A Conversation with Lael Brainard

Thursday, May 16, 2013

Lael Brainard, undersecretary for international affairs at the U.S. Department of Treasury, discusses the outlook for the global economy.

This meeting is part of the C. Peter McColough Series on International Economics.

FARYAR SHIRZAD: Good morning, ladies and gentlemen. Let's go ahead and get started.

Welcome to today's CFR meeting with Lael Brainard. This is part of the C. Peter McColough Series on International Economics.

As you've heard, please completely turn off, not just put on vibrate, your cellphones, BlackBerrys and all wireless devices to ensure that we avoid interference with the sound system. And as was just said, we're going to do this session on the record.

We'll start this session with some remarks by Lael. We'll follow that by some questions that I will get to ask her, and then we'll turn it to all of you in the audience so that the members can ask questions as well. In keeping with the traditions of the council, we will stay on time and finish at 9:00.

Lael, as everyone knows, is well-known to the council. And you all have her bio in front of you, so I'll keep this introduction short. Lael is one of the leading thinkers and practitioners in the area of international economic policy. She's currently the undersecretary for international affairs at Treasury. In that role, Lael is the administration's point person on international economic and financial matters, making her one of the key architects of the post-crisis economic order and one of our country's chief economic diplomats.

She has over the last four years dealt with an extraordinary range of challenges that are almost unprecedented in their complexity and scale. She has been the U.S. chief representative at the G-7 and G-20 tables as countries have attempted to restore their economies, build a new international economic architecture and create a new framework for financial regulation, all with a view towards promoting economic growth and putting people back to work.

She has undertaken this role at a time when it's increasingly critical for the United States to work with multiple geopolitical powers and market stakeholders and through increasingly complicated and multilateral mechanisms to build consensus on economic issues. Despite the challenges of multilateral policymaking, Lael has adeptly and diplomatically advanced U.S. interests. So it is in that context that we look forward to hearing from her this morning on her perspectives on the global economy and on the agenda ahead. Lael? (Applause.)

LAEL BRAINARD: Well, thank you very much for that extremely kind introduction. It's nice to be here with all of you at the Council on Foreign Relations, and it's always good to work with Faryar.

The U.S. economy is on the mend. Private demand has now expanded for 15 consecutive quarters. Early on, the United States took very difficult steps to rebuild the capital of our financial institutions, combining tough transparent stress tests with a backstop. The buffer against losses in our largest banks has doubled over the past four years, and our banks are again lending to households and small businesses.

Restoring financial stability was only the first chapter. It was necessary but not sufficient. Policy action was needed to jump-start the recovery of private demand, followed by a careful withdrawal of public support calibrated to support the pace of recovery and private demand. According to the CBO, we're on track to bring our deficit down significantly to 4 percent of GDP this year, less than half the level in 2009.

Flexibility on the pace of fiscal withdrawal has proven to be vital to sustaining the recovery in the face of strong headwinds, as you will recall, with a payroll tax cut enacted at the end of 2010 and its subsequent extension through 2012.

Today there is broad agreement the sequester should be replaced by a balanced approach to better support the recovery, but importantly, the current consolidation comes after three years of gathering strength in the private sector. The headwinds from deleveraging are fading, and the overall pace of growth is expected to accelerate, which is critical to finish the healing process.

Global recovery has been held back by a lack of demand growth in many of the major advanced economies and by reluctance in many emerging economies to move more quickly toward the currency flexibility needed to durable rebalancing.

It's now important to guard again the risk that global recovery remains fragile and excessively dependent on U.S. demand.

The key to a resilient global recovery, where growth in each country advances growth in every country, is action directed at supporting demand at home. That's been the core focus of Secretary Lew's discussions in Europe, at the spring meetings and most recently, of course, at the G-7 in the U.K.

But that key test, strengthening European demand is the most important immediate imperative on the global growth agenda. Domestic demand in the euro area is now below the low point of the global crisis in 2009 in real terms. The recovery in European output since that time has come entirely from net exports. That is not sustainable for a region that accounts for one-fifth of the global economy.

Euro area leaders deserve credit for the difficult steps they've taken to restore financial stability and address the risk of cascading defaults and exit. Spain and Italy are now able to borrow at rates significantly lower than a year ago. But one of the key lessons of our own crisis is that restoring financial stability, while critical, is only the first step for the economy to heal. The focus of the policy debate in Europe must now shift from restoring financial stability to developing a plan to boost demand and employment.

Last year, demand contracted 2 percent across the euro area. Unemployment has reached the highest level in at least 20 years. It's clear that decisive action is needed now to restart demand and avoid the risk of protracted stagnation. And there are steps that can be taken to do so.

First, European leaders need to recalibrate the pace of their fiscal consolidation. As we know from our experience, course correction can make an important difference. The consolidation path should be stretched out in some countries, and those with fiscal space should shift to supporting demand. We welcome indications that France, Spain and The Netherlands, most recently, have decided to take additional time to meet their budget targets.

Second, the core of Europe can make a difference by rebalancing demand. Increased demand in Europe's strongest economies would not only provide relief to weaker euro area economies but would also spur the global economy. In those countries in the euro area where current account surpluses remain above 6 percent of GDP, faster wage growth and greater homeownership are some of the steps that can be taken to make an important contribution.

Third, the discussions on lowering borrowing costs for small- and medium-sized enterprises in southern Europe are extremely important. With weakening growth and disinflation, we welcome the ongoing discussions at the ECB and more broadly about additional measures to improve transmission and to address the credit crunch in the periphery.

And fourth, events in Cyprus only have served to underscore the importance of moving forward with a full concept of banking union. Upcoming bank stress tests and bank asset reviews are a critical opportunity to restore confidence in bank balance sheets and restart credit to starving local economies. Our experience in the U.S. suggests that the credibility of those exercises will be enhanced when there's a strong backstop in place, permitting capital to be built without a further downward spiral of deleveraging.

We've also learned from our own experience, it's much easier to wind down banks in an orderly manner where there's a well-established framework for resolution that clearly prioritizes deposits, buttressed by a strong system of deposit insurance and, ideally, backstopped at the euro area level. Drawing back to the global level, adjustment has thus far relied more broadly, heavily on compressed demand in deficit economies when stronger demand from surplus economies would enable higher growth overall.

Avoiding competitive devaluation and a downward spiral of beggar-thy-neighbor policies is critical to ensure growth strategies are mutually reinforcing at this critical time for the global economy. In February, the G-7 members affirmed their commitment to rules of the game on exchange rate. The G-7 makes clear that domestic monetary and fiscal policy should be directed toward meeting clear domestic objectives, using domestic instruments to ensure growth in each country is compatible with growth across countries.

G-7 members, by making this commitment, have ruled out the pursuit of macroeconomic accommodation by the purchase of foreign assets, or targeting exchange rates. It's critical that Japan's efforts work through an expansion of domestic demand. Moreover, Japan's macroeconomic policy measures need to be complemented by the critical third arrow of structural reform, which the Abe administration has made clear will be a next step.

With demand in the advanced economies weak, some G-20 members still run managed exchange rate regimes and intervene in the foreign exchange market to resist adjustment. That kind of approach puts an undue burden of adjustment on those emerging economies that have market exchange rates, that contribute to the weakness of demand and intensify the risk of inflation and asset bubbles in those economies with undervalued exchange rates.

As G-20 countries follow through on their recent commitment not to target exchange rates for competitive purposes, it's extremely important China take additional measures to increase the flexibility of its exchange rate regime. Last year the band was widened modestly and the full band was used for the first time. But intervention subsequently has risen. China's path towards market determination implies further widening along with significantly greater transparency on reserves and intervention.

Going forward, that will be the continued emphasis of our global efforts, action to support domestic demand and making sure that the pursuit of growth in each of the G-20 and G-7 economies supports growth more broadly.

So let me wrap up there. And then, Faryar, I think we're going to take some questions. Thank you.

SHIRZAD: Lael, thank you for that comprehensive overview. What I'll do is I'll ask questions for a few minutes and then we'll turn to the audience.

So let's start with Europe. You talked about sort of the imperative of Europe becoming a part of the economic growth picture. The Wall Street Journal this morning described them as the weak link. Even with all the steps that Europe has taken to try to put in mechanisms of rescue, are you fundamentally optimistic or pessimistic in terms of their ability to undertake the necessary structural reforms to become a part of the growth picture over the long haul?

BRAINARD: You know, I think the past few years have shown that European leaders can make very important decisions when it's necessary. And the steps they've taken to restore financial stability, I think, have been extraordinarily important, not just for Europe, but of course for us in the U.S., for financial markets globally.

But the focus now really needs to be on demand. You see unemployment rates up 25 percent in several southern European countries, large countries, you see youth unemployment of 55 percent; that's not sustainable. And that's certainly not sustainable for an economy that accounts for one fifth of the global economy. So the focus now really needs to be on restoring demand.

And we're seeing a debate in Europe. We're seeing some welcome moves. We've seen moves in the direction of adjusting fiscal consolidation paths to better support recovery. We think there's more room there. We think that surplus economies have a tremendous capacity to boost demand in Europe and in the world through mechanisms that really operate through private demand. We think that unclogging the credit channels in southern European countries are vitally important for getting young people back to jobs.

And of course, we think that the debate on banking union needs to move forward with greater urgency and a comprehensive banking union is necessary, not in five years, not in four years, but now.

SHIRZAD: You know, it's interesting, the OECD recently put out a study essentially arguing that the two primary mechanisms for stimulating the economy, monetary policy and fiscal policy, have run their course and that structural reform is ultimately the recipe for sustained growth in Europe and elsewhere. Do you feel like the reforms that have been undertaken as a part of these various rescue mechanisms -- Spain, Portugal, Italy, places like that -- are these fundamentally going to bear fruit in any time soon in a way that promotes the kind of growth we're all looking for?

BRAINARD: Well, I think the last few years, we've seen significant structural reforms that over time, will bear fruit in boosting the potential of many European economies. The difficulty of course is, right now, what's needed is demand.

And so you know, our general view is that they have now anchored their credibility, they have important structural reforms that are in place. And it gives them space to do more -- to do more in terms of stretching out fiscal consolidation paths and using fiscal space where they have to do more on private demand. Wage growth in some countries, where wages have grown slower than productivity for many years, could grow faster and that could provide a boost to the overall euro area.

You know, we've seen that important recent academic debates have real bearing here. You know, we've seen that fiscal multipliers, the impact of fiscal withdrawal on the economy is much sharper under current circumstances when monetary policy is close to the -- to the zero bound and when there is synchronized consolidation. And so all of those things would suggest not only that there is the case for doing more, but that there is space for doing more.

SHIRZAD: A lot of the issues you talked about are the kinds of issues that at least in theory or at least in principle are the kinds of things on which you should -- you could or you would hope to get agreement at the G-7 table, the G-20 table, essentially trading a coordinated framework for economic recovery.

Can you talk about those mechanisms and what role they play? Has the consensus fundamentally broken down in a way that bilateral diplomacy, the trip that you and Secretary Lew took recently to Europe, are ultimately the mechanisms by which these policies get advanced, or should we still look at the multilateral mechanisms?

BRAINARD: You know, I think that there's always -- as you know, because you have been the chief negotiator for some of these meetings in the past -- there's always the public record of what takes place and the commitments that members are willing to sign up for. And then there are the very important discussions in the room. In terms of what members are willing to sign up for, that, of course, is a more contentious process, but we saw in February in Moscow extremely important commitments on rules of the game on both exchange rates in the G-7 going into Moscow, and then on the G-20 more broadly in Moscow. And I would not understate the significance of that.

At a time when, I think, the public debate was quite contentious, that that really provided an important path forward that would help guide members as they were undertaking their own macroeconomic policy choices. In terms of the discussions on the pace of fiscal consolidation -- the need for surplus economies to do more, the relative prioritization of demand versus longer-run fiscal consolidation, that's the most important debate right now in the international arena. And I think you've seen a shift -- the most recent communique coming out of the G-20 clearly prioritized employment and demand, but I anticipate that that argument, that debate will continue in the months ahead.

SHIRZAD: The problem you have, or one of the challenges you have is that you have the central banks and all the major economic regions of the world all pursuing accommodative monetary policy, and as you said, you know, there's a bit of a better beggar thy neighbor dimension to that that's unsustainable over the long term, and the domestic demand has to be a part of the -- a critical part of the picture.

Do you think -- do you have some hope that there is a balance that will be found on that, or are -- where are we going to go?

BRAINARD: So I think there is a very important distinction that has come out in this debate between what has traditionally been viewed as beggar thy neighbor policies -- policies that are designed specifically to operate on the exchange rate, to promote growth in one country by changing relative prices, by promoting net exports in a way that fundamentally leads to a race to the bottom.

I think that it's important to distinguish between that and macroeconomic policy that is designed to achieve clear domestic targets using clear domestic instruments, and that's what the G-7 statement does. It's very clear, both in the G-7 now and the G-20, that members will not target exchange rates, which has really been the traditional locus of problems on competitive devaluation.

And what we know from studies at the IMF and elsewhere is that when accommodative macroeconomic policies, monetary and fiscal, are designed in such a way to promote domestic demand, that the spillovers are overwhelmingly positive, and we've seen that in the case of the U.S. And of course, as we've had discussions more recently, as Japan has moved forward on its three-arrow framework, the focus has really been on channels of transmission through domestic demand.

SHIRZAD: So Europe is an important test case for that framework, to see how it's applied? Another one that you mentioned earlier is China. There's a new leadership there; you've talked to them. Secretary Lew has as well. Can you give us a sense of where they're headed? Are they really looking at building a -- more of a domestically -- demand-oriented economic growth model, or is it going to be a -- more of an export model, as we've seen in the past?

BRAINARD: Well, Secretary Lew was out, really, in the first few days of office of the new team and had a really good opportunity to meet with all the top leadership and hear from them. And then, subsequent to that, of course, we're now in planning for the July meeting of the Strategic and Economic Dialogue -- the first -- the first meeting with new teams on both sides.

But the leadership in China is very focused on promoting consumer-led, domestic-led demand, and it's a -- it's a very important shift in terms of what we're hearing. And of course, we're hearing this at a time when you can see major shifts under way in their economy as their labor force starts to slow, and of course, will reverse as wages have been growing, as domestic consumers have demanded better standards of living -- less pollution, more focus on standards of living at home, less distortionary policies that rely excessively on very resource-intensive, and of course, for us, export-intensive investments.

So that debate, I think, has changed quite a lot. We've seen some policies oriented in that direction, but a great deal more, I think, will be necessary to make sure that the micro structure of incentives, the price structure of the economy really pushes in that direction. That's why we've pushed so hard. The exchange rate is one of the most powerful tools.

And we've seen 15 (percent), 16 percent appreciation of the RMB against the dollar in real terms, but more is needed there. Again, they need to take the next step in terms of allowing their exchange rate to move within a wider range, to move to greater market determination.

But it's also true that they're state-owned enterprises, who are doing a lot of this investment, still have much different dividend policies than private enterprises. Credit is still allocated with administered interest rates and rationed to enterprises that might not be serving domestic consumers. So all of those things, I think, are going to need to be changed in order for that very important machine of the Chinese economy to reorient to the domestic consumer. And of course, for our companies to give them a more level playing field, we've got tremendous capacity in areas across services -- financial services, across the services area as they open up services, which they need to do to lift the lives of their consumers, our companies will also be able to bring their innovative products to bear.

SHIRZAD: You know, one interesting thing in your recent speeches has been the degree to which trade has now featured very prominently. You talk about the International Services Agreement, the Trans-Pacific Partnership and a new trade agreement with Europe that you're all developing the framework for. Could you talk about the trade initiatives and how they fit into the broader framework of it?

BRAINARD: Absolutely. Yeah, no, this is an extraordinarily important part of the president's overall agenda for growth -- for restarting growth, really globally. And, you know, as you'll recall, early on in the administration he set this very ambitious target on exports, and it's served to focus, I think, all of us on what more we can do through all the various parts of the U.S. government to support our companies, our workers as they are working to sell into growing markets abroad.

Right now, as you know, we are engaged in a very important set of negotiations on the Trans-Pacific Partnership, which has the potential to unlock the most dynamic economies in the world and to sign up for, I think, some of the best in-class standards across a whole host of areas where increasingly we'll need to have a level playing field in order to bring the biggest benefit to consumers and to lift growth. And of course, the most recent announcement is that Japan sees the TPP as a vital part of its structural reform agenda, and that could go a long way for both sides.

Now on the other side -- on the one side we've got the Pacific, on the other the Atlantic -- a critical part of Europe's growth agenda is also going to be unlocking greater trade opportunities, and that's why we're so excited about the potential for the Trans-Atlantic Trade and Investment Partnership. We're still in the stakeholder consultation phase, but there's a lot of excitement there, too, and a lot of potential to set the highest standards.

And of course, given that our services, producers are the most competitive, the most innovative in the world, we're very excited about the trade and investment services agreement that is being discussed at the WTO. That, again, has the potential to unlock sectors that have traditionally lagged in terms of the trade liberalization agenda, and we think there might be a little bit of a window of opportunity there to make a big difference for our companies, and again, for growth.

SHIRZAD: You know, as a guy who's been involved in trade for a while, I was both impressed and a little bit fretful on your behalf in the sense that, you know, with the U.S. and Europe, there are very few border measures that are at issue in terms of trade between the two economies. It's really sort of fundamental sovereign decisions that each side has made regarding the shape of regulation that a trade agreement could help harmonize so that you create a more coherent regulatory framework that then allows a more -- for a more integrated set of economies. Is the -- is the administration really ready to take that on? I mean, these are hard issues, and all the various sectors that would help ultimately become the elements of a deal like this.

BRAINARD: Well, I think first, as you know, there have been certain trade sectors that have -- even though our trade with Europe is already extremely important, among the biggest trading relationships in the world, there are sectors that have not been really part of the trade liberalization agenda and very protected in Europe, as we know. So I'm hoping that we unlock some of that. But you're right, that regulatory convergence has also got to be a central part of the conversation in any trade agreement -- in any deeper trade agreement in today's world.

And that's why everything in the regulatory convergence agenda across a whole variety of sectors is being discussed right now. And hopefully we'll make some progress. Of course, it's very important to converge on a high level of standards. And I think there is going to be a very rich agenda going forward on that front.

SHIRZAD: Are the -- one of the things that Secretary Lew had as a welcoming kind of gift when he became secretary was a letter from seven, eight of his colleagues, admonishing the United States for problems with extraterritoriality in terms of financial regulation. Could you talk about that? Do you think that was a fair kind of concern that the finance ministers raised? And what do -- what is the administration trying to do to deal with that?

BRAINARD: You know, I will say that the G-20, the FSB have a very, very ambitious agenda across the whole set of financial reform initiatives that are encompassed in Dodd-Frank. And the work that is underway there -- and of course I participate on behalf of Treasury and the FSB piece, but it's really our regulators who are working with their European, Asian, Latin American counterparts -- that that agenda has progressed.

It has -- it has not progressed as quickly as it needs to. I think the U.S. is out ahead of other jurisdiction in terms of implementing in a number of areas. And in particular, the U.S. has moved forward -- according to its Dodd-Frank timelines -- on putting in place comprehensive reform of the derivatives space for the first time -- very significant -- for the first time really putting in place incentives to move things to central clearing, reporting, trading, you know, a whole set of extraordinarily important reforms.

And of course, the world has signed on for those through the G-20 and the FSB. Now what we need to see is other jurisdictions move to the same level. And Europe has lagged in that respect. And so I will say that our regulators are very closely engaged. And we've been part of those conversations in our role through the FSB and the FSOC in trying to get the greatest convergence possible because these are inherently global markets. We know it's important for market participants that there not be big distortions that cause business to move to one side of the border or the other, for artificial reasons.

And so my sense is actually conversations there between the regulators are very engaged, and they are progressing. So you know, I think we have to guard against extraterritoriality. We are dismayed by the extraterritorial aspects of the financial transactions tax that has been passed in France and has -- also in Italy. We're working on that. We think it's extraordinarily important that that be removed. But I will say, in the derivatives space, conversations are granular and they are progressing and we are seeing a convergence that we think is going to be critically important for these markets.

SHIRZAD: You know, there were news reports that said at the last G-7 meeting there was a lot of discussion about dealing with "too big to fail" resolution planning, making sure that large financial institutions that get into trouble are ultimately able to be wound down in a way that doesn't create systemic implications. Can you give us a sense of what the discussion was and where it's headed?

BRAINARD: Well, I think recent events in Cyprus only highlighted that this is a part of the reform agenda that's extraordinarily important to move forward in Europe. As you know, European banks tend to be much larger, relative to their home markets, relative to their sovereigns -- the largest banks -- than -- certainly than is the case here in the U.S. And they are still quite a bit farther behind in terms of putting in place a legal regime on resolution that provides certainty to financial institutions, to investors. And it is extraordinarily important that they do so.

In the G-7 discussions, Secretary Lew had a chance to go into some depth on the FDIC's orderly liquidation authority. And you know, the FDIC itself has tremendous experience in the area of orderly resolutions. And now, with Title 2 orderly liquidation authority, they believe they have the capacity to wind down even the largest, most complex institutions, through a single point of entry model which other regulators around the world see as having tremendous promise not just domestically but also in terms of the cross-border area, which is extraordinarily important, as we know from the crisis.

So there was a general consensus that this is a good model; it's extremely important to see ex-ante clear party of claims with depositors getting preference, strong deposit insurance systems. And because of the interconnected nature of the European banking systems, that that really should take place at the Euro area level, which is why the discussion about full banking (in union ?) has to move in conjunction with the discussion about resolution and what resolution means for bank funding models as well.

SHIRZAD: Let me ask you another Europe question. You know, you talked about -- earlier about the fact that Europe has the capacity, and it has made incredibly difficult decisions to deal with its sort of internal challenges. It seems, though, to play the devil's advocate, that as they make their decisions, they make their processes of decision-making even more complicated -- add layers of bureaucracy, mechanisms of decision-making that require national ratification each time a big crisis is confronted. Is the European model fundamentally -- I mean, is it -- is it fundamentally sustainable given how, as they make difficult decisions, they seem to make their system more complicated than they started with?

BRAINARD: Well, I think the financial crisis demonstrated, you know, in ways that were not fully foreseen, that, in fact, it is quite complex to have a monetary union encompassing very disparate economies, without greater risk-sharing, greater centralization on the banking front and on the fiscal front.

And so that is going to continue to be an institutional process of evolution. If you think about it, the -- you know, in full, kind of firefighting mode, there's only one institution that has the capacity -- has the instruments across the entire Euro area, and that's the ECB. And yet, there were -- you know, there were constraints on the ECB's ability to deploy that set of instruments across the Euro area.

So I think, you know, as the -- as this very important partner of ours -- very important strategic partner, very important economic partner moves forward, they're going to grapple with this broader question of institutional design. And we're seeing it very actively on the banking union. Of course, you know, at the moment of crisis, you need to use the instruments you have, and create, you know, instruments.

And of course, the creation of the ESM, the creation of the OMT -- those were critically important moments. The, you know, decisions that were made to keep Greece within the Euro area -- critically important not just for the Euro area but for the world. But in order to solve the demand deficiency, in order to make this a really vibrant and stable Euro area, I think that discussion about institutional changes will continue.

SHIRZAD: I'll ask you one more question, and then we'll open it up to the audience. The G-20 meeting under the Russian presidency -- the leaders meeting is, I guess, set for the fall. Can you give us a sneak preview as to what will happen at that meeting, both on economic coordination as well as on financial regulation or any other issue?

BRAINARD: Yeah, I think Petersburg -- you know, we have a -- at least on the -- on the finance side of the agenda, we have a pretty clear, already, view about that trajectory. I think the discussion is going to continue (to ?) intensify about how we do a better job of coordinating so that we make sure that countries are doing the right policies in terms of boosting demand, and that as a result, we grow together. And that's important not just for the G-20 -- not just for the economies in the room, but it's really vitally important for the developing economies, smaller economies that are not in the room.

I think, you know, we'll want to see the consensus on exchange rates continuing to be upheld, and further movements, as has been committed, on market-determined exchange rates, not targeting exchange rates. On the financial regulatory agenda, there are a number of commitments that have been made across the spectrum that really now are in the implementation phase. So we've -- you know, we've had the systemically important designations for the banks, but we have to do that in the nonbank arena.

At the G-20 level, we need to see derivatives reforms, as we were saying earlier, put in place in a way that's convergent and consistent with the timelines that we're committed to. So that discussion will be very robust.

And you know, of course, I think the trade discussion is also going to be very robust. There's just so much excitement about the initiatives that the U.S. is undertaking with various members of the G-20, and the questions about what can the multilateral system do, I think, will be on the table.

SHIRZAD: Great.

OK, why don't we turn to the audience. If you have a -- Hamid, why don't you wait for the microphone. When you're about to ask you question, make sure you identify yourself, as well as any affiliation you may have.

QUESTIONER: Hamid Biglari. There have been repeated incidents of cyberattacks against financial institutions, cross-border cyberattacks. And while each financial institution has been responsible for its own security, there is a point at which this gets elevated to the point of national security. How is the U.S. government thinking about it? Who has primary jurisdiction? What is the role of the Defense Department versus the Treasury versus our various national intelligence agencies, if you could give us some guidance on that?

BRAINARD: Yeah. Well, as you know, the president has put out an executive order in this space. We're working on legislation. We think this is a matter of very high national priority, from a perspective of our critical infrastructure, financial infrastructure, but more broadly, as well as, of course -- this is core to our -- one of our greatest competitive strengths, our intellectual property and our innovation.

So we're working very tightly across the administration on these issues. We work with the Department of Homeland Security and the other agencies on the security side.

And of course, this has also become one of the top priorities in our deep discussions with the Chinese. This is an issue that the president raised in his first conversation with President Xi. This is an issue that Secretary Lew had good conversations on, as did Secretary Kerry. And you know, for us, it's important that we make progress so that our Chinese counterparts understand that in particular, cyberintrusions from state-involved entities create a real -- real difficulties in terms of trade secrets and intellectual property more generally, and reputational risk, we think, for them. And so, you know, this is an area where we think we have to make progress over the next little while.

Of course, separately, we're working with the private sector to help the private sector work together and work internally to protect itself to the greatest extent possible.

So we're working all of those fronts. And it'll continue, I think, to be a very high priority in years to come, for all the reasons you said.

QUESTIONER: Thank you. Patrick Dirkin, Barclays. Nice to see you. Combining your comments on financial reform in the trans-Atlantic trade discussions, would you put financial institutions and markets in a trade deal? If yes or no, why? And if we do arrive at dislocations in regulations, would including it give us a chance to come back a second time and create better harmonization, whether it's in resolution, cross-border derivatives, capital rules, which seem to be going, at least from a markets perspective, to a certain degree in different directions? Also, the financial transaction tax. Thank you.

BRAINARD: Yep, so on the Trans-Atlantic Trade and Investment Partnership, we are right now in the period of consultations. So we're in listening mode. And you know, we're talking to members of Congress. We're talking to the business community, to labor, to all the various stakeholders, consumer groups that have an interest in this.

In terms of what the scope of those discussions should be -- you know, I can tell you that from my own perspective, obviously, financial services needs to be part of the conversation. It's very important to make progress on market access, to nail down access that we've already secured. So I think, at least in terms of our inclination, it would be to make sure that's a very important part of the conversation.

On the regulatory convergence front, you know, we are already signed up for very tight timelines, most of which are in the next year to 18 months. And we're already engaged in very detailed conversations with clear commitments on regulatory convergence. And we're -- those conversations are partly bilateral because, you know, we have important depth of engagement of our private sectors across the Atlantic. But they are, by necessity, multilateral.

Asia is just going to be an increasingly important market, and Latin America already is an important market. So there are -- there are a variety of reasons why, partly because the time is now, these things need to get done now -- I don't think -- I don't think the business community wants to wait another several years for certainty; I don't think we can afford to -- and partly because we need other partners in the room that we want to use the G-20 and the FSB to get these things as far along as we possibly can in the near term.

QUESTIONER: Hi. Massimo Gaggi from the Italian Daily Corriere Della Serea . Mario Monti two years ago was welcomed also here in the States almost as a hero. I remember a cover story on Time magazine: This man can save Europe. Now his policies are considered one of the major reasons for the deepening of Italian recession. Do you think that Italy in its current fiscal conditions has room for initiatives from the new Letta government for sustaining the internal demand and the growth and that Europe should do something to lower the -- at least the short-term limits on its budget deficit, and if there is any possible role for United States in this area? And I know that President Obama after the G-8 in Britain is going to Berlin. Thank you.

BRAINARD: So I think, you know, Italy is a very important economy and a very important player within the broader euro area. If you look at the course of the crisis over the last two years or so, you know, Italy has put in place important reforms. They've moved very rapidly on the fiscal front. They've put in place some structural reforms. But as you say, Italy is struggling with rising unemployment and continued demand contraction, and it's part of this broader picture of very disappointing demand. And, you know, I think the entire euro area really is facing the need for decisive action or the risk of protracted stagnation, which is not in the interest of Europeans. It's certainly not in our interests or the world's interest.

We think there are things that can be done, and I spoke a little bit about those earlier, that there is space in many countries. You know, Italy is now engaged in a process of paying off some of the very substantial arrears that are weighing on the small business sector. We think that is important.

So, you know, again as countries in the euro area continue to move forward on structural reforms, which will bear fruit in the longer run, we think it's important to stretch out fiscal timelines where possible or provide fiscal space where possible, better balance that need for longer-term consolidation with short-term support for the recovery, and of course for employment.

SHIRZAD: Stay back there.

QUESTIONER: Thank you. Good morning. (Name inaudible) -- from Chinese Taichi (ph) Media. You talk about S&ED talk. What are the most important issues does the United States think they want to address with their Chinese counterpart? And also, last year you talked about greater access to high-tech components, but that doesn't seem to have any substantial progress after last year's talk. Could you explain on that? Thank you.

BRAINARD: So our agenda for the Strategic and Economic Dialogue on the economics side -- I won't speak to the strategic side -- but on the economic side, you know, there are very important areas where we think we need to make further progress for the bilateral economic relationship to be strengthened. And, you know, those are areas that we think for the most part are beneficial for both sides and closely aligned with the Chinese leadership's own agenda.

The Chinese leadership talks about a higher value, more innovation in their economy. We talk about how important it is to strop trade secret theft and to provide protection for all intellectual property, not just indigenous intellectual property, that that will be positive both for growth and the value of production in China, but also important -- critically important for giving fair access to private enterprises and foreign enterprises, U.S. companies. We have very much heard the Chinese leadership as they talk about the domestic consumer and making domestic demand-led growth the kind of central thrust of their policies. Well, of course, the exchange rate has to be central to that. And allowing the exchange rate to fully reflect market forces is something they've made some progress on, but there's still some distance and there's scope to move now.

The way that credit is allocated, still a lot of administrative controls that distort capital to large investments, to state enterprises that choke off more innovative, more competitive private enterprises -- foreign enterprises but also domestic private enterprises. So that's an extraordinarily important part of it.

Cybersecurity has got to be front and central. That is just simply too much of a threat, really, to our competitiveness and to critical infrastructure not to make that a central part. We'd like to make some progress on the bilateral investment treaty. It's an area of great potential for both sides. And so we'd like to see how fast and how far we can push those discussions.

We'd like to see some services sector access. You know, we got equity caps lifted for the first time. In very important parts of the financial services market there is ample opportunity to allow greater foreign participation and thereby have a more dynamic financial sector, services sector more generally, by lifting equity caps and lifting investment restrictions.

SHIRZAD: Let's actually go down here.

QUESTIONER: Thank you. Allen Batkin (sp). I wanted to ask about Japan and the weakening of the yen. There's been some press recently about the impact on the economies and exports of countries like South Korea, Taiwan, Indonesia, Philippines from the weaker yen.

So my questions are: How serious are those implications, the impact on their economies? Can that affect our economies -- our economy and our export markets if those countries are weakened? And how does this strategy of Japan fit into your comments earlier about the G-7 and the -- not using exchange rate mechanism?

BRAINARD: So we have had extensive conversations in the G-7 more broadly. It is extraordinarily important that when countries are pursuing macroeconomic policies, that their fiscal and monetary policies be oriented very clearly to domestic objectives, to domestic demand, and that they are oriented in that way under clear rules, using domestic instruments, not targeting exchange rates.

We think those rules are important to make sure that those policies actually boost global growth and are not -- are not going lead to a downward spiral. So you know, in the current context, we think Japan has said they're going to move forward with their third arrow, structural reform. That's going to be a vital component in order to restore growth. And we've only seen the beginnings of that with the TPP, but it's extraordinarily important to see a very robust structural reform agenda.

Japan's growth is important obviously to the world, but the way they pursue it, we want to make sure is through the domestic channels. Now, more broadly in Asia, of course, it's important that countries not fall back on undervalued exchange rates and export-led growth strategies.

Those haven't worked. They haven't worked for the world and they certainly are not the path forward. And so we're going to continue to push for a clear commitment to exchange rates that are market-determined and growth strategies that are demand-led.

QUESTIONER: Glenn Gerstell from Millbank, Tweed. Thank you very much for your comments this morning. One country that the discussion this morning hasn't touched on is India. And I wondered if -- I know you recently hosted a delegation of some senior officials from the Indian Ministry of Finance. Could you comment on prospects for India opening up a little more to trade and investment?

BRAINARD: Yeah. I think our engagement with India is also -- glad you raised it -- has also really deepened over the last few years, with a lot of bilateral engagement, you know, both through economic channels, but more broadly between the -- President Obama's broader administration.

And what we've seen there is, you know, some forward momentum on the reform front, but not enough. There, too, you know, if the Indian government can move forward on the reform agenda that it has articulated, and get public support for it -- we think it would very meaningful in terms of spurring growth there. They have huge infrastructure needs, but they need to be able to catalyze private investment into infrastructure, and right now, there are a whole host of impediments why private investors are reluctant to participate.

But the kinds of scale of infrastructure investments they need requires -- inherently requires, we think, private capital to be unlocked for that, and so our conversations have very much been around reform in the financial sector, reform of their regulatory environments to make investment much more predictable -- more predictability about the tax regime.

And -- you know, as you know, we've made some progress there, but , you know, India has ambitious growth goals, and we -- our companies and -- you know, we would -- we would like to help be part of that. It's a very exciting potential growth story, but it's going to require continued and much deeper reforms. And we'll keep pushing for them, because we think it's important. But they're still -- they've got quite a ways to go.

SHIRZAD: In the corner.

QUESTIONER: (I work for ?) -- (inaudible) -- (Blackrock ?). You mentioned several times about China's desire to increase their economic growth through increasing consumer spending. That would seem like an extremely easy to do with a savings rate that is estimated to be 35 percent. However, to get that savings rate to decline and consumption to increase, one would think that they would have to put in some safety net provisions that I'm not sure they've put in.

My question is, how quickly are they moving to put in these safety net provisions and also whether -- how are they going to communicate that to the Chinese public in order to get the savings rate down and to turn it into domestic consumption?

MS. BRAINARD: Well, I think this is a central challenge -- is, you know, providing enough of a social safety net and providing clarity about who's responsible for that -- at what level? Is it the, you know, traditional state-owned enterprise, is it the locality, is it the, you know, urban area where migrant workers have moved into but still have really no rights in some cases? That clarity is going to be critically important for Chinese consumers to consume, to feel like they don't need to build up really massive amounts of precautionary savings.

So of course, it's also important that they earn a real return on their savings, and right now, what we know is that they have interest rate caps that don't give them the kinds of returns that they would normally earn. And of course, they don't have access to the full suite of savings -- products that we would -- you know, our companies would love to provide and do so such a great job of providing elsewhere.

So there is a whole set of important reforms there that, you know, you'll see in our strategic and economic dialogue commitments. You know, we made a big deal last year about their commitment to ensure that state-owned enterprises would pay out dividends at the same rate as a publicly-listed company. Why is that important?

Because a lot of that funding is just sitting in state-owned enterprises -- massive build-up of savings that might get directed, in some cases, to noneconomic investments -- and this is part of the -- you know, excessive reliance on investment, but is not getting put into the government coffers to provide health and pension kinds of insurance education, insurance that would give Chinese consumers the comfort they need to go out and actually raise their living standards.

QUESTIONER: Yes, thank you, Faryad. Thank you very much, Lael. Carol Brookins (sp). You've spent a lot of time focused on Europe, and I'm glad to hear that, but we've seen in the past -- and the past being a prologue to the future, this kind of crisis lurching forward -- being able to do something, but only after several iterations of things that may not have been the right things to do. Given that the timelines and the urgency of this agenda going forward for domestic demand to be increased -- are you optimistic, pessimistic, neutral, given the timeline of the German elections?

BRAINARD: What -- you know, what I said earlier I think is the dominant kind of approach on our end, which is to say, look, this is important to us, it's important to you, it's -- you know, it is not sustainable to have 55 percent youth unemployment. That has long-lasting damage that gets inflicted on the economy. You know, nobody -- it's in nobody's interest for the euro area, which is such a vital partner strategically and economically, to be in protracted stagnation. So we just think it's extraordinarily important that these issues be squarely on the agenda.

And, you know, we are seeing these debates. We think there is a path forward. I think I talked about the four key areas that we think would have the most impact in the short run. And so, you know, we'll continue to offer our views based on our own crisis playbook and recovery playbook and what worked, what didn't work, in an effort to help that debate move forward, recognizing that their institutional constraints are quite different and, you know, challenging -- 17 national parliaments; you know, we are challenged with one, so I think -- I think it -- I -- you know, we take seriously that it's a complicated institutional environment. We think we -- they have capacity to act, and they need to act.

SHIRZAD: So Lael, let me take the prerogative last -- ask the last question. We only have about 60 seconds. Big question, short answer. We have a new World Bank president, a huge development agenda that you inherited and you guys are pursuing. Can you talk about the development agenda?

BRAINARD: Yeah, so, we're -- we, you know, have been pretty excited about what we've been able to do with our partners in development countries on lifting the lives of the poor, on addressing gradual states. And that's both through the bilateral as well as the development banks.

We -- in the last year we recapitalized every single one of the development banks. That's never happened before, and it's at a time when people say that, you know, Congress won't move forward. And I think it was on a bipartisan basis that we recapitalized every institutions because of their performance in the wake of the financial crisis. They really stepped up. They helped countries keep trade finance at a time when trade was plummeting. They helped countries keep in place safety nets, infrastructure projects. They really proved their worth.

And Jim Kim is really bringing a lot of energy, a lot of focus. You know, he's very focused on what more middle-income countries can do to lift their poor populations, because that's, of course, where most of the poor live today. Very focused on some of the win-wins between addressing environmental challenges like climate change and poverty, improving resilience of agriculture. And that squares very closely with, you know, our own food security agenda. We've got a terrific new trust fund at the World Bank called the Global Agriculture and Food Security Program that's part of the broader present Food Security Initiative. We think he can do more on empowering women, on locking the productive potential of women. We're really encouraging that at the World Bank because it's such a flagship.

And of course, we have emphasized that the World Bank is most powerful not through its -- not primarily through its lending but through its knowledge products. And there is no better example of that than doing business report -- it's -- very simple benchmarking exercise, which has helped numerous countries, from Colombia to Sierra Leone, to slash red tape and really see rates of business formation double in some cases.

SHIRZAD: Great. Lael, thank you very much. Our meeting is adjourned.

BRAINARD: Thank you. Good to see everybody. (Applause.)

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