proof, will push him into doing a lot of things and he will not have the wherewithal or the inclination to stand up against that.

NEALER: I'll let David react to that, but isn't one of the paradoxes with Obama that I can't imagine a more Democratic Congress allowing a President McCain to have trade negotiating authority, whereas I can fantasize that there might be a certain stance under which that high degree of party identification in fact helps open the door to trade negotiations. Is that wrong or --

IP: No, I think that could be right. I mean, I think that is likely to be right.

I think where we are on trade is that the thing to hope for at this point, I would say, is two things. One would be standing in the way of bad ideas -- so standing in the way of really silly anti-market stuff that takes us backwards. I mean, you've heard the equivalent of this ban on short selling, which is not a good idea, and just to sort of stand in the way of protectionist of stuff like that. But then --

MALLABY: Pulling out of NAFTA, for example.

IP: Yes, pulling out of NAFTA, for example. (Laughs.)

But then also making good on the promise that has been there for trade all along and that we really made good on. The promise of trade is that it enlarges the pie, and that, yes, some people's slice gets bigger and some people's slice gets smaller, but the overall pie is bigger and so we can afford to move the gains around -- spread the gains around. We have not done that.

And so to ask people to agree to this regime of liberalization that I think most people like us and most people in this room think is clearly the way to go, I think we have to make sure that we don't just pay lip service to that and really do that. And I think it's important to connect that to this liberal -- in the sense that Sebastian was using the word -- this liberal philosophy of open markets and free people because we're going to be facing a backlash if we don't do that.

MALLABY: I think that's right, and when voters see that McCain has come out for wage insurance which, you know, certainly takes the agenda beyond what a Republican has said before -- (inaudible) -- think about actually if some of the, you know -- we have a system already for joblessness insurance. If you lose your job for some number weeks, you can get some money from the government. What we haven't had is if you lose your job and you get a new one and for the next 15, 20 years of your working life, you're earning, for those, you know -- two-thirds of what you did before, should the government pick up half of that difference?

We had a study that we published last year from the council. We were showing the difference equivalent of that kind of wage drop -- you were 40 years old; you had 20 more years that you were going to be working and you went through this transition from a unionized labor job to an nonunionized service job, the financial hit -- (inaudible) -- is like having your house burn down with no insurance. And so not surprisingly, people hate it, and politically they are going to fight against it. And so I think wage insurance is -- although it's an expensive government program, it's probably an important one, and one that actually makes -- it's fair because some people are, in globalization, to bear the brunt of what goes on and societies should protect them to some degree.

But I do think also that, you know, when I talk about a new kind of moment in this globalization debate, I'm thinking that we have to go beyond some of the things that we've been talking about before. It's not just Doha; how do you revive that; what do you do to help workers in this country -- important though all those things are. There's also new stuff. I mean, we saw a huge spike in food prices earlier this year and the policy response around the world was, basically, you know, export restrictions from developing countries, trying to bottle up the food inside your own country, so an anti-globalization response of a new kind -- not an import restrain, but an export restrain.

I just think the trade agenda needs to be broadened and we need to be thinking also about coordination on the currencies now. You can tell a whole story about how the financial crisis that we've been though, sort of, begins in part with China's exchange rate policy.

First of all China has had a cheap exchange rate, which means that all -- everything we import to China looks very cheap, so the Fed is watching the Consumer Price Index and it looks very low so we can have relatively low interest rates. Meanwhile, the Chinese exports have -- (inaudible) -- the money is flooding into the world, creating an asset price bubble, which then creates a -- (inaudible) -- bubble as commodity price goes up, so commodity exporters suddenly have huge amounts of money. And we go through this cycle over about five years of essentially soaking a global bubble because originally the problem was an imbalanced world economy, and the imbalance comes down to China's exchange rate policy. It's not the only thing, but I think it's a factor.

And so I think a new agenda for globalization would include getting serious with the Chinese about their exchange rate policy and making them understand that if we do have a backlash against globalization, guess who will be affected? It is the export dependents and our Asian economies, with China being the biggest one.

NEALER: I want to bring you back to where you started on domestic agenda.

For everybody -- what is -- you talk about the next big thing internationally on trade. What's the next big thing domestically if the virtuous result occurs; if we get a favorable vote in the next hour? That's certainly not the end of it, is it? I mean, no financial turmoil that any of us have seen -- admitting this is going in a whole new direction -- involved the capstone piece of legislation, and there was the end. What do you see -- you've hinted at a few things, but what do you see as necessary policy responses over the next six to 18 months? What's the follow on to the package?

MR. : Well, I think that we have gone ahead with so many ad hoc measures in the last few weeks, it is going to take years to extricate ourselves from them. And the big question we will have as a society will be, how do extricate ourselves from them, or do you want to stay with it? I mean, just to give you one example, the higher deposit insurance limits that are part of the package. One of the first stories I covered when I came to Washington in 2001 was the effort by the small bank lobby to raise the limit from $100,000, and the Fed and the Treasury and all responsible economists who were utterly opposed to it said this would just give banks, you know, the incentive to borrow more money at the taxpayers' risk and invest it in dodgy projects.

You notice that, Sebastian? I said "dodgy." That shows I'm learning The Economist's way of speaking. (Laughter.)

And ultimately they did not raise the limit. And here we did it virtually in a 72-hour period where it went from the twinkle in somebody's eye and now it's about to become law. And it's probably bad policy. It really is. I mean, honestly, the people who are fleeing banks are not the people who are between 100 (dollars) and 250,000 (dollars). It's generally wholesale depositors of small businesses who are way over the 250,000 (dollars).

So not only will it not achieve what it's meant to do, in my opinion, but it will incentive a lot more bad behavior. Marginal banks will be incentivized to rake in a lot more hot deposit money and try and basically double down on whatever bad lending they've already done.

So -- but I'm not sure if the climate will be supportive of reeling back from that and saying, with executive compensation caps and so forth, the short selling ban -- I mean, at some point we've got to get ourselves out of that. You can't -- I think it's done extraordinary damage to the capital market.

MALLABY: (Inaudible) -- is a financial company because they have a lobbyist who was good enough to get them on the list, too.

MR. : Oh, did they?

MALLABY: It's gone way beyond financial --

MR. : Oh, really? Yeah. (Inaudible.) Yeah.

I mean, that thing I just found bizarre. I mean, what a way to reward the people that essentially got us into this. I mean, what does every CEO ever want from government? "Stop the short sellers who are killing my stocks. They just don't understand what a great company I have." Right? And like, Wall Street got that, right?

MR. : Yeah.

MR. : What a deserving bunch of people. (Laughter.)

NEALER: So part of this -- so part of this may well be unraveling the excessive steps that we've taken. But what else?

MR. : It's interesting to put the ban on short selling along with the mark-to-market fight because one of the things that we've been talking about is the resistance to globalize market systems among the hoi polloi, right?

The mark-to-market and the ban on short selling is a resistance to market systems from Wall Street. It's saying, "We don't want the market to operate where you can both go long and short. No, no, no, no. Going short is terrible. And we don't want the market to set prices on these assets. I want to be able to tell you what the price of my assets are using a formula or a model rather than letting that silly, old irrational market set the price." And I think it's sort of interesting to see the extent to which we're dealing with a potentially dangerous reaction to this in -- across many different levels.

NEALER: Look, a lot of this effort -- you guys say and you've written -- is effect of confidence. Confidence shows up every day in the form of the markets going on the dollar.

Now, you know, we've got -- the trade-weighted dollar is up like 10 percent since July. Maybe that's because it's others' turns to cut rates; maybe it's because of the leveraging. I don't know. But what -- how much weight do you give? How likely do you think it is that we could see folks step in, re-denominate commodities -- purchases like oil and other things, like aircraft, that are currently in dollars -- rebalancing baskets as some of these people overseas -- sovereign wealth funds and others who are overweight dollars start to have doubts about how long it's going to take us to unwind this crisis? Is there a dollar impact, and what does it look like?

MALLABY: I think the short term answer is that you're right -- there's no evidence yet of any move away from the dollar. In fact the dollar, as I say, is relatively strong. The euro yesterday was at its weakest point in a whole year against the dollar, and I think that makes sense when you look at the trouble that's now brewing in Europe. They have their own -- you know, a week ago European leaders were saying, you know, "This financial crisis was made on Wall Street; it's not our problem." Two days later they're bailing out one bank, then another bank and then a fifth bank. And now they're locked into this policy argument about how you respond to that, which is no more dignified or elegant that the one we just had in Washington. So you've got the Irish going way beyond what Greg criticized with Republicans -- (inaudible) -- insuring not only every deposit in the Irish banking system, but every credit, every bond holder -- everybody has just been underwritten. And so then the British government gets serious because asset deposits will flow from the British bank into the Irish bank so everyone can have 100 percent insurance from the Irish government, even though the value of this guarantee is, sort of, two or three times Irish GDP, for how they actually pay this thing -- (laughter) -- is entirely unclear.

MR. : Which in our terms is a $30 trillion guarantee -- an equivalent of that in this country.

MALLABY: (Laughs.) That's good number.

MR. : The luck of the Irish.

MALLABY: Thirty trillion (dollars). I want a headline. That sounds right. (Laughter.)

And then you've got, you know, this French proposal for some European-wide bailout fund which the next day is knocked down by the Germans, and then the French retreat and now they have a summit tomorrow and nobody knows who's going to show up or what they're going to come up with.

So there's enough uncertainty in the rest of the world -- and we haven't even talked about the fact that India and the second biggest bank had a bank run last week -- this week.

You know, the dollar for the moment is looking fine. But I think if you extrapolate beyond the immediate and you ask yourself, you know, in the longer term, does it make sense for, you know, the Arab Gulf states for hold a lot of reserve in dollars when their imports don't necessarily come from the U.S.? They come from increasingly from Asia. Shouldn't reserves normally be seen as a protection against -- you know, you need purchasing power for what you want to purchase. And that is actually Asian imports, so they should hold more Asian instruments.

Now, the reason why people who have not done that -- they've held reserves in dollars is because the United States is supposed to have the deepest, most liquid and most confidence-inspiring financial market in the world -- terrific securitizations that you could really trust. Now their de-securitizations are not securing to be so trustworthy. I think there's a real question -- not in the next year or two, but in the next five to 10 years -- as to whether reserves might start to shift out of dollars.

NEALER: My colleague Eric Neldy (sp) taught me long ago that policies are actually people. And I want to take a step back to the incoming administration, whatever it stripe. How does this affect -- how do all these moving parts affect how the new president's going to think about his choice -- I guess we have to say his now -- his choice for Treasury, and in the not too distant future, possibly a choice on Bernanke or somebody else at the Fed? How would you play that out?

And, Dave, you've written a piece and gone out on a limb about Obama policy, but range wide and be McCain for a moment, too.

LEONHARDT: Sure. And this is -- this veers into speculation which is fun because maybe we'll disagree a little bit. But it seems to me that this definitely -- this crisis makes it much more likely that we're going to get old faces rather than new ones. A serious person tried to convince me this week that he thought Paul Volcker was a candidate for Treasury secretary --

NEALER: (Inaudible.) (Laughter.)

LEONHARDT: -- in an Obama administration. I don't know about that, but I mean, I think certainly this increases the odds that Larry Summers would come back as Treasury secretary. I think certainly it increases the odds that veterans of the Clinton administration, who wouldn't be -- in any way need to seem like they need to learn on the job, would come into jobs like that. I think it increases the odds that Bernanke stays at the Fed, but I would defer to Greg on that.

I also think it increases the odds, even though he's saying otherwise, that Paulson stays on at Treasury under McCain because the Republican bench for Treasury is thin. And you could see Tim Geithner, who's the head of the Federal Reserve Bank -- you could actually even sort of see him in a McCain administration. He's not a Democrat, although he worked in the Clinton administration. He's an independent. He was actually -- little known fact, he was once a registered Republican --

IP: That's right.

LEONHARDT: -- when he worked for Kissinger.

IP: That's right.

LEONHARDT: And then he switched to independent when he worked in the Clinton administration.

IP: Is that right? Okay.

LEONHARDT: I think.

And so I think my guess is that we're going to end up getting a Treasury secretary who's names we all know very well.

NEALER: Greg, this is a game any number can play, but can you -- what do you think?

IP: I agree on almost everything David said.

Let me talk a little bit about the Bernanke reappointment issue. It's very interesting the dynamics around the Fed right now because they will have three -- assuming it's a -- let's say it's an Obama presidency, right? You'll have three vacancies because there are two empty right now, plus there's a third person who's basically stayed on past the expiration of his term. And then a year from then, you have Bernanke's own term as chairman coming up. So I worry a little bit about -- because you could have significant turnover of the makeup of the board in a very short period of time. I think that you will probably -- so the people I talk to who might -- who have some insight into Obama taking on this think that you will probably get, you know, your one community activist-type person appointed to the board to -- because those people have not had representation on the Fed in some time, but the others will be straight-up, you know, confidence-inspiring, monetary-type people. I'm not going to get into --

NEALER: If there are any left, right?

IP: That's right, yeah. (Laughs.) The ones who haven't -- who aren't busy writing op-eds for The Financial Times and The Wall Street Journal.

LEONHARDT: I think that if there were an in-trade market for future Fed governors -- which maybe now that we're throwing this out there there will be tomorrow -- I think reasonable names you'd see on there would be Christina Romer and David Romer. They're husband and wife. They're both Obama advisers. They are -- they're sort of serious monetary academics, the same way Bernanke was when he was originally named for the board.

IP: Yeah.

MALLABY: So would Obama necessarily not choose Bernanke? I mean, it seems to me that --

LEONHARDT: Well, that was the next thing -- I was going to touch just briefly on that. Yeah.

I think that six months ago the view in the Obama camp was that the events between now and 2010 will determine whether he comes or goes. You know, it's an old saying that the bond market basically vote and elects the next Fed chairman, and essentially if the economy was doing reasonably well with low-ish unemployment, low-ish inflation, then it would be hard to, like, (throw ?) the guy who seemed to be -- brought us to that point.

Another scenario as well -- you have either high inflation and/or high unemployment and, you know, his reputation is very low. It would be relatively costless to replace him.

I'm not sure of the gain in this scenario, where the economy would be going through a very severe financial crisis where irrespective of whether you actually like the guy, changing the skipper of the ship in the middle of a storm --

IP: Could be a signal, yeah.

LEONHARDT: -- you know, could really hurt confidence.

And I think actually apart from that sort of issue, which is not relevant to Bernanke himself -- he's actually acquitted himself very well in this crisis; certainly in the political process, and he has -- even prior to this process, he made extraordinary efforts to reach out to both sides of the aisle. You know, he had -- he would every week -- sometimes more often than once a week, have a senior congressman in for lunch or breakfast, from both sides of the aisle. If you looked at his diary, his schedule, you would find it was chock-a-block with these political meetings and so forth. And people on the Hill like him. You know, he has never come across as a partisan individual.

IP: (Inaudible.)

LEONHARDT: People like Barney Frank and Chuck Schumer have seen him as an ally on their priorities, such as more money for restructuring mortgages. So I think that reappointing Bernanke would be actually a pretty easy decision for Obama.

MALLABY: An easy thing to do.

LEONHARDT: And just to be clear, when I was mentioning academics, I was talking about the other vacancies.

MR. : (Inaudible.)

LEONHARDT: Not the chairman. Right.

NEALER: Let me, in the time we have left, throw it open to questions from the floor. We'll start with one way in the back, there. And could you identify yourself, please?

QUESTIONER: My name's Peter Ackerman. I want to make a point that I think has been a source of tremendous confusion this whole discussion. Getting rid of the short sale rule and getting rid of mark-to-market are not both pro-capital -- are not both anti-capitalist acts. One is; one isn't. Getting rid of the short sale rule is a bad idea because what you want in the marketplace is as many people as you can to express their views about a market. As a matter of fact, one of the reasons why we had the bubble during the Internet period is because after IPOs, the stocks were held in very, very short supply, there was no ability to short sell, and these things ran to very high levels. There's a danger of that happening now.

But with respect to mark-to-market, I think the people up front here have it completely upside down. What happens with mark-to-market is you take a bond that has a maturity and it has coupons and somebody, for reasons extraneous to the risk assessment of those payments being made, has to sell. So a small group of people, a small amount of debt, basically forces the pricing on a large amount of debt. And what happens in a mark-to-market environment with financial regulation is that when that small group speaks for the overwhelming number who disagree with the discounted values based on that short -- that small sale at a low price, suddenly the accountants come in because they have to cover their needs, and they force a write-down, and then suddenly that debt is forced into equity because you have to raise equity. And so the whole idea of basically not marking debt to market was to be able to turn the discussion into what is the true discounted value of those payments? And if you actually look to other indicators that are market indicators that more people participate in, where you can basically look at that credit and compare it to other credits, you'll find that there's wild divergencies between short-term, one-off sales and the true discounted value of those streams of payments.

And one of the reasons we're in the trouble we're in today is that we have used mark-to-market with new accounting standards that's forced prices down, that has in turn forced debt into equity, and sometimes the equity's not available.

NEALER: Peter, let me give my panel a chance to react to that.

QUESTIONER: Sure.

NEALER: Do you want to take that on?

LEONHARDT: I mean, for starters I would say that the argument against mark-to-market is based on the assumption that someone else -- an accountant, an executive, me, Greg, someone here -- knows the value of the asset better than the market does. I'm deeply skeptical of that argument as a place to start. I understand that fire sale prices can sometimes not reflect the actual true value of something, but I think as a matter of policy, it's troubling essentially to say, "We're going to overrule and outsmart the market." And I think it's troubling to put the blame on this on the idea that we're being too pessimistic about accounting values than to put the blame on this -- to put the blame for this on a housing bubble and on all sorts of excesses.

At the end of the day, to me mark-to-market has meaning, and it's that you're marking it to the market value, and saying that the market value is wrong, I consider to be anti-market.

MALLABY: Let me say quickly -- I mean, Peter Ackerman raises a very serious point, and since he contributed to the creation of some of our debt markets in this country, he knows whereof he speaks. And what I would say is that, you know, anyone serious agrees that the markets are overshooting at the moment. And so it's possible that a mark-to-model -- some other -- some -- if you just discount what you think the cash flow will be from your loan and you've figured out the net present value, you would end up with a value that is actually more accurate than what your neighbor has for sale because he has to sell them in a matter of a week. It's true that if I live in my house and my neighbor gets sick; he has to sell his house within 24 hours, he will probably take a very low price. It doesn't mean my house is less valuable. So there's a lot of truth in what Peter says.

The worrying thing is that -- you know, is mark-to-model any better? What is the alternative, as David says? And I think to me, to the extent that what we have in the market is a crisis of confidence, no financial institutions believe the other financial institutions, and therefore nobody will lend to each other. That's why LIBOR, interbank rates are so high. If you allow institutions to mark to some model, even though the model may be great, because others don't know what the model is -- it may be better than mark-to-market and will allow them -- will allow outsiders to say, "We understand you've marked to market; we understand the market's overshot; therefore we won't penalize you." As a matter of fact -- (inaudible) -- a regulatory problem because you've marked your assets to market so now you have a capital adequacy problem. You should have forbearance on the capital adequacy problem, not on mark-to-market. And so I think Congress is going slightly the wrong way in this, and the SEC as well, in attacking mark-to-market as opposed to attacking -- (inaudible) -- to capital adequacy.

(Cross talk.)

NEALER: Greg?

IP: On that one point -- I'm by no means an expert on this, and would I certainly concede the point that this is a trickier question than certainly the short sale question. But I would wonder really whether, if you allowed banks and financial institutions to use something else, whether it would make a difference because investors don't really care what your model is. They really care what is the truth. And I would draw and analogy to earlier this year when we had the issue with the monoline bond insurers who were suffering grievous mark-to-market losses, and the rating agencies were practicing forbearance. They were -- none of these companies really could have been rightfully called a AAA company, but the rating agencies were -- because they didn't want to essentially issue a death sentence -- were not downgrading them. But they were trading in the debt markets like junk. You know -- well, they were not trading like AAA. So in other words, the fact that their numbers were not being marked to market did not change what the market -- what investors thought.

NEALER: What the -- (inaudible) -- yeah.

IP: So I think you really have to ask the question, just because we say it's worth this, will investors believe you? And I think that's an important test.

NEALER: Jim Moody had a question.

QUESTIONER: Jim Moody. Just a quick point on the short sales; then I want to ask Mr. Mallaby a question.

On -- there are several different types of short sales. It's not just one thing. From my work -- you have to -- (inaudible) -- sell short on an uptick -- very important qualifier. Also, you cannot sell naked short, meaning -- naked short is when you sell something but don't have the -- aren't required to deliver the stock. If you have -- don't have to sell on an uptick -- you can sell on a downtick, and you don't have to deliver the stock, you can bring the country -- company to its knees pretty fast if it's a concerted attack. So be careful -- I would say be careful what kind of short sale animal you're talking about. There's different qualifiers that make it much less -- banning short sales, yeah, would be a terrible idea, but some of these qualifying safeguards might be a good idea. But I'll leave that for another discussion.

My question was about the dollar. You had said the dollar should be fine for now and that sounded like a good thing, but isn't the fact that our ability to import infinitely from a Chinese market or other places where they artificially keep their currency devalued relative to the dollar makes us sail further and further into this deep water of being vulnerable to the very thing -- creates a bubble of consumption versus saving? And that's what has brought this economy to its knees. So my question is, isn't it -- wouldn't it be healthier if the dollar wasn't so strong? Why is the dollar strong -- why is the dollar strong -- why is the dollar reserve necessarily in our interest given what we've just seen?

MALLABY: Right, right. I mean, I think it's fair to say that since the mid-'90s, Treasury secretaries have had this line, "A strong dollar is in our national interest," and in fact at the same time have been tacitly quite happy when the dollar weakened a little bit. And certainly for global readjustment, the U.S. has a current account deficit; it needs to address that with a weaker currency, and that's how you get out of the imbalance. So I agree with you to that extent.

I do think though that the U.S. has had some advantages, and what you want is a bit of -- ideally you would want a dollar that gradually depreciates so you get a gradual readjustment of this current account problem without falling out of bed, which then -- (inaudible) -- you create huge disruptions if it moves very quickly. And as it goes down, you have so many people abroad who hold dollar assets. We're in a world where anyone with a Fidelity account can move his or her savings out of dollars into a foreign currency. So I think we're in new territory in terms of how much the tipping effect could accelerate if you got into a dollar panic. I don't think it's likely, but if it happened, it could be very, very, very nasty because of the mobility of capital.

So what you want is gradual depreciation so you get gradual adjustment, but also not losing sight of the fact that it has been an advantage I think for American policymaking over the last decade, that, you know, when faced with some kind of slowdown, the Fed has always been able to cut rates aggressively, moreso than the ECB, moreso than any other -- certainly any measure market central bank, partly because it's not worried that the dollar will falter. I mean, if you were worried that your currency were going to fall out of bed every time you cut rates aggressively because you have a domestic financial crisis or something else, then you're in the problem that Thailand was or Indonesia was in 1997. And then your policy flexibility is severely constrained. So I think there is some value in having a lot of confidence in the dollar -- (inaudible) -- gradual depreciation without shattering people's confidence in it.

NEALER: Matthew, and then (Becker ?).

QUESTIONER: Matthew Goodman with Stonebridge International. I want to ask an institutional question in two parts. First, are we on the eve of a creation of a whole lot of new permanent institutions along the lines of the New Deal institutions domestically? And internationally, even before the crisis there has been a lot of talk about changing the G8 structure and whether we should have a G13 or whatever, but is there a case for actually having a smaller grouping of the people that really matter in sort of financial terms -- you know, the G4 or (G)6? You can make up, you know, who should be in that group, but --

NEALER: An institutional --

QUESTIONER: And are we on, you know, the verge of some kind of new institution like that?

NEALER: Allowing at the outset that if we were talking about any country other than the United States, we'd already be in an IMF program. (Laughter.) Go ahead, take it.

MALLABY: I think, you know, following on Dean Acheson's book, I expect Condi Rice to come out with a volume entitled "Present at the Non-Creation." (Laughter.)

LEONHARDT: I'll take the first one and leave the second one to Greg or Sebastian.

I think what's interesting is that if you look at Obama's policy, which is certainly more institution-based since he's from the party that likes institutions better than the other party, you see what would effectively be the creation of institutions that could eventually become really important. So -- his health care plan is an institution that might try to start making decisions about what kinds of health care are actually worth it -- what kinds of health care are effective, which right now we don't do. We pretty much pay for any health care. You see similar things like that within the global warming policy. But health care and global warming are not what are top of mind right now, and there aren't obvious -- to me it's not obvious that there are, in either a Republican or Democratic administration, plans for entirely new institutions to cope with these problems. And so if we get them, I think it's likely to take a little longer, and I think some ideas have to be formulated about them. So I don't immediately see all kinds of new institutions coming out of this.

I also am not sure whether we need them or whether we just need our existing ones to do much better than they've done.

IP: Yeah. I think it's interesting, actually. I mean, we still have a lot of those New Deal institutions, like FHA was done in the New Deal. FHA in the '80s -- at one point I think it accounted for 40 percent of new mortgage initiations, and by the early 2000s it had diminished to less than 5 percent. And the reason why was the type of low-income families that FHA catered to had been entirely gravitating toward the subprime market where approvals were faster and underwriting standards were lower. Well, we now know where that led us to.

And so we actually found ourselves, for better or for worse, with some of the infrastructure in place to deal with the new challenges. We will get at least one new institution. I think the bill that creates -- the (trouble after ?) the relief program creates an institution to administer that, and that's got the potential to become really quite a large, gangly type of outfit because when you think about it, when they've maxed this $700 billion, they'll be managing a portfolio that's as large as quite a few sovereign wealth funds, and they're going to have to decide what to do with all these equity stakes.

Where we go from there -- I mean, my way of thinking about this is I think that the degree of new regulation and backlash against the free markets you get will be proportionate to the degree of economic pain and contraction. I mean, one of the reasons so much changed with the New Deal and the Great Depression was because it was -- I think there was a widespread feeling that capitalism was just completely broken. You know? I think if we have succeeded -- if Paulson and Bernanke have succeeded in turning this crisis around with the tarp, then they will also possibly have succeeded in preventing a wholesale retreat, I think, from free market principles.

NEALER: A friend who shares Bernanke's passion for the history of the depression said that FDR had given a speech in Pittsburgh in '32 in which he talked about the need to balance the federal budget -- did not presage a single New Deal institution. And of course, after the election, his economic advisers said, "But, sir, what about Pittsburgh?" And he said, "I was never in Pittsburgh." (Laughter.)

Yes, Kim?

QUESTIONER: Hanya Kim with Intrepid International. I was wondering what you thought the effect the regulations would have in terms of driving investors and deals offshore -- Abu Dhabi, Europe, et cetera -- away from the U.S.?

NEALER: Good question.

MR. : I mean, in some ways one of the lessons from this is that investors should like good regulation. (Laughs.) And you might hope that we would get good regulation after this. There's no guarantee of that. We might get bad regulation. But -- it's a really hard question to answer, but I would hope we sort of can move beyond -- I hope one of the good legacies of this crisis is that even investors chasing returns can move beyond the notion of that returns are always best where the regulations are least, because it doesn't strike me that that is obvious today.

NEALER: Is part of the answer here the question of contagion, obviously? I mean, what offshore looks like?

MR. : Yes, although I think the questioner was thinking more in terms of an institutional response. You know what I mean?

NEALER: Oh, okay. Okay.

QUESTIONER: (Inaudible.)

MR. : Will things happen that will make (Visa's ?) money feel less welcome?

I -- (inaudible) -- given this as much thought as I should, but I think about -- I wonder if almost the opposite could happen. Now, let's remember who led the campaign against the Dubai ports acquisition, right? It was Chuck Schumer, right? Who is now encouraging banks go hat in hand to the sovereign wealth funds of the world, right, because a lot of those companies happen to be based in his state. And if anything, I think since beggars can't be choosers, the United States might be a little less inclined than it had been before to impose the kind of requirements we might have otherwise on some of these funds.

Now, how is that -- how that particular dynamic interacts with the opposite dynamic, which is suspicion of globalization in general, I'm not really sure.

MALLABY: And I think, you know, the question is good in the sense that as we move forward through this crisis and the -- (inaudible) -- various policy responses, it's always good to remember that if you do something to repress a certain activity within the U.S. or you make it difficult, financial markets are global and this stuff will go offshore. When I lived in Japan in the 1990s, there was a healthy market in trading futures on the Nikkei stock index, but the market was not in Osaka where the Japanese (derivatives ?) traded because it had been too heavily regulated. So it was in Singapore and Hong Kong. And -- (inaudible) -- the euro-dollar market is another famous story and -- (inaudible) -- to Europe for some period in the '70s I think because the U.S. market, for whatever reason, still was regulated. And so if we get in the way of short selling, the short selling could go on maybe somewhere else. If we get in the way -- if we have capital requirements on hedge funds, for example, they will be done -- (inaudible) -- offshore.

So I think there is this regulatory -- (inaudible) -- that has to be factored into any quality response that we come up to, and it links back to the question before about whether we need international institutions to prevent some sort of race to the bottom. If we think that more capital requirements are important, we probably need to try to negotiate those internationally.

NEALER: I asked a (Hill-watcher ?) friend if he thought that more congressional Democrats (hassle ?) Senate meant more congressional activism on these kind of regulatory issues -- (inaudible) -- otherwise. He chastened me by saying, "Yeah, but remember, the people who will be picking up those seats -- those seats are -- have been Republican districts." So if you're playing to your constituency, you might be a little circumspect about how quick you grab for some of those tools.

Okay.

QUESTIONER: (Inaudible) Aberdeen, Capital Trust. Two comments: The -- (inaudible) -- of dollars -- the Chinese, the Japanese, the Arabs and the Taiwanese -- are not supporting the dollar. It's the multinational banks in Europe and the U.S. that have -- (inaudible) -- shorting the dollar. I'd like your comments on that.

The other comment --

MR. : We can't hear him.

MR. : They can't hear you.

QUESTIONER: If you look at the sovereign wealth funds in the Arab region, they're worried about the U.S. banking system. At the same time, they tell you there's nowhere else where we can place our assets. Your markets remain the largest -- (inaudible) -- Abu Dhabi has a small exchange, and Dubai has a small exchange. Dubai is highly leveraged. Dubai could collapse like New York in another six months or nine months.

NEALER: Sebastian?

MALLABY: Yeah. So I mean, you're right that it's difficult to find alternatives to U.S. -- when the whole world has basically been in the habit of buying dollars and holding money in the U.S. financial system, it's not as though there are four other places to park it which are just as good that you can switch to like that. But it doesn't mean that there won't be a response over time, and that's why I say I'm not worried on account of -- (inaudible) -- currency, but I think that down the track it's something to keep an eye on because over time you can have alternative financial institutions grow up.

And I think it's worth remembering on this point that, you know, competitiveness in the 21st century for a national economy really depends on retaining clusters of innovation. And these geographic clusters which feed off each other, whether it's Silicon Valley for software or New Jersey for pharmaceuticals or Hollywood for entertainment or New York for finance, have a way of attracting good people who then are creative and bounce ideas off each other. And losing that actually does, I think, matter for the U.S. going forward.

NEALER: Greg, did you have something?

IP: Two quick thoughts on that. First of all, I mean, just to sort of reinforce your point, I mean, from what little I know about the history of crises it's that when there's a foreign exchange crisis certainly in emerging markets, it's the locals who sell the currency first, so I don't see why the United States would be any different in that particular scenario. (Laughter.)

I wanted to offer one slightly counterintuitive point, which is that the demand for the currency reflects both the supply and demand -- both the demand and the supply for -- (inaudible) -- currency. And one of the reasons the dollar has become so widely held for the last, you know, 10 years, certainly in portfolios of various kinds. We have been exporting vast amounts of dollar-denominated paper, whether it was Treasury bonds, Fannie and Freddie agency debt, more stock securities, or whatever. I used to say that we can't seem to export, you know, high value added manufacturing products particularly well, but we have been really good at exporting toxic assets. (Laughter.)

The point I'm trying to make -- David said earlier in the discussion that we're going to -- there's going to be more saving going on in this country, whether we like it or not. That's just kind of where things are going. If that's true, the current account deficit will decline. If that's true then we will need to finance less of our consumption by selling these assets, and it may be through the supply side, not the demand side, that the (overlay ?) of the U.S. dollar assets in foreign portfolios starts to decline. That would be a benign outcome for the kind of dynamics that we're all talking about. I'm not sure I'd want to put odds on that being the outcome, but it is -- it's an area we ought to think about.

NEALER: Barbara Matthews.

QUESTIONER: Barbara Matthews. An observation and a question. The observation is that if you step back and you look at the capital markets for the last 18 months, we've been seeing a significant influx of state assets -- state actors coming into the capital markets, the most recent of which is probably occurring during our meeting right now with the Treasury department, and that's been alluded to in this conversation. So my observation actually impinges on the mark-to-market debate. I think everything we understand about the market and the motivation for the participants in the market is about to change dramatically. In the Treasury legislation of course, there are very specific requirements for pricing that versions of the bill had that take into account not just true value or intrinsic value or economic value but taxpayer considerations. As you alter the perspectives and the priorities of the market participants, a lot of the valuation mechanisms start to look very outdated. And so in part this is a question -- what does the market that one would mark-to-market look like if you're not just relying on economic efficiency as your driver?

And the second related question is, it strikes me as I look at the commentary on this in the press that everyone is looking at the S&L debate. I'm wondering if it wouldn't make more sense to look at the circuit breakers that were created in 1987 because that short circuited the market but it stipulated that a precipitous drop -- double-digit percentage precipitous drop in the stock market would justify a circuit breaker. We haven't triggered a circuit breaker yet in the United States, thank goodness, but I'm wondering if the mark-to-market debate should perhaps be framed in terms of time horizons. In the short term you need a circuit breaker, but maybe not in the long term. And I'd love reactions to that conflict.

MALLABY: I'm not sure that -- I mean, you know, circuit breakers have been around and actively used forever in commodity futures, right? And so sometimes if a market goes up a lot suddenly or down a lot suddenly, you get limit up, limit down, and the market closes for the rest of the day. And what happens is that everyone then is (gaming ?) their broker and trying to be the first one to trade the next morning because everyone knows where the market was going when it was artificially interrupted, and you know exactly where it's going to go the next morning.

So I feel like -- you know, the circuit breaker idea was developed in '87 in response to this perception that the portfolio insurance was responsible for the crash. The studies I've seen, the retrospectives suggest that actually most of the selling in the '87 crash was not -- (inaudible) -- insurance -- (inaudible) -- like a quarter or something. It mattered, but it was not the thing.

I'm sort of skeptical about what -- do you break -- do you have a circuit -- we sort of had that, I guess, after 9/11. We closed the stock market for the rest -- I mean, I think it can play a small role, but I just wouldn't want to weight my policy response too much on that. But I really think the market picks up where you shut it down before.

NEALER: Greg, David? Either?

MR. : I have a couple quick thoughts. First of all, I actually agree that the law of unintended consequences is a very troubling one with respect to this tarp -- that I have worried that the -- in an effort to safeguard the taxpayer we will end up not doing this right and making the program so constricted that it can't do what it's meant to do and it actually will ultimately produce a much larger cost to the taxpayer. Whether it has the ability to actually affect those market values -- which I think is what you're talking about, right? -- that's an interesting question.

There are very few investors who can actually buy the active -- buying an asset actually change the fundamental value of the asset. I can only think of two. One is Warren Buffet -- (laughter) -- and the other is the United States government because the United States government has the balance sheet and the patience to do this in sufficient size. It can actually change the long-term economic path of our economy in a way that makes those assets worth more in that state than they would have been in the state where the actually didn't go in and do that.

I don't actually think it's a bad thing. I mean, if -- it's not a good thing to create artificial prices, but it is a good thing to change the outcome of the economy from one state to that better state, and therefore change the fundamental value of the assets.

On circuit breakers, I still remember -- I was covering the stock market in New York the first time the circuit breakers were used. And if I recall correctly -- this was in either '97 or '98, we had two. One would be at 350 on the Dow; the other was at 550. I might have the numbers quite -- a little bit off. So we hit the 350 in the early afternoon; we closed the markets. Everybody sort of sat there. The rules required that the market be closed for 30 or 60 minutes. The markets reopened as required at 3:00, and immediately went straight down and hit the other one. You know, it took a matter of minutes. And all it -- and the reason why -- in retrospect it was obvious why -- nobody wanted to be in the market unable to sell before the second circuit breaker hit. You think you're actually preventing the market from falling; sometimes you think you actually cause it to fall faster. And sometimes -- the law of unintended consequences, which is what I strongly believe about the short sale rule. You make it harder for people to sell, you make them less inclined to buy.

NEALER: Like my friend Jimmy, I only get to do this if I make the trains run on time, so I'm just going to let one more question happen, if I may.

QUESTIONER: Thank you. I'm -- (inaudible). On the issue of the mark-to-market, most of those asset-structured products are priced to model of different forms. That's what the rating agencies use to rate them and that's what the market buyers and sellers use to price them. The major reason why the value of those securities has declined is because the underlying cash flow deteriorated and the falls created a decline in value. The question I have is, under the new proposal of the Treasury, what models are they going to use to reflect the different price for those securities?

MR. : That's a good question. (Laughs.)

NEALER: And none of us know, right?

MR. : Yeah. Well, I think I must -- (cross talk.)

MR. : The bill as I understand it doesn't dictate what the Treasury departments do. It actually authorizes the SEC to consider it --

MR. : (Inaudible.)

MR. : Yeah. It doesn't actually force the issue.

NEALER: So wait and see is the answer.

We do in fact have time, I think, for one more question. Is that right? Or no. We have actually no more time. The 3:18 is coming right together. (Laughter.)

I want to -- please join me in thanking our colleagues for an excellent presentation. (Applause.)

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