Previewing Pittsburgh: The G20 and the Global Economy

Friday, September 18, 2009

CHARLES H. DALLARA: Good afternoon, ladies and gentlemen. We're going to go ahead, with your permission and your cooperation, to get this session started -- this session focusing on the G-20 Summit, which I think, as you all know, is taking place next week in Pittsburgh.

Before introducing our speakers today, let me make just a few opening house business points. First, please completely turn off your cell phones, your BlackBerries, and all modern concoctions which you may have in your pockets. It would interfere with the sound system, which, as you can see, is quite an impressive one without the inference.

Secondly, after we have 30 minutes or so of give-and-take up here, we're going to have a Q & A session. And you're more than welcome to participate in that, but please do so by stating your name and your affiliation. Everyone should keep in mind, particularly my colleagues up here, that this is on the record, so what they say may well circulate around the world.

It's a real pleasure for me to have the privilege of chairing this council session this afternoon, and a pleasure to be up here with Ted and with David. I don't think either necessarily requires much introduction, because I'm sure that most of you know them well. Ted is now the senior fellow at the Peterson-Bergsten Institute of International Economics --

EDWIN M. TRUMAN: (Laughs.)

DALLARA: -- I think they got the name almost right-- but has before that been a senior officer, the head of international policy at the Federal Reserve Board in Washington for many, many years; and then also served as an assistant secretary of the U.S. Treasury some years ago as well.

And I'm pleased to say that Ted's predecessors in that position at the Fed are with us here today, Bob Solomon and Karen Johnson. So we have many decades of institutional experience from the Federal Reserve.

And we have, to my left, someone who has followed very closely the Federal Reserve in his distinguished work as a journalist. David Wessel is the economics editor, as you know, of the Wall Street Journal.

He began his journalistic career I think in other endeavors and has, over the years, earned two Pulitzer Prizes. Most recently, he published a new book on the crisis, with a focus of how Ben Bernanke and the Fed has fought and tried to cope with the pressures in the crisis. And I'm sure that if you haven't looked at it, you may find it of interest.

Let me open the discussion up here, if I may, by asking Ted what two or three things would he most like to see come out of the summit and, therefore, help this summit qualify as a success?

I might just note that this, of course, is a fairly new phenomenon -- the G-20 summits. It began, actually, I think at the head-of-state level only 10, 11 months ago -- November of 2008, in the throes of this horrendous crisis we've all lived through. But the notion of summits has been around for quite some time.

In fact, the summit last year in Washington was exactly on the date of the 34th anniversary of a summit in Rambouillet, France -- which Ted will certainly remember, which I think was just a G-5 summit, it was probably, and now it has migrated into a G-20 process. So we'll talk a little bit about what these summits have accomplished, and what they should accomplish, but let me throw this question to you, Ted.

TRUMAN: Well, I think the very fact -- first of all, it's a pleasure to be here. Thank you for coming.

And thank you to Bob and Karen to support me, you know, if I get beat up too much.

It is remarkable that here you have the leaders of these countries sitting together for the third time in 10 months. It is a tribute to the depths of the crisis. And one should be, but one can -- probably shouldn't expect too much out of the process.

I mean, summits have their -- they are action-forcing events. Sometimes the action is -- as in London, has quite a lot of numbers associated with it, and so forth, and so on. But sometimes the action is actually things you never see, and is only vaguely reflected in the communique.

And I would hope -- and to answer your question, Charles, I would hope that you get out of this summit a broad consensus, in the sense of the communique -- and maybe for the leaders and their governments as they return to their capitals, about, sort of, three broad issues:

One is the macroeconomic situation -- of the recovery, which I think we're in; and the expansion that follows that, some consensus about how that should unfold; and what the responsibilities of various countries are.

Second, is on the repair and reform of the financial system.

And the third is institutional issues, like the international financial institutions and the role for the new Financial Stability Board.

So it seems to me those are the three topics. And I suspect -- and we know, from what David and his colleagues have already reported, that there's been quite a lot of work on all three of those things.

I think whether they end up in, you know, headline-grabbing decisions, I don't know. But I actually think the process -- building on November's meeting, and building on April's meeting, has been quite constructive. Because, many leaders don't actually spend -- even finance ministers don't actually spend a lot of time worrying about what goes on the rest of the world. Rather, they worry about their own problems. And so the very summit process is a, sort of, self-education process, which is constructive.

DALLARA: Thank you, Ted.

You mentioned the April summit, which took place in London.

And David, I wonder if the challenge this time isn't much greater, in a certain sense, because at that time I do believe that the summit actually did give a sense of confidence and some sense of direction, and markets benefitted from that.

Now we've had a number of months of good market performance. A lot of the hard work has been done by finance ministries and central banks, and a lot of the hard work remains to be done by the professionals, particularly with regard to regulatory reform, is it going to be more difficult for President Obama and the other heads of states to create a sense of success this time?

DAVID WESSEL: I think so.

I think, for two reasons: One, is that when you're in the middle of a crisis, as particularly one as severe as the one we've been through in the last year or two, there's a kind of "Oh, my gosh, we got to get together and get out of this thing." And they were clearly quite aware that appearing to be at odds was not conducive to breeding confidence that the leaders of the world economy knew what they were doing.

After all, we've run the experiment of having disarray among world financial leaders in a crisis, and that's what produced the Great Depression. So the natural tendency of governments to look after their own national interests, and to worry about their own problems rather than the collective problems, is enormously greater at a time when things are calmer.

But I think the second problem is that it's very nice to know that we're not going to have another Great Depression but, as Barney Frank said the other day -- Barney Frank, the source of all great one-liners -- (laughter) -- about the financial crisis, "No politician ever got elected with a bumper sticker that said, 'It could have been worse.'"

And there's, frankly, not a whole lot that I think the leaders can do or say, that anybody will believe, about getting unemployment back to anything near normal. I mean, the conventional wisdom, from them and most other people, is this going to be a long slog. And people really don't want to hear that.

So to come out of this thing and declare, "Well, we declared victory. We didn't have a Great Depression. Now settle for 10 percent unemployment in the U.S. for the next 18 months." I suspect that's not on Rahm Emanuel's talking points "that will get me a Democratic Congress reelected."

DALLARA: David, the unemployment problem that continues to grow in the U.S. and much of the industrial world, and unfortunately in many emerging markets, does pose a real challenge, I think, for this set of issues that Ted referred to of "exit strategies."

Here the issues are when do you shift gears on fiscal policy to a more conservative position? When do you shift gears on monetary policy to moderate the flood of liquidity that has been necessarily provided over the past year or so? And when do you shift gears in this complicated world of the special support, capital, guarantees, special funding programs, et cetera?

Ted, how difficult do you think it's going to be to get it right on these exits? And of the three exits that policymakers have to find, which one do you think they're going to stumble around on the most?

TRUMAN: I think the one that's most difficult for the individual countries is the third. You've had a whole range of governmental interventions in the economy in various different forms, right, and in a wide range of countries -- maybe more the advanced countries, but some emerging market countries as well. And getting out of that is going to be a problem, because it involves many domestic political issues.

And then if you don't get out of it, especially with the financial sector, you end up with competitiveness problems, right. So you have a vast increase in the number of government-owned and government-controlled banks, right, and that leads to its own accusations of uncompetitive playing field. That may not be the most important issue, but I think it is the most difficult issue to try to coordinate, in some sense.

I think, between the fiscal and monetary -- I'm now speaking probably as a former central banker type, I actually worry that the monetary will be held hostage to fiscal; that, in the name of reducing government debt build-up and narrowing budget deficits, going forward, political pressures will be placed upon the central banks to keep interest rates at zero, for both the reasons of promoting the economy and helping the budget deficit -- nice to finance your debt with short-term interest rates close to zero.

And that, I think, is -- the people who worry about, sort of, a repeat performance of an excess of liquidity should worry about that point. But I -- that's -- I actually think the monetary-fiscal mix question, which is essentially the combination of the two.

So do you address the budget deficit here in the United States, which is horrendous, right, and start to bring it down, but, "by the way, Federal Reserve, keep your interest rates at zero while we're doing that," in the name of supporting the economy; or do you -- or do you, sort of, normalize monetary policy at the same time?

And it's not an easy question. But I worry, in some sense, that the political forces will be harder against the central banks than actually on the fiscal side.

DALLARA: You know, you talked about the challenge of monetary and fiscal effort -- exits.

And David, I wonder -- you've followed very clearly the Fed's activities over the past few years. If you look back a little longer, the central banks have, on the one hand, built up a good bit of credibility in the markets with regard to containing inflation and inflationary expectations. And yet the actual track record in recent years, of being able to find the exit from easy monetary policy at the right time, is not really that impressive.

How do you see the challenge here? Is this an area where the heads of states can do anything constructively, or is it really going to be up to the central banks to chart their own course, independent of how fiscal policy heals?

WESSEL: Well, as a journalist, I think it would be great fun if Sarkozy and Gordon Brown and Barack Obama decided to handle the monetary policy thing. (Laughter.) But as a citizen --

DALLARA: As a citizen you might --

(Cross talk.)

WESSEL: -- as a citizen, I think it's probably not a great idea.

Look, I think you make a very good point, that one of the lessons that's been drawn -- with the benefit of hindsight, and I emphasize that, is that the central banks probably were too easy for too long, and that helped create the orgy of speculation and borrowing that created the crisis.

And so, on the one hand, that tells us that if they keep interest rates too low for too long, you can end up with unintended consequences of enormous dimensions. On the other hand, despite the popular opinion, I don't think central bankers are all idiots who are doomed to repeat the mistakes that they made a few years ago. And so you can see, in Trichet's rhetoric and Bernanke's rhetoric, a kind of understanding of this.

So I think it's not so much that they lack the intention to tighten monetary policy at the right time, it's just that there are two very difficult part parts here:

One is the technical one. The right time to tighten monetary policy is not too soon, and not too late. But the point that Ted makes is a very good one. The question is whether the central banks will have the political fortitude, if they decide it's time to tighten monetary policy; and if the Fed decides to tighten monetary policy just about the time that the United States Congress has decided to reopen the Federal Reserve Act and think about how independent the Fed should be. That will be a pretty dicey political dynamic.

So I think you've identified the problem. But the good news is that so have they identified the problem. And Bernanke's push towards an inflation target, and the discussion about inflation fighting credibility is now fairly well established as a -- sort of a part of the "10 Commandments" of central banking. Well, we didn't have that in the '70s, and I think that that may help us get through this.

DALLARA: Well, it certainly may on the monetary policy and central banking side.

I wonder though, Ted, whether you see much evidence that the politics in this country, and, in fact, in the other major European countries that are caught up in fiscal stimulus -- high debt and high deficits, whether the politics really auger well for fiscal consolidation, or whether it's simply going to be "wait until the markets force our hand here" -- which we all know could be disruptive, because if there's one thing that can undermine the recovery it's an artificial and premature reversal of medium- and long-term interest rates.

And that is not something the Fed controls. And, in fact, you might say that that's more in the hands of Capitol Hill and the White House than it is the Fed. I wonder how you see that?

TRUMAN: Yeah, I think I would say two points:

One is, I -- although I admit that it's possible that we could have a rise in long-term interest rates -- that comes into play. I think it's not likely to be an issue in the, sort of -- in the two- to five-year time frame. It may be out there five years from now. But the notion of long-term interest rates going up over the next two years, and somehow short-circuiting the -- short-circuiting the recovery, either here or anywhere else, I think is implausible. Maybe they should, but I don't think they will.

And then on the, sort of, basic question of political fortitude, I tend to be a glass-half-full type, even though central bankers are paid to worry about everything all the time. And I think the remarkable thing about this crisis, both in this country and around the world, is how much attention has been paid to the fiscal consequences.

And we're not -- no, I don't want to sound partisan, but there's a quotation that said, "we proved, in 1980s, that deficits don't matter," right -- a popular quotation that we've heard in the recent decade. I don't think that's accepted, actually, by either party, as a whole. And the good news is that the tough work in Congress is going to be -- and the administration, for that matter, is going to be, once they're clearly beyond this crisis, will be to have a -- implement a plan for fiscal consolidation.

But I think actually there is -- while there may be differences of view about how you go about it, raising taxes or cutting expenditures, for example, I think the objective is probably better accepted than, say, it was in 1987, right, in this country; or even maybe in 1983, when we had a big fiscal adjustment. So I'm somewhat encouraged on that point.

The problem is harder, but I actually think we have more -- it's better recognized than it was a couple decades ago.

DALLARA: Let's shift for a few minutes to the banking community, which has, unfortunately, been at the heart of this crisis, in large part because of the deterioration of business practices in many of the large banks of the U.S. and Europe. And I think it's -- no denying that deterioration in risk management, underwriting standards, transparency, inadequate and inappropriate compensation policies, all contributed to the crisis that surrounded us for the better part of the last year.

It's totally understandable, in that world, that regulatory reform would be high on the agenda. But are we at any risk -- and I would ask both, perhaps you first, David, and you, Ted, this question. Are we at risk, however, that we are not only going to try to fix the last crisis -- instead of creating a more stable system, going ahead, but doing so in an uncoordinated and excessive way which actually imposes such burdens on the regulated financial community that you have two adverse consequences. One is to drive business, again, into the shadow financial sector and out of the regulated institutions; and secondly, are we going to make it much more difficult to revive the flow -- to revive the flow of credit, to revive the securitization market, and support renewed economic growth?

WESSEL: One of the things that Ted and I agreed, before this thing, is we were going to see who could make the most outrageous comments about banks to see if we could get -- to put Charles on the spot here. (Laughter.) So I was just sort of wondering whether I've just been -- if it's tee'd up. (Laughter.)

TRUMAN: (Laughs.)

DALLARA: Look, I knew it had to happen at some time.

WESSEL: One of the -- Mervyn King had a great line about this whole thing, in which he said, "Banks are global in life, and national in death." And so it is inevitable that there will be a regulatory response to the amount of damage that the banks' business practices have done, and the amount of taxpayer money that has been spent to try and repair the capital of the banking system.

There is almost certain to be an overreaction. There always is. And whatever they do will undoubtedly create some problems that the creators and the regulated didn't anticipate at the time. So I think you have to take that as a given, and then say, so given that, how are we doing and what's -- where are we going?

And so I think that -- I think that there is -- there was, there is a, just as Ted said that the reason to be optimistic about the deficit is that people acknowledge we have a problem; and that's part of recovery, you have to acknowledge you have a problem. Well, similarly, I think there is a recognition that uncoordinated bank regulation is not going to help us build a stronger economy.

Now, it is true that everybody thinks the way to have coordinated things is that we should go first, and everybody should do what we do. So we're not quite there yet. And I think that a lot will depend on what happens over the next couple of years, that if it's perceived that Wall Street is going back to its old ways, and the world community of regulators is moving at the Basle pace to come up with new rules -- which is to say, we'll come up with new rules that will just be about to go into effect when the next crisis hits, that there will be good reason for national regulators to say, "To hell with this. We're going to do our thing, and at least do our part."

If there is a sense that there's some good will among the national governments -- and I think it's important, very important, and more than symbolism that we're talking about the G-20 here -- the G-7 is no longer the board of directors of the world economy, and you can no longer really do this without thinking about what role do the Chinese banks play in it.

So I think that you identified the right risk and, to some extent what you fear is going to happen, but I do think there's a recognition that uncoordinated bank regulatory capital standards, and other things, were one of the reasons we got into this thing, and that we ought to try and avoid that again.


TRUMAN: I think David is right about what he said about, sort of, how there's an understanding, "but," I think is the way he put it.

And I think you're right, Charles -- just to talk about the noninflammatory aspects of all this, you're going to have a substantial, I think, retreat into some degree of nationalism in regulatory and supervisory structures. And some people would argue that actually that's good, right. So the balance between home and host regulation, right, which is (what) we've been wrestling with since the Herstatt days, the Franklin National days in the mid-70s, I think is going to shift towards the host.

Not an easy thing to do, right, but it does -- it sets up, sort of, national systems, right. Basically, you say, so you can't have branches, you have to have subs, right; the subs have to obey local rules and regulations, right. Those local rules and regulations may be different in different jurisdictions. It becomes much more complicated for the financial institution to operate in multiple jurisdictions.

And so there is some differentiation of the product, because the idea is that when the bank fails, you want to -- you, the authorities, want to be, you know, in charge of the failure, in some sense. I think that's almost inevitable. It's not easy to do because I think, in some sense, that doesn't really solve the problem, right. But I think the intention to do that will be there.

And the other side is the whole question, which gets into this, is the whole question of -- back in the first part, the whole question of the role of international capital flows. The emerging-market countries believe, with some considerable -- this time with some considerable merit, that they've been sideswiped by the international, collapse of the international financial system; that it was perpetrated by either the United States alone, or by the United States and its G-7 colleagues.

And the consequence of that, they said where they're going to go -- go along, right. They're going to try to restrict capital inflows more, and create their own barriers, and build their own war chests -- self-insurance, as it's called, which gets back into the question of whether the global expansion is going to be right.

So I think those -- and there's an interplay between, sort of, the question of, sort of, how the financial, global financial system operates, and the macroeconomic issues that we were talking about at the beginning.

DALLARA: You know, I think you put your finger on something, Ted, which should concern us all really, because I think while the rhetoric has been very focused on global coordination -- and, indeed, in the regulatory arena there has been some of that, certainly we see a major effort to coordinate new capital requirements -- but on the other hand, the reality has been that a lot of regulators have had to kind of try to out-politic the politicians.

They've been forced, in key countries -- in particular, in the U.K. and Switzerland, but it's happened everywhere, to announce measures ahead of any serious international coordination, and very much with a focus on "I'm going to protect my own backyard. I can't really afford to worry about the neighborhood anymore, and I can't really afford to worry about the world at large."

So you have a degree of fragmentation occurring right at this very time, when, in fact, I think we should be trying to focus on reinvigorating global coordination, because it may be that without it we're going to lose some of the benefits of global markets and global financial flows.

I wonder, David, if you look at the role of emerging markets in all of this, how do you see them handling this issue of coordination on the regulatory front? And, as Ted pointed out, they are leery. Suddenly the model toward which they were aspiring has collapsed around them.

And, Ted's right, they feel very sideswiped. As Guillermo Ortiz said a couple of years ago, "You know, we didn't do it this time" -- the Mexican central banker said with some degree of pride and some degree of irony. And, indeed, I was just in Canada earlier this week and one of the Canadian bankers used the same term there, "We've also been sideswiped."

Are the emerging-markets finance and central bank officials going to retreat into their own world and erect their own barriers? And will this really deprive the entire global community of some of the benefits of globalization?

WESSEL: That's the first time I ever heard Canada described as an emerging market. (Laughter.)

DALLARA: No, I was just saying they're in the same company. They always feel "under the shadow."

WESSEL: I think -- yes. The answer is yes.

I think the point that -- I want to reinforce the point that Ted made, is if we end up with every bank being regulated in the country in which it operates, and we, sort of, make it very difficult to have big global financial institutions because it's unsafe, then an inevitable consequence of that is it'll be harder to have global capital flows, and maybe even harder to have global -- the expansion of global trade.

And I think your point goes to the same thing. We have lost -- we in the United States, and our, and likeminded governments, have lost an enormous amount of moral authority with the rest of the world. We thought that we could maybe not make things as well as the Japanese, and not as cheaply as the Chinese. But the one thing that America knew how to do was run a financial system, and now we've lost that.

So I think they're right to be suspicious. I think there will be lots of efforts for them to go their own way. And I think it'll be very interesting to see whether they have any -- the intellectual firepower to come up with some alternative to the stuff that's being pushed by the British, the Swiss, the Germans, the French and the U.S.

But the risk is -- you're absolutely right, they will be hurting themselves; and that we'll end up with less of the global capital flows and less of the global trade that has been so responsible for lifting so many people in those countries out of poverty.

DALLARA: Maybe before we open it up to questions from the floor, we can spend just a couple of minutes on the longer-term issue of correcting macropolicy.

Ted, you wrote an op-ed recently which stressed that this is something that the G-20 summit had to attend to. And as you know, I share that view very strongly, because I think that as much blame as we want to put on the banks -- and much of that obviously is well-deserved, as much criticism as we may want to direct at gaps in regulation, and other malpractices in Washington and in other capitals -- Fannie Mae, Freddie Mac, for example, I think we all realize that the global macro imbalances, which have developed over the years, contributed significantly to the crisis here. It certainly helped fertilize the seeds which were planted elsewhere.

It worries me -- and perhaps, I guess, implicitly it seems like you share this concern, Ted, that the focus on near-term stabilization of the economy, regulatory reform, has either suffocated or allowed the authorities not to focus at all on strengthening the framework for a medium-term policy coordination, to see if we cannot migrate toward growth models around the world that are somewhat more balanced and less prone to feed large global imbalances. Do you think this is something that the G-20 could make some headway on?

TRUMAN: Well, I think, yes. And I was trying to suggest that at the beginning.

I'm in the minority that actually thinks that global imbalances were, at best, a minor factor, which isn't the same thing, however, as saying that they're not relevant, going forward; or, to put it the other way around, that the nature of the expansion, going forward, right -- I call it the global growth paradigm, and I think they're calling the "framework for global growth," or something like that, in terms of the communique language, I think that's very important, right.

So if the United States has learned -- or either through policy or just through the behavior of the American consumer, that they're going to save more, right, and consume less, then the rest of the world can't depend upon the American consumer as much as it did before, right; or you have a contraction, because then you have -- we are adding to global savings, and if someone isn't spending, then the whole economy slows down.

And so global imbalances are an output of that, right. But I think it's better to think about it in terms of the global growth strategy. And I think, and obviously there have been -- not obviously, but my reading between the lines of the stuff that David and his colleagues reports is that this is being actively discussed.

Now, will there be an agreement about who should do what, with the numbers attached to this? No. Will there be greater understanding on the part of the leaders and their teams, right, as a result of the Pittsburgh process? I think, actually, yes, regardless of what's happened, right, because they know where different -- where different people are.

I'll do a historical analogy. In 1976, an early summit -- I think it was the Puerto Rican summit, it was largely unnoticed because, a) it was in Puerto Rico, and that was an election year here, and essentially it -- well, I know you were involved, Charles. But the communique in that summit said -- it coined the phrase of "noninflationary growth" -- you know, "sustainable noninflationary growth." It actually took us about a decade to get that broadly accepted as a paradigm for the global economy, right.

But it started at a summit, right. And the process by which policies were trained on that objective were put in place in the United States -- because we screwed up in the meantime, and so we didn't follow up, because -- we didn't follow our own policies -- the change in administrations may have had something to do with it. But I think that's an example. So you can have consensus, right -- a broad consensus, or an emerging consensus, and that can be built on over time.

And the second part of it, I think, is a very -- is to try to have some way of structuring that. And the talk about whether you do it within the G-20 itself, or you assign it to IMF, or some combination of that, I think is constructive, because you need a "cop" -- I would prefer the IMF, by the way, than actually to the G-20-related one, for institutional reasons. But you need some sort of umpire of that process.

So if you sign onto a consensus, right, about the global growth strategy -- not about imbalances, but they fall out; and then you tell the Fund to tell -- they'll tell the Fund to police that, right, and blow the whistle when people are, sort of, violating their -- they (sic) understanding, then I think there would be great progress. I'm, again, being optimistic, but --

DALLARA: Well, you know, it sounds to me, listening to you, Ted, that you believe that there's a lot of the agenda that remains unfinished, particularly in this arena, if I may say, as well as in other aspects.

And I wonder, David, does this mean that there is an important and ongoing role for the G-20? I've heard that some G-20 participants would just as soon see it kind of fade into the background a little bit and become more of a technical group, others view the head-of-state involvement as something, actually, that needs to be sustained going forward. What are your thoughts?

WESSEL: Well, I think the G-20, as an institution, is a recognition of how much the economic power in the world has shifted away from the victors of World War II. So I don't think that is going to change.

You guys have so much more experience than me about whether these summits are actually worth the cost. I mean, are they action-forcing events that get people to do things that they should do, but wouldn't unless there was a deadline? Or do they get consumed with whatever it is that's politically palatable at the time?

And so one outcome of this summit is that none of things that we've discussed in the last half hour really get much attention or much progress, and the whole thing turns into a discussion about how can we change bankers' pay so they don't drive car off the road again.

Now, I think it's a pretty good idea that they spend some time thinking about how to pay bankers and traders so they don't drive car off the road again, but I would agree that if that's all that they talk about -- which they might, because it's about the only thing that we've talked about today that the ordinary voter in these countries can possibly understand.

I mean, really, capital requirements, global imbalances in coordination, resolution authority, exit strategies -- you know, in this group those words all carry a lot of content, and we understand how important they are. But at a time like this, the elected heads of these countries need to show that they're doing something, and doing something on pay is one thing that almost everybody who reads a newspaper in any of these countries can understand.

DALLARA: Well, if I -- if one of my goals was to stimulate an interesting discussion, I think we've made a lot of head-way, but if one of his -- if one of the goals was to provoke Ted or David (and his ?) controversial statements, I'm now going to throw that -- (laughter) -- challenge out to you and see if you can help me here.

I would just remind you. Raise your hand; identify yourself; wait for the microphone to migrate to you; and remember, it's all on the record.

John Petty (sp) had his hand up first. I think it was a two-hander here, actually.

So, John?

QUESTIONER: John Petty (sp) at -- (inaudible).

I was struck by the first portion of our discussion, that the value of the dollar was brought into the dialogue. Is the value of the dollar not a variable in the -- (off mike) -- stabilization -- recovery?

TRUMAN: I'm a former Federal Reserve and Treasury official, and I say a strong dollar is in the national interest -- (laughter) -- or my pension will be docked.

It's relevant. I think it's relevant in the discussion, in very complicating ways. I mean, I -- whether the dollar -- (audio break) -- Exchange rate policies in the past were a problem -- China, but not only China, right. They were a contributing factor to the global imbalances, whatever you think about the global imbalances role in the -- (inaudible) -- crisis.

And to the extent that -- and to the extent that we're going for a new global growth paradigm, and it involves having less in the way of global imbalances, the exchange rates could adjust in that process. And certainly parts of the world -- especially parts of the world where the country is holding $2 trillion of international reserves, 70 percent of which is in dollars, are very nervous about that. Whether it's appropriate for them to be nervous about that or not is a different question.

So we -- meaning the United States, both the fiscal authorities and the monetary authorities, cannot be immune to the implications, for the dollar and the exchange rate, of our policies going forward, whether it's monetary or fiscal policies, and so forth, and the consequences for the rest -- for the rest of the world.

But that's a -- I actually don't think, however, in terms of Pittsburgh, we're going to have a -- yet have gotten to the point that you have an exchange rate paragraph in the leaders' communique, at least I hope not. But just those paragraphs -- I see Tim Adams (sp) smiling over your shoulder, tend to have not much content anyhow, so why -- those particular -- once you're therre, the communique probably eliminate all the paragraphs that have no content, right, and that they would give you a shorter communique and it might be easier for us all to read.

DALLARA: Barbara.

QUESTIONER: Thank you very much for -- (audio break). And I tend to agree --

DALLARA: Identify yourself, please --

(Cross talk.)

QUESTIONER: -- that there is a -- Oh, Barbara Matthews, with BCM International Regulatory Analytics.

I tend to agree that there is a "dash for cash" and a nationalization process underway -- not nationalization in terms of government ownership, but nationalization in terms of national efforts to bring a lot of the authority home. It seems the G-20 does see this and is trying to bolster the role of the IMF, the Financial Stability Board, and is trying to counterbalance that effort.

You haven't talked a lot about the IMF. I'm particularly struck by the agreement that they brokered with the parent banks of the Hungarian banks to try to ensure that there was a commitment for support. I'm wondering if you could provide a sense of how you think the tension between national efforts to -- (inaudible) -- have living wills, have cash on hand, is going to counterbalance against the clear desire of the G-20 to create some kind of lasting international coordinated process?

TRUMAN: I think you put the problem very aptly, Barbara, in the sense that you have, on the one hand, a desire -- and I come back to what -- one of the things David said -- I actually think that the regulators themselves, right, have a, more of a shared consensus today than they probably had three years ago.

The problem they have is that the issues that they're dealing with are now much more political. So you have this tension. And that's exactly what you just described, is this tension between the desire to have mechanisms that coordinate -- and to help to create a level playing field, and some balance, right, and the political desire to go your own way. And how that plays out will be a very complicated issue.

One issue, I mean we've got Charles -- I'll ask Charles to talk about this. An example, I think, is accounting, right, international accounting, and where the world was on that path, over the last 20 years, to come to a common accounting standard. My understanding, from the experts in this area -- and I'm not one, is that that path is -- first of all, we have now diverged from that. We, the United States, have diverged from that path, for good reasons or bad reasons. And the international effort, on the other hand, has collapsed under the weight of -- for want of a better word, and I'm sorry if some former politician, a current or former politician is in the room -- (inaudible) -- under the weight of political pressure, right, to politicize the accounting process.

Not that it's -- you know, I always believe that the world is round, so you can't ignore political pressures, but the overt process of politicizing accounting -- (inaudible) -- has apparently broken up the efforts to create a common international accounting standard, and we have -- meanwhile, for our own political reasons gone off the other side.

So that's an example, it seems to me, of how this process, where you had some convergence, is breaking apart, largely under -- maybe understandable political pressures, but political pressures are pulling it in various different directions.

DALLARA: I might add briefly just two points here -- and I will not wander far into the morass of the bog of accounting issues, but I would say two things:

First, I think you're example of the IMF encouraging banks to support Hungary is an interesting one, because the challenge -- and I think it's symptomatic of the problems we face with coordination, is that it wasn't just a question of Western banks failing to support Hungary, it was a question of the measures taken by the authorities in their home countries -- in the French, Italian, Belgian, British, American, et cetera, environments where new capital and regulatory policies were clearly transmitted with a signal of "keep the capital at home."

And so I think there's been a real struggle. And I think the IMF is a bit handicapped here, because they not only need to be engaging in discussions with banks supporting the Hungarian economy, which is totally legitimate, but also with authorities in Paris, and Brussels, and elsewhere.

Secondly, I would say that Ted is, unfortunately, right. And if there's any area that seems to me to be --

TRUMAN: Unfortunately -- you want me to be wrong -- (inaudible, laughter.)

DALLARA: -- with regard to the accounting issues.

If there's any area that I think is sadly going seriously off track right now -- in terms of convergence, in terms of sensible outcomes, it is accounting. You have the FASB -- the U.S. accounting framework and authority, you have International Accounting Standards Board; and in the U.K., which obviously really shapes accounting practices and standards for much of the world today, and they're going in different directions on the applicability of fair-value accounting to the banking book.

Now, I'll stop on the technicals, but I can tell you, this is potential dynamite for the operation of a sensible financial system. And the regulators need to try to get a handle on this, without political pressure coming from legislators, but, I would say, but with the political support of the G-20. And I think that, ultimately, regulators will have to be part of the governance process of accounting standards for financial institutions. Financial institutions are different animals than non-financial industrials, and they need a set of accounting standards that reflect that.

And this is a tough set of issues. It's probably not going to make it too far onto the radar screen in Pittsburgh -- probably just as well, but I think it's a real, it's a real problem.

WESSEL: Can I say a word in defense of political pressure -- not for accounting standards. I really -- I could just imagine what the accounting book would look like if the Senate Finance Committee wrote it. (Laughter.)

But there are an awful lot of people in the world who feel that the institutions broadly defined in our society -- the bank risk management committees, the financial press, the credit rating agencies, the regulators, really let them down here. And to tell them that the answer is to let all those people get back together and figure out how to rebuild the system, does not seem to me a case that I would want to have to make.

So the political involvement is going to be here precisely because all the people who said they knew what they were doing look like they didn't. And so I don't think it's a question of saying, let's keep the political politicians out of it. It's a question of saying, how do we harness that to get something good done, so it doesn't take us 10 years to come up with a repair of something that we know is broken.

DALLARA: Unfortunately, David's correct about that. (Laughter.)

Let me go to this gentleman here, then I'll move back.

QUESTIONER: Rudin Rollette (sp), Johns Hopkins University-SAIS

You mentioned the emerging-market countries -- (audio break) -- London they were quite feisty -- (audio break) -- haven't heard very much -- (audio break) --

TRUMAN: That's a good question. And I think actually they've been pretty feisty. One topic we didn't discuss before was this question about IMF governance, right, and they have been feisty on that point.

There are news reports that they're making considerable progress, with the support of United States -- I have no idea whether that's correct, by the way, in shifting some of the voting power, a substantial further shift in voting power away from the traditional industrial countries to the emerging-markets countries. The BRICs have asked for a 7 percent shift in that voting power.

And it is conceivable, and it is conceivable that there will be -- I don't think a number will come out in the communique, it is conceivable that there will be progress on that. Just to give it a little bit of the background, the thought is that they have a -- should have a bigger voice in the International Monetary Fund. And in London it was agreed -- actually at Haversham the finance minister agreed that they would accelerate a new review of this process at the January, 2011.

And so if you're going to get an agreement by 2011, starting it in September of -- yeah, September 2009 makes sense, because it takes awhile to negotiate all this. So the notion that they will at least have a path, or at least have two paths, right, which have to come together -- and largely it is between the United States, to some degree, and the BRICs, and the Europeans on the other side, this is an "intra" advanced country issue, it may well play itself out. I'm not sure there will be full agreement, but I think there will be a narrowing of -- sort of, understanding of where they're going to go, go going forward.

The other dimension of this -- which is where they've been quite feisty comes back to the earlier discussion, has to do with the issue of capital standards. So those people who went through the Asian financial crisis period, the view then was -- where banks and emerging-market countries collapsed, and the PRIGA (ph) you're an expert in this, in Latin American crisis, financial crisis collapse -- so the view was, of us, right, "We have our capital standards, right. You should have your capital standards, and your capital standards should be higher."

Now, here we are, with the secretary of the Treasury, opposing higher capital -- higher capital standards, and they're saying, "That's fine. You guys caused the problem, right. You need higher capital standards, but why should we have higher capital standards? We didn't have any problems." So that's an example of how the shoe is on the other foot.

And I think, and the -- I was at one meeting recently in New Delhi where the representative -- someone from one of these countries, not a representative, though, someone from one of these countries -- said exactly that. Basically said, "Why should we have -- impose higher capital standards on Indian banks, or Chinese banks, or Korean banks, right, at this point in -- or Brazilian banks at this point in time? They went the cause of the problem. The cause of the problems were right here in the United States or in Western Europe.

DALLARA: You know, I think that the issue of emerging markets -- if I could add a small point, raises another interesting, very interesting challenge, in a way, for emerging markets, because the G-20, as David said, is validation of the clear sense that the G-7 is history, in many respects, as a steering committee for the global economy; and the G-20 is a crucial, a crucial fora, going forward -- crucial forum going forward.

However, with a voice in the debate, with a seat at the table, comes greater responsibility, and what has yet to be seen very clearly is whether there's full recognition of that in emerging markets. They can squabble all they want, and legitimately so, over a larger voting share at the IMF and the other multilaterals' positions on the board.

I recall 20 years ago -- or perhaps it was a little longer, when the Japanese successfully achieved greater voting share at the IMF, and seats at the table, and the deputy managing director positions. And then they were faced with two quandaries: Well, I've got this bigger voice, how do I use it? And does this really mean that I have to now kind of frame my policies with more of a sense of the global good than just the national good?

And this was the challenge for the Japanese for many years -- and not alone. And I think this is something that the Chinese, Indian, Brazilian, and other authorities really have to focus on, particularly in these -- some of these tricky areas of macropolicies and exchange rates.

Barry (sp), at the rear of the room, and then I'll come back up front.

QUESTIONER: Barry Wood, economics correspondent.

I'd like to ask if this process is viable. Can it work when you've got 20-plus countries, very disparate? Absent the crisis, can they agree on anything? Is this a viable process, going forward?

WESSEL: Well, what's the alternative? You know, we are in a world of national governments, global financial institutions, enormous global flows of capital, and, at least in the next 15 minutes, we will not be arguing that everybody decouple. So it's essential to have some attempt at coordination.

And my impression of these things is that they serve two purposes: One is the -- the one that Ted said, which is they kind of force all the bureaucrats together, and if we're going to agree on something, we got to do it by Friday, because that's when the leaders are meeting.

And the second is, they give the sense to people that there actually is some attempt at coordination, and sometimes that perception is important. But does that mean that you can solve all the problems if everybody comes to this meeting and decides that the other 19 countries have to tighten their belts, but I don't; or everybody else has to have higher capital standards, but not my bank? Obviously not.

So it's like any international negotiation. Sometimes they produce great things -- look what happened when -- we've had great moments in the past; and they sometimes may produce disasters, like Versailles. And there's no guarantee. But is there some alternative? Do we want Barack Obama not to talk to Hu Jintao about flows of capital?

DALLARA: Yeah, I will join David and Ted, I think. This really does have to be viewed as a "glass half-full." I think that -- will they accomplish everything that we would like? Absolutely not.

But the legitimacy of other groups has really been called into question. And I think no matter how difficult the G-20 process is -- no matter how cumbersome it is, no matter how complicated and diverse the views are there, I think that we have little alternative but to try to work within the framework to try to move the global economic system forward.

Yes, ma'am? She's been raising her hand here.

QUESTIONER: Paula Stern.

And I'm glad that the discussion shifted from the initial exit strategy discussion to a global growth strategy, because I think for the politics, if nothing else, at least the U.S. voter is going to care not only about what the bankers make, but about their jobs.

So I want to talk about the global growth strategy, and ask you whether if you see the unemployment rate -- as we do in this country and elsewhere, as Charles opened up the discussion; and underutilized capacity in this country being so enormous, and that the only source of inflation seems to be gasoline prices right now; what role the world's largest cartel, OPEC, plays -- and, in particular, its representative at the G-20, Saudi Arabia?

How much can we start to talk about, in this era of global climate change, the relative relationship between energy costs, gasoline prices and global growth?

TRUMAN: You didn't end -- you didn't end where I thought you were going.

Let me say one thing -- to pick up on what David said earlier on the employment question. I think he's absolutely right about that. And there will be some nice-sounding words about that problem coming out of Pittsburgh, I'm sure. And, no doubt, they will call for the labor ministers to get together to talk about the common problem and how you address it -- which is the standard formula, though, that Charles invented when he worked at the Treasury Department. (Laughter.)

And it's a serious problem, and it's relates to this question about, sort of, the recession may be over, but unemployment is going to stay high, and it will inevitably -- especially when it gets to 10 percent, it'll be a long time before we're get -- (inaudible) -- no matter how, what kind of recovery you have.

I mean, even in the, even in the 1980s, which is the last time around we went to 10 percent, we got -- the unemployment rate went down 2 percentage points. But 2 percentage points is 10 to 8. It's not -- so that's the first part of the question, where I thought you were going.

The second part of the question, I think, is very interesting. Energy and -- obviously energy, and inflation and climate change are very much part of the, sort of, background factors. And there's a lot of -- and they're bound up together. They are part of these discussions, my impression is. Energy security is one way it's calculated, as talked about. And another is the broader question of supply and demand.

I think the G-20 probably is not the place to discuss those issues -- the broader supply and demand issues. Not that they shouldn't be discussed. But you can't -- I mean, Saudi Arabia, in terms of the oil producing -- we do have Russia too, by the way, as well as Mexico. There are a few other oil producers, but -- and Brazil, by the way. So, in some sense, you --

QUESTIONER: -- (inaudible) -- the cartels.

TRUMAN: -- but the cartel -- as far as the cartel is concerned, you only have one participant -- do you need to sell part of OPEC, I don't think so. But it hasn't produced anything for the world as a whole -- net exports, I think, these days. But I think that's an important question, going forward.

And it relates, again, to the global -- both the global imbalances question that we were talking about before, and so forth. And I'm not particularly -- I'm not an expert in this area, maybe David has a view, if nationalism in the financial sector is rising, I would say nationalism in the energy sector is rising -- it's rising even more rapidly, and has been for a number of years. And that complicates the problem. And in some sense it's a manifestation of the fragmentation kind of question that -- language that Charles was using earlier.

DALLARA: Our staff coordinator signaled me that I -- we only have time for one more question. But I'm going to see if I can try to squeeze in something a little different. I wonder if it's possible for me to ask a question of a member of the audience.

Carla (sp), do you have a concern that, during all of this, that so little progress has been made on the Doha Round; and that, in fact, if anything, we are in a more fragmented world today than we were a year ago? Sorry to pull you up onto the podium, but.

MS. : I might not use the word "fragmented," but I am concerned. I think the G-20 is a great institution that brings 85 percent of the world's economies together to deal with the issues that we have to deal with.

And it's very good to set principles. In November, and again in April, we set the principle that we would not raise trade barriers. But we have. And a WTO report has just come out to say every third day one of the G-20 raises a trade barrier.

And we have led the way on this. And that is fragmenting to global cohesion and growth, and I think a grave mistake. I simply can't justify what we have done, in so many ways, to lead the parade on protectionism.

Now, as they go into the third G-20 the question is, what are going to be the principles? And perhaps the time has come, not only to issue principles, but to agree on mechanisms of enforcing those principles. And we've been very weak along those lines.

But if the largest economies cannot see the danger of the circumstance in which we find ourselves -- yes, we are recovering economically, but we have to, we have a good deal of repair to go on. And I think your discussion here today underlies that fact.

But I am concerned, because I do see the opening of markets to trade and investment -- capital flows, as being one of the mechanisms of repair. And we're moving in the wrong direction, along those lines. Sorry to say.

DALLARA: Thank you. Thank you very much.

TRUMAN: Can we comment on her comment?

DALLARA: Yes, you may.


DALLARA: Briefly, briefly.

TRUMAN: I agree with Carla (sp) in the -- in your, in your dismay. I think, actually -- again, to go a little bit to the glass half-full point, we've had a lot of these measures, but the interesting thing, if you go back to April -- November and April, is actually that -- how much attention this has gotten, right.

The good news is -- so leading up to the April -- I'm not, I'm probably telling stories out of turn, leading up to the April meeting, the view was that there was no way to police that, right, and that -- But the fact that they had cooperation among the WTO, and the World Bank, and the OECD in putting together that report; and the fact that you had a think-tank -- I can't remember if it was the "Action Trade (sp)," or something like that called, right, that has created a website to shine the light on each one, including us, of the G-20 countries.

I think actually is -- is actually very -- I mean, it's a weak reed, but I think the process actually has worked out better than I feared, right, compared with the world in which you could have actions, sort of, always below the radar screen, along the same -- along the same area.

So I'm slightly encouraged that at least the embarrassment factor has gone up, has been raised by this process. And one would hope that the embarrassment factor turns -- will turn into some action -- this -- that's a negative fact -- some positive action in either Doha and other trade issues, going forward. So it --

WESSEL: That's a long way of saying that the headline on the G-7 communique -- G-20 communique should be, "It could have been worse." (Laughter.)

DALLARA: Well, on that --

TRUMAN: Touche.

DALLARA: -- on that note -- (laughter) -- our problems are certainly not all solved, but our time is up.

I'm told that I should remind all of you once again that this is on the record. But I'm afraid if you haven't realized it by now, it's a bit a late. (Laughter.)

David, thank you very much for joining us today.

TRUMAN: But I'll deny it.

DALLARA: Ted, thank you. And thank you all for joining us. (Applause.)







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