The G-20 London Summit

Wednesday, April 1, 2009

MERIT JANOW: I think we're ready to begin. My name is Merit Janow, and it's my pleasure to preside at this morning's discussion.

A few administrative matters: Please turn off your cell phones and BlackBerrys, because they interfere with the sound system here.

And let me remind you and our speakers that this morning's discussion is on the record.

With the G-20 summit convening tomorrow in London, this is, of course, a very timely discussion, and we're fortunate to have with us two leading experts on international finance and economics. You have their bios, so I'll be very brief in my introduction, but let me mention a few noteworthy features of our distinguished speakers.

Richard Clarida is a member of the Columbia University economics faculty, where he holds the Lowell Harriss Professorship of Economics. His stellar career has encompassed government service, where he was assistant secretary of the Treasury for Economic Policy; of course many years in the academy, where he was also chair of his department; as well as the financial sector, where he is now executive vice president and global strategic adviser to PIMCO.

Benn Steil, the Council on Foreign Relations' own senior fellow and director of international economics, is a leading voice in international financing market regulation. He's editor of International Finance and cofounder of a firm which advises in the financial markets space. And he's author most recently of a very timely book called "Money, Markets, and Sovereignty," which was just published in January and which is getting a lot of attention. I bought a copy, look forward to reading it, and you know, hopefully my students will too.

Now the G-20, which is convening tomorrow -- I thought I'd mention a few contextual observations. We have a lot of people here, I see, that are involved in this process. But it started as a finance minister and central banker's informal forum after the -- in the late '90s, after the Asia crisis. And it was elevated in November as a heads of state meeting. And I think now, with the 20 members, as against the G-8, it's purported to represent something like 85 percent of global GDP with that membership.

The November meeting outlined a work plan of identified priority areas, but of course since that time economic conditions have deteriorated by a number of important measures -- trade flows, employment, increasing protectionism, and much more.

Yesterday the Financial Times released a draft communique, which contains a lot of bracketed text on aggregate numbers -- for example, on aggregate stimulus measures, on the amount of available liquidity that will -- has been and will be made available to support banking systems. But it does speak to these issues as well as additional support for the IMF, on additional resources to support a secondary market for trade financing, additional aid to emerging and poor economies, some IMF reform and WTO monitoring activities, and it does convey a sense of urgency and a commitment to keep markets open.

So of course we have a ways to go before this document is final and released, presumably tomorrow, but it gives us a sense of what is under discussion.

So I'd like to start by asking our experts here what each of you thinks needs to be achieved at the summit and what you think is likely to be achieved.

Rich, would you start us off?

RICHARD CLARIDA: Well, thank you. I think that was an excellent overview, and let me begin with a couple of comments.

First of all, when I accepted this, I was honored to be included, and I thought, well, this'll probably occur a day or two after the meeting, so I can look back and show off how smart I am and talk about everything they should have done and didn't do. Course, we're the day before, so there's still an element of surprise.

And I think one lesson we're learning from this is if you want to generate 82 headlines every day, get 20 prime ministers and presidents in the media capital of the world in front of microphones.

And so -- but I think -- I actually am positive about this process. I think if you look at the November meeting, which was the first -- held, you know, right after the collapse of Lehman Brothers -- getting the leaders together in Washington of the 20, and then this meeting, if you look at what I think would have to be the four main agenda items, whether or not it is on the policy front, fiscal and monetary; the regulatory front; financial supervision, which I'll let Benn focus on, the international financial institutions; or on the trade side, which I would hope Merit would opine on, I think that the focus has been appropriate.

And I think that, certainly, relative to this process, including the G-8, it will very likely be judged, at least by me, a success. On the fiscal end, you certainly, in the last six or eight months, have had fiscal expansion -- discretionary fiscal expansion. We can highlight the fact that the U.S. would prefer more, and other countries think that they can rely on automatic stabilizers. But certainly, getting that sort of discretionary action in such a brief time is certainly noteworthy.

Obviously, the monetary-policy front, which is where I do most of my work, you had either -- depending upon your viewpoint, either correlated or coordinated policies, whether or not it's cutting interest rates or providing liquidity to markets.

You know, on the international-financial-institution side, I think we'll be looking for the tangibility of the commitments to grow the resources of the IMF. Certainly I think the IMF has, in some ways, evolved over the past several years and is moving towards less of the conditional model and more of a crisis-response model, which I think is appropriate.

And then finally, on the trade side -- which is, I think, down the road, potentially the biggest concern -- I'm -- it's not clear to me what we'll see coming out of it, other than some platitudes about avoiding protectionism. But I actually think that, given that you're getting leaders together in a period of financial crisis, on all four of those dimensions there'll -- there has been and will be tangible progress.

I think countries typically act in their own interest. There are few examples of true cooperation at -- in this sphere where you sort of give up something to get something. But I think the fact that you're having these meetings scheduled has probably, in the U.S. case, moved the Treasury's focus on the regulatory agenda -- probably moved that towards the first of the year, and obviously on the fiscal end as well.

So that would be my initial take. But I look forward to Benn's comments.

BENN STEIL: I think the meeting always had the potential to be a major train wreck. And we're still not out of the woods, particularly given the fact that French President Sarkozy has threatened not to sign the communique if he doesn't get what he wants. We're not clear exactly what his bottom line is yet, but I don't think we're going to come to that.

The U.S. has toned down its rhetoric on fiscal expansion in Europe. It was quite clear that we weren't going to get any substantive agreement in that area. The Europeans, at least for now, seem to have toned down their sense of urgency about regulating hedge funds and private-equity firms, institutions that seem to the Americans to be rather peripheral to this particular crisis.

There are a few things that I think are welcome that will almost certainly come out of the meeting. More funding for the IMF: absolutely necessary. Having said that, this is basically a Band-Aid. Every five to six years, we have significant financial crises, usually in developing countries, and nothing that's on the agenda today is going to prevent that from coming in cycles. I think the statement of the Chinese Central Bank governor, that we may come to later, about the international monetary system, that's something that I think these countries are going to have to start discussing more in the future.

But staying on the subject of the IMF, getting to the sort of resources that the Obama administration said they wanted -- for example, a trillion dollars -- would require some sort of new grand deal between China and the United States. I don't think we're anywhere near that. Basically, China blames the United States for the crisis, says that: You have run much too loose monetary policy for much too long; now you're engaged in a reckless fiscal expansion; that's why we're concerned about the future of the international monetary system. The U.S. response is basically: Nonsense; you've built up this huge current account surplus; you do it year after year on the basis of a fixed, undervalued exchange rate; you can't blame us.

And since China would certainly demand not only more voting rights, but implicit understanding that their exchange rate policy would not be criticized within the IMF, in order to bring in the necessary funding, I don't think we're going to get anywhere near the sort of additional funding that the U.S. would like to see.

On protectionism, we were talking about that before the meeting. I'm actually mildly encouraged by the draft communique, insofar as countries appear to be willing to pledge not to raise new trade barriers, even if those barriers are already within WTO limits, and not to add new export subsidies. And they've pledged to have the WTO monitor this and report on it on a quarterly basis. And I think some sort of "name and shame" system is welcome in this regard.

I'm not saying it's going to stop forms of "Buy American" national legislation. We'll probably still have some more of that. But I think it will at least heighten sensitivity across the world to this issue and keep it on the table, and I think that's a welcome thing.

JANOW: Thank you very much. Well, let me offer one comment on that last point. I think the WTO is undertaking an inventory of measures, and this is a useful step. Of course, the November communique includes some very good language in opposition to protectionism. And since that time, 17 of the G-20 countries have introduced trade-restrictive measures. So that's a bit worrisome, to put it mildly.

I don't think the aggregate effect of those measures, according to the World Bank, is that large, but the signaling is very disturbing and, in a period of economic strain, it's really very alarming. So this potential language I think goes further than that November, in being quite specific about putting a standstill to these trade-restrictive measures, focusing on export subsidies with particularly pernicious -- and stepping up monitoring. I'm not sure it goes so far as naming and shaming. That's for the experts outside to do. But I think we now have a basis for doing so, which would be useful.

Benn, you've helpfully identified some of the fault lines among the G-20 members in your comments. Let me ask, Rich, if you have any further dimensions of those fault lines you'd like to emphasize.

CLARIDA: Well, I think that I would focus really on the broad outlines of the way this will evolve in terms of coordination and cooperation on financial regulation. Major changes, increases in financial regulation, are inevitable. They will certainly occur with or without the G-20 process.

And certainly Secretary Geithner's comments reported this week staked out a pretty predictable U.S. position, which is we obviously wish to consult and listen and attend international meetings, but ultimately we're going to develop the regulatory framework which is best in the U.S.

And certainly in Europe -- I'm no expert on European regulation. Ben and others here are. But it does seem to me that even within Europe, there are -- there's vast range of levels of cooperation, coordination even within the European financial system.

So I think it is -- well, we'll have -- more regulation is inevitable; it is not inevitable that it will necessarily be cooperative or coordinated. And I think that is -- that is certainly one area that will not be resolved at this conference, but it will be useful to see how much impetus there is in that, because at some level, I think in the past what has prevented those efforts has been skepticism among academics as well as the fact that you have obviously your national considerations.

But the dynamic now may be more receptive to that than it -- than it has been certainly in my professional lifetime. So I think that's certainly the only thing that I would add to this.

JANOW: The -- let me put this a little differently. What are the areas where concerted action and cooperation are essential in light of the current crisis that we're in? And are -- is this summit focusing on those areas, in your view?


STEIL: It's relatively easy for the U.S. to come up with a coherent policy on dealing with too-big-to-fail, systemically important institutions because we have the capacity to prop them up or wind them down. That's not clearly the case in Europe.

Take a highly levered institution like Deutsche Bank. If they were to get into serious difficulties, that would be a major problem, not just for Europe but for the world, because it's certainly far from clear that Germany on its own would have enough resources to deal with the situation. So there's -- I think there's quite a bit of urgency in Europe in terms of reinforcing the European single financial market with a regulatory and supervisory system that's capable of dealing with institutions that are legitimately global, even though the regulation is still, as it's carried out on the ground, primarily national.

We also learned in the early stage of this crisis that one small country in Europe can force the hands of all the others. Ireland, for example, when it decided overnight to underwrite the debts of most of its banking system -- its top six banks, and guarantee all the deposits, of course suddenly everyone else in Europe had to do the same because you had deposits moving across borders to Ireland very quickly. Money moves very fast. But I think there's a heightened the sense of urgency in Europe to beef up the cross-border regulatory and supervisory system.

There are some areas where we're moving quite rapidly in the U.S. and the EU, and I am concerned that it's being done on a competitive rather than cooperative basis.

I've long been an advocate of using central clearing houses in the OTC derivatives market for high volume securities like credit default swaps. The U.S. moved much faster in this regard than the EU, in particular, Tim Geithner, when he was head of the New York Fed. And the EU has been since then playing catch-up. But right now they're quite determined to come up with a quote-unquote "European solution."

Now, since this market is an inherently international market - the OTC derivatives market is not offshore; it's not European; it's not American. It's based on a 32-page downloadable document from an organization called ISDA. All the provisions are governed by either U.K. or New York state common court. It's an inherently international market. And if we have the EU and U.S. building competing regulatory regimes, you're going to have regulatory arbitrage between the two.

And you're going to have some serious information gaps. And I'm very concerned that we don't seem to be taking steps to put a stop to that competitive process and to coordinate much more.

CLARIDA: A couple points on that.

Mervyn King was quoted as saying recently that mega financial institutions are global in life and national in death. They're very complex and profit very well in an expanding global economy. But when they get into trouble, it's their home country that ends up writing the check on the bailout. So at some point, that obviously is something that would perhaps be addressed.

Let me turn this to the fiscal policy discussion. There's been a lot of focus recently on whether or not the rest of the world is pursuing enough fiscal stimulus.

The IMF, under Olivier Blanchard's leadership, I think, produced a very timely and influential report, a month or so before the meeting, sort of documenting the amount of fiscal stimulus, in the G-20, and dividing it into discretionary measures and automatic stabilizing measures. And you know, as a professional macroeconomist for the last 25 years, it is a remarkable example of timely fiscal -- discretionary fiscal stimulus.

However I'm in the camp that doesn't necessarily think that right now we need better coordinated or more fiscal stimulus. In fact, I'm actually a little bit skeptical of the value of that. I've written recently that, you know, we're in a situation now where there are a lot of boxed dollars, euros, yen committed to fiscal policy.

But it's not clear what the bank from these policies is going to be. And I think one reason for that is the traditional multiplier that we learn about, in undergraduate economics, even though when we first learn about it, we don't talk about the financial system.

If you think about it, the way in which the multiplier works is really through the financial system. The individual gets the rebate check and goes out and buys a car or consumer durable or whatever. And now with a frozen financial system, I believe that the multipliers on traditional changing fiscal policies are likely to be much smaller. And thus I think more of the emphasis should be normatively on getting an appropriate, coherent and timely resolution to the financial crisis.

So I think at the margin, attention on another percentage point of GDP, on a fiscal package, is probably less valuable than actually getting to the resolution of the financial crisis.

STEIL: I would also point out that we have an almost unprecedented situation right now, of the IMF and the World Bank saying two completely different things about fiscal expansion.

Dominique Strauss-Kahn has been a big advocate of countries around the world expanding their fiscal efforts. But Bob Zoellick at the World Bank has referred to it provocatively as a sugar high. And that's a bit discomforting.

And it does reflect a legitimate split in views, around the world, certainly a split in views even in this country, about the logic underlying using massive fiscal measures to stimulate the economy.

As Rich emphasized, the empirical evidence is ambiguous at best. I would argue, it should be very discouraging to those who support it. But it's not surprising that we're not getting anything akin to a consensus on that.

CLARIDA: One other point that just occurred to me.

I think one reason why it may be -- why it is and may continue to be a challenge, to get to a resolution on financial rescue or financial reform, is that even though we have a common global financial crisis now, its manifestations actually differ quite substantially in the U.S., relative to Europe.

And the reason for that -- it isn't simple, it's obviously very complex -- is that the U.S. went much further than any other country, certainly in Europe, in terms of moving towards a securitized finance model, away from bank-centric model.

So in the U.S., a lot of our policies can be interpreted as the Treasury or the Fed or the FDIC attempting to replace a securitization system that's imploded, where in Europe they don't need to replace a securitization system that's imploded, because it was a much less important part of their credit intermediation system. So even though you might say we've got a common crisis, let's get to a common solution, the crisis is playing out quite differently in terms of the details because of our two very different -- the way our financial systems have evolved.

STEIL: Rich makes an important point on securitization. This is one thing that concerns me about our efforts in the United States. I think to a significant extent you could argue that the U.S. market is, quote-unquote, over-securitized, in the sense that we've given companies in general and financial institutions institutions an enormous incentive for debt financing rather than equity financing.

The effective tax rate on an equity-financed investment for a U.S. corporation is about 36 percent. The effective tax rate for a debt-financed investment is minus 6 percent. We subsidize it very heavily. So if you've ever asked yourself why are banks so reluctant to raise equity capital, the reason is that the taxation system makes it exceptionally expensive.

So why do banks love securitization so much? Well, there are many reasons, but the primary one is that it's extremely expensive to hold a loan on your books. You've got to get capital to support it. So that encourages them, naturally, to get loans off their books, to put them in off-balance-sheet entities, to package them, securitize them and sell them off to other investors that don't bear this sort of disadvantage.

And I'm a little concerned that if you look at the combined policies of the Fed, the Treasury, and the FDIC, we're trying to maintain securitized finance at a level that we probably shouldn't be supporting going forward into the future. We should be asking why there is so much of it. Do we, for example, need to revisit the taxation system? Do we need to revisit the capital adequacy system that we impose on the banks?

JANOW: Well, thank you. Those are longer-term structural questions.

Let me put one more issue on the table before we open it up for our audience, and that has to do with China's role at this meeting. Usually China says very little in advance of important gatherings. This time the governor of the central bank has made a number of statements recently that have been noteworthy about institutional reform of international institutions, and also alluded to some SDR proposals, not fully understood by me, about creating some new super-reserve currency that wouldn't have the vagaries of over-weighting an individual currency.

And I wonder if you would both comment briefly on what you think China is seeking from this gathering and what its position is on some of these core issues.

CLARIDA: Let me jump in first, because I think I know less about it than Benn does. I think that it's clear that China is positioning itself and in a very, you know, clever -- certainly in its own self-interest, China would like a much larger role in international financial institutions, and, by any arms-length metric, should have a much larger role in international financial institutions. And so I view this as just one step, along with many others that we'll see in the future, to expand that role and influence more broadly.

I think with regards to the important China-U.S. relationship, obviously we're all aware of the fact that China holds a lot of Treasurys and still continues to maintain a relatively fixed exchange rate. And as you know, in the context of U.S. legislation the Treasury is required on a -- I think a quarterly or semi-annual basis, to issue a report, and we get into the whole issue of whether China is or is not a currency manipulator or whether or not you could use the word "manipulator."

So I view this as really part of that larger dynamic that will -- that has played out and will play out over the next several years, but.

STEIL: British Prime Minister Gordon Brown had referred to the November G-20 summit, in the runup to the meeting, as a Bretton Woods II.


STEIL: And it seems that the Chinese are the only ones who are now taking him seriously. They're the only ones who have raised a fundamental issue about the sustainability of the international monetary system.

Now, their timing is not coincidental. I'm sure they don't expect to get a statement on this included in the communique. But they've clearly put it on the table that this is a very important issue.

If you haven't yet read the statement of the Chinese Central Bank Governor Zhou on the international monetary system, I highly, highly recommend it. It's extremely brief, but it's remarkable for a Chinese government statement.

It's -- as you said, the Chinese government is usually very reactive. You know, there's a proposal put out there, usually by the Americans, and they'll say, "This is not in our interest," or, "We're willing to talk about this." It's exceptionally rare for the Chinese government to ever say, "You know, we think the world should be different, not just for our own parochial interest but for the world's interest."

And this statement was, I thought, historically and logically impeccable. He argued that the system of one country producing the international reserve currency, managing it in its own domestic interest, but the rest of the world relying on it for international trade, and as a store of value, that this system was inherently unsustainable.

He referred to, for example, the Triffin dilemma: that a country that's in this position of issuing the international reserve currency, will always face a dual challenge of producing enough liquidity for the world while sustaining confidence. And Robert Triffin, the economist who gave birth to this idea, argued that it really was essentially impossible, that it would break down at some point. And the Chinese are basically backing that position.

Now, their specific proposal I don't think has legs. But the fact that they've pointed to the fundamental flaws of the existing system I think is very, very significant. And I don't think we're going to be able to avoid a discussion of this, going forward.

JANOW: Well, thank you very much. Be very interesting to know how that statement went through clearances within China, wouldn't it.

Let's open it up to our audience here -- a lot of expertise. If you could wait for the mic and identify yourself, please.

Question's back -- right there, sir.

QUESTIONER: Two questions --

JANOW: Your name and --

QUESTIONER: Oh. Oh, sorry. Kevin Harrington with Clarium Capital.

Two questions. First, what was that book that you recommended that was a great read, you said, just a couple of minutes ago?

JANOW: He was referring to a statement.

STEIL: Oh, the -- it was a statement of the --

QUESTIONER: Oh, okay. The statement by Governor Zhou. Okay.

STEIL: Governor Zhou, yes. Yeah.

QUESTIONER: Okay. So the question I have about his statement is, why isn't the U.S. pushback that, okay, fine, you don't want to be overdependent on the dollar? Revalue your currency, you know, to 50 percent.

It seems that the Chinese have within their power to reduce their dependence on the U.S. dollar any time they want to. And we have, in fact, been arguing that they should be doing that for a long time. So does this then amount to Governor Zhou in fact implicitly taking that position within the Chinese leadership and perhaps internationally?

CLARIDA: The Chinese argument is that, given the menu of alternatives available to us, we have no choice. With this -- we use it as our reserve currency because everybody else does. We have to trade with the rest of the world. The rest of the world prices primary commodities in dollars, we have to price primary commodities in dollars. It's not within our power to change this system unilaterally. They claim it has to be done cooperatively.

Their proposal is to broaden both the scope of the SDRs issued by the IMF in terms of the currencies that comprise it and then to expand its use. The idea is that somehow this could eventually replace the dollar as the international reserve currency and then become a vehicle for international trade.

But they would say we can't get from here to there without cooperation. This is something that China can't do on its own. At least that's China's argument.

JANOW: Thank you.

QUESTIONER: (Off mike.)

STEIL: Do you want to talk on that right now?

CLARIDA: No. (Off mike.)

JANOW: Okay. Thank you.

I think I saw a question over here.

QUESTIONER: Hi, my name is Nina Schwalbe from the GAVI Alliance. In the last couple of years -- last, really, since Okinawa -- the G-8 and the G-20 have become incredibly important venues for international aid and discussion of (UNITAID ?), the global fund, et cetera. Where do you see that coming out in this discussion?

CLARIDA: The one part of it that I'm aware of is the conversations that are ongoing and may actually result in something in the communique on a substantial increase in the IMF SDR allocation, which can be thought of, if not directly as aid, certainly as a way to provide financial support to many countries within the existing structure of these institutions without necessarily going to legislatures.

But beyond that, which is sort of a technical, financial issue, I'm not really aware that this is going to be a focus of this meeting.

STEIL: When you started talking about the draft communique, you emphasized that all the numbers were in square brackets with an X between the brackets. And those X's are actually quite important. And one of the X's referred to increased support for the multilateral development institutions, which presumably includes the World Bank.

So we don't know yet what their thinking is. I mean, it's always possible that they're going to come up with a significant number. Personally, I doubt it. I think that may be disappointing, of course, but I think the U.S. and the EU are very inwardly focused at the moment, for understandable reasons. And I don't think you're going to be able to get a sustained commitment for development aid at this point.

JANOW: Well, I think there's ambition to have some language in there that's very positive and supportive of ODA and Aid for Trade and the global vulnerability fund concept, which is under discussion.

So it's clearly there, and I think there is an effort to recognize that this crisis is having a differentially bad impact on emerging and the poorest countries. So I don't think that's not part of the discussion. But as Benn says, the kind of numbers that might be associated with this are far from clear.


QUESTIONER: Dick McCormack, Bank of America. I'd like to know your view on Richard Koo's thesis, that this is in part a balance sheet recession, and that even if we recapitalize banks, until these balance sheets are repaired, both individual and otherwise, we're not going to really get ourselves out of this hole.

CLARIDA: I'll jump in on that, because I've thought a lot about it. I fundamentally agree with that. I think, you know -- just very quickly, since it's not the focus of this discussion -- but initially, this was viewed as being a liquidity crisis, and central banks know how to deal with liquidity crisis. And in the U.S. case, and later on the European case, there was ample liquidity provided. But why hasn't the crisis been resolved? Because it's not a liquidity crisis. It's fundamentally a balance sheet, and in some cases a solvency crisis. And solvency crises are much more challenging because they involve discretionary and substantial fiscal actions. And in the U.S., we're sort of blurring the two, because the Fed in some cases now is acting as a fiscal agent.

But that's my quick version of this, and it gets back to what I said a moment ago about why getting closure, or certainly cooperation, on the financial regulatory end may be challenging now, because the crisis, even though it's global, has impacted different economies in very different ways because they have different originations of their financial sectors.

STEIL: I agree with you strongly. And one thing we're definitely going to learn from the Geithner plan is what the underyling problem is. It seems to me there are broadly three different theses. The one that the Obama administration is working on is that this is a liquidity problem, in the sense that investors don't have access to sufficient funds to go out there and buy these assets off the banks in sufficient quantities. And that's the idea behind the Treasury providing enormous debt support for private investors to buy these assets. The notion is then they'll be able to offer attractive prices; the banks will sell and we'll move forward.

If the banks still won't sell, what does that mean? It may mean that we are legitimately in a solvency crisis; that the banks are saying, well, we can't sell to you at those prices, even if they're reasonable, because if we have to mark down our assets to those prices, we're under water. And that would be very worrying, indeed.

There seems to me to be a third problem that we haven't discussed too much, and that's that some of these assets, particularly the derivative assets, are exceptionally difficult to price. They're complex bundles of securities, each component of which was initially valued according to a credit rating. Those credit ratings no longer have any validity. It's very difficult now to strip them down and reevaluate them from scratch. I'm not saying it can't be done, but it's exceptionally costly and labor intensive to do. And that uncertainty about the valuation of these assets can lead to a persistent gap in evaluations between sellers and buyers. But I think, as we see the Geithner plan play out, we'll get a better understanding at least of what the fundamental problem is.

JANOW: The question's over here, please.

QUESTIONER: Jonathan Chanis, Detroit Asset Management. Since it was just brought up, I can't help but ask if the speakers have seen Joe Stiglitz's op-ed in The New York Times this morning, and what their reaction is.

CLARIDA: I saw it, as is almost always the case, since I recruited Joe to Columbia and -- and actually, a week before he won the Nobel Prize, so it was good timing. But I thought Joe makes a -- you know, it's a very well written article, making the point about the structure of this program. I think I might disagree with it in terms of the value of the program, but he does illustrate the way in which the PPIP is designed to operate, which is essentially -- I actually have a more positive take on the Public-Private Investment Program because I think -- I totally agree with Benn, and we've discussed it at length -- I think a fundamental challenge in this crisis is the distinction between the riskiness of investing and the absolute uncertainty of the valuation of these complex instruments.

And I think that these programs, by essentially cutting off the left-tail risk -- because there is an optionality embedded in the Treasury program, which is that you know going in, down to the penny, what your maximum loss can be, and you've got an upside gain, and I think that is an important contribution. So I think the article is well written, but I'm much more positive on the program than Joe is.

JANOW: Other questions? In the back, please.

QUESTIONER: Thank you. Regina Schweiger (ph) from Medley Global Advisors. You mentioned you have questions over the aggressive emphasis on the G-20 countries to pursue more emphatic fiscal stimulus.

So I'm just wondering, because of the question marks over the reduced multiplier effects, in an environment where markets are frozen, I deduced from that that you are suggesting that the focus should be on those frozen markets and unfreezing them. I'm just wondering what other measures you would suggest to pursue that approach, and where are the alternatives now for them to focus their efforts?

CLARIDA: Well, broadly speaking, if you've only got -- and realistically this is the case -- if you've got so much fiscal room to maneuver, either because politically there's aversion to larger budget deficits or in the markets, it's my own professional judgment -- again, there can be a range of opinion -- that expending political capital to get the fiscal resources needed to help support a(n) appropriate bank resolution model would be money better spent than spending six months over whether or not you do another half percent of GDP on some public works project.

So again, it's -- you know, in a world of more resources, you do both: another fiscal program, and a bigger financial rescue. But if you have to make a choice, I think getting the financial rescue right, which will probably require some fiscal resources, is a better use of that than another round of fiscal stimulus. That's one man's opinion.

STEIL: The basic argument behind fiscal stimulus is that if the public wants liquidity, they want to hoard cash and hoard U.S. Treasuries, then the government is obliged to do the spending for them.

But it's never been clear to me why you leap from that analysis of the current situation to that conclusion. If the public wants liquidity, the Fed can supply that very easily, in unlimited quantities. And as long people are not spending money, it's not inflationary. So it seems to me that everything you can do through fiscal means you can also do through monetary means. At some point, the Fed will supply us all with enough liquidity that we're going to say,"Enough of this stuff; we want to invest in stocks and bonds, and we want to start accumulating consumer durables." And then you'll get precisely the sort of economic stimulus that those who support fiscal approaches want.

So you know, my view is that those who support fiscal-oriented approaches are looking for specific types of spending, rather than a broad stimulus of the economy.

JANOW: But you know, Rich referred to this blurring of fiscal and monetary instruments, and we're seeing -- are we not seeing this, the use of expansionary measures in quite uncharted territory and a willingness around the world to go down this path? Isn't that what we're seeing?

CLARIDA: Yes. Well, certainly the U.S. in this case is leading the way with the Fed's really, I would say, monumental announcement -- the fact that it was leaked in advance doesn't make it any less important -- but the Fed this year is committed to essentially monetizing $300 billion of new issue government debt. Now the Fed says we can also change our mind and we can have an exit strategy, but still the U.S. has not engaged in this monetization of a fiscal deficit since World War II, and I would remind those of you who'd forgotten that even though World War II did end in 1945, the Fed did not get out of the monetization game till 1951.

So this is a very politically complex issue when you get into monetization of deficits. I was in Europe last week meeting with officials, and certainly the appetite in Europe now by the ECB to go down that road is not there. They -- at least now both in -- for public presentation and in private conversations will say they don't want go down the road of monetization of deficits.

But certainly we have blurred the line in the U.S. The Bank of England is undertaking a similar operation.

JANOW: Yeah.

In the front, please.

QUESTIONER: Hi. Roger Kubarych, UniCredit and Council on Foreign Relations. Tell me why I'm wrong in thinking that there are two obvious things that need to be done that no governments are doing: one, stopping the decline in housing prices through stopping foreclosures; and two, doing something to restore a global crash in stock market prices, which is unprecedented and affects everybody, and in this country the loss of wealth and 401(k) type wealth from the stock market is many times bigger than the net decline -- net-worth decline from housing.

Most people know that they're worse off on both. And I don't see anything that any of these governments are doing, to confront those two facts, with any degree of resolve or even understanding of the really long-lasting negative effects of these negative-wealth effects.

JANOW: Who would like to start?

CLARIDA: Okay. I'll take that. Let me focus most on the U.S., because we have the biggest housing problem, then I'll turn to other countries. I think in the U.S. case, I would disagree somewhat. I think that the Fed's efforts, to essentially peg the mortgage rates, is an effort by the Fed to stem the decline in house prices.

It will not necessarily be sufficient, because of the impairment in credit markets. And I do agree with you that we've now had a year or more of discussion, in Washington, with various proposals about getting involved in the foreclosure process. And I think it's complex, in the U.S. case, because of the securitization that I talked about earlier.

It's much more difficult to work out foreclosure mitigation with a securitized mortgage than a mortgage that's held by a bank. Indeed what we've seen, and we have banking experts in the audience, but as I understand it, what we've seen is that for those mortgages in which people still have income coming in, but they're falling behind on their payments, that are held by banks, there has actually been pretty substantial effort to engage in reworking those. But because we went so far down the securitization road, that's the tip of the iceberg.

So I think in the Fed's case, the Fed's doing what it can, in terms of in effect pegging the mortgage rate at a low level. And again two weeks ago, the Fed announced that it's going to double the size of its mortgage purchase to over 1 trillion a year. So the Fed has essentially become the Fannie Mae and Freddie Mac of the housing system, at least for 2009.

So I think the reason there has not been more done, on the foreclosure, is just the complexity and the legal, contractual complexity, getting back to Benn's point moments ago about this, the complexity of these securities. And one thing that makes them complex is that they're hard to unwind legally.

STEIL: Roger, as you know, there are many reasons why people find themselves in foreclosure. One thesis is that they just can't afford their payments. And if we lower their monthly payments to an affordable level, a certain percentage of their monthly income, then they'll be fine. And everyone will be made better off, including the lender. But there's another factor.

If they're deeply into negative equity, even if they do have the income to make their payments, they're probably not going to do it. And given how many people are suffering from this problem, it's exceptionally difficult to distinguish between them with any sort of mass program. We're trying to do it right now. But it's an exceptionally difficult exercise.

With regard to the stock market, I think, one thing that's weighing on the market, day after day after day, is the question about, which financial institutions and which auto manufacturers are going to be nationalized or put out of business. And this is a very complex question.

It's very possible that a number of major financial institutions are insolvent. We don't quite know yet. But you don't want to go down the route of nationalization before you're pretty sure of it, because it makes it impossible for all the other institutions, then, to go out in the private market and raise capital, because none of us are going to want to give capital to an institution that may be seized by the government any day now.

And until we resolve that uncertainty, about who's solvent and who's not, I think, the stock market is going to be very volatile. And there's not terribly much we can do about that. (Off mike.)

JANOW: Let me start here. (Off mike.)

QUESTIONER: John Biggs, currently at Stern.

I'm sort of interested in the international reaction to the AIG fiasco here. AIG was probably our most international financial institution. It had its founding in China, deep roots in Asia and all over the world. And it's not a bank. It was an insurance company with a holding company over it.

There's been a -- sort of a populist incoherent reaction to the fact that the bailout money to them just went, as through a conduit, to foreign banks. Tens of billions went to foreign banks and also to Goldman Sachs. And people don't understand: Well, why should we -- taxpayer money here be less being -- going directly to them? I think it's more -- a sort of more glaring question to many people -- more understandable to Congress, probably -- which is -- unlike the banks where -- their loans and other kinds of obligations that are more complex.

But surely the -- we need some way to regulate the AIG kind of entity. We totally failed here in the U.S. I mean, having the home loan reporting wasn't regulation, because they had a home loan bank as their regulator who was a farce.

But clearly there are some international obligations as well. I don't know whether that's -- AIG's a very pressing, obvious point right now -- whether that will enter into any of the G-20 discussions. And I'd be interested in your reactions to that.

CLARIDA: Well, there's just no doubt that here in the United States that Treasury is very interested in dealing this -- with this question of systemically important non-bank financial institutions, and very much because of AIG.

As you know, secretary of -- Secretary Geithner has said that he would welcome new authority to intervene with just such sorts of institutions. It's not, however, immediately clear to me that it's authority that the Treasury or the Federal Reserve lacks. In the case of AIG, you may remember that when they initially approached the Fed and Treasury back in September they were told to go jump in a lake. But then they opened up the books.

The important point seems to be that neither the Fed nor the Treasury were aware of the grossly irresponsible positions that they'd taken in the credit-default-swap market. And even if they had had the authority to wind them down in an orderly manner much earlier, if they hadn't had this absolutely essential information they wouldn't have had cause to intervene.

So I think one of the essential things we have to do is to make sure that our regulators have this essential information. I think the credit-default-swap market, which ultimately is what brought down AIG, is a huge source of hidden vulnerability for the entire international financial system.

JANOW: Yeah. And let's --

MR. : (Off mike) --

JANOW: I mean, I would just note that I think part of the global discussion that is occurring is the issue of moving the OTC market onto exchanges. I think that is now, you know, quite -- quite a lot of interest in doing so, not only in the United States but also in Europe.

I think there was a question over here.

QUESTIONER: Chris Harris (sp). Back to the G-20 for a moment, the -- at the conclusion of the G-20, I'd like the panel's view on what would be an -- from a market perspective, certainly not a political perspective -- what would be an extreme positive outcome and what would be an extreme negative outcome.

JANOW: Who would like to start? Positive and negative. We don't have to have extreme.

CLARIDA: Well, I think extreme negative is -- I'll begin with -- which I don't think will happen; a low-probability event -- but we've had press accounts about Sarkozy saying if he doesn't get his way on financial regulation he's going to take his marbles and croissants and go home. (Laughter.) So you could have everyone -- you could have everyone storm out of the meeting, again, so that would be a huge -- that would be a huge -- a huge negative.

In terms of feasible positive outcomes, I think they've largely been discounted because the iron law of summits, right, is anything that's positive, you know, you -- is going to sort of already be out there. You might have a little surprise at the end, but I can't think of something that's not priced in now that's on the positive end that would move things, that's feasible.

STEIL: I agree with Rich. I think the market has relatively low expectations for the summit. What they fear the most is that it would break up in acrimony, because that would make cooperation exceptionally difficult down the road. And as long as we don't see that, I think the meeting will be seen largely as a non-event in the market, in that the market already has relatively low expectations.

There are things that I think the market would welcome. A strong statement against protectionism, I think, is important, with this mechanism of the WTO reporting quarterly, because for the G-20 countries to say, "We have a commitment to this and there's a body separate from us that will report back on how we're doing," I think is significant.

Because in the 1930s, as you know, the global contraction of trade was absolutely catastrophic. People have rightly pointed out it wasn't just Smoot-Hawley that did this, but the cycle of retaliation around the world, which no one really envisioned, was impossible to break. And I think we have to really bind ourselves to make sure that we never go down that road. It could be absolutely catastrophic.

JANOW: I completely agree with that, of course. And I don't know how the markets will react, but I thought the indication of substantial secondary trade financing is also an important part of this. We don't know how much of the trade financing has dried up from the drop of demand as against other regions, but it is not available and it needs an injection from governments. And so this looks like it will be a useful step particularly for developing countries.

I think we have time for one last question. And let me invite you, please.

QUESTIONER: Lester Wigler, Smith Barney. You both indicated that one of the expectations we can have out of the G-20 meeting will be a renewed commitment for funding for the IMF. And my question is, given the fact that there is so much insularity among the individual nations, how will that additional funding actually occur? And is there a possibility that there may be a different way to assess each nation's contributions to the SDR?

JANOW: Briefly.

CLARIDA: Briefly, I think that's inevitable. I don't think it will happen at this meeting, but I think that's inevitable, as is voting. And the third, I would point out, and the IMF's already doing this, is moving away from the conditional model where you give aid in exchange for change in the tax and regulatory landscape of a country, and you more are in the model of providing resources to fundamentally sound economies who are going through what's supposed to be a temporary difficulty. So, less conditionality, I think we'll see that, more of that.

STEIL: The draft communique actually did have some amorphous language about revisiting governance. So I think this is a clear recognition that the current status quo, the allocations, the voting rights, that's unsustainable. It's going to have to change. But I don't think we're at the point where they're ready to start putting numbers on it.

JANOW: And one suspects that it's not as urgent as some of the other issues. Important as it is, long-standing as it is, an issue of great divisiveness, you know, it is not at the front of the urgency

STEIL: If you wanted to build IMF funding up to $1 trillion overnight, then you would have to address the governance issue now.


STEIL: But perhaps to get at something a little more modest, perhaps something up to half a trillion (dollars), we might not have to revisit this right at this moment.

JANOW: Well, it's clearly in train.

I think we've reached our magic hour. Please join me in thanking our panelists.








Top Stories on CFR

United States

The Trump presidency has demonstrated the appeal of populist authoritarianism to many Americans. The way the country responds to the attack on the U.S. Capitol will indicate how long this movement lasts.

Conflict Prevention

In CFR’s annual Preventive Priorities Survey, U.S. foreign policy experts assess the likelihood and impact of thirty potential conflicts that could emerge or escalate in the coming year.


The global distribution of COVID-19 vaccines is underway, but the emergence of new coronavirus strains threatens to make the pandemic far worse before it gets better.