>>Chrystia Freeland: I'm going to have a little
bit of a conversation with Jim and Nouriel.
And then I hope we will have a few minutes
for you to ask questions. So please get ready.
I just want to start, Jim, by asking you -- both
you and Nouriel have talked about this really
painful not paradox but sort of dichotomy
that we're seeing right now with rising Asia
but really decline in the west, including
in America.
Does that mean there's going to be a trade
war? Are we going to see U.S. politicians
responding with some sort of pressure on China?
>>James Wolfensohn: That is one way to do
it, but I think the general view is if you
get into trade wars, it really hurts you in
the end and it doesn't achieve an objective
to give you an advantage.
I don't think that there is anything that
we can do other than to look at the fundamentals.
We have to get our education system better.
We have to really deal with the next decade
to make sure that our kids are in a position
where they can be competitive with their Asian
counterparts.
Second thing we have to do is we have to deal
 -- and this is very difficult given the entitlement
programs. We have to deal with our budget
deficit issue. The strength of our country
is being eroded as we build up our budget
deficit.
And from my money, I think you can have short-term
palliatives by having trade barriers, but
it doesn't solve the basic problem, which
is that we need to take a very careful look
at ourselves, stop thinking of ourselves as
the dominant force in the world and recognize
that we have a lot of work to do if we are
going to be competitive.
And if we are going to have the leading position
on the planet that we want.
>>Chrystia Freeland: And you have talked about
deficits. How do you get that balance right?
What you are talking about costs money. So
where -- you have spent a lot of time in Washington.
What should Larry Summers be doing?
>>James Wolfensohn: I don't think how long
Larry will be doing it.
>>Chrystia Freeland: We can have a pool on
that.
>>James Wolfensohn: Maybe Nouriel can go back
and do it for a democratic administration.
But I think we have a real difficulty at the
moment because our political system has become
so antagonistic, Republicans to Democrats,
that almost the national -- the national focus
and the national program becomes secondary
to the debate between the two parties.
But what is needed is for the two parties
to come together and say, as a nation, "We're
falling behind." Statistics that I gave -- and
I think some that Nouriel gave -- lead you
to believe that our country is not as competitive
as it was, either in manufacturing or in services
or in innovation. And that is a fact.
And you can't solve that by artificial trade
barriers. What we have to do is to address
the fundamentals and have the confidence in
ourselves and have people like the audience
here take the lead in terms of innovation
and in terms of getting our country going.
But the first thing to do is to recognize
that we have a real problem and that we have
to look at ourselves in real terms by comparison
with other countries, notably in Asia.
>>Chrystia Freeland: Now, Nouriel pointed
out the Japanese situation as sort of a real
nightmare scenario for America. But if we
think back not too long ago, people were holding
up Japan as the great challenge to American
power. So maybe, Jim, both you and Nouriel
are incredibly short sighted and the big Chindia
threat which we see right now will prove as
illusory as the great economic threat that
Japan seemed to pose.
>>James Wolfensohn: The fundamentals are very
different. The Japanese population is declining.
The population in China and India is increasing.
The base is lower and what we are looking
for is a huge lift in economic activity and
in terms of the creation of the middle class,
first in China and then in India.
We currently globally have two-thirds of the
middle class in the G20. There are about a
billion people and half a billion in Asia.
By 2025, it will be 3 billion in Asia and
1 1/2 million with us. It will just be reversed.
We will see the dynamics of moving towards
Asia.
I have said before, I'm not sure I will be
statistically accurate, that it will be exactly
2025 and it will be exactly the numbers I'm
giving. But, directionally, I am sure that
that is correct.
And most of us in my age group do not perceive
the world as having changed to the degree
that it really has. And I'm very worried that
if the next generation doesn't do it, we will
be behind yet another generation. I don't
know what Nouriel thinks. He may have a more
positive view.
[ Laughter ]
>>Chrystia Freeland: He's likely to be -- Now,
Nouriel, before you say whether you have a
more positive view or not. Jim just a minute
ago -- I don't know if you caught it. He has
nominated you for a big job in Washington
if the Democrats stay in charge.
So if you were right now in the White House
or in the treasury -- you have worked in Washington
before -- what would you be doing? And specifically
right now, would your bias be towards more
stimulus or focusing on the deficit?
>>Nouriel Roubini: Well, before I get to that
question on the first point --
>>Chrystia Freeland: But that's the hard one.
>>Nouriel Roubini: I'll get to that one. I
would say on the changing on the relative
powers in the world, I think that we sometimes
overemphasize what's going to happen with
China. In the '60s, Germany was the rising
power and people said Germany is going to
take over manufacturing the world.
Then in the '70s and '80s, it was Japan. Now
people speak about China and India and so
on. The reality is as the capital income rises,
then wages rise and some comparative event
that China has today in some things are going
to be lost. Those productions will be transferred
to other countries, for example, in southeast
Asia. So the globe is going to rebalance with
economic power shifting towards China and
Asia. And so on and no one is going to, quote,
take over the world.
But it is true that some countries in the
region will become centers of global economic
power. And, as I said, 19th century was the
U.K. 20th century was the U.S. And this century
could be the Asian or the Chinese current
center. We will have to see. There are many
challenges in China about rebalancing growth,
moving from exports to domestic consumption,
from regional and coastal kind of growth to
more internal growth, dealing with environmental
damage that has been done, political transition.
There's going to be (inaudible) and an authoritarian
state.
In many ways in all, China is a different
challenge from Japan because we are speaking
about 1.3 million people, not about a hundred
million. Secondly, Japan was under the kind
of defense and geopolitical umbrella of the
United States while China is going to become
also rising geopolitical power with probably
interests different from the United States.
Those are the things we have to think about.
You know, I don't know what I would do if
I was in Washington. The reality is that in
many dimensions, we are running out of policy
bullets. Policy rates are zero. We already
doubled base money. Banks are sitting on trillion-dollar
reserves and not lending it because either
credit demand or credit supply. If we do more
QE, they are not going to lend the second
trillion.
>>Chrystia Freeland: QE, quantitative easing?
>>Nouriel Roubini: Quantitative easing. They
are not lending the first trillion. Why would
they lend the second trillion? So monetary
policy becoming input then because it can
relieve liquidity problem, not with credit
and solvency problem, the source of the problem
in the private sector.
The fiscal policy is also constrained. There
is this debate today with G20 between fiscal
austerity now or stimulating growth with more
fiscal stimulus now.
U.S. is in the growth-now camp while everybody
else is in the fiscal austerity. But even
in the United States, the limit to how much
we can do more stimulus, you know, the budget
deficit, 3 1/2 this year, is expected to be
at a trillion for the next ten years every
year.
Even the U.S. cannot go from a budget deficit
of 10% GDP to 12 to 13 to 15. At some point,
the bond vigilantes would wake up even the
United States.
>>Chrystia Freeland: Okay. But bottom line,
what would you do right now? It is a terrible,
hard situation. What should they do?
>>Nouriel Roubini: I would say that -- I would
do a plan of medium-term fiscal consolidation
and monetary stimulation in the short term.
>>Chrystia Freeland: So another stimulus?
>>Nouriel Roubini: Well, I would say as long
as you can commit to reducing the budget deficit
over the medium term by raising taxes and
controlling entitlement spending, then you
can afford in the short run to do more of
a stimulus, whether it is infrastructure,
instead of subsidizing.
By the way, capital with an investment tax
credit, I would actually have a temporary
cut in the payroll tax so you can boost the
demand for labor which would make labor costs
lower for the firms.
The problem in the United States is not enough
investment that firms are doing enough investment.
They are not hiring workers because the cost
of labor is too large. So I would do a two-year
payroll tax cut that's funded by increasing
the tax that are expiring on the rich. That's
something that would be budget neutral and
is going to have an effect on labor demand.
The big problem is jobs, we are not creating
jobs. Creating jobs is going to be key. The
longer these people remain unemployed, the
more they lose their skills. They're human
capital, and the worse it's going to be. They
will be long-term unemployed. That's the problem
we are facing today.
>>Chrystia Freeland: Okay. I'm going to ask
Jim and Nouriel one more question, and then
I hope you all will have a few questions to
ask them. There are mics on the floor.
I'm looking, Jim, for a few points of light
in the rather grim picture the two of you
have painted.
Nouriel said one, I thought, quite optimistic
thing about this idea that Africa could be
the coming, emerging market, that this might
now finally be the moment when we see Africa
taking off. Do you buy that?
>>James Wolfensohn: Ideally, I wish I could
buy that. About 16 countries in Africa will
show 5% growth or better this year, which
relative to recent history is enormous. There
are 53 countries in sub-Saharan Africa. And
if you look at the projections in terms of
the future of Africa, by 2050 -- 2025, maybe
it will grow from 1 1/2 to 2% of global GDP.
But by 2050, it is still around 2% of global
GDP.
I think Africa, which will then have a doubled
population of 1.7 billion, is really a fantastic
challenge, not just for the Africans but for
us.
Africa used to be a place where, if you visited
it, it was very contained in villages and
people went out hunting and the communications
were zero. That is not the case today.
It is a place where cellular radios and where
telephones and things are manifest and where
it is part of the world.
>>Chrystia Freeland: Doesn't that mean it
this emerging market phenomenon there?
>>James Wolfensohn: Well, it is except that
if you have an average per capita income which
is 1/10th of capita income of China and India
and that itself is less than half of the per
capita income in the developed world, you
have 2 billion people that are not in great
shape. And it worries me very much that our
country and, indeed, the west pays all too
little attention to Africa.
And I might add it worries me that the Africans
themselves still persist in having 53 countries
to run with 53 finance ministers and 53 central
banks when the continent really needs to be
run in terms of quartiles of the continent.
And some of the leaders would like to do that,
but politically it is still not possible.
But Africa is a hell of a big challenge. It
is very rich in natural resources. It has
enormous potential and it has a growing population.
But at the moment, the economy is not keeping
up with the population growth.
>>Chrystia Freeland: Okay. So easy answer
for Africa, united into either an United States
of Africa or maybe four. Countries?
>>James Wolfensohn: That's not an easy answer,
but it is one that the African leaders that
I talked to would love to see happen and would
much prefer to see how they can share. But
you have -- you have all the problems of colonialism
where tribalism was disregarded. And so you
have countries with the wrong tribal mix and
you have, unfortunately, a very poor system
of governance in at least half the countries.
>>Chrystia Freeland: Okay. Question? Please.
>>> Yes, Dr. Roubini, you touched on quantitative
easing. The money supply generally is not
one of the levers in the economy that's talked
about very much in terms of what we manipulate.
And it seems that we may be -- "we" the government
 -- seems to be reducing the money multiplier
through the new regulations on banks that
restrict lending.
Could you talk about whether more quantitative
easing might be worthwhile and whether we
need to reform some of the bank reforms? And
this is actually for both Jim and you.
>>Chrystia Freeland: Okay. Got to love it
when the first question is about quantitative
easing.
Go for it, Nouriel.
>>Nouriel Roubini: Well, I mean, you point
out some things very important. We've pushed
down interest to zero. We have more than doubled
base money, currency in circulation, and the
reserves of the banking system. So that's
what's called base money zero.
But all the other monetary aggregate, M1,
M2, M3, are contracting and credit is still
contracting. So as you point out, there is
more money in circulation but velocity in
financial market has collapsed because banks
are hoarding all the excess base monies, excess
reserves. They are not lending it out.
Whether they are not lending it out because
there is not demand for credit, because borrowers
don't want to borrow, or whether banks are
constrained because of the new regulations,
still risk averse, or they worry about another
financial crisis or there is a credit crunch
for other reasons, we don't know yet. But
the reality is there is something broken with
the financial institution system.
The big banks have been backstopped, but the
FDIC has on its critical list 840 banks. Most
of them are going to go bust.
Now, each one of them is small. It is not
systematically important as a Lehman or Bear
Stearns. But, you know, take the local bank
that's financing the local real estate, the
residential, the business and so on, that
bank goes bust and you have mini credit crunch.
Multiply it by 800 and you have a nationwide
credit crunch. That's what's happening.
Most of the shallow banking system has collapsed
in the last few years. Securitization has
died a few years ago. It has not been restored.
350 known bank lenders have gone out of business.
Seasoned conduits are gone. Bear Stearns,
Lehman, Fannie and Freddie, AIG, CIT, major
institutions have collapsed or have de-leveraged.
There is a significant problem in the financial
mediation system. And just printing money
is not going to make much of a difference.
That's a sense in which it is a credit problem,
it is not a liquidity problem, that's affecting
the financial markets.
>>Chrystia Freeland: Okay. So what -- I think
we get the difficulty of the situation. What's
the answer? Is this just something we have
to live through?
You've talked about how de-leveraging is something
the U.S. economy has to go through. There
was a bubble before. We have to go through
de-leveraging. Maybe there is no solution?
Just --
>>Nouriel Roubini: There's no solution in
the sense that in my view, we live beyond
our means and growth was below potential for
a number of years because there was a massive
creation of credit that was unsustainable.
You know, houses, financial institutions,
other ones. And now we quite have a hard slog
of growth-below-trend for a while as we save
more, consume less, and we de-leverage.
And instead we have responded with something
that was, in part, necessary, fiscal stimulus
that was necessary because otherwise the great
recession would have become another Great
Depression.
So I'm not against that stimulus, but in some
sense we've piled now on top of private debt
public debt, and again we're stealing demand
from the future because at some point there
will have to be fiscal consolidation and when
we start raising taxes and cut spending, growth
is slow down, but that's necessary.
So you cannot keep on kicking the can down
the road by having private debts and then
socializing it with public debts, and in countries
where the sovereign are in trouble, we have
super-nationals, like in Greece, bailing out
the now sovereign states, right? The EU, the
IMF, the Eurozone. At the end of the game,
who is going to bail out the super-sovereigns?
There's not going to be anybody from Mars
coming and bailing out the IMF of the Eurozone.
So there is this much you can do in terms
of kicking the can down the road.
At some point, the de-leveraging of the private
and public sector has to occur so you have
lower debt and you have a greater and stronger,
more sustainable basis for stronger economic
growth down the line.
That's why I think that slow below-trend growth
is going to be with us for a number of years
until we de-leverage and the best we can do
is through policy avoid something worse like
a double-dip recession, but I think that is
unavoidable, a period of low economic growth.
>>Chrystia Freeland: Okay. Jim, do you buy
that?
>>James D. Wolfensohn: I agree with what Nouriel
said, and I think we should remember that
it's only two years ago since we had this
Lehman event which brought home to us the
extent of over-leverage in the financial community.
Two years is not a long time to put that right,
and I think people are still significantly
affected in the financial community by trying
to ensure that they're not out of business,
that they can preserve their capital, and
that they can be ready for the next problems
that emerge.
So I don't think it's going to be a quick
turnaround and I don't think that we could
have -- in view of what happened before, it
seems to me that we couldn't have expected
a quick turnover.
>>Chrystia Freeland: Okay. Just more pain.
A blood, sweat and tears panel here.
And we have a final question.
>>James D. Wolfensohn: It's getting better.
>>Chrystia Freeland: It's getting better?
>>James D. Wolfensohn: It's getting better,
but...
>>> So my question is: Nouriel, you talked
about the fact that global coordination is
needed, but assuming that the governments
can't get their act together and nobody from
Mars is going to come rescue us, what is the
role that you think that global corporations
that are border-agnostic can play in terms
of saving us?
>>Nouriel Roubini: Well, you know, I think
that one of the important things, as I pointed
out, that's happening in the global economy
 -- and, you know, you said that, you know,
I was pessimistic but I spoke about three
things that are actually positive.
One is globalization is driven by global corporations;
two is the emergence of these emerging market
economies; and three, there's a massive amount,
as I pointed out, of technological progress
that is done, again, by global corporations
that are at the cutting edge.
Most of that indeed is done by small, medium
size, and larger corporations.
So I think that, you know, global corporations
have to play their own role. One of the paradoxes
that's happening in the U.S. right now is
that corporates have become mean and lean,
right? They're sitting on, at most, 2, $3
million of cash. They've cut labor costs massively,
they've fired 8.4 million workers, and now
they're starting to think about the future.
They have to invest more, they have to start
 -- hire more and they have to think --
>>Chrystia Freeland: But Nouriel, if they
listen to you and Jim, aren't they going to
invest in the emerging markets, not in the
United States?
>>Nouriel Roubini: Well, that's a trend that
has to occur, and it's going to occur regardless
of. You know, this shift in global economic
power implies there will be more foreign direct
investment, more investment, more growth in
emerging market economies.
I think that probably the corporates, to do
their own thing at all, may have to have also
sound economic policies. You know, for the
U.S. to become more competitive, we need to
have skilled workers. We have to invest in
education and skill. We have to reduce, you
know, healthcare costs. We have to deal with
unfunded liabilities. We have to deal with
having infrastructure that works.
So that's the role that the government can
play to create an environment where the private
sector is going to start hiring again, investing
again, and do it both in the United States
and in emerging markets.
>>Chrystia Freeland: Okay. We've run out of
time, but I would just like to hear from Jim:
What can big multinational companies represented
here with their innovative best people, what
can they do to resolve this huge problem we're
talking about?
>>James D. Wolfensohn: Well, I think there
are --
>>Chrystia Freeland: Pay more taxes?
>>James D. Wolfensohn: I don't think that
that's -- well, I guess our government would
like that to happen, but I think what is more
important is to build an international workforce
that understands the changes in the global
economy and that allows us to compete in Asia
in a way that is maybe more effective than
we have done up to now.
This is not to knock American corporations,
but the truth of the matter is that we're
confronting a very serious competitive challenge
in Asia by Asian companies and by Asian individuals,
and we need to change that, and I think that
we're going against a background where the
countries with which we are competing -- as
I look down the list in terms of their foreign
exchange reserves, you've got People's Republic
of China with 2.4 trillion, Japan at a trillion,
Russia 450, Republic of China 348, India 287,
South Korea at 270, Hong Kong 256, Brazil
241.
There are no G7 countries in that group and
you're down to number 10. We just need to
recognize, in a way that I don't think we
have, that we've got to take a good look at
ourselves, training of our people, and we've
got to get out there and be able to compete
on equal terms.
And I hope very much that -- I know that companies
like Google already do so, but I hope there
are many more Googles to come. Thank you.
>>Chrystia Freeland: Okay. Well, thank you
very, very much.
[Applause]
