like. we talked about that. what did you do? i can anticipate your answers as i think you've given them, just to make it very clear on the record, what would you recommend march 4, 2011? >> briefly, first, i want to emphasize the things we have said. one, you need more capital. and that you need increasing capital has to be with the size of the bank's, the risk of too big to fail. it has to be that this distortion has to be eliminated. secondly, if you have a problem, you should play by the ordinary rules of capitalism. when you go into bankruptcy, you convert that to equity. it is really a version of the standard rules of capitalism. you look at the numbers back in citibank, they had enough long- term capital it was more than enough to manage them, more than we put in. the answer -- the resolution authority ought to be nothing more than basically the rules of capitalism. but i do feel that because there are agency problems, that the owners or the managers of the banks do not necessarily act in the interest of the owners. the kind of a managerial capitalism, that you have to go bad -- be on that to have regulations and restrictions. for instance, it should not be allowed for government insured institutions were very large institutions to be writing these kind of risky derivatives and under other high-risk activities. so i think we do need additional regulations and more transparency that would circumscribe excessive risk- taking by either government answered institutions or large institutions, because i do not think capital is enough, is a full solution. >> thank you. >> at the risk of sounding as though simon johnson and i collaborated, i would say i would change capital to equity and picking up what he said, and what i would do is raise the requirement to say that for every -- after minimum size to protect community banks, and you start to phase in capital requirements which start at 10% and really increase as the size of the bank increases so bad -- so that going up to 20, said the largest banks would be paying with their pain in the 1920's. i would face that in beginning now because the big banks are reporting substantial profits and i would give them three years to get to the required capital. as far as other regulations are concerned, i am a believer that regulation only works when it is incentivizing the regulated. that is, if you compare drug regulation reese said, well, we will give you a monopoly and you produce this drug. then you have someone who wants to protect his right. we have to do the same thing. capital is one way to do it. there are other ways to incentivize the bankers. if we just give them prohibitions, you can see it happening, you can see the number of lobbyists, bankers, in washington every day trying to write the rules that were passed in dog-franc. that is not the way we're going to restrict future risks. >> thank you. >> do not allow them to pay dividends today. we all agree you need more capital. nobody knows how much capital is necessary. even the bankers will conceded the easiest way to increase equity in the business is to retain earnings. they have profits now. that money stays in the bank, belongs to the shareholders. pain that equity under these circumstances makes no sense in economic terms. it is irresponsible, encourages risk-taking of these banks, high leverage and debt. it is completely contrary to the stated policy both in the broad of the administration. mr. timothy geithner says we need capital, capital, capital. it is completely against the process. the federal reserve process stress test and how it will apply to financial institutions systemically is not done. why would to let them pay capital under the circumstances? it makes no sense and they should not do it. >> thank you. >> i agree with more so what has been said with one situation. if it is done in accounting terms, it is not particularly useful. washington mutual did not violate any capital requirement before it failed. lehman at 11% of capital, just the day before it went bust. i do not think this accounting based measure of capital, particularly use for, what we need to do is market based. we have a proposal based on a swap. he to be based on other indicators. i think the notion is, we don't want to treat everyone the same because there are people who behave properly. why should they be subject to the same walls? i think the rules should be -- you cannot pay dividends or pay cash bonus. you have to transfer the bonus you want into equity. that would play a bigger role in recapitalizing banks than even stopping dividends. >> thank you, tournament. -- thank you, gentleman. >> if i have learned one thing from this panel, it is to not ask you all the same question. [laughter] i have several questions, but i will ask the specific questions. first, when secretary spoke, one thing i took away from his testimony was the argument that while we had a lot of problems in our economy, those problems are not really related to tarp. perhaps even problems in credit are not tarp problems not. professor stiglitz, i think your testimony to be the view you do not agree with that. can you explain what it is in relation to those macroeconomic matters that are related to tarp? >> in the short run, and in the long run, but in the short run, i was turned argued if they had given money to the banks in ways or in other ways, they could have induced moral lending. and induced more restructuring. for instance, by the time we bailed out citibank and bank of america, we were very large shareholders. we could have been even larger shareholders if we had shares -- >> money for the value, so to speak. >> yes. if we used that shareholder voice to say you cannot go make your profits out of speculation or go pay these bonuses -- back to the paying out bonuses -- and decapitalizing the banks, what was the to boy's recapitalization. we allow the capitalization of banks through the palace of bonuses and dividends -- payouts of bonuses and dividends, we did not put any pressure or constraints on the behavior of the banks. so there were, including the restructuring of the mortgages. so given the amount of money if you're putting in hundreds of billions of dollars, it should have some voice in what happens in the result of that is that we did not get what we wanted, which is restarting of the economy. the long run, the more difficult or even more worse problems because we have a more concentrated banking system in interest rates will be higher, spreads will be higher and the result of that is not only is there longer risk we been talking about, but in the short run, because the market is less competitive, the flow of money in the long run will not be what it should be. >> prof. johnson, treasury seems convinced the banks are healthy, sound or something like that. i wonder if he would comment on two things. is that right? and happen anyone know that is right? with top and a lot about the liability side, given -- we have talked a lot about the liability side, but what about the asset side of the balance sheet? >> that is exactly right. there's a great deal of uncertainty around asset values. of course, the correct way to assess the state of any banks is to do a stress test. the downside scenario needs to be much more rigorous or negative, pessimistic than the one they used in 2009. i fear the stress test they're doing now, although they have not disclosed anything really about them, i fear the tests are even more gentle. my answer is, we don't know. there are many bad things that can happen. we are not out of the recession as my colleagues have mentioned in many dimensions. the sensible, a prudent thing to do is to require the banks retained earnings and build a bigger equity buffers against potential future losses. that is in respect of of whether you accept my view or other fees. -- that is a respective of what the except my view or other views. the head of the bank of england, even if you do not agree with the views of those people, just today, the only thing that makes sense is to have the retained earnings right now and not pay out dividends, given what we know and the many things we don't know, fear about the economy going forward. >> prof. meltzer, you're suggesting that we have size adjusted capital requirements. as i noted in the prior panel, it was one of the recommendations of this panel in our regulatory reform progress to congress. >> good for you. >> thank you. it seems the most obvious idea to me and i'm heartened to see some of your experience having recommended it. >> said vitter introduced a bill to do it. >> i have also been involved in the arguments on the hill that prevented it from being mandated it in dodd-frank. i find it is being treated as though you're suggesting a perpetual motion machine in the political process. can you explain to me why something so sort of straight forward cannot seem to be taken seriously? >> yes. the bankers do not want it and they come down with the lobbyists and hordes to tell the congressman that you are facing disaster. there will not be loans for the public or capital to build industry, all of that stuff. >> the me ask and then i will stop. >> we got to the 1920's with capital requirements. >> since we're talking about size-weighted capital requirements, would that not as many would be a powerful incentive for institutions to be smaller and then they would lend more when there were smaller? i mean, would it not move rashly to step away from the too big to fail structures and the amount of credit provision would not be affected? >> we would remove the incentive, which pushes them to be bigger and bigger all the time. that would be good. i do not think they would be small, but i think it would be smaller. there isn't any evidence that i know that says their economies scale of that size, which makes them want to be bigger. i want to add one other thing. in 1991, i believe congress passed the audition. are you familiar with that? did they use it at all? no. what did it call for? it called for early intervention. just completely ignored. they gave reasons. they said it did not apply to holding companies and such things as that. given all the things they were doing, they could have made it work. they closed them down. we have to legislate it. thank you. >> i am allowed to keep going, i am told. [laughter] >> my understanding, there is not economies or evidence of scale or scope and banking over about $50 billion in total assets. the macy $100 billion if he wanted -- you may say $100 billion if you want to be generous. >> i want to emphasize one more theoretical point, the requirements of leverage, basic idea and economics that says leverage does not buy you anything except hire probabilities of defaults. and so the argument that they're making that it would interfere with the efficiency of the economy has no support in the economics profession. >> one argument i want to dispose of. there is the notion that -- you suggested various levels of capital be required. but how much capital should be recorded in a given size, just the notion of a sliding scale does not -- is there any basis for the argument that a sliding scale would bring on a credit crunch? >> no. >> no. >> can i dissent on this? >> i think i found a point of disagreement. i feel proud. >> i have to say i have great respect for prof. stiglitz. i think since miller, the level is not irrelevant. i am surprised to say to see now is completely irrelevant. i do not think is relevant. i think in the current situation, if you were double the capital requirements to banks to mark, you would have a credit crunch. there would be a consequence. why? the managers do not want to raise more equity, regardless if this is in the interest of the shareholders. they do not want to raise more equity. the alternative to raising more equity is to lend less. i think there would be consequences. i think the argument they're going to use to say why the sliding scale is bad is that it is going to unfairly affect the large banks. i completely disagree with this argument. i think now we unfairly favor large banks, so a sliding scale with only bring a level playing field, but that is the argument they will make. >> your point about the credit crunch is a constitutionalist argument. >> why? >> you get more collective form of lending, that is, if a bank -- one argument made is of the corporations are so big that they need to have big banks, but they can syndicate the loans for hundreds of years, syndicate the loans and service the banks. >> known is proposing you immediately double -- no one is proposing immediately double it. you could dump assets. look for example at the plan put forward by david. experienced treasury and to this demonstration. now the proposals out there, ways you can time the shift in capital requirements to phase in these kinds of either higher level overall or step level as prof. meltzer is suggesting. it would not a contraction mary. >> my chair has some of this must come to an end. >> this is been a fascinating conversation. i'm certainly not one to try to compete with you on your field. i will pull you over to mind as a mere labor economist and start talking about executive compensation, which has received a certain amount of attention. my own view of this issue and combined with the current crisis sort of has evolved over time. to one in which it seems to me when you have a too big to fail financial institution, it is the case that shareholders very much value risk and are going to move toward more leverage. they are going to compensate executives in a way that would have them shift the risk profile of the investments they make out to a more risky environment. you do not need to take a very strong stand in terms of what you think executive pay is set optimally or not. in the presence of too big to fail, both shareholders and executives are willing to move towards more risky forms of investment and are going to be compensated. i guess i would like your thoughts and my hypothesis. i will start with you, professor stiglitz. >> the important point you're emphasizing is that the decisions made by the banks are made by managers, not the shareholders. and there cannot be misalignment of interest -- there can often the misalignment between the two dead. i remarked before, there needs to be regulation affecting shareholder compensation, regulations in general, including those affecting shareholder incentives. those incentive structures can leave them to want to undertake excessive risks and there may be limited ability of shareholders to constrain the ability of managers in that way. there is a second problem in managerial compensation you did not mention that i think is important to realize. when you get shareholder stock- option kind of compensation, it provides an incentive for you to distort the information that you are providing. so it encourages non transparent accounting. there's always going to be a lot of discretion, a lot of the issues that we have ignored the mistakes that have been associated with the ability not to keep on bad mortgages at full value and the whole distortion in the assessing of the asset structure. but the point is, if you have compensation that is related to the seeming performance of the share market, you have an incentive to distort the information provided by the market and to the regulators. >> does anybody have anything different to add? >> yes. if i may, i agree theoretically if the two big to fill guarantee holes, then the interest of management and his guard can be aligned to they want them to take risk. as a practical matter, the kinds of concerns professor stiglitz engines comes into play. i would refer you to a paper that went carefully through the compensation of the top 14 executives of the top 14 financial institutions in the u.s. between 2000-2008 and on as executive stick out in cash bonus and three stock sales, $2.6 billion in cash. the top executives took around $2 billion in cash. if you're a shareholder in that time, you did pretty badly. that suggests as a practical matter, maybe because of misrepresentations and maybe some other reasons, the shareholders do not do well the when the managers take a great deal of risk and get paid on more less immediate return basis, equity basis, not properly risk adjusted. >> i worried about this problem a lot as a practical thing because i was a chairman of an audit and composition committee for a fortune 500 committee -- company. i face the problem of how your award chief executive and a subsidiary executive. i do not think there is an easy answer. dodd-frank , up with the proposal, and on finding -- non- binding vote. so far, i think the evidence shows that the shareholders do not care much. i think that should be evidence enough to leave alone. >> professor -- >> except in this case. >> i want to ask you a somewhat different question. a more related to your recent paper "paulson's gift." yet estimate that's tarp preferred equity infusions and the fdic debt guarantee costing taxpayers $44 billion. you talk about an alternative plan. the government could a charge more for both the equity infusion and the debt guaranteed as one of the day when invested in goldman sachs three weeks before the polls and plan. can you elaborate on the difference between private party transactions undertaken at the time of tarp and the actual tarp transactions? >> yes. i think they're two aspects. first of all, the capital infusion that was done was done not in market -- known in market terms, worse than the one that warren buffett got in return. the same is true for the debt guarantee. what is interesting, when the debt guarantee was extended, we observed the overall cost of insuring, the institutions dropped. even if we take the value of this cost after the announcement -- think about systemic effect an individual affect. even if we sort of take away the systemic effect, the cost of insuring institutions was too cheap and was not really been varying according to the type of institution. for jpmorgan, this was not very convenient. for citigroup or goldman, tremendously convenient. the number are doing does not give a good picture is sort of the cross-section was -- j.p. morgan was heavily penalized by the plan. the market expected them to buy on the cheap and the other worked expecting to sell. citigroup, morgan stanley and morgan were tremendously helped by the plan. there's sort of this cross- section aspect. it is important because it distorts the market incentives. by treating everyone the same, the good managers are not rewarded in the bad managers are not penalized. >> let me ask a final question. as anoften characterized able to out reached consensus on any issue. i would argue the five independent economists and the war room, i will be arrogant enough to put yourself -- myself in your group, agree about the importance of incentives and the effects the distorted incentives have brought this problem and continue to have today. this is a point i have made repeatedly since being on the panel. i can understand why folks ignore me, but i struggle to understand why they ignore you. and i guess i am curious on your thoughts. what are we doing wrong? what are we doing wrong as a profession? i think these issues are something the economists do agree about. i guess i would like your thoughts. i am tired of shouting to the wind. i don't know about you. professor stiglitz, i will let you lead off. >> i think what is interesting about this particular case is that there is a broad spectrum of support from the left and right in the economics profession, but this goes back to the particular groups who are big beneficiaries of this particular system. they have a lot of money. they have a lot of money to invest both in trying to shape public opinion and to get what they want. i do not