Paul Volcker, Larry Summers and Robert Rubin Address The Atlantic’s Economy Summit

On March 14, the Atlantic held an “Economy Summit” featuring a number of high profile individuals, including Paul Volcker, Robert Rubin, Larry Summers, and Sheila Bair. Discussions during the morning session focused on the recovery of the U.S. economy since the 2008 financial crisis, current economic troubles, as well as ways to solve them. Former Federal Reserve Chairman Paul Volcker was the event’s keynote speaker and the afternoon session included a number of one-on-one interviews that focused on a broad range of topics, including the Federal Reserve’s actions during the 2008 crisis, the housing market, the European debt crisis, unemployment, and tax reform.


The first panel, entitled “Diagnosing a Sick U.S. Economy: What Happened and What is the Fix” addressed the causes of the 2008 financial crisis, the current state of the U.S. economy and some of the issues currently affecting it. Panelists included: Craig Alexander, Senior Vice President and Chief Economist at TD Bank; Peter Hooper, Managing Director and Chief Economist at Deutsche Bank Securities, and Co-Head of Deutsche Bank Global Economics Team; Paul McCully, Chairman of the Global Society of Fellows at the Global Interdependence Center; Thomas Palley, Senior Economic Adviser at AFL-CIO; and Yves Smith, Publisher at Naked Capitalism.

On Dodd-Frank, the panel agreed that if the legislation had been in place during the financial crisis in 2008, the outcome for the U.S. economy would not have been much different. Smith said credit default swaps (CDS) “extended the life of financial markets till 2008,” while McCully and Hooper said a complacent Federal Reserve also contributed to the financial crisis. Paul argued that the Federal Reserve’s inability to establish lending standards led the markets to “run amok in the creation of mortgages.” If the Fed had properly defined what an acceptable mortgage was, this would have played a “big part” in preventing the 2008 crisis, he said. Alexander added that Basel III requirements are more important and will be a “far more useful device for ensuring reduced risk.”

On housing, Smith criticized mortgage servicers and called the federal government’s recent effort to help out the mortgage marketplace “too small.” She also said the Troubled Asset Relief Program (TARP) should have stipulated harsher penalties for banks, including the replacement of executives and boards. Alexander added that there was a serious underestimation of “how bad the housing market was going to be and how bad mortgage servicers were going to be.”

On the health of the U.S. economy, Smith said she does not believe the U.S. is experiencing a “sustainable recovery,” and pointed to the continued weakness in the housing market and the upcoming expiration of various tax breaks, which will be “another drag on the economy.” Palley said the U.S. cannot go back to driving the economy through asset inflation and debt.

Panelists largely agreed that the U.S. economy is looking at “several years” of sub-par or stagnant growth.

On whether regulation is a big factor inhibiting recovery, McCully said the recession is a demand-side not a supply-side recession. He added that regulatory burdens were a factor, though not a substantial one, and said the discussion has to turn from sustainable recovery to shared prosperity. However, Hooper said regulatory uncertainty and additional capital requirements are creating an adjustment period that “will not be friendly to credit creation and the cost of credit.” He also made mention of the Volcker Rule, noting that a failure to properly define proprietary trading could have detrimental effects on the corporate bond market and market makers.

The second panel entitled “No-Nonsense Prescriptions for Jumpstarting Real Economic Growth” consisted of the following speakers: Douglas Holtz-Eakin, President of the American Action Forum and former Director of the Congressional Budget Office; Kevin Keller, CEO of Certified Financial Planner Board of Standards, Inc.; Annette Nazareth, Partner at Davis Polk and former Securities and Exchange Commission (SEC) Commissioner; Former Governor of Pennsylvania Ed Rendell; Peter Schiff, CEO of Euro Pacific Capital; and Sherle Schwenninger, Director at the New America Foundation.

The panelists discussed a number of macro-level measures to spur economic growth including public education and health care reform, tax reform, and infrastructure and energy investment. The second panel’s moderator, Derek Thompson, a Senior Editor at The Atlantic, began by asking what tax reform proposals pushed by Congress, President Obama, and Republican Presidential nominee Mitt Romney would be the most effective in facilitating growth. Eakin noted the Bowles-Simpson and Domenici-Rivlin deficit reduction plans reflected a number of measures that are needed, including raising revenue to lower debt and reforming the corporate income tax so that is it is not an “anti-growth tax.”

Thompson asked Nazareth what Americans should be doing to invest in their retirement security. Nazareth noted how more Americans are relying on their 401(k)s and private pension plans for their full retirement needs even though such plans were initially established to serve as supplemental investment tools. She said more investor protection is needed.

When asked how new financial reform measures will strengthen the financial system, Nazareth noted that the U.S. is largely in the implementation phase and further protections are needed, including improved investor disclosure as well as a re-thinking of how information is delivered to the investor. Keller said anyone who provides financial advice should be held to a fiduciary standard of care. Nazareth agreed that a uniform fiduciary standard should be established. Schiff criticized the Dodd-Frank Act, stating that it did nothing to solve the underlying problems of the financial crisis including taking powers away from the Federal Reserve. Schiff also offered scathing criticisms of the way Federal Reserve Chairman Ben Bernanke has handled the crisis and the current economic recovery by arguing that keeping interest rates artificially low is hurting real growth.


Former Federal Reserve Chairman Paul Volcker offered a keynote address that largely focused on the macroeconomic issues facing the county. He did state that the progress of financial reform implementation is only half complete and that a number of issues have yet to receive much focus including the mortgage market, money market funds, and credit rating agency reform. He also criticized the role of CDS in the financial crisis, and said financial innovation and engineering did not contribute “real economic benefits to the broader economy.”

He brought up the Volcker Rule provision in the Dodd-Frank Act and said that it establishes needed protections against speculative trading by firms that are insured by the federal government. He said firms that are largely created by equity, such as hedge funds, are free to speculate as desired. Volcker stated his hope that the provision will make a little progress toward the “rebalancing of incentives in the financial system and will eventually lead to an old-fashioned return” to commercial banks lending to small- and medium-sized businesses and managing deposits.

Steve Clemons, The Atlantic’s Washington Editor-at-Large, asked if Volcker was hoping for a more robust Volcker Rule. Volcker clarified that the argument was actually about banks complaining that the regulators’ proposed rules that are too robust. He said the question pertains to whether “you can put out some broad principles and try to see if the banks understand and can implement those principles and then check up on them” to ensure they are adhering to those principles. Volcker commented how such an approach sounds sensible but becomes complicated in its application. As an example, he noted how financial firms would be constantly asking the regulators detailed questions about specific provisions in the rule in order to ascertain what activities would be acceptable.


Robert Rubin, former Treasury Secretary under the Clinton Administration, offered his opinion on the Eurozone crisis and policy reforms that should be undertaken in the near term. Rubin said the European Central Bank has taken steps to mitigate the crisis but European leaders have not made any progress in addressing the issues that need to be resolved in order for the EU to enter a period of interim stabilization. He said a combination of balanced austerity measures and the creation of a lender of last resort as well as EU member countries taking on the debt other members are all needed to stabilize the region.

In terms of U.S. policy reform, Rubin said the post-election period will be the most important time for implementing new measures. He said three possible outcomes are likely: 1) the parties will work together to produce a framework that substantively address the country’s fiscal challenges; 2) the parties will “kick the can down the road” by legislating away the sequester provisions in the debt ceiling increase compromise and extending the Bush tax cuts; or 3) the government will do nothing. Rubin believed there was a higher likelihood of Congress and the Administration coming together to find a feasible solution to the nation’s fiscal problems.

Lawrence Lindsey, President and CEO of the Lindsey Group and former assistant to the President and Director of the National Economic Council, said the Bowles-Simpson plan “made a good stab” at tax reform, adding “it’s certainly doable.” On corporate tax reform, Lindsey rejected calls for a territorial tax system and instead promoted the idea of a border-adjustable tax system. In a response to a question from the audience on whether a value added tax (VAT) would accomplish what Lindsey is advocating for, Lindsey said “absolutely.” Lindsey favors scrapping the income-based taxation in favor of a VAT.

Allan Meltzer, Professor of Political Economy and Public Policy at Carnegie Mellon University, advocated strongly against the Federal Reserve’s decision to build up its balance sheet to its current standing. He said the Federal Reserve’s bulk purchase of government bonds “is not a good idea” and criticized the Federal Reserve’s short term focus. Asked what he would have done differently in 2008 if in Ben Bernanke’s position, Meltzer said he would not have bought long-term securities or mortgages and went on to question how the Federal Reserve is going to unload its balance sheet without significantly affecting the market.

Sheila Bair, Former Chair of the Federal Deposit Insurance Company (FDIC), offered her opinions on the recently reported bank stress tests. She said the tests were “very helpful exercises” that represented a forward looking evaluation process, which was in stark contrast to previous evaluations’ “static and ineffective” methods. She also said she appreciated the public reporting of the results because it puts pressure on institutions that did not do very well to improve, which is beneficial for the health of the overall financial system.

However, Bair said the tests can be improved, and offered three suggestions. First, she said that the test’s measurement of risk-based capital is not the best barometer of financial health. Second, she said the tests demonstrated that leverage ratios are still high, highlighting passing banks’ leverage ratios of 33-1 or higher. She said the test should include lower leverage requirements. Lastly, she said the test’s focus on credit risk, “while relevant now,” might not be the most relevant risk to the financial health of banks in the future. Instead, Bair said including measures for interest rate and liquidity risk would make the tests more relevant going forward.

The moderator followed up by asking if there is a better way to evaluate “safe assets.” Bair said the definition of safe assets will “always come down to a judgment call, which is inherently imperfect,” but she did say it is important to look at measures of liquidity and credit risks when determining if an asset is safe or not. Bair was also asked if the financial services industry is hurting economic growth. Bair said banks’ declining revenue is “hindering the economy,” but said the gradual shrinking of the financial services sector was the real restraint on growth. However, Bair did not blame the private sector for this, instead she said the government had the chance to shrink the financial services industry as it was bailing them out, but chose to “prop up ineffective banks,” artificially maintaining the sector’s size.

The interviews of Gene Sperling, Director of the National Economic Council and Assistant to the President on economic issues, and Laura D’Andrea Tyson, a member of the President’s Council on Jobs and Competitiveness, both focused on unemployment and industrial policy. Sperling refused to offer any future employment projections but noted the considerably positive employment streak the country is currently enjoying. He highlighted the 2.1 million jobs the economy added last year and the 500,000 jobs added so far this year, but acknowledged that “those numbers did not and do not feel great because of high long-term unemployment and continued weakness in the housing market.” Tyson added that there are jobs out there, but those jobs are not matching up with the skills that the unemployed possess.

The final interview of the event was with Larry Summers, the Former Secretary of the Treasury. Summers said there are three key areas that Congress and economists must focus on to spur a stronger recovery and preserve fiscal responsibility. First, he said the “single greatest determinant of the United States’ continued economic success,” is the growth rate of the economy over the next decade. He said if the growth rate does not reach a point that supports an environment of robust employment and demand, “the U.S. will fall behind.” He added that the “greatest threat to U.S. fiscal health is stagnation.”

Second, he said, entitlements must be cut by a quarter or revenues must be raised by a sixth by 2022. He said a combination of cuts and revenue raisers will also work, but said “these policies are hard to do suddenly,” urging Congress to “get in front of these issues soon.” Third, he said the issue that “unites the broadest range of problems currently afflicting our fiscal and economic health,” is tax reform. He said taxation is central to issues of revenue and spending and economic equality and fairness, adding that “real” tax reform will also help restore confidence in the government.

Summers said he believes it is “near impossible” to do comprehensive tax reform during a lame duck session, and instead, advocated for temporary measures dealing with the debt limit, sequesters and the Bush tax cuts to “give Congress enough time to enact real, meaningful tax reform.” He said members should be “open to every possibility and framework,” including VATs and consumption taxes. He also added that he believes tax reform should be structured around revenue raisers because cutting entitlements will be “very, very difficult” and could have significant adverse affects. In response to a question from the audience on the tax burden of the “1 percent,” Summers said the tax burden on the highest earners should be increased, because of their outsized income growth over the last decade.

For materials from the meeting, please click here.