C. Peter McColough Roundtable Series on International Economics: A Conversation with Alistair Darling

PETER ACKERMAN:  Good morning.

Welcome to today's Council on Foreign Relations meeting.  This meeting is part of the C. Peter McCullough Series on International Economics.

I'd like to ask you to please turn off, and not just put on vibrate, your cell phones, BlackBerrys, and all your varied wireless devices so as to avoid interference with the sound system.  And let me say as a reminder, today's meeting is on the record.

Now, if I may, I'd like to introduce our distinguished speaker.  Alistair Darling was appointed as chancellor of the exchequer on 20th June, 2007.  But before becoming chancellor, our speaker had an extraordinarily varied career in public service.  He was secretary of state for the Department of Trade and Industry from May 2006 to June 2007, and was secretary of state for Transport and secretary of state for Scotland from May 2002 to May 2006.  Before that, Alistair Darling was secretary of state for the Department of Work and Pensions from June 2001 to May 2002, and secretary of state for Social Security between July 1998 and June 2001, and was also chief secretary to the Treasury for May 1997 to July 1998.

While out of power, our chancellor was the shadow secretary -- shadow chief secretary to the Treasury from July 1996 to April 1997, and the opposition spokesman on the City and Financial Services between 1992 and July 1996 -- and we'll have a chance to ask questions about his experience from that -- and also the opposition Home Affairs team from 1988 to 1992.

Alistair Darling studied law at Aberdeen University, and has worked as solicitor -- before then worked -- and then worked as solicitor in Edinburgh before being called to the Scottish Bar, and was admitted to the Faculty of Advocates in 1984.  And he's been a member of Parliament first for Edinburgh Central, from 1987 to 2005, and for Edinburgh Southwest since 2005.

Our speaker is married to Margaret Vaughan and has two children, and we're delighted to have you here today.

So, please, if you could make some comments, and then we'll go after that.

CHANCELLOR ALISTAIR DARLING:  Thank you very much indeed, Peter, for your kind introduction.  And then I'm very pleased to be here to talk to the Council of Foreign Relations.

I was just being reminded as you went through my c.v., as it were, that in all the things I've done in government and before that, I can probably say that the last two years as chancellor of the exchequer have been extremely interesting.  (Laughter.)  As you know, chancellors on the whole prefer that life is boring rather than interesting, and for the last two years we, and every single country in the world, have been through quite extraordinary circumstances in the financial system and the wider economy.  And I think one of the many lessons that we will need to draw as we come out of this is a determination to ask ourselves very frankly what happened, what went wrong, what were the things that we need to learn from, because if we are not careful, because of the nature of these things, these problems will come again.  And after this extraordinary series of events, we really do need to learn from what has happened so we can prepare ourselves all the better for the future.

Now, I want to speak to you for a comparatively short period of time, and then I think we are going to have a discussion with Peter, and then I'll be very happy to hear what you have to say, to answer your questions.  All I ask is you tell me who you are and where you come from, not because I ever bear any grudges, but it does actually help to know from my point of view your perspective, what your experience is.

What I would like to talk to you about this morning, very briefly, is not just what individual governments can do, but the importance of countries coming together, not just to support their economies but the wider global economy, as well as, of course, making sure that we prepare ourselves for the future.

And one of the things that is very clear from what has happened over the last couple years or so is that, if there was any doubt about it, we live in a truly global economy, which has got massive opportunities now, it will have massive opportunities in the future.  But also, that globalization does mean that if a problem that in the past might have been contained in one part of the world or one region -- what is clear now is that there is a very substantial risk that something could very rapidly spread from that to affect the whole economy within a matter of weeks and months.

I think the other thing that is also very obvious is that there is no country now that is large enough to be self-contained from what is going on in the rest of the world.  There was a time, I think, up until even recently, when some people thought, well, there's some economies that can carry on, they can behave as if the rest of the world, it was there, but it wasn't actually fundamentally important to what they were doing and their decision-making.  It is clear now that every single country in the world is affected by what's happening, and every single one of us need each other to get through this.

And that's why the meetings that we're having in Washington today -- the G-20, the G-7 meetings -- are so important.  It isn't just another gathering of ministers.  It's important that we build on what we agreed at the London summit earlier this month, when we got countries to come together within actually what was historically a fairly short period of time, building on the meeting we had here in Washington last November, to agree to take action jointly, together.  And it's now our job to make sure that we actually deliver, and we speed up what it was that we agreed earlier this month as we speed up recovery.

Now, already countries have started to do that.  Here in the United States, we in the United Kingdom, in Europe and Asia.  We need to do more, though, I think, if we are going to meet the objectives that we set ourselves earlier this month. But what is crucial is that we use this weekend's opportunity to turn that agreement into action.

Now, it's almost impossible now, for obvious reasons, to open a newspaper, wherever you are in the world, and not see something about the current state of the global economy.  In Asia, we see export growing very -- falling very sharply; n Japan alone, over 45 percent fall in exports in the last few months.  In Europe, many countries have seen very sharp falls in industrial production.  And across the world, you're seeing the same picture.

In the U.K., I've always been clear that the last six months was going to be difficult.  And I expected the first quarter's growth of this year in particular to see a large contraction in our economy.  But we must always remember that there is huge uncertainty at times like this, when large shocks hit economies everywhere and economic data becomes much harder to read.  But there is, I think, little doubt that the economic situation across the world, whether it's here in America, in Britain, has been both been difficult and uncertain over the last few months.

Yet I do believe there are reasons to be confident about our economy, about the global economy.  Now, many people see parallels with what happened in the 1930s following the Wall Street crash of 1929.  And then, when the world economy was plunged into a deep crisis in the early 1930s, and the response at that time was far too little and it was far too late.  And the failure, both nationally and internationally, to act meant that you had a serious downturn which fell into a prolonged depression that lasted the best part of a decade.

This time, though, we have seen decisive action in many countries, and we've set in place forces which will help the global economy come out of recession sooner.  For our part in the United Kingdom, we've already taken action, which means that we expect the economy to start growing again towards the end of this year.

And much of this general help, for example to protect jobs, it's essential, because we do need to help families, we need to help businesses now.  And it will mean that we can get people back into work more quickly.

And one of the many lessons that we have learned -- I think other countries have learned too, from what happened to us in the '80s and 1990s -- is it is imperative to make sure that if people lose their jobs, they get back into work as quickly as possible because the longer they are out of work, the greater the risk that a short period of (un)employment can turn out to a very long period out of work.  And that is extremely damaging for countries, as well, of course, as being a huge -- hugely damaging experience for the individuals concerned.

We've seen other initiatives, too.  In Europe, for example, there's been a lot of intervention, direct support for certain labor-intensive industries.  We've been helping families through our tax-credit system.  And of course, here in the United States, the new administration has been supporting the economy with increased public spending in education, transport infrastructure and science -- all the things you would expect to see, all the things we must see.

In the U.K., we've introduced a 13-month reduction in the sales tax, VAT, to boost spending.  We've cut income tax for middle- and modest-income families.  And that was complemented with further support which I announced in my budget on Wednesday.  It included help for homeowners, help for companies to deal with cash flow, and more measures to help people get back into work.  And we also took action to help business make the investment that it needs -- and we need as a country as a whole -- by supporting low-carbon projects.

And making sure, of course, when we do all these things, that our public finances are sustainable.  That is important, though.  We're right to support business and families now, it is right that we prepare for the future, but we need to do that whilst maintaining sound public finances.  The two things go together.

Now, of course, on top of fiscal support, central banks across the world have cut interest rates aggressively and they're starting to use the monetary policy instruments, including credit easing, which will, again, help the economies.  It is important that we remember that across the world, a great deal of money is being put into our economies.  And that is still working its way through the system, but it will make a difference.  And kick-starting credit, as President Obama has said on many occasions, is an essential part of that.  And I believe that the fiscal and monetary expansion that we've seen to support domestic and global demand represents the largest stimulus of modern times.

Now, in -- each country agreed in London when we met earlier this month that we'd do whatever was necessary to restore global growth to over 2 percent by the end of next year.  We have been bold and aggressive because, I believe and other countries too, believe that the risks of doing too little are far greater than the risk doing too much.  Or, to put it another way, as John Maynard Keynes said, "I'd rather be roughly right than precisely wrong."

Now, to ensure that countries are held to account for what they do, we've called collectively on the IMF to assess the action taken and to see what further needs to be done.  And that's something that we need to be discussing this weekend and thereafter.  But what is clear is that countries are now taking action in order to ensure that we get the growth, that we get the recovery that we all need to see.

Now, part of this -- and indeed, I would argue an essential precondition of what we're doing -- is to make sure that we take steps to make sure that we get bank lending going again, to get credit flowing through the system.  And cleaning up the banks' balance sheets is essential because if we don't fix the banks, we will never fix the economy.  It's difficult, but it's got to be done.  And it's an essential precondition to recovery.

We're providing support to our banking system, including more capital being put in, and of course insuring those assets for which there is now no market, or the valuation of assets is very much reduced.  But banks must clean up their balance sheets.  It is an absolute essential step towards recovery.  And at the London summit, countries committed to doing that.  And I can't overemphasize the importance of countries actually seeing this through, to repair or reform their financial system.

In the coming few months, countries will need also to ensure that they see this through in order to ensure that in the future, the financial services industry -- the banking system in particular -- is properly supervised and properly regulated.

We will shortly be setting our proposals because I think we need to learn from what we've done over the last few years.  There are improvements that need to be made, both domestically and internationally, because we need to build trust in the banking system.  People may not like banks today, but we actually need banks, and banks should remember they need us too.  But it's essential that relationship of trust, which is fundamental to the banking system, is restored and is strengthened.  And that's why the supervisory and regulatory regime needs to be tightened up.

There are a number of specifics which we need to deal with to ensure that we can guard against the risks to which we know we're likely to be exposed, to make sure that the banking system does not overextend itself and by doing so expose the institutions concerned -- and indeed, the countries in which they operate -- to risks which they are unable to meet.  And we also need to make sure that we've got appropriate regulation of pay and compensation so that people are incentivized to behave responsibly and not expose themselves to undue risks, and also to ensure that the people properly understand the risks to which they have become exposed.

But this is absolutely essential, to make sure that we have a properly functioning banking system.  It goes hand in hand with what we've done.

Which brings me to a the last point that I want to make.  Each of us, in our own countries, can do whatever we think is necessary in order to support domestic demand, in order to (shore up ?) what is necessary to get the banking system going again.  But as I said at the start, it is patently obvious now that we do live in a a global economy.  Each one of us depends on other countries behaving appropriately and us taking action together, both to guard against the negatives, if you like, the risks to which we're exposed, but making sure, too, that we act together to take the necessary action to support our economies, and to support the people, the businesses that operate not just in our countries, but across the world.

If ever there was a time to express our faith and our need in international institutions, this is it.  These international institutions can sometimes seem remote because they are, of necessity, several steps removed from the people that actually rely on them.  But all of us, I think, have a duty to remember that we depend on each other not just in our own countries, but we depend on each other taking action together not just to get through this, but to work towards recovery and to seize the massive opportunities that will come ahead so that everyone -- not just some, but everyone -- can benefit from the opportunities that I know await us in the future.

Thank you very much indeed.  (Applause.)

ACKERMAN:  I'm going to ask the chancellor a few questions.  And after we get by those, I will open it up to the floor and look forward to hearing the questions you have to ask.

The first question I have is referring back to the April 2nd London summit.  It was clear that there was a tension between the United States' desire for more countries to undertake additional stimulus and the German and French desire for more emphasis on regulation.  Where does your country stand today on that tension between those two thoughts?  

And specifically, on a bilateral sense, what can the United States do?  What policies do we have in place today or you would like to see in place that could be most helpful in helping you get through your crisis?

DARLING:  Well, let me start with the perception that when we met in London that we started with, you know, opposing views on what you should do in relation to fiscal stimulus, because, you know, okay, you can look at what people said and you can -- you can try and stack that argument up.  Actually, I don't think there was as much of a difference as people make out.

If you actually look at the stimulus that has gone into, say, the German economy or our economy or the United States, they're not actually that much different, the proportion of GDP.  The reason for that is that in Europe we have far more developed welfare systems.  

And if I give you an example, we have a system in our country where, if you are lower incomes and you've got a family, you will get an additional tax credit.  In other words, you will get money from the government to supplement your pay to help you with your -- looking after your family.  Now, you get that in work -- it's part of being in work.  And when your wages go down -- if, for example, you are put on short time, your hours are reduced and your income reduces, automatically, the payment you receive goes up.  So that -- the money that is actually going into the economy, assuming all this money is spent, is retained at the level it's -- that it was.

Now, in Germany and France, for example -- and, you know, to an -- and in some ways, to a greater degree than ourselves, there are -- there is this automatic help, you know, the automatic stabilizers that economists talk about.  And that is rather different from the United States welfare model, which is much, much more restricted.

But for this purpose what matters is that whether it was the United States, ourselves, Germany, other countries, too, we have put very substantial sums of money into the economy.  

I was always very clear that when we met in London, nobody was going to say, you must do this; you must do that.  It was up to each country to do what was right and what was appropriate, because they have to take everything into account.  What was important was to take action.

Now, at the end of it, I think people were pretty much agreed that they did need to take that action.  Some of them had done it.  Some people, it will need to be more.  I suspect it's something that you just keep under review as things develop.  But I don't think there was that much of a tension there, if you like.

Now, what can America do to help?  Well, the United States is so big and so influential, what happens here matters to every one of us, no matter where we're living in the world.  I fully support what the administration here is doing.  It's for the administration to decide what else it needs to do.  

But I -- I'd just make one point, and that is, America must do what it thinks is right.  And my only "ask," if you like, is that you here continue to do what you can to get your economy going, because that will influence what happens in the rest of the world.

The other thing is -- and we're going to come on to this, I think -- in relation to the banking system, a lot of the banking system comes back to America, so actually, what you do here to sort out your banking system is terribly important for the rest of the world.

So those are the two things.  But I think we're pretty much in the same place as far as this is concerned.  The Americans, ourselves, the Europeans -- I don't think there's nearly as much division as sometimes people make out.

ACKERMAN:  Great.  

Let's talk about a potential hypothetical in the future.  Consider a bank that's been operating in all the G-20 countries and in other jurisdictions.  In each one of these jurisdictions and countries, they have their own operating license, their separate balance sheets.  But since clients transcend these borders, each of these entities are taking on counterparty commitments, pieces of counterparty commitments in coordination with other jurisdictions.  

And at the end, this bank has, through derivatives and other types of instruments, notional claims against them that could be multiples of what their -- even their assets are, not only their capital.  And this bank is now insolvent.  It needs to be liquidated.  

Now we go through a process of liquidation where new views as to who has priority claims competing amongst the various jurisdictions pop up, and it's not clear how they work themselves through.  But the precedential value of the questions that come up can have a chilling effect on the entire global system and how the -- business is done in the future.  How do you think we should address this issue as to how to shut down a major bank?

DARLING:  This is -- you know, it follows on the point I was making earlier about the recognition that we very much live in a global economy.  And in the last 18 months, I've been struck that -- by the fact that these banks, when they're doing well, are very global; when they fail, they become very national.  (Laughter.)

ACKERMAN:  Exactly.  (Laughs.)

DARLING:  And if you happen to be the nation concerned, that -- this is the big -- this is a big problem.  And, you know, the last 18 months or so, this problem has come into very, very sharp focus.  

Because, you know, with Lehman Brothers, for example, it's an American bank, but, you know, when it got into difficulties last autumn, it wasn't just an American bank.  You know, we had problems -- you know, as you know, the then-administration and ourselves, we had discussions as to what we might do with it.  

But this is a problem that needs to be sorted.  There are very few large banks now that don't operate across several countries, and one of the reasons that I want to bring together the supervisory and regulatory regime -- you know, we've -- last year we agreed we'd set up colleges of regulators, bringing these regulators together -- is that very often part of the problem was that no one country had a complete view as to what was going on in the whole bank.  And the banks knew it.  

And indeed, if you look at the -- let me go back to the subprime mortgage problem:  that this is happening in one part of the world; in other parts of the world, people may have heard of it, but they weren't really focused on what, actually, it meant.  And especially now, as we realize that it isn't just capital that we should be bothered about but liquidity that we should be bothered about, I think the lessons are quite clear.  You must have far closer cooperation between regulators.

I think the other question which is much more difficult is that -- suppose you've got a bank that operates out of one country but is very, very dominant in terms of influence in another country.  Well, who do you ask to intervene if it goes wrong?  The country that will be most affected may find, well, actually, it's not theirs.  

And we've had problems here in relation to the Icelandic banks.  You know, they are regulated and supervised in Iceland; actually, one of their branches in London was doing far more business than the rest of the bank, and yet it -- we had to treat it as a branch of a bank -- you know, any other bank.  And we could see the problems that were going to arise from there.  

So I think there's a lot of lessons to be learnt here, not just in terms of tightening up supervision and regulation, but also making sure that there is proper cross-border cooperation.  And it can't just be the sort of cooperation that means you have a meeting once or twice a year.  It has to be pretty active.  

Because we cannot allow a situation to arise where we get the banking system going again, we get it back on its feet, and these guys say, "Well, that's fine," and -- you know, we were saying earlier, in my experience, you know, the number of people who used to tell me they had little time for state intervention and really wished governments would get off their backs, when they get into difficulties, they couldn't come to the government quick enough.  And no doubt, when things get better, some will say, okay, thanks very much, go away now.  

Well, we're not going to go away now, because the people who paid to sort this out do expect that, you know, banks have to live in a world, where they recognize that we need them, yes, but they need us too.  That's why you can't go back to business as usual.  

ACKERMAN:  Well, in that mode, before you're asked to go away, and things get better, but there's one thing.  (Inaudible.)  

I think everybody realizes that there's a new -- there's a need for a new way of thinking, about risk management, not only with banks but with non-bank financial institutions.  And it's a conceptual problem that has to reach a new level of agreement.  

And I'd like you to address -- I'm sure you've been thinking, in your quiet moments, about what that new architecture might look like.  But could you address how risk should be managed, in the global system, and address three points?  

One is capital adequacy and how it should be defined.  Two is whether there's needs for absolute leverage, where we could go back to some mixed absolute leverage or value-at-risk issue.  And three is how we basically deal with impaired assets, so that there's transparency, whether we want to -- you know, what the tension is between mark-to-market and mark-to-model.  

DARLING:  Yeah.  I won't claim that every spare moment I've got that I think about these things all the time.  But you're right.  They're pretty fundamental.  

And I think the whole question of capital adequacy needs to be looked at.  And in particular one of the things that we need to look at is, to what extent you attempt to put a brake on excessive exuberance, in lending, in times when they appear good.  Because there's no doubt that if you allow that sort of credit level to build up, then there isn't just an exposure for when things turn down.  But also I think it does put an excessive strain on the institution.  

I think in relation to liquidity, I said it earlier.  I think that does need to be looked at.  When we -- when you -- in Britain, we saw the first symptom of what was going wrong, with the Northern Rock bank.  It was liquidity problems.  It was one of the best-capitalized banks we had.  And what good did that do it?  It just -- it ran out of money.  

So I think there are huge lessons to be learned, as far as that's concerned.  And I think, you know, on the question of impaired assets, there's a debate whether you mark them to market or to a model.  And you know, those discussions will no doubt continue.  But I just wanted to make one point on the impaired assets.  And that is, whether you like it or not, a lot of banks have got impaired assets that need to be dealt with.  

We have an insurance scheme.  You know, we haven't set ourselves against -- (inaudible).  But we've done that with a couple of smaller banks.  In the United States, there's a slightly different approach.  But whatever happens, it's got to be sorted out.  Unless we sort out the impaired assets problem, you will not get credit going.  And if you don't get credit going, you won't get recovery.  

So it's one of these things that I was saying earlier on.  In an ideal world, you would not want to do this.  In an ideal world, you would say, well, you made these bad calls; you know, you have to live with it.  Unfortunately with the banking system, which is why, you know, I think, our whole attitude towards the banking system needs to change, not in the sense that we tell them what to do or stand in their shoes or that.  

But we do need to make sure that we understand the importance of an effective banking system and that we make sure the supervisory regime doesn't have a rule and regulation for every single conceivable possibility, because that would be nonsense, but that it sets out pretty clear parameters, so that people fully understand, what's their risk; what's our risk?  When I say our, not just government's but, you know, the people who elect governments and ultimately pay for these things.  

ACKERMAN:  Wonderful.  

We're now going to invite the audience members to join in the discussions.  If I point to you, please wait for the microphone.  Stand up and speak directly into it.  State your name and affiliation.  And if you can keep the comment -- the question short, so we can have more time for people to -- more people that -- time for more people to ask questions.

QUESTIONER:  Arnaud de Borchgrave, CSIS.  Chancellor, as you peer in -- over the horizon, say 10 years out, is an economy based on conspicuous consumption still possible at a time of growing world shortages?

DARLING:  You want to take one a time?

ACKERMAN:  Please.

DARLING:  Well, I think when I spoke earlier, I said that there were -- you know, that people have talked about global economies and they've talked about more advantages, you know, for some time.  And I also made the point that I think that's true, there are massive opportunities, but there's also risks that come with that.

I think one of the other things that we need to learn and we can -- we're seeing that now -- is if you look at the imbalances in the world and if you look at the inequalities of the world, and, actually, if you look at where growth is likely to come from in the next few years, which will essentially be from the emerging, the developing economies, that tells you two things.  One is you've got to make sure that we help those economies now.  And that's one of the good things that came out of the London summit, I think, was a recognition to do that.

But I don't think -- I think it -- you can't, you know, regulate precisely to do these things, but I do think there has to be a recognition that unless the whole world is in it together, unless we recognize that, you know, sometimes we may have to forgo things to make sure other parts of the world come up, in the short -- in the short term you might gain, but in the long term you'll lose out.  And I think for the long-term prosperity of each and every one of us, whether we're here in Washington or in London or Paris or Tokyo, you need to make sure that all economies benefit from the growth and the potential prosperity to come.

Now, that means -- that means a lot of hard work.  It isn't something that's going to happen just if you leave things to their own devices.  It does mean interventions; it does mean a conscious effort to ensure that we do that.

But just as one -- a country with huge imbalances will sooner or later run into difficulties, I think if we don't address the wider global problem, then I think looking ahead 10, 20 years, we're just storing up more problems.

QUESTIONER:  Good morning.  I'm Hani Findakly, Potomac Capital.  You have recently had an experience of a failed gilt auction, in the sense that the Treasury did not get enough bids to cover the entire amount that were offered for sale.  My question is, do you see this as an isolated incident?  And what contingency plans do you have to avoid the consequences of the Bank of England having to monetize the government debt?

DARLING:  Well, firstly, there was one auction that wasn't completely covered.  It was almost completely covered, but it wasn't completely covered.  The next week, we had two auctions which were more than completely covered.  And indeed, every auction has been covered since that time.

The head of our debt management office said in January that at the present time then it was inevitable there would be occasions when you might have an auction for one reason or another that wasn't covered.  I mean, Germany, for example, had one in the same position.  So, you know, I am confident that we will be able to continue to have these auctions and that they will be successful.

Now, I think the thing that people are looking at -- not just in our country, but they're looking in every country in the world -- is, yeah, they recognize they're having to do things they wouldn't do in normal times.  You know, if you look at the borrowing -- or if you look at the debt numbers in countries right across the world, they're higher than you would want.  But people recognize if you didn't do that, the cost of not intervening would be far, far greater.  And I suspect you would end up borrowing even more and you'd have higher debt levels.

What they're looking for, though, is whilst you do that help just now, you've also got a plan to make sure that you, in simple terms, live within your means over the medium and long term.  And that's why in the budget, just as I had in our pre-budget report, which we -- which we made in November, there are two parts to what we're doing.  We're helping the economy now, but we're also making it clear that we and every other country in the world are going to have to make sure that as we come through this, as we come through recovery and our economies start to grow again, then we've also got to make sure that we live within our means.  And I think those two things are absolutely essential.

As far as the Bank of England is concerned, you will know, I suspect, it announced -- or I agreed to it putting money into the economy for quantitative easing, as it's called, in March.  And that process is starting -- has started.  And, indeed, I think there's a number of other central banks that already are doing it and more are looking at it, because this is all part of making sure that, you know, we take as aggressive steps as possible to get our economies going again, because, as I said earlier, the cost of not doing so is just far too great.

ACKERMAN:  We now have a queue of eight or nine people who'd like to ask questions --

DARLING:  Well, will I take two or three at a time, then?  Would that help?

ACKERMAN:  Let's keep going for a minute or two more.  Please.  Maybe --

DARLING:  I'll be brief.

QUESTIONER:  Barbara Matthews, with BCM International Regulatory Analytics, former U.S. Treasury official.  I have a question on the regulatory side, with the FSB and its elevation after the London summit.  I'm wondering if you could provide your perspectives to us based on the European experience.  The de Larosiere report had a particular vision for how information and coordination could occur across border.  Lord Turner had a slightly different vision.  

The question could be asked two ways.  One, what can we learn from the European experience?  Or two, if Europe can't come to quick agreement amongst itself, even when it has a treaty obligation to share some sovereignty, what hope do we have at the global level of being able to come to some kind of an agreement on sharing information and coordinating?

DARLING:  Okay.  Let me try and deal with a very complex matter fairly briefly.

What all those things -- developments in Europe and our country and here in the United States show is that I think people are clear about a number of things.  

Firstly, regulation must start a national level, because it's really only the national regulator that can see into the nuts and bolts of the particular institution.  And from that, we were clear 12 years ago when we reformed our system, is that whilst we had seven or eight different regulators, we wanted to bring them together and we set up the Financial Services Authority, because otherwise you run the risk of people, you know, managing -- only seeing a very small part of what the institution does.

Now, having done that, the question then is, do you need supranational organizations?  Now, I think if you take the -- in Europe, for example, yes, we have treaty obligations and we've got the de Larosiere report.

There are some people in Europe, as you know, who would like to go to a pan-European regulator.  My view is that, well, maybe one day you will want to have, you know, an overarching view, because of the points you were talking about, because most of our banks trade all over Europe.  But we believe that regulation ought to be done at a national level, but there has to be far, far closer supervision and regulation, and far closer cooperation so that European regulators know what they're doing so there's contingency plans if you get difficulties and so on.

And it's an extension of that, but, you know, I don't think anyone would argue that you would have a joint, say, Anglo-American regulator.  But it does mean that the British regulators and the American regulators need to talk to each other and be less hung up on exchanging information than perhaps they were.  There are times when, you know, people say, "Well, we can't tell you that," even though sometimes you could read it in the Financial Times or, you know, the New York Times or whatever.

You know, I think there needs to be far greater cooperation.  But frankly, where we are now, I would rather build on what we've got.  We don't have 10 years to sort out the architecture.  We've got some very immediate problems.  And we need to remember that once things start to improve, we've got to watch that the old bad habits don't creep in, which means that you build on what you've got.  I recognize here, for example, if you did want to bring all the regulators together, that needs quite a lot of legislation.  And I suspect that would take time, and I don't suppose it would be uncontroversial.

But I would rather have that closer regulation, whether you use the FSB, which is very new and, you know, it hasn't got lots of resources; but I would rather let's build on what we've got.  I think we can see where the problems are.  And even if it means you have to make do in the meantime, I'd rather do that, rather than try and design an international architecture that would take years to put in place.  I'm pragmatic about it.

ACKERMAN:  Paula?

QUESTIONER:  Paula Stern, with Stern Group.  I'd like to ask you about China and the role you feel China would optimally play going forward after this historic point in time.  Coming out of the G-20, China made -- came forward and put in quite a bit into the IMF.  Some people feel like it wasn't as much as they would have liked to have seen.  And I'm wondering what role you wish to see China play in the globalized economy.

How much do we want to see them come up with a convertible currency?  How much do we want to see China control the value of its currency vis-a-vis other currencies in the competitive economy?  Do you feel that China is playing as big a role as we need it to, as we try to find the source of growth going -- going forward, now the U.S. has basically said it's not going to be consuming the way it has been up until now and the model has changed?

DARLING:  Well, I think I can answer your question fairly shortly.  The first obvious one is, yes, China's crucial.  It'll be the second-biggest economy in a few years time.  And, you know, it demonstrates how fast things have changed over the last few years.

And China, I think, recognizes itself -- now, obviously, you know, China -- the Chinese can sometimes be very cautious, for understandable reasons.  But, you know, I think they recognize that they have a very important role to play.  

I was very pleased at what China agreed to do in London earlier this month.  And in return, China is understandably clear in saying, "We want to sit at the top table, but we want to be sitting alongside you, not being invited along" -- you know, which is what has happened so often in the past.

You know, you think about it, we -- I am here in Washington primarily to attend the G-7 group of countries.  And the same G-7, the same countries there, could have been there in 1945.  Well, the world has changed somewhat, and there's an awful lot of countries in the world who -- you know, people who have never been to, you know -- or that, you know, just didn't figure in people's -- you know, developed countries' thinking at that time.  The world has changed, and we got to recognize that.  

And, you know, China's -- China's a very, very important part of that.  Now, you know, I'm not going to get into the detail of what China can and can't do, but I think we need to engage with China, and I think, you know, that that's recognized.

There's one other thing that occurred to me while you were speaking, which, you know, I simply mention, you know, because it gives a sense of perspective.  I was in Beijing about a year ago, and I was speaking to a very senior Chinese minister, and, you know, he was very focused on the fact that China was affected by what, even then, they could see in the United States.  

And I -- and, you know, we were talking about the need to look in the long term.  And I said, well, you know, never mind the long term; what do you think about the medium term?  And he said, well, when I look out over the next thousand years, I see that -- (laughter).  And I suppose, in a country that has thousands of years of history, it's actually not a bad thing to bear in mind.  

Sometimes I think the long term's important, but I -- in the long term, you know, if we think we can carry on as, you know, the small group of countries who -- inverted commas -- "ran the world" over the last 60 years, we can't.  The world's changed, and we need to realize that.

QUESTIONER:  Thank you.  Chancellor, my name is Dan Price.  I'm currently with Sidley Austin.  I was President Bush's sherpa for the G-20 here in Washington.  First, I wanted to congratulate you and Prime Minister Brown and your sherpa, Jon Cunliffe, on a very, very successful summit in London.  

Then I wanted to follow up on a point that Peter (sp) made about tensions between continental Europe, on the one hand, and the United Kingdom and the United States on another -- on the other.  In the leadup to the summit, we heard a lot of vilification about the Anglo-Saxon model, and we heard a fair amount of kind of "blame America first."  

Yet the Wall Street Journal reported yesterday, I think citing an IMF report, that well over half of the impaired assets of continental Europe's banks are not the result of the purchase of CDS or toxic assets, but are, in fact, bad loans made by continental European banks to European businesses and households.  And I'm wondering if you think that that new information will kind of help us get past this challenging-of-models point and get us all on the same page in working to clean up balance sheets.

Thank you.

DARLING:  Okay.  

Look, firstly thank you for your remarks about the G-20.  And in turn, we greatly appreciated the work that President Bush put into the meeting last November, even at that -- you know, the closing stages of his administration.  It made a huge difference, because if we hadn't had that, then it would have been much more difficult to have taken quite a significant step forward, when we met in April.  

I think in relation to the transatlantic discussions and so on, I'd just say this.  There was a time, in 2007, you know, when we had our problems with the Northern Rock bank.  And I used to go to meetings in Europe where people -- there were people who could barely conceal their view that, you know, we had this coming and all that, and it was just us.  

I think everybody knows now that every single country is affected.  There isn't a country in the world that doesn't have a bank that's got problems.  You know, some of them; it's more obvious than others.  But they know it.  And that's why I made the point earlier that no -- it can be difficult.  

It can be politically difficult.  But every one of us has to make sure that our banks are in a position where they clean up their balance sheets, where they can get credit flowing again.  And you know, I think, we need to just, you know, face up to that.  And I think things have changed in mainland Europe, if you like.  

You know, I sense now that, you know, if I talk to a lot of my finance ministers, they're quite open about it.  You know, they will say, yes, we've got problems; we need to sort them out.  And you know, for the most part, they are sorting them out.  And you know, that's something that I think needs to continue.  

ACKERMAN:  We have 15 minutes to go.  With the hope of trying to get everybody's question in, would you mind taking three in a row?  

DARLING:  Yeah, I'll do that.  

ACKERMAN:  Great.  

So.  

QUESTIONER:  Nelson Cunningham with McLarty Associates.  

You touched on the G-7 and some of the tensions between the G-7 countries.  Certainly there are tensions between the G-7 countries and the eighth member, Russia.  And then you talked about the need to broaden to a G-20, as you noted.  

As we broaden the range of countries that are involved, in these groups, what is the governance mechanism, to help us actually make decisions with these increasingly larger bodies?  

QUESTIONER:  David Apgar.  I'm an independent credit rating and performance management consultant.  

Do you worry that despite stated intentions, policies of Asian and European countries in fact rely on a resumption of U.S. overconsumption at some point?  And why are countries resisting good-bank/bad-bank resolution since, after all, they do address the interplay of banks' needs, for transparency on the asset side and for new capital?  

QUESTIONER:  (Inaudible.)  

I was in London yesterday.  And I picked up a copy, a 28-page copy, analysis of your budget.  And one of the things that has been criticized or almost, I would say, attacked most was the growth assumptions going forward.  

Without specific reference to the U.K. -- I mean, you're welcome to do that -- but more generally how would you see the tradeoff, between being overly pessimistic and overly optimistic on the recovery, at this stage?  

DARLING:  Okay.  On the first point, the governance, it is an important point.  We met at the G-20, but there were a number of people at the G-20 who were very conscious of the fact that there were other countries that arguably (should/shouldn't ?) be in the G-20 but; you now, there is no governance, it's simply just leaders coming together.  And they contrasted that with the IMF, for example, which is a constituency-based system.  

Now, I know there are very good arguments for reforming the way the IMF is done, but, you know, we are going to have to address these governance things.  You remember these -- the G groups have no -- you know, they're not set up under treaty or anything like that.  The advantage of the G-7 is simply this:  it is easier to have a conversation around the table with seven people than it is with 70.  The G-20 recognize the fact that, as I said earlier, you need to bring all the countries, a wide range of countries around the same table.  

And I suspect that we are going to have a discussion sooner or later as to what organizations do we need, and therefore, what should the governance be.  But once you start excluding people, or people say, "Well, you know, I've got something to say and you're not hearing me," then you get difficulties.

I'm not sure that's going to be sorted immediately.  As I said in answer to a question earlier, I'm very pragmatic about this; what works is what we need to push at the moment.

On David's point about, you know, you're asking about the rest of the world relying on U.S. consumption.  Well, yes, the rest of the world does rely on what we -- we depend a lot on the American economy because the U.S. economy is so big, it's important.  But as I said earlier, it's important that we have a balanced recovery.  It's important that it isn't just focused or doesn't rely on one aspect of one economy, even a very big economy like the United States, which is why I think we do need to pay far more attention to what is going on in the emerging economies.

On the good-bad bank split, I said earlier I don't have a philosophical view that one way of sorting out the banks is inherently superior to another.  As I said, in the U.K. we have done a good-bank/bad-bank split in a couple of occasions when they were smaller banks.  And if you look at the restructuring of one of the biggest banks, effectively its new management is looking at, you know, building the bank off one part of its core business and then at some stage in the future doing something else with what they regard as non-core business.

And if you look in continental Europe, you know, Germany, for example, has been looking at that sort of split, although I think it's run into some difficulties in the German Parliament.  But I don't think there's a philosophic difference between us; the question is just getting on with it and doing it, because if you keep discussing it and not sorting it out, you're losing time, and time you can't afford to lose.

On Andreas' (sp) point about, you know, growth assumptions and whether you should be optimistic or pessimistic, firstly, we do live, as all of us, I think, in this room would acknowledge, in extraordinarily uncertain times.  If we'd had -- if I had been here a year ago and I'd told you the British government would own one of the largest banks in the world in 12 months time, you know, most of you would have thought, well, that's a bit odd.  But we do.  In fact, we own quite a lot of the American banking system as a result of it, as you know as well, which I'd have thought pretty extraordinary as well.

But -- and if you'd said that Japan would see its exports fall by nearly 50 percent, or that you'd look at some of the debt levels that countries are contemplating at the moment, if you'd look at what's happening here in the United States, people would have said, well -- you know, even 12 months ago -- that seems a bit far-fetched, doesn't it?

So it is an uncertain period at the present time.  But I think governments have a duty to be realistic.  That means you shouldn't be wildly optimistic, nor should you get yourself into a position of saying, well, actually, nothing works.

Now, I base my forecasts on what I see happening in the British economy.  We have had a very difficult past six months.  You know, we -- this has happened since last October.  I said that I thought the first quarter of this year was going to be difficult.  But I think the combination of what we're doing domestically, both in terms of fiscal monetary policy, in terms of what the G-20 action, which is working its way through the system, will do, then, you know, I see growth picking up towards the end of this year in the U.K., in view of the range of forecasters.  There's many other people who see that, too, as well.

But the key thing that will determine all of this is the point that I made right at the start:  It's if every one of us actually signs up and, importantly, delivers on measures that will make a difference, then I think this whole downturn will be far shorter and far less painful than would otherwise be the case.

Now, I know here people are very focused on it.  You know, when you have 5 million people that lost their jobs in the last year, you can't just stand by and let that take its course.  I just really think that is -- it would be morally wrong and it would be economic madness.  And that's why I so support what President Obama and his administration are doing.  That's why we're doing similar things.  They're doing it in France and Germany.  You know, when people say, "What's the difference between France and Germany and the United States?" in France and Germany they're actually doing a lot of the same things that -- as you're doing here.  And the key for us is to see it through.

ACKERMAN:  I think we have time for two more in a group, so -- please.  And if these are the last questions, let me remind the participants that this meeting is on the record.  And when we're done, if you would please stay in your seats until the chancellor leaves, that would be appreciated.

So -- and we had one more.

QUESTIONER:  Thank you, Chancellor.  My name is -- (name inaudible) -- and I'm from the South African Embassy.  I just to want to note that there is a concern right now by African governments that Western countries, in light of the global financial crisis, will resort to buying local and to various protectionist policies.  So my question is, how would the U.K. or how is the U.K. balancing the concerns of their people to protect their industries with your international obligations and your bilateral relations with various African countries?

Thank you.

QUESTIONER:  My name is Sidney Weintraub.  I'm with the Center for Strategic and International Studies.  One of our problems here in the United States -- and I think it is in other countries, too -- is that there are institutions that are too big to fail, and that becomes a big problem.  Should there be some regulation, maybe among the G-20 countries, that there should not be institutions any more -- regulate -- that are too big to fail?

DARLING:  Right, if I may -- are we just doing two questions?

ACKERMAN:  Well, it turns out we have a little more time, if you'd like to --

DARLING:  All right.  Yes, I'll take one more, then.

ACKERMAN:  Was there -- did anybody else have one?  No?  Yes.

QUESTIONER:  Thank you.  Jeremy Pam.  You mentioned rising debt levels across the world.  I wonder what you see as the medium-term implications of that, as liabilities get transferred from private balance sheets to public balance sheets.  Is it inevitable that there will be a wave sometime down the road of sovereign debt difficulties, restructurings, or even defaults?  Thank you.

DARLING:  Well, let -- let me deal with the questions in reverse order.  Firstly, you know, I said earlier that I thought that debt levels would inevitably rise in many countries.  And obviously, that is something that you would want to address as soon as it's prudent to address.  And I think what countries, what investors, what markets will look at is clear signs in countries that they are prepared to address that problem, but to do it in a sensible time scale.

You know, classically, if you -- if your borrowing goes up and your debt goes up, you know, you might -- you know, there are some who argue, well, you need to address that immediately.  I think if you do that when you're still coming out of recession -- and you know, recovery, you know, is inevitably going to be modest when you start with it -- if you start doing things that chokes off that recovery, then that would make the situation so much worse.  And I think investors recognize that.

On Sidney's point about too-big-to-fail, this is an interesting point, in that, you know, especially in the U.K. -- probably, you know, 40 years or so more ago, you know, in the United States -- we've had a far bigger tradition of many more smaller banks.  This hasn't been a problem, because if anything happened, then it was mostly the smaller banks that got into difficulty.  You could just come along and you could do what was necessary, and it would all be over by lunch time.  But you know, we're not in that position just now.

What -- the problem I see with the too-big-to-fail approach is that at what stage -- how could government possibly say to a particular bank, "You've got to such a stage, you can't take any more business" or "You can't go into this line of business, or the rest of it"?  That is very, very difficult and I don't have a -- you know, I'll be blunt about it:  I don't have a precise answer to it.  Because, you know, it comes back to the point that Peter was asking me about in relation to, you know, global banks, you know, which are very, very global, and then when there's trouble they come back to the one country where they're based, where the brass plate's on the wall, and say, "Please, help us."  So that it is a pretty important question, and I don't have an easy answer to it.

I just -- rather like, you know, we're having a bit of a debate.  And I'm not saying that everybody talks about this in every pub and every club and every home in the United Kingdom, about, you know, whether or not you should have a -- you know, a division between, you know, the Glass-Steagall-type debates:  you know, investment banks and retail banks and so on.  

But these are all issues that we're going to have to address, and the too-big-to-fail problem -- I'd just say this, that I think we just have to recognize now that there is a changed landscape in the relationship between banks and governments.  And the last -- events of the last 18 months have really brought that home, that you just -- you know, whether you like it or not, you know, if we're the lender of last resort, if we're the guarantor of last resort, it has implications.  

And, you know, we can't have a situation where people say, "I don't like state intervention, except when I get into trouble, then I want lots of state intervention, and when it gets better I want you to go away again."  I don't think people will stand for that.

Now, that brings me to the last point, which is actually a very, very important point, which is essentially about protectionism.  And I think you're absolutely right:  It -- and it comes back to the point that you were making earlier on -- right at the start of this.  And that is that if countries, developed countries, pull down the shutters and say, "We'll look after our own country first," and that you'll buy goods that are sourced locally, it will have a disastrous consequence.  This happened in the 1930s, and it was disastrous then.  If it happens in the next decade, it will be disastrous again, and the effects will be felt for many decades to come.

And it's not just bad for African countries or Asian countries.  It's bad for Europe.  It's bad for America.  Because we are not in a position now where we can say, "Well, the rest of the world doesn't matter anymore."  The rest of the world does matter.  It's in our interest, not for -- just for humanitarian or for social or moral reasons that we -- that we -- that we deal with poverty in Africa.  But it's actually in all our interest that African countries do grow and do become properly functioning democratic countries with trade with the rest of the world.  

And that -- you know, that's one of the reasons that -- as you know, from our point of view, Tony Blair, when he was prime minister, and Gordon Brown, you know -- you know, and actually, there's not an easily-won argument at home (warranted ?) to increase the amount of money that we provide in development and aid and writing off debts, of building up education -- simple things like providing basic health-care needs that just are absent in so many African countries.  

We're doing it not out of some sense that, you know, it's charitable or something like that.  We're doing it because it is actually in everybody's interest that we do this,  For political reasons, for economic reasons, you know, it is essential that we do it.  

And I know that, you know, here, as in every other country in the world, the temptation to say, "Okay, we can get out of this by pulling down the shutters for a bit, and we promise you we'll be all right in a few years' time and we'll come back and" -- that isn't good enough.  

And, you know, coming back to our point, and maybe Andreas's (sp) point, we are the second-biggest exporter for services in the world.  We're the sixth-biggest exporter of goods.  I'm not saying that to say, well, you know, isn't Britain good.  I'm just making the point, for three or four hundred years, our wealth was built off our ability to trade round the world.  

And every country actually is in that position.  You know, there's -- this is -- there's no country that is too big where it can turn its back on the rest of the world.  So whether it's Africa, Asia, you know, wherever -- I think it is absolutely imperative that we do everything we possibly can not just to sign up to no protectionism, but we don't actually do it.

ACKERMAN:  Chancellor Darling, thank you so much for being with us, for your frank discussion.  I think we enjoyed it (immensely ?). (Applause.)

DARLING:  And thank you to you.

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THIS IS A RUSH TRANSCRIPT.

PETER ACKERMAN:  Good morning.

Welcome to today's Council on Foreign Relations meeting.  This meeting is part of the C. Peter McCullough Series on International Economics.

I'd like to ask you to please turn off, and not just put on vibrate, your cell phones, BlackBerrys, and all your varied wireless devices so as to avoid interference with the sound system.  And let me say as a reminder, today's meeting is on the record.

Now, if I may, I'd like to introduce our distinguished speaker.  Alistair Darling was appointed as chancellor of the exchequer on 20th June, 2007.  But before becoming chancellor, our speaker had an extraordinarily varied career in public service.  He was secretary of state for the Department of Trade and Industry from May 2006 to June 2007, and was secretary of state for Transport and secretary of state for Scotland from May 2002 to May 2006.  Before that, Alistair Darling was secretary of state for the Department of Work and Pensions from June 2001 to May 2002, and secretary of state for Social Security between July 1998 and June 2001, and was also chief secretary to the Treasury for May 1997 to July 1998.

While out of power, our chancellor was the shadow secretary -- shadow chief secretary to the Treasury from July 1996 to April 1997, and the opposition spokesman on the City and Financial Services between 1992 and July 1996 -- and we'll have a chance to ask questions about his experience from that -- and also the opposition Home Affairs team from 1988 to 1992.

Alistair Darling studied law at Aberdeen University, and has worked as solicitor -- before then worked -- and then worked as solicitor in Edinburgh before being called to the Scottish Bar, and was admitted to the Faculty of Advocates in 1984.  And he's been a member of Parliament first for Edinburgh Central, from 1987 to 2005, and for Edinburgh Southwest since 2005.

Our speaker is married to Margaret Vaughan and has two children, and we're delighted to have you here today.

So, please, if you could make some comments, and then we'll go after that.

CHANCELLOR ALISTAIR DARLING:  Thank you very much indeed, Peter, for your kind introduction.  And then I'm very pleased to be here to talk to the Council of Foreign Relations.

I was just being reminded as you went through my c.v., as it were, that in all the things I've done in government and before that, I can probably say that the last two years as chancellor of the exchequer have been extremely interesting.  (Laughter.)  As you know, chancellors on the whole prefer that life is boring rather than interesting, and for the last two years we, and every single country in the world, have been through quite extraordinary circumstances in the financial system and the wider economy.  And I think one of the many lessons that we will need to draw as we come out of this is a determination to ask ourselves very frankly what happened, what went wrong, what were the things that we need to learn from, because if we are not careful, because of the nature of these things, these problems will come again.  And after this extraordinary series of events, we really do need to learn from what has happened so we can prepare ourselves all the better for the future.

Now, I want to speak to you for a comparatively short period of time, and then I think we are going to have a discussion with Peter, and then I'll be very happy to hear what you have to say, to answer your questions.  All I ask is you tell me who you are and where you come from, not because I ever bear any grudges, but it does actually help to know from my point of view your perspective, what your experience is.

What I would like to talk to you about this morning, very briefly, is not just what individual governments can do, but the importance of countries coming together, not just to support their economies but the wider global economy, as well as, of course, making sure that we prepare ourselves for the future.

And one of the things that is very clear from what has happened over the last couple years or so is that, if there was any doubt about it, we live in a truly global economy, which has got massive opportunities now, it will have massive opportunities in the future.  But also, that globalization does mean that if a problem that in the past might have been contained in one part of the world or one region -- what is clear now is that there is a very substantial risk that something could very rapidly spread from that to affect the whole economy within a matter of weeks and months.

I think the other thing that is also very obvious is that there is no country now that is large enough to be self-contained from what is going on in the rest of the world.  There was a time, I think, up until even recently, when some people thought, well, there's some economies that can carry on, they can behave as if the rest of the world, it was there, but it wasn't actually fundamentally important to what they were doing and their decision-making.  It is clear now that every single country in the world is affected by what's happening, and every single one of us need each other to get through this.

And that's why the meetings that we're having in Washington today -- the G-20, the G-7 meetings -- are so important.  It isn't just another gathering of ministers.  It's important that we build on what we agreed at the London summit earlier this month, when we got countries to come together within actually what was historically a fairly short period of time, building on the meeting we had here in Washington last November, to agree to take action jointly, together.  And it's now our job to make sure that we actually deliver, and we speed up what it was that we agreed earlier this month as we speed up recovery.

Now, already countries have started to do that.  Here in the United States, we in the United Kingdom, in Europe and Asia.  We need to do more, though, I think, if we are going to meet the objectives that we set ourselves earlier this month. But what is crucial is that we use this weekend's opportunity to turn that agreement into action.

Now, it's almost impossible now, for obvious reasons, to open a newspaper, wherever you are in the world, and not see something about the current state of the global economy.  In Asia, we see export growing very -- falling very sharply; n Japan alone, over 45 percent fall in exports in the last few months.  In Europe, many countries have seen very sharp falls in industrial production.  And across the world, you're seeing the same picture.

In the U.K., I've always been clear that the last six months was going to be difficult.  And I expected the first quarter's growth of this year in particular to see a large contraction in our economy.  But we must always remember that there is huge uncertainty at times like this, when large shocks hit economies everywhere and economic data becomes much harder to read.  But there is, I think, little doubt that the economic situation across the world, whether it's here in America, in Britain, has been both been difficult and uncertain over the last few months.

Yet I do believe there are reasons to be confident about our economy, about the global economy.  Now, many people see parallels with what happened in the 1930s following the Wall Street crash of 1929.  And then, when the world economy was plunged into a deep crisis in the early 1930s, and the response at that time was far too little and it was far too late.  And the failure, both nationally and internationally, to act meant that you had a serious downturn which fell into a prolonged depression that lasted the best part of a decade.

This time, though, we have seen decisive action in many countries, and we've set in place forces which will help the global economy come out of recession sooner.  For our part in the United Kingdom, we've already taken action, which means that we expect the economy to start growing again towards the end of this year.

And much of this general help, for example to protect jobs, it's essential, because we do need to help families, we need to help businesses now.  And it will mean that we can get people back into work more quickly.

And one of the many lessons that we have learned -- I think other countries have learned too, from what happened to us in the '80s and 1990s -- is it is imperative to make sure that if people lose their jobs, they get back into work as quickly as possible because the longer they are out of work, the greater the risk that a short period of (un)employment can turn out to a very long period out of work.  And that is extremely damaging for countries, as well, of course, as being a huge -- hugely damaging experience for the individuals concerned.

We've seen other initiatives, too.  In Europe, for example, there's been a lot of intervention, direct support for certain labor-intensive industries.  We've been helping families through our tax-credit system.  And of course, here in the United States, the new administration has been supporting the economy with increased public spending in education, transport infrastructure and science -- all the things you would expect to see, all the things we must see.

In the U.K., we've introduced a 13-month reduction in the sales tax, VAT, to boost spending.  We've cut income tax for middle- and modest-income families.  And that was complemented with further support which I announced in my budget on Wednesday.  It included help for homeowners, help for companies to deal with cash flow, and more measures to help people get back into work.  And we also took action to help business make the investment that it needs -- and we need as a country as a whole -- by supporting low-carbon projects.

And making sure, of course, when we do all these things, that our public finances are sustainable.  That is important, though.  We're right to support business and families now, it is right that we prepare for the future, but we need to do that whilst maintaining sound public finances.  The two things go together.

Now, of course, on top of fiscal support, central banks across the world have cut interest rates aggressively and they're starting to use the monetary policy instruments, including credit easing, which will, again, help the economies.  It is important that we remember that across the world, a great deal of money is being put into our economies.  And that is still working its way through the system, but it will make a difference.  And kick-starting credit, as President Obama has said on many occasions, is an essential part of that.  And I believe that the fiscal and monetary expansion that we've seen to support domestic and global demand represents the largest stimulus of modern times.

Now, in -- each country agreed in London when we met earlier this month that we'd do whatever was necessary to restore global growth to over 2 percent by the end of next year.  We have been bold and aggressive because, I believe and other countries too, believe that the risks of doing too little are far greater than the risk doing too much.  Or, to put it another way, as John Maynard Keynes said, "I'd rather be roughly right than precisely wrong."

Now, to ensure that countries are held to account for what they do, we've called collectively on the IMF to assess the action taken and to see what further needs to be done.  And that's something that we need to be discussing this weekend and thereafter.  But what is clear is that countries are now taking action in order to ensure that we get the growth, that we get the recovery that we all need to see.

Now, part of this -- and indeed, I would argue an essential precondition of what we're doing -- is to make sure that we take steps to make sure that we get bank lending going again, to get credit flowing through the system.  And cleaning up the banks' balance sheets is essential because if we don't fix the banks, we will never fix the economy.  It's difficult, but it's got to be done.  And it's an essential precondition to recovery.

We're providing support to our banking system, including more capital being put in, and of course insuring those assets for which there is now no market, or the valuation of assets is very much reduced.  But banks must clean up their balance sheets.  It is an absolute essential step towards recovery.  And at the London summit, countries committed to doing that.  And I can't overemphasize the importance of countries actually seeing this through, to repair or reform their financial system.

In the coming few months, countries will need also to ensure that they see this through in order to ensure that in the future, the financial services industry -- the banking system in particular -- is properly supervised and properly regulated.

We will shortly be setting our proposals because I think we need to learn from what we've done over the last few years.  There are improvements that need to be made, both domestically and internationally, because we need to build trust in the banking system.  People may not like banks today, but we actually need banks, and banks should remember they need us too.  But it's essential that relationship of trust, which is fundamental to the banking system, is restored and is strengthened.  And that's why the supervisory and regulatory regime needs to be tightened up.

There are a number of specifics which we need to deal with to ensure that we can guard against the risks to which we know we're likely to be exposed, to make sure that the banking system does not overextend itself and by doing so expose the institutions concerned -- and indeed, the countries in which they operate -- to risks which they are unable to meet.  And we also need to make sure that we've got appropriate regulation of pay and compensation so that people are incentivized to behave responsibly and not expose themselves to undue risks, and also to ensure that the people properly understand the risks to which they have become exposed.

But this is absolutely essential, to make sure that we have a properly functioning banking system.  It goes hand in hand with what we've done.

Which brings me to a the last point that I want to make.  Each of us, in our own countries, can do whatever we think is necessary in order to support domestic demand, in order to (shore up ?) what is necessary to get the banking system going again.  But as I said at the start, it is patently obvious now that we do live in a a global economy.  Each one of us depends on other countries behaving appropriately and us taking action together, both to guard against the negatives, if you like, the risks to which we're exposed, but making sure, too, that we act together to take the necessary action to support our economies, and to support the people, the businesses that operate not just in our countries, but across the world.

If ever there was a time to express our faith and our need in international institutions, this is it.  These international institutions can sometimes seem remote because they are, of necessity, several steps removed from the people that actually rely on them.  But all of us, I think, have a duty to remember that we depend on each other not just in our own countries, but we depend on each other taking action together not just to get through this, but to work towards recovery and to seize the massive opportunities that will come ahead so that everyone -- not just some, but everyone -- can benefit from the opportunities that I know await us in the future.

Thank you very much indeed.  (Applause.)

ACKERMAN:  I'm going to ask the chancellor a few questions.  And after we get by those, I will open it up to the floor and look forward to hearing the questions you have to ask.

The first question I have is referring back to the April 2nd London summit.  It was clear that there was a tension between the United States' desire for more countries to undertake additional stimulus and the German and French desire for more emphasis on regulation.  Where does your country stand today on that tension between those two thoughts?  

And specifically, on a bilateral sense, what can the United States do?  What policies do we have in place today or you would like to see in place that could be most helpful in helping you get through your crisis?

DARLING:  Well, let me start with the perception that when we met in London that we started with, you know, opposing views on what you should do in relation to fiscal stimulus, because, you know, okay, you can look at what people said and you can -- you can try and stack that argument up.  Actually, I don't think there was as much of a difference as people make out.

If you actually look at the stimulus that has gone into, say, the German economy or our economy or the United States, they're not actually that much different, the proportion of GDP.  The reason for that is that in Europe we have far more developed welfare systems.  

And if I give you an example, we have a system in our country where, if you are lower incomes and you've got a family, you will get an additional tax credit.  In other words, you will get money from the government to supplement your pay to help you with your -- looking after your family.  Now, you get that in work -- it's part of being in work.  And when your wages go down -- if, for example, you are put on short time, your hours are reduced and your income reduces, automatically, the payment you receive goes up.  So that -- the money that is actually going into the economy, assuming all this money is spent, is retained at the level it's -- that it was.

Now, in Germany and France, for example -- and, you know, to an -- and in some ways, to a greater degree than ourselves, there are -- there is this automatic help, you know, the automatic stabilizers that economists talk about.  And that is rather different from the United States welfare model, which is much, much more restricted.

But for this purpose what matters is that whether it was the United States, ourselves, Germany, other countries, too, we have put very substantial sums of money into the economy.  

I was always very clear that when we met in London, nobody was going to say, you must do this; you must do that.  It was up to each country to do what was right and what was appropriate, because they have to take everything into account.  What was important was to take action.

Now, at the end of it, I think people were pretty much agreed that they did need to take that action.  Some of them had done it.  Some people, it will need to be more.  I suspect it's something that you just keep under review as things develop.  But I don't think there was that much of a tension there, if you like.

Now, what can America do to help?  Well, the United States is so big and so influential, what happens here matters to every one of us, no matter where we're living in the world.  I fully support what the administration here is doing.  It's for the administration to decide what else it needs to do.  

But I -- I'd just make one point, and that is, America must do what it thinks is right.  And my only "ask," if you like, is that you here continue to do what you can to get your economy going, because that will influence what happens in the rest of the world.

The other thing is -- and we're going to come on to this, I think -- in relation to the banking system, a lot of the banking system comes back to America, so actually, what you do here to sort out your banking system is terribly important for the rest of the world.

So those are the two things.  But I think we're pretty much in the same place as far as this is concerned.  The Americans, ourselves, the Europeans -- I don't think there's nearly as much division as sometimes people make out.

ACKERMAN:  Great.  

Let's talk about a potential hypothetical in the future.  Consider a bank that's been operating in all the G-20 countries and in other jurisdictions.  In each one of these jurisdictions and countries, they have their own operating license, their separate balance sheets.  But since clients transcend these borders, each of these entities are taking on counterparty commitments, pieces of counterparty commitments in coordination with other jurisdictions.  

And at the end, this bank has, through derivatives and other types of instruments, notional claims against them that could be multiples of what their -- even their assets are, not only their capital.  And this bank is now insolvent.  It needs to be liquidated.  

Now we go through a process of liquidation where new views as to who has priority claims competing amongst the various jurisdictions pop up, and it's not clear how they work themselves through.  But the precedential value of the questions that come up can have a chilling effect on the entire global system and how the -- business is done in the future.  How do you think we should address this issue as to how to shut down a major bank?

DARLING:  This is -- you know, it follows on the point I was making earlier about the recognition that we very much live in a global economy.  And in the last 18 months, I've been struck that -- by the fact that these banks, when they're doing well, are very global; when they fail, they become very national.  (Laughter.)

ACKERMAN:  Exactly.  (Laughs.)

DARLING:  And if you happen to be the nation concerned, that -- this is the big -- this is a big problem.  And, you know, the last 18 months or so, this problem has come into very, very sharp focus.  

Because, you know, with Lehman Brothers, for example, it's an American bank, but, you know, when it got into difficulties last autumn, it wasn't just an American bank.  You know, we had problems -- you know, as you know, the then-administration and ourselves, we had discussions as to what we might do with it.  

But this is a problem that needs to be sorted.  There are very few large banks now that don't operate across several countries, and one of the reasons that I want to bring together the supervisory and regulatory regime -- you know, we've -- last year we agreed we'd set up colleges of regulators, bringing these regulators together -- is that very often part of the problem was that no one country had a complete view as to what was going on in the whole bank.  And the banks knew it.  

And indeed, if you look at the -- let me go back to the subprime mortgage problem:  that this is happening in one part of the world; in other parts of the world, people may have heard of it, but they weren't really focused on what, actually, it meant.  And especially now, as we realize that it isn't just capital that we should be bothered about but liquidity that we should be bothered about, I think the lessons are quite clear.  You must have far closer cooperation between regulators.

I think the other question which is much more difficult is that -- suppose you've got a bank that operates out of one country but is very, very dominant in terms of influence in another country.  Well, who do you ask to intervene if it goes wrong?  The country that will be most affected may find, well, actually, it's not theirs.  

And we've had problems here in relation to the Icelandic banks.  You know, they are regulated and supervised in Iceland; actually, one of their branches in London was doing far more business than the rest of the bank, and yet it -- we had to treat it as a branch of a bank -- you know, any other bank.  And we could see the problems that were going to arise from there.  

So I think there's a lot of lessons to be learnt here, not just in terms of tightening up supervision and regulation, but also making sure that there is proper cross-border cooperation.  And it can't just be the sort of cooperation that means you have a meeting once or twice a year.  It has to be pretty active.  

Because we cannot allow a situation to arise where we get the banking system going again, we get it back on its feet, and these guys say, "Well, that's fine," and -- you know, we were saying earlier, in my experience, you know, the number of people who used to tell me they had little time for state intervention and really wished governments would get off their backs, when they get into difficulties, they couldn't come to the government quick enough.  And no doubt, when things get better, some will say, okay, thanks very much, go away now.  

Well, we're not going to go away now, because the people who paid to sort this out do expect that, you know, banks have to live in a world, where they recognize that we need them, yes, but they need us too.  That's why you can't go back to business as usual.  

ACKERMAN:  Well, in that mode, before you're asked to go away, and things get better, but there's one thing.  (Inaudible.)  

I think everybody realizes that there's a new -- there's a need for a new way of thinking, about risk management, not only with banks but with non-bank financial institutions.  And it's a conceptual problem that has to reach a new level of agreement.  

And I'd like you to address -- I'm sure you've been thinking, in your quiet moments, about what that new architecture might look like.  But could you address how risk should be managed, in the global system, and address three points?  

One is capital adequacy and how it should be defined.  Two is whether there's needs for absolute leverage, where we could go back to some mixed absolute leverage or value-at-risk issue.  And three is how we basically deal with impaired assets, so that there's transparency, whether we want to -- you know, what the tension is between mark-to-market and mark-to-model.  

DARLING:  Yeah.  I won't claim that every spare moment I've got that I think about these things all the time.  But you're right.  They're pretty fundamental.  

And I think the whole question of capital adequacy needs to be looked at.  And in particular one of the things that we need to look at is, to what extent you attempt to put a brake on excessive exuberance, in lending, in times when they appear good.  Because there's no doubt that if you allow that sort of credit level to build up, then there isn't just an exposure for when things turn down.  But also I think it does put an excessive strain on the institution.  

I think in relation to liquidity, I said it earlier.  I think that does need to be looked at.  When we -- when you -- in Britain, we saw the first symptom of what was going wrong, with the Northern Rock bank.  It was liquidity problems.  It was one of the best-capitalized banks we had.  And what good did that do it?  It just -- it ran out of money.  

So I think there are huge lessons to be learned, as far as that's concerned.  And I think, you know, on the question of impaired assets, there's a debate whether you mark them to market or to a model.  And you know, those discussions will no doubt continue.  But I just wanted to make one point on the impaired assets.  And that is, whether you like it or not, a lot of banks have got impaired assets that need to be dealt with.  

We have an insurance scheme.  You know, we haven't set ourselves against -- (inaudible).  But we've done that with a couple of smaller banks.  In the United States, there's a slightly different approach.  But whatever happens, it's got to be sorted out.  Unless we sort out the impaired assets problem, you will not get credit going.  And if you don't get credit going, you won't get recovery.  

So it's one of these things that I was saying earlier on.  In an ideal world, you would not want to do this.  In an ideal world, you would say, well, you made these bad calls; you know, you have to live with it.  Unfortunately with the banking system, which is why, you know, I think, our whole attitude towards the banking system needs to change, not in the sense that we tell them what to do or stand in their shoes or that.  

But we do need to make sure that we understand the importance of an effective banking system and that we make sure the supervisory regime doesn't have a rule and regulation for every single conceivable possibility, because that would be nonsense, but that it sets out pretty clear parameters, so that people fully understand, what's their risk; what's our risk?  When I say our, not just government's but, you know, the people who elect governments and ultimately pay for these things.  

ACKERMAN:  Wonderful.  

We're now going to invite the audience members to join in the discussions.  If I point to you, please wait for the microphone.  Stand up and speak directly into it.  State your name and affiliation.  And if you can keep the comment -- the question short, so we can have more time for people to -- more people that -- time for more people to ask questions.

QUESTIONER:  Arnaud de Borchgrave, CSIS.  Chancellor, as you peer in -- over the horizon, say 10 years out, is an economy based on conspicuous consumption still possible at a time of growing world shortages?

DARLING:  You want to take one a time?

ACKERMAN:  Please.

DARLING:  Well, I think when I spoke earlier, I said that there were -- you know, that people have talked about global economies and they've talked about more advantages, you know, for some time.  And I also made the point that I think that's true, there are massive opportunities, but there's also risks that come with that.

I think one of the other things that we need to learn and we can -- we're seeing that now -- is if you look at the imbalances in the world and if you look at the inequalities of the world, and, actually, if you look at where growth is likely to come from in the next few years, which will essentially be from the emerging, the developing economies, that tells you two things.  One is you've got to make sure that we help those economies now.  And that's one of the good things that came out of the London summit, I think, was a recognition to do that.

But I don't think -- I think it -- you can't, you know, regulate precisely to do these things, but I do think there has to be a recognition that unless the whole world is in it together, unless we recognize that, you know, sometimes we may have to forgo things to make sure other parts of the world come up, in the short -- in the short term you might gain, but in the long term you'll lose out.  And I think for the long-term prosperity of each and every one of us, whether we're here in Washington or in London or Paris or Tokyo, you need to make sure that all economies benefit from the growth and the potential prosperity to come.

Now, that means -- that means a lot of hard work.  It isn't something that's going to happen just if you leave things to their own devices.  It does mean interventions; it does mean a conscious effort to ensure that we do that.

But just as one -- a country with huge imbalances will sooner or later run into difficulties, I think if we don't address the wider global problem, then I think looking ahead 10, 20 years, we're just storing up more problems.

QUESTIONER:  Good morning.  I'm Hani Findakly, Potomac Capital.  You have recently had an experience of a failed gilt auction, in the sense that the Treasury did not get enough bids to cover the entire amount that were offered for sale.  My question is, do you see this as an isolated incident?  And what contingency plans do you have to avoid the consequences of the Bank of England having to monetize the government debt?

DARLING:  Well, firstly, there was one auction that wasn't completely covered.  It was almost completely covered, but it wasn't completely covered.  The next week, we had two auctions which were more than completely covered.  And indeed, every auction has been covered since that time.

The head of our debt management office said in January that at the present time then it was inevitable there would be occasions when you might have an auction for one reason or another that wasn't covered.  I mean, Germany, for example, had one in the same position.  So, you know, I am confident that we will be able to continue to have these auctions and that they will be successful.

Now, I think the thing that people are looking at -- not just in our country, but they're looking in every country in the world -- is, yeah, they recognize they're having to do things they wouldn't do in normal times.  You know, if you look at the borrowing -- or if you look at the debt numbers in countries right across the world, they're higher than you would want.  But people recognize if you didn't do that, the cost of not intervening would be far, far greater.  And I suspect you would end up borrowing even more and you'd have higher debt levels.

What they're looking for, though, is whilst you do that help just now, you've also got a plan to make sure that you, in simple terms, live within your means over the medium and long term.  And that's why in the budget, just as I had in our pre-budget report, which we -- which we made in November, there are two parts to what we're doing.  We're helping the economy now, but we're also making it clear that we and every other country in the world are going to have to make sure that as we come through this, as we come through recovery and our economies start to grow again, then we've also got to make sure that we live within our means.  And I think those two things are absolutely essential.

As far as the Bank of England is concerned, you will know, I suspect, it announced -- or I agreed to it putting money into the economy for quantitative easing, as it's called, in March.  And that process is starting -- has started.  And, indeed, I think there's a number of other central banks that already are doing it and more are looking at it, because this is all part of making sure that, you know, we take as aggressive steps as possible to get our economies going again, because, as I said earlier, the cost of not doing so is just far too great.

ACKERMAN:  We now have a queue of eight or nine people who'd like to ask questions --

DARLING:  Well, will I take two or three at a time, then?  Would that help?

ACKERMAN:  Let's keep going for a minute or two more.  Please.  Maybe --

DARLING:  I'll be brief.

QUESTIONER:  Barbara Matthews, with BCM International Regulatory Analytics, former U.S. Treasury official.  I have a question on the regulatory side, with the FSB and its elevation after the London summit.  I'm wondering if you could provide your perspectives to us based on the European experience.  The de Larosiere report had a particular vision for how information and coordination could occur across border.  Lord Turner had a slightly different vision.  

The question could be asked two ways.  One, what can we learn from the European experience?  Or two, if Europe can't come to quick agreement amongst itself, even when it has a treaty obligation to share some sovereignty, what hope do we have at the global level of being able to come to some kind of an agreement on sharing information and coordinating?

DARLING:  Okay.  Let me try and deal with a very complex matter fairly briefly.

What all those things -- developments in Europe and our country and here in the United States show is that I think people are clear about a number of things.  

Firstly, regulation must start a national level, because it's really only the national regulator that can see into the nuts and bolts of the particular institution.  And from that, we were clear 12 years ago when we reformed our system, is that whilst we had seven or eight different regulators, we wanted to bring them together and we set up the Financial Services Authority, because otherwise you run the risk of people, you know, managing -- only seeing a very small part of what the institution does.

Now, having done that, the question then is, do you need supranational organizations?  Now, I think if you take the -- in Europe, for example, yes, we have treaty obligations and we've got the de Larosiere report.

There are some people in Europe, as you know, who would like to go to a pan-European regulator.  My view is that, well, maybe one day you will want to have, you know, an overarching view, because of the points you were talking about, because most of our banks trade all over Europe.  But we believe that regulation ought to be done at a national level, but there has to be far, far closer supervision and regulation, and far closer cooperation so that European regulators know what they're doing so there's contingency plans if you get difficulties and so on.

And it's an extension of that, but, you know, I don't think anyone would argue that you would have a joint, say, Anglo-American regulator.  But it does mean that the British regulators and the American regulators need to talk to each other and be less hung up on exchanging information than perhaps they were.  There are times when, you know, people say, "Well, we can't tell you that," even though sometimes you could read it in the Financial Times or, you know, the New York Times or whatever.

You know, I think there needs to be far greater cooperation.  But frankly, where we are now, I would rather build on what we've got.  We don't have 10 years to sort out the architecture.  We've got some very immediate problems.  And we need to remember that once things start to improve, we've got to watch that the old bad habits don't creep in, which means that you build on what you've got.  I recognize here, for example, if you did want to bring all the regulators together, that needs quite a lot of legislation.  And I suspect that would take time, and I don't suppose it would be uncontroversial.

But I would rather have that closer regulation, whether you use the FSB, which is very new and, you know, it hasn't got lots of resources; but I would rather let's build on what we've got.  I think we can see where the problems are.  And even if it means you have to make do in the meantime, I'd rather do that, rather than try and design an international architecture that would take years to put in place.  I'm pragmatic about it.

ACKERMAN:  Paula?

QUESTIONER:  Paula Stern, with Stern Group.  I'd like to ask you about China and the role you feel China would optimally play going forward after this historic point in time.  Coming out of the G-20, China made -- came forward and put in quite a bit into the IMF.  Some people feel like it wasn't as much as they would have liked to have seen.  And I'm wondering what role you wish to see China play in the globalized economy.

How much do we want to see them come up with a convertible currency?  How much do we want to see China control the value of its currency vis-a-vis other currencies in the competitive economy?  Do you feel that China is playing as big a role as we need it to, as we try to find the source of growth going -- going forward, now the U.S. has basically said it's not going to be consuming the way it has been up until now and the model has changed?

DARLING:  Well, I think I can answer your question fairly shortly.  The first obvious one is, yes, China's crucial.  It'll be the second-biggest economy in a few years time.  And, you know, it demonstrates how fast things have changed over the last few years.

And China, I think, recognizes itself -- now, obviously, you know, China -- the Chinese can sometimes be very cautious, for understandable reasons.  But, you know, I think they recognize that they have a very important role to play.  

I was very pleased at what China agreed to do in London earlier this month.  And in return, China is understandably clear in saying, "We want to sit at the top table, but we want to be sitting alongside you, not being invited along" -- you know, which is what has happened so often in the past.

You know, you think about it, we -- I am here in Washington primarily to attend the G-7 group of countries.  And the same G-7, the same countries there, could have been there in 1945.  Well, the world has changed somewhat, and there's an awful lot of countries in the world who -- you know, people who have never been to, you know -- or that, you know, just didn't figure in people's -- you know, developed countries' thinking at that time.  The world has changed, and we got to recognize that.  

And, you know, China's -- China's a very, very important part of that.  Now, you know, I'm not going to get into the detail of what China can and can't do, but I think we need to engage with China, and I think, you know, that that's recognized.

There's one other thing that occurred to me while you were speaking, which, you know, I simply mention, you know, because it gives a sense of perspective.  I was in Beijing about a year ago, and I was speaking to a very senior Chinese minister, and, you know, he was very focused on the fact that China was affected by what, even then, they could see in the United States.  

And I -- and, you know, we were talking about the need to look in the long term.  And I said, well, you know, never mind the long term; what do you think about the medium term?  And he said, well, when I look out over the next thousand years, I see that -- (laughter).  And I suppose, in a country that has thousands of years of history, it's actually not a bad thing to bear in mind.  

Sometimes I think the long term's important, but I -- in the long term, you know, if we think we can carry on as, you know, the small group of countries who -- inverted commas -- "ran the world" over the last 60 years, we can't.  The world's changed, and we need to realize that.

QUESTIONER:  Thank you.  Chancellor, my name is Dan Price.  I'm currently with Sidley Austin.  I was President Bush's sherpa for the G-20 here in Washington.  First, I wanted to congratulate you and Prime Minister Brown and your sherpa, Jon Cunliffe, on a very, very successful summit in London.  

Then I wanted to follow up on a point that Peter (sp) made about tensions between continental Europe, on the one hand, and the United Kingdom and the United States on another -- on the other.  In the leadup to the summit, we heard a lot of vilification about the Anglo-Saxon model, and we heard a fair amount of kind of "blame America first."  

Yet the Wall Street Journal reported yesterday, I think citing an IMF report, that well over half of the impaired assets of continental Europe's banks are not the result of the purchase of CDS or toxic assets, but are, in fact, bad loans made by continental European banks to European businesses and households.  And I'm wondering if you think that that new information will kind of help us get past this challenging-of-models point and get us all on the same page in working to clean up balance sheets.

Thank you.

DARLING:  Okay.  

Look, firstly thank you for your remarks about the G-20.  And in turn, we greatly appreciated the work that President Bush put into the meeting last November, even at that -- you know, the closing stages of his administration.  It made a huge difference, because if we hadn't had that, then it would have been much more difficult to have taken quite a significant step forward, when we met in April.  

I think in relation to the transatlantic discussions and so on, I'd just say this.  There was a time, in 2007, you know, when we had our problems with the Northern Rock bank.  And I used to go to meetings in Europe where people -- there were people who could barely conceal their view that, you know, we had this coming and all that, and it was just us.  

I think everybody knows now that every single country is affected.  There isn't a country in the world that doesn't have a bank that's got problems.  You know, some of them; it's more obvious than others.  But they know it.  And that's why I made the point earlier that no -- it can be difficult.  

It can be politically difficult.  But every one of us has to make sure that our banks are in a position where they clean up their balance sheets, where they can get credit flowing again.  And you know, I think, we need to just, you know, face up to that.  And I think things have changed in mainland Europe, if you like.  

You know, I sense now that, you know, if I talk to a lot of my finance ministers, they're quite open about it.  You know, they will say, yes, we've got problems; we need to sort them out.  And you know, for the most part, they are sorting them out.  And you know, that's something that I think needs to continue.  

ACKERMAN:  We have 15 minutes to go.  With the hope of trying to get everybody's question in, would you mind taking three in a row?  

DARLING:  Yeah, I'll do that.  

ACKERMAN:  Great.  

So.  

QUESTIONER:  Nelson Cunningham with McLarty Associates.  

You touched on the G-7 and some of the tensions between the G-7 countries.  Certainly there are tensions between the G-7 countries and the eighth member, Russia.  And then you talked about the need to broaden to a G-20, as you noted.  

As we broaden the range of countries that are involved, in these groups, what is the governance mechanism, to help us actually make decisions with these increasingly larger bodies?  

QUESTIONER:  David Apgar.  I'm an independent credit rating and performance management consultant.  

Do you worry that despite stated intentions, policies of Asian and European countries in fact rely on a resumption of U.S. overconsumption at some point?  And why are countries resisting good-bank/bad-bank resolution since, after all, they do address the interplay of banks' needs, for transparency on the asset side and for new capital?  

QUESTIONER:  (Inaudible.)  

I was in London yesterday.  And I picked up a copy, a 28-page copy, analysis of your budget.  And one of the things that has been criticized or almost, I would say, attacked most was the growth assumptions going forward.  

Without specific reference to the U.K. -- I mean, you're welcome to do that -- but more generally how would you see the tradeoff, between being overly pessimistic and overly optimistic on the recovery, at this stage?  

DARLING:  Okay.  On the first point, the governance, it is an important point.  We met at the G-20, but there were a number of people at the G-20 who were very conscious of the fact that there were other countries that arguably (should/shouldn't ?) be in the G-20 but; you now, there is no governance, it's simply just leaders coming together.  And they contrasted that with the IMF, for example, which is a constituency-based system.  

Now, I know there are very good arguments for reforming the way the IMF is done, but, you know, we are going to have to address these governance things.  You remember these -- the G groups have no -- you know, they're not set up under treaty or anything like that.  The advantage of the G-7 is simply this:  it is easier to have a conversation around the table with seven people than it is with 70.  The G-20 recognize the fact that, as I said earlier, you need to bring all the countries, a wide range of countries around the same table.  

And I suspect that we are going to have a discussion sooner or later as to what organizations do we need, and therefore, what should the governance be.  But once you start excluding people, or people say, "Well, you know, I've got something to say and you're not hearing me," then you get difficulties.

I'm not sure that's going to be sorted immediately.  As I said in answer to a question earlier, I'm very pragmatic about this; what works is what we need to push at the moment.

On David's point about, you know, you're asking about the rest of the world relying on U.S. consumption.  Well, yes, the rest of the world does rely on what we -- we depend a lot on the American economy because the U.S. economy is so big, it's important.  But as I said earlier, it's important that we have a balanced recovery.  It's important that it isn't just focused or doesn't rely on one aspect of one economy, even a very big economy like the United States, which is why I think we do need to pay far more attention to what is going on in the emerging economies.

On the good-bad bank split, I said earlier I don't have a philosophical view that one way of sorting out the banks is inherently superior to another.  As I said, in the U.K. we have done a good-bank/bad-bank split in a couple of occasions when they were smaller banks.  And if you look at the restructuring of one of the biggest banks, effectively its new management is looking at, you know, building the bank off one part of its core business and then at some stage in the future doing something else with what they regard as non-core business.

And if you look in continental Europe, you know, Germany, for example, has been looking at that sort of split, although I think it's run into some difficulties in the German Parliament.  But I don't think there's a philosophic difference between us; the question is just getting on with it and doing it, because if you keep discussing it and not sorting it out, you're losing time, and time you can't afford to lose.

On Andreas' (sp) point about, you know, growth assumptions and whether you should be optimistic or pessimistic, firstly, we do live, as all of us, I think, in this room would acknowledge, in extraordinarily uncertain times.  If we'd had -- if I had been here a year ago and I'd told you the British government would own one of the largest banks in the world in 12 months time, you know, most of you would have thought, well, that's a bit odd.  But we do.  In fact, we own quite a lot of the American banking system as a result of it, as you know as well, which I'd have thought pretty extraordinary as well.

But -- and if you'd said that Japan would see its exports fall by nearly 50 percent, or that you'd look at some of the debt levels that countries are contemplating at the moment, if you'd look at what's happening here in the United States, people would have said, well -- you know, even 12 months ago -- that seems a bit far-fetched, doesn't it?

So it is an uncertain period at the present time.  But I think governments have a duty to be realistic.  That means you shouldn't be wildly optimistic, nor should you get yourself into a position of saying, well, actually, nothing works.

Now, I base my forecasts on what I see happening in the British economy.  We have had a very difficult past six months.  You know, we -- this has happened since last October.  I said that I thought the first quarter of this year was going to be difficult.  But I think the combination of what we're doing domestically, both in terms of fiscal monetary policy, in terms of what the G-20 action, which is working its way through the system, will do, then, you know, I see growth picking up towards the end of this year in the U.K., in view of the range of forecasters.  There's many other people who see that, too, as well.

But the key thing that will determine all of this is the point that I made right at the start:  It's if every one of us actually signs up and, importantly, delivers on measures that will make a difference, then I think this whole downturn will be far shorter and far less painful than would otherwise be the case.

Now, I know here people are very focused on it.  You know, when you have 5 million people that lost their jobs in the last year, you can't just stand by and let that take its course.  I just really think that is -- it would be morally wrong and it would be economic madness.  And that's why I so support what President Obama and his administration are doing.  That's why we're doing similar things.  They're doing it in France and Germany.  You know, when people say, "What's the difference between France and Germany and the United States?" in France and Germany they're actually doing a lot of the same things that -- as you're doing here.  And the key for us is to see it through.

ACKERMAN:  I think we have time for two more in a group, so -- please.  And if these are the last questions, let me remind the participants that this meeting is on the record.  And when we're done, if you would please stay in your seats until the chancellor leaves, that would be appreciated.

So -- and we had one more.

QUESTIONER:  Thank you, Chancellor.  My name is -- (name inaudible) -- and I'm from the South African Embassy.  I just to want to note that there is a concern right now by African governments that Western countries, in light of the global financial crisis, will resort to buying local and to various protectionist policies.  So my question is, how would the U.K. or how is the U.K. balancing the concerns of their people to protect their industries with your international obligations and your bilateral relations with various African countries?

Thank you.

QUESTIONER:  My name is Sidney Weintraub.  I'm with the Center for Strategic and International Studies.  One of our problems here in the United States -- and I think it is in other countries, too -- is that there are institutions that are too big to fail, and that becomes a big problem.  Should there be some regulation, maybe among the G-20 countries, that there should not be institutions any more -- regulate -- that are too big to fail?

DARLING:  Right, if I may -- are we just doing two questions?

ACKERMAN:  Well, it turns out we have a little more time, if you'd like to --

DARLING:  All right.  Yes, I'll take one more, then.

ACKERMAN:  Was there -- did anybody else have one?  No?  Yes.

QUESTIONER:  Thank you.  Jeremy Pam.  You mentioned rising debt levels across the world.  I wonder what you see as the medium-term implications of that, as liabilities get transferred from private balance sheets to public balance sheets.  Is it inevitable that there will be a wave sometime down the road of sovereign debt difficulties, restructurings, or even defaults?  Thank you.

DARLING:  Well, let -- let me deal with the questions in reverse order.  Firstly, you know, I said earlier that I thought that debt levels would inevitably rise in many countries.  And obviously, that is something that you would want to address as soon as it's prudent to address.  And I think what countries, what investors, what markets will look at is clear signs in countries that they are prepared to address that problem, but to do it in a sensible time scale.

You know, classically, if you -- if your borrowing goes up and your debt goes up, you know, you might -- you know, there are some who argue, well, you need to address that immediately.  I think if you do that when you're still coming out of recession -- and you know, recovery, you know, is inevitably going to be modest when you start with it -- if you start doing things that chokes off that recovery, then that would make the situation so much worse.  And I think investors recognize that.

On Sidney's point about too-big-to-fail, this is an interesting point, in that, you know, especially in the U.K. -- probably, you know, 40 years or so more ago, you know, in the United States -- we've had a far bigger tradition of many more smaller banks.  This hasn't been a problem, because if anything happened, then it was mostly the smaller banks that got into difficulty.  You could just come along and you could do what was necessary, and it would all be over by lunch time.  But you know, we're not in that position just now.

What -- the problem I see with the too-big-to-fail approach is that at what stage -- how could government possibly say to a particular bank, "You've got to such a stage, you can't take any more business" or "You can't go into this line of business, or the rest of it"?  That is very, very difficult and I don't have a -- you know, I'll be blunt about it:  I don't have a precise answer to it.  Because, you know, it comes back to the point that Peter was asking me about in relation to, you know, global banks, you know, which are very, very global, and then when there's trouble they come back to the one country where they're based, where the brass plate's on the wall, and say, "Please, help us."  So that it is a pretty important question, and I don't have an easy answer to it.

I just -- rather like, you know, we're having a bit of a debate.  And I'm not saying that everybody talks about this in every pub and every club and every home in the United Kingdom, about, you know, whether or not you should have a -- you know, a division between, you know, the Glass-Steagall-type debates:  you know, investment banks and retail banks and so on.  

But these are all issues that we're going to have to address, and the too-big-to-fail problem -- I'd just say this, that I think we just have to recognize now that there is a changed landscape in the relationship between banks and governments.  And the last -- events of the last 18 months have really brought that home, that you just -- you know, whether you like it or not, you know, if we're the lender of last resort, if we're the guarantor of last resort, it has implications.  

And, you know, we can't have a situation where people say, "I don't like state intervention, except when I get into trouble, then I want lots of state intervention, and when it gets better I want you to go away again."  I don't think people will stand for that.

Now, that brings me to the last point, which is actually a very, very important point, which is essentially about protectionism.  And I think you're absolutely right:  It -- and it comes back to the point that you were making earlier on -- right at the start of this.  And that is that if countries, developed countries, pull down the shutters and say, "We'll look after our own country first," and that you'll buy goods that are sourced locally, it will have a disastrous consequence.  This happened in the 1930s, and it was disastrous then.  If it happens in the next decade, it will be disastrous again, and the effects will be felt for many decades to come.

And it's not just bad for African countries or Asian countries.  It's bad for Europe.  It's bad for America.  Because we are not in a position now where we can say, "Well, the rest of the world doesn't matter anymore."  The rest of the world does matter.  It's in our interest, not for -- just for humanitarian or for social or moral reasons that we -- that we -- that we deal with poverty in Africa.  But it's actually in all our interest that African countries do grow and do become properly functioning democratic countries with trade with the rest of the world.  

And that -- you know, that's one of the reasons that -- as you know, from our point of view, Tony Blair, when he was prime minister, and Gordon Brown, you know -- you know, and actually, there's not an easily-won argument at home (warranted ?) to increase the amount of money that we provide in development and aid and writing off debts, of building up education -- simple things like providing basic health-care needs that just are absent in so many African countries.  

We're doing it not out of some sense that, you know, it's charitable or something like that.  We're doing it because it is actually in everybody's interest that we do this,  For political reasons, for economic reasons, you know, it is essential that we do it.  

And I know that, you know, here, as in every other country in the world, the temptation to say, "Okay, we can get out of this by pulling down the shutters for a bit, and we promise you we'll be all right in a few years' time and we'll come back and" -- that isn't good enough.  

And, you know, coming back to our point, and maybe Andreas's (sp) point, we are the second-biggest exporter for services in the world.  We're the sixth-biggest exporter of goods.  I'm not saying that to say, well, you know, isn't Britain good.  I'm just making the point, for three or four hundred years, our wealth was built off our ability to trade round the world.  

And every country actually is in that position.  You know, there's -- this is -- there's no country that is too big where it can turn its back on the rest of the world.  So whether it's Africa, Asia, you know, wherever -- I think it is absolutely imperative that we do everything we possibly can not just to sign up to no protectionism, but we don't actually do it.

ACKERMAN:  Chancellor Darling, thank you so much for being with us, for your frank discussion.  I think we enjoyed it (immensely ?). (Applause.)

DARLING:  And thank you to you.

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