All right. Good afternoon. Thanks for coming. We are going ahead with the next talk. My name is Jorge Salamero.  So a little bit about myself first. Let's see if this makes less noise. Yeah, much better. So I've been working in open source for some time already on monitoring for a few years and with a year working at CISDAQ. I work on the marketing team, but I consider myself a gamer. So I one of those persons is lucky to play with different technologies and today we are going to talk about containers, security and messes. So how many of you know CISDAQ? Can you raise hands? So a little bit. So all right, like more than half of the audience. Good. So you, for those that you know and you don't know CISDAQ for both of you, if you remember a few years ago we created this open source project. Last year we were over one million of downloads add-in to be honest right now.  So it's great for looking at what's happening inside your containers. It was a great success and people they were asking us to do more.  And from that experience we saw that that level of visibility that we can gain what's happening on what's happening inside the containers we could also do some security stuff and we started experimenting it with it and we ended up with something we called CISDAQ Falco. It's also all open source. It's been kissed for by a few folks out there with big names and it basically provides you with CISDAQ security nor is I'll give you them afterwards. That went very well and we said okay, let's do something else more. That's why we came with CISDAQ secure commercial product to do runtime container security in forensics. I'll show you a bit later on or if you have more questions, you can come around the booth. But when trying to implement security on containers, obviously there are multiple layers things that you're going to implement. But I want to focus today on scanning. So what are the containers doing? We can look at it at this from two perspectives. Something that's called static scanning and something that we call dynamic or runtime. So static scanning basically means analyzing your image without running it. So why do you need this? Well, probably even if you are not aware of, your developers are using containers and because they didn't look at it from a security mindset, you might end up having them run Dockerfiles like those. So I'm going to download this thing from the internet, not even with three HTTPS. I'm not going to check any signature. I'm going to build inside the container and that's going to be my application. Awesome. Well, not really because who's maintaining that. How do you make sure there are no vulnerabilities in that image? So that's why static scanning is going to help you. It's going to look at the software versions, the libraries, compared to the database with vulnerabilities, CVAs, or something like that. And actually the way that containers work, it's very handy for this because basically as you build the containers, you always take like a base image. So when you detect a vulnerability on the base image, it propagates across the other containers. So actually this can be implemented in a efficient way. Probably you want to implement this at the registry level. So if you're using Dockerhub or you are using whatever repository you're using, you'll probably have that there already. There are a bunch of different open source for implementing this, for example, the Corice Quay. But is that enough to cover all the use cases? Well, can we say if our image passes, our static scanning is secure? I wouldn't say so.  It's very difficult to look what's happening inside. So we need a software, we need a technique to look inside and see how those processes inside the containers they are behaving. We can just edit, we can enforce. These are the use cases. There are a few bunch of different tools for looking at containers being executed at runtime. So I come, it's a facility in the kernel. It works great, but it's very basic, so you can allow or blacklist some system calls. When you put it together with BPF, you can do some additional stuff, but it's still, it's kind of like tricky to work on this. Cilinux and a partner, they work also containers, but you know them already. They don't integrate with your orchestration tool. They don't have high level of concepts or rules for creating the policies. You have AuditD from Cilinux and we also created Falko. How many people know Falko from here? Raise hands. Just a few, less than Cilinux. Okay, so I hope this is going to be useful. So first, to understand Falko, I'm going to explain you a little bit about how Cystic, the open-source technology, works and we'll move into Falko. So Cystic looks at all the system calls being executed in your host. Basically, we hook into the Linux kernel trace points and that way we can see absolutely everything. There are some functions when you enter into a syscall and when you exit into a syscall that we can hook in there and actually also understand how much time you spend on every syscall. Unlike other solutions, like for example S-trace, that you have to attach into an existing or into a new process, Cystic approaches different. So we just see everything and we will filter out the stuff that we are not interested until we reach the invisibility on what we want to say. So this is a simple diagram of the architecture of Cystic. So we hook at the kernel level, we capture all the system calls and because containers, they are just processes running into a different use space, we don't really care if it's a native application, docker container, rockhead. All of them, they just work. A little bit also on how the architecture of Cystic works. So we have, at the moment, it's a kernel module because basically all the facilities exist in there, they were not enough to reach the visibility we wanted. This might change in the future, but at the moment, as it is, it's a small kernel module that copies all the system calls into this ring share buffer. From there, we have a set of libraries and user space processes that decode all the system calls from their vPorse events. We actually decode known protocols like HTTP or SQL or memcache using some additional scripts that they are called chisels. And looking at it from an instrumentation or orchestration perspective, it's going to be like that. So we have the host, we copy the system calls, actually their events, I'll share you in a sec, into the ring buffer. The user's processes typically run into a container and that the user space process talks to your orchestration tool. These do us messes, and it's going to be the example I'll show you today, and you can correlate those low-level entities of the system calls with high-level entities that they are resources in your orchestration tool, applications, tasks, all that. So if we look at that share ring buffer, we will see something like this. Like what we call event stream, where we can see the different system calls and we can do a bunch of different things. We can save them to a disk for later analysis. We will see this in a second for doing forensics.  But how we can use system calls to understand what's happening inside the containers? Well, if we know how things work behind behind the hoods, we can know that if we find a clone or an XVE system call, it's because a new process has been spammed. So a new process has created inside that container. We can use look at open and close to see if we are opening files or accepting connections on sockets. Sockets and connect are set to look at network activity. This is a way, basically, you can understand what's happening inside looking at the system calls. But we will see in a sec that with statistic fault code, you don't need to go that deep because we provide enough structure on top of all these things. And to be completely fair, all these activities or events as we put in that ring buffer, they are not just plain system calls, as you would see from a trace output. Actually, we put a lot of metadata or contextual information, so the libraries on the user space, they can understand, they can reconstruct what's happening. So for example, we can see the process from that specific system call came, the parent process, the remote IP address, if it's a system calls that they are affecting the socket. So that's what provides that level of visibility. So now that you have a little bit of understanding of FALCO, of statistic, sorry, let's look at how we can implement a security tool on top of this. So looking at how the system calls are doing, what the processors are doing, we can detect suspicious activity. We will define that in a rule set. That rule set, it's basically created using the filtering language of statistic, which is very similar to TCP-DOM, that most probably all of you are going to be familiar with. It works very well in containers because this way of looking at the processes at the host level, so even if our user space process is in a container from there, we are going to see what's happening in all the containers that they are being executed in the same hosts. On FALCO, you can configure notifications when any of these rules they are trigger, like sending out commands or putting things into a file, and as I was saying at the beginning, it is entirely open source. So a few examples, and I'm looking back because my screen here doesn't work very well. So if we want to add a shell running into a container, we can write a rule like that. So container ID is not the host, so it's a process running in a different user space, and the process name is that. We can actually create those arrays and do matches against those, so if our file directory is in this list, tell me about it, and we do a write system call. If we change the name and space of a specific process, and it's not docker or cistic, which are the only privileged guys in my host, there's probably something wrong happening. So these are just a few examples of different things. Once these rules trigger, you can send notifications to syslog, FAL, standard output, or even to any command. So you can send an email notification or a webhook, post notification, whatever it is. So with this, I finish the boring slides, and I'm going to jump into the dangerous territories of demos. First, I'm going to demo in detail our syslog FALCO, the open source solution, and then we'll leg some of the cool machaic of syslog secure. So I have here some configuration files. FALCO.JAML is my main configuration file for FALCO, just a bunch of different things like which are, where are my configuration files, where I'm sending the notifications. So this is like pretty much a standard out of the box. FALCO rules contains the default rule set. I'll show you later how this is shared. All the same syntax for this language is the same in FALCO and in syslog secure. Here, this is a super long file where you can define all these rule sets. And we can basically define macros or aliases to simplify things. So if we look at the lowest level syslog filtering language, our write needs to be either opening or the system called open add, and we need to do the open with the write flag on. And it needs to be a file. So instead of having to write that all the time, we can define it on a macro so we can work at a higher level. So this is full of helpers, macros, and definitions. So that's fine. You're going to work into a different file that looks like this. And here, I have defined a standard, a rule that I use a lot of times. So all right, I got this container, and I know the processes that need to run in that container. If something else that is not that process runs for any reason, send a notification. All right, in this case, I'm looking, let's look at the, well, roll is just the name of the roll description. But what it's really interesting here is this, this condition. So basically, I'm looking for a new process that has been created. All right, which is this first macro. The second, I want this to be running inside a container. I don't want to look at the processes natively on the host. I'm pulling, in this case, already some container metadata, in this case, the counter image. And I'm looking that it's called nginx. All right. And finally, if all the processes, or if there is any process that it's not called nginx in that container, I'll trigger notification. Some of you probably are going to say, oh, you could, you can rename the name of a process. Yes, we have a roll to detect process renaming themselves. Okay. I'm going to try to keep this simple. I'll send another message like this and some priority. So to, I'm running this at the moment in my, in my laptop to keep things simple. And how you run Falco is basically like this. It runs as a container where you run the Falco container privilege mode, because it's load that kernel module. I mount a bunch of different volumes to get information about the hosts. And I mount my configuration files. So I'm going to do that. I'm going to do run that container. And then here in this side, I'm going to run an nginx container. Okay. I'm going to call it nginx. So we need to look at the output here. So now I'm going to do, going to run my history. All right. I'm going to run a shell in that container. So I'm here inside my nginx container. And I can see how there was already a notification, which is part of the default rule set that's saying, hey, a new shell has been created in this container. Actually has been attached. And this is the, the user who executed it. And this is the container ID, the process. It was a new process. And this is exactly what's been executed. All right. But now, since I have created that rule that says, if any other process running in here exists, and it is not calling nginx, trigger a rule. So anything I execute, like ls, or codresolve, if we look back at the output, we can see how we are getting those messages in there. Okay. So this is the use case of Falco, gaining visibility inside the containers, creating rules head or a policy of things that we want to look for, and trigger alerts on those. So as I was saying at the beginning, this is pretty unique. There are big names, big companies already using this. But at the end of the day, it's like kind of like a do-it-yourself thing. So some people we work with, they were asking for something easier to build. And this is where we came up with Sestic secure. I'm going to do a very quick demo on something similar. So what we can see here is a different cluster with a few containers running inside. It doesn't really matter. Actually, I'm going to show you, so you believe me, this is my interface. So with DCOS Messos. And I have here a WordPress application with a client that's making fake requests, my application, and then the database. And also I have deployed Sestic in all my nodes using marathon. So when I'm looking at this from an application perspective, see all the containers, but I'm interested in looking at this one. Okay. So here I can see how there is this client talking to WordPress at the same time talks to MySQL. So I decided to create a rule to look for a specific anomalous activity. So one of them, we are going to see, executed, it's going to be this one. So the name, it's new shell, running a container, a description. I got here some severity where I am applying this. I can leverage any marathon metadata for this. The rules, if we look at the rules editor, you see it's exactly the same language we could see with Falco. So you can actually reuse all your Falco.com fake. And which is very interesting is what actions. Because with Falco, you can just send out a notification. That's it. Obviously, you can put that into an orchestration tool and then take actions, modify what are doing your containers. But here, we have already made it available for you. So we can do three things. So we can stop or kill the container to prevent the attacker from breaking it. Actually, when thinking on containers, uptime, it's not something we should be proud of. The less uptime that your containers have, the less likely is that they are being hacked. So we need to change it into a different paradigm. We can also pose a container if it's a database or something else that has been a legacy application, something that cannot be killed immediately. And finally, we can create a SSD capture. So if you remember at the beginning, when I was showing you the architecture of Falco, we could get that event stream, all those system calls plus metadata information, analyze it, or dump it into a file. So this is something we can do. And actually, a very cool feature of secure is that we can include a number of seconds before the alert, that notification was fired. So that's going to help us to understand in the context of security, for example, how the attacker hacked into my container. So in the system called file, I'm going to have hopefully that information. Okay, where it looks like a very small time, five seconds, we need to understand that when attackers, they are hacking into containers because as they know they are highly volatile. All those attacks attempts, they are most probably automated. So it shouldn't be that bad. In any way, that's a compromise you're going to have between memory assigned into the agent versus time that you want to have there. Obviously, after the notification, you can include as many seconds as you want. We also can send you notifications anywhere, really. So what I'm going to do now is also show you a rule I created this morning, which is actually going to the staff. So it's a similar thing when here, I'm looking at someone writing in a binary there. Okay, so who should modify a binary there if the container has been built at build time?  So now I'm going to minimize all this and hopefully SSH into the right node. So when looking, if we look at this with perspective, I talk about static scanning at the beginning and then this runtime or dynamic scanning. So it's safe to assume that all these images I'm running in production in my cluster, they are safe. They don't have any well-known vulnerabilities. But still, there are two use cases, for example, detecting a shell running a container. Number one, someone using a third-day vulnerability and doing a common injection, sorry. The other one is someone like me who has decided to SSH into a production server and now do Docker, exec in that specific container. Sorry, that's not the right idea. And start hard fixing the stuff because I can't do it. Why shouldn't we do it? Oh, you shouldn't be doing this, but you can do it. So I executed the shell inside the container. I'm looking at the files, but now if I go back to Falco, and I filter in here, you see this box. It's yellow now. There is one. That basically means, if we switch into this beer, is that someone run, executed a shell in the container. And we could automatically detect it and give you some information like when this happened. So just a few seconds ago, all the severity, the policy that was triggered, the container image and the container name, the host where it was executed, the container details and the alerts details. Actually, if I go here, you see, you can see the LS command that I executed. So this is really, really cool to understand what are the attackers or anyone really, even someone from your team, who decided to exec into a container or do anything really.  But we can do more. If you remember that policy, I created here, I said, okay, if I write below any binary directory, I want to kill, I want to stop kill the container. So, all right, let's do that. So I'm going to do this, because I'm going to do echo full var being hacked. And execute that. And you see that they didn't do anything else, right? Just a straight away, the container has been killed. And actually, let's look at this ID. And let's look, hopefully, it has been a schedule in the same node. Yes. So if you see, this is the previous container, which was exited, it was killed. And methods started, anyone automatically is orchestrated. It's safe. It's in principle, the best way to stop an attack in a containerized application is just to kill it, because the orchestration tool will create a new container with a clean image. All right. So now, if I go here, three minutes ago, all right. So we can see that in addition to running a shell, I got this other alert trigger. Someone modified our press container. So we can see the commands, hopefully, which is the same thing, because I didn't run any other stuff. If I go back, there is a very, very neat feature. So we have seen how with this so far, we can stop the attacks killing the containers. Basically, we can also see what it was executed in the case of running a shell. If it's a process doing an unexpected or doing connection, it doesn't make sense to look at the commands. But as well, we can do the following. All these system calls that they can be dumped into a file, if we configure that in our policy, it's going to be a by level here and be captures. And we can open them with a new UI, a new cystic UI that it's called cystic inspect. In these cases, they can inspect it's available in here. But this is entirely open source as well. So you can actually install it in your Linux host or in your Mac laptops as well. And use it for troubleshooting as you are long used to. But now use it for postmortem analysis and forensics of your container interactions. For the ones who knew cystic before, if you remember, we have two options, like the common line tool that is required to use all those hackish filters in a TCP dumb style, or we could use cystic which was a end courses UI similar to H sub. Still, it was kind of like funky to use because you had to understand all those low level concepts, file descriptors, system calls, system call errors, all that. With cystic inspect, we have to take a slightly different approach where basically the idea is that we are going to help you to correlate high level concepts like alerts coming from cystic secure, processes running containers, or any like file activity in the file system, network activity as you can see here, network applications, security commands, even performance and logs, all things that anyone with basic DevOps or Linux concepts can understand down to all the system calls. And if you have a look at here, in this file, we have 5.5 thousand system calls, so it's a lot of them. The idea now is that you can click on any of these boxes and go relate all of the information. And we can see it down here in this, in this specific capture file. There are a couple of things I want to show you here. We can see how there are some patterns of file activity in here. This is, and we have the alert here. This is a clear example of my capture, including a number of seconds before the actual alert was triggered. So it works. Everything has been live. The other thing we have on top is the system file that it was modified. So using these timeline, it's going to be easy from a human side point of view to correlate activity, looking at these graphs. And actually, I can, I can use these sliders to focus my approach around the specific time frame I'm interested at looking. And with all these boxes I have here in the top, I can actually isolate them and look at, for example, all the activity. So in this case, when my alert was triggered, two files, they were modified. Number one, the file, the binary file I put on the slash, be in the slash hack. The other one, bash, automatically wrote the bash history file. But I can do even more. So I can go into this specific file and decode the system calls they wrote that file and see the actual contents of the file. All right. This is very, very powerful. This is the first tool that's going to give you all the information you need to do that post mortem analysis to understand how they hack into your container, what they did, what kind of information they could access, credentials, or defecate database, and see if they actually send that information somewhere else. So you have a data leak, all that, even if your container doesn't exist anymore, because as you see, as you saw, we killed that container, doesn't exist anymore, but we could do all this troubleshoot in with CISIC inspect. Another cool example, actually, it's part of our demo, but since I have some time I wanted to show you, is this, hopefully, is this one that we got here. Yes, no, it's not in here. Capture files, events, another one hour. Sorry, this should be one day. Let me see, where do we have that container? Let me see if it's going to be in here. Not last hour. One day, yeah. So in this case, it was kind of like a more complex attack. So we saw how someone kid do a shell injection or execute a shell, download a root kid, and that person uncompress the root kid. He couldn't proceed any farther because we killed the container, but going back into my captured file, I can do again this post-mortem analysis, bringing in my notification, my file activity, my network activity, and for example commands. So in this case, I can see how the commands, they were executed basically at the same time that my alert did fire, and there was like a spike of download traffic. So in this case, instead of filtering for file activity, I'm going to filter the commands. And I can see all those commands again, the shell, the download, the uncompress. But now I can filter on this specific command or process. And here on the left side, we have different views, like connections, it was a tar, it didn't have any connection, directories, file errors, system calls. I can look at the system calls, but unless you know how things work, this is not meaningful, but looking at the files, everyone is going to understand and see how the file was uncompressed. And I can go to any of these files, decoded, actually put it in a beautiful way with assay, and being able to rebuild, reconstruct all the components of that specific root kid that my attacker executed. So this is everything I wanted to show you in this presentation. Do I have a thank you slide or something like that? Probably I should. Yeah, there you go. So this is everything I have for today. Falko, it's, as I said, this open source community-based project. We have contributions for many people. If you feel, if you are not into writing code, but just contribute to new rules for any of the applications you work, we will be very, very happy to accept your pull requests. You can also join our Slack community and discuss. There is a mailing list, but you know, these things are kind of like low volume. And if you like, since it's secure also, you can go to the booth and talk to us about it. And now I think we have a few minutes for questions. So anyone? Hello? Yes, it is. Don't take this the wrong way, but I'm going to play the devil's advocate a bit. It seems we can't have another week and something gets hacked. I don't know, the last couple of weeks was kind of crazy. Everything gets hacked. How do you guys assure that SysDig is not itself leaky? Because if I understand correctly, basically anything I have in my applications will go through it. Unfiltered credit card numbers, data, you name it, it's going to be sucked up by SysDig. Yeah. Okay, that's a good question. And so basically all the analysis, it happens at runtime. So it's not leaving both with the open source product and with the commercial product, the analysis, it's happening in that specific container. Okay, it's not that we are going to send the data somewhere else. So that constrains like a little bit where the data leaves. It's always in the same house. There is no leaking unless you take a SysDig capture, in that case it's sent somewhere else, or they command history. Yes, that goes to your backend. The other thing is SysDig, the container itself, is not exposing any external service. You can also write SysDig secure rules to monitor SysDig itself. But at the end of the day you need to define a boundary on what you are going to trust and what you are not going to trust. It's the same thing when writing a credentials world. When you write all your store, all your authentication, password, certificates into a service and that it's in charge to distribute it across all your infrastructure. What happens if your ball gets hacked? Well, you have access to everything. So it's like a little bit of a compromise. Yes, you have deep visibility, you can see everything vertically and for the bot. So this is a decision you need to make. It makes sense. Can I ask one follow-up question? Yes. How do you guys do this with your hosted solution with regard to basic things like, I don't know, like entry security or? Yes. So all that with a hosted solution, all communication gets encrypted between end to end basically. If you are really concerned and you don't want to share any database with any other customer because you have super private data, you can install on prem and it's going to be your responsibility making sure everything runs smoothly and you can implement your own security policies. Thanks. More questions? Feedback? Regarding Falco rules, is there a way to create at least a base sample template based on existing activity? So at the moment it's not possible. It's one feature which is in the roadmap of the commercial product. Probably some pieces maybe end up appearing in the open source tool. I don't have either the authority or the information to talk about that. So I don't know. I know it's part of the commercial product. You can also implement it in your own way. You can get Falco and actually someone already wrote about this on the internet, sending all the events or different events into a login system like a like key and then do machine learning there based on that. So there are multiple and different approaches. At the moment it doesn't exist in either of both solutions but it's going to be something available very soon. More questions? All right. Well thanks very much for listening. I hope you like it and if you have any other questions just come around.


Now stay tuned for the Burl-Ives program produced and transcribed in Hollywood for your listening pleasure. Burl's Gastonite, Trinidad's King of the Calypso, Sir Lancelot. Jimmy Cracorn, then I don't care. Jimmy Cracorn, then I don't care. Jimmy Cracorn, then I don't care. My master's gone away. He's coming up the road again. Your Wayfarer and Stranger, Philco's friendly troubadour, Burl-Ives. Oh, she's gone again. Skip to Malou, she's gone again. Skip to Malou, she's gone again. Skip to Malou, skip to Malou, my darling. Hair's in the buttermilk, two by two. Hair's in the buttermilk, two by two. Hair's in the buttermilk, two by two. Skip to Malou, my darling. Oh, she's gone again. Skip to Malou, she's gone again. Skip to Malou, she's gone again. Skip to Malou, skip to Malou, my darling. If you can't get a red bird, a blue bird will do. If you can't get a red bird, a blue bird will do. If you can't get a red bird, a blue bird will do. Skip to Malou, my darling. Oh, she's gone again. Skip to Maloo, she's gone again, Skip to Maloo, she's gone again, Skip to Maloo, skip to Maloo, my darling. Hello, friends. I'm aware in my Sunday go-to-meat-and-suit, and the front parlor is unlocked. I've got a fresh coat of blacken on the old pot-bellied stove, and I've dusted off the old moose-head, and I'm hotting up the coffee, and a few of my friends are showing up, because we're entertaining royalty. Sir Lancelot of Trinidad, and Knight of the Order of the Calypso. Now, before Sir Lancelot gets here, I better explain that I've been boning up on this calypso, so I'll know how to act when his lordship arrives. You see, calypso is a little hard to understand, because it has a kind of a private lingo. It goes something like this.  Now, that means put out the fire. That's how I found that out. Now, Sir Lancelot might come in singing a French or Spanish or a Chinese song, but on his engraved announcement of his arrival, he told me that he was going to sing a real authentic calypso song. Now, here he comes now. Jimmy Clark corn, and I don't care.  It serves me right for pretending that I'm a calypso expert.  Yes, you did. Oh, Mr. Eyes, you must never pretend. It will always get you in the end. Never, never tell a lie. It will come back and smack you between the eyes. I guess that's right.  Ah, neighbor, neighbor, leave me door. I don't want your hair no more. I don't like your company. She'll fly, don't bother me. Let me tell you a little story about the woman next door to me. She's the worst thing I ever see. Oh, she like his tribe and misery. The other morning, about half past four, she come knocking at me door. She must be trying to ruin me, but she know I don't get up that early. She said, Sir Lance, not I'm all alone. Take me to your island home, but she forgot to inform me that she has a little husband six foot three. I don't like your company.  I'm going to compose a calypso-filco commercial. Oh, no, permit me, girl. Ah, Lance, I couldn't do that. After all, you're my guest. What would the people across the street say? What I would be delighted. Permit me as a token of my appreciation of your hospitality. This one little thing. Okay, Sir Lance, let you twisted my arm. For the very best buy-in radio, get the 1201 combination-filco, one of the finest radios they have today. Just slide a record in this slot and let it play. The fact that all over the land Filco radios are in demand. So listen to Sir Lance searching your calypso. Get yourself a filco radio. Don't go away, Sir Lance. I want to give this calypso a whirl myself a little later on, and I'll need your help so you stick around. Right now, friends, I'm going to sing a little song of the Florida Everglades that's sometimes called, Baby, Did You Hear? It'll surprise you.  The boys who sailed the clipper ships down to the Caribbean and loaded cargo of West Indian spices and riches sang their own songs. This may have been one of them.  Seems she wants to melt the fat from your bones Therefore from a logical point of view All you have to do is just what I say Now that we've sung about an ugly woman I want to introduce you to a very pretty man The Filco Man I want to tell you that I've had a very enjoyable time And I hope you have too Sir Lancelot, it was an honor to have you with us And I sure hate to see you go, boy Oh, Mr. Rise, mighty ballad singer You're a very polite host, but I cannot linger I must myself most quickly be stirred I'm leaving by Pal-American clipper Sir Lancelot, it was a pleasure to have you here I must admit you have brought us good cheer You certainly are one of the finest of men I hope you will come back and see us again Long, girl And friends, listen next week at this time For Burl-Eyes, Filco's friendly troubadour Whose weekly visit is produced and transcribed in Hollywood For your listening pleasure Next week, Burl plays host to more old friends And remember, come into our store And let us demonstrate the new Filco radios And radiophonographs


Thank you very much. Again, we apologize. As Senator Brock was saying, some of the discussions on these were very interesting and intriguing, and we hope to be able to continue some of those here today. I'm Stephen Truggan, the Shoal Chair in International Business, and this is a forum where we're discussing the G20 and whether it will be able to achieve some concrete progress, or even at least a way forward in terms of fighting protectionism and putting the world economy back on track. I think as everyone's recognized, the stakes are incredibly high. Before the first G20 leaders meeting last November, we said it was kind of like in the middle of a five-alarm fire, calling together the fire chiefs to try to restructure the fire department. But now we're five months later, and the fire is still raging. It's spread to much of the world. You've got leaders like President Obama, who's going to be his first time on the world stage under an incredible amount of pressure, as are Gordon Brown, Angela Merkel, several of the EU leaders that are going to be facing elections and intense political pressure from this kind of firestorm that's gripped a lot of the developing world and the developed world. And the question is, will the G20 be able to meet the immediate challenges? We've seen a lot of breaks and divides on things like stimulus, whether we can go forward with monetary policy, reviving banks and lending, and most of these seem to have been papered over, or a few real concrete actions going forward. There's a lot of discussion about international regulation, but a real debate about whether this is the right time to do that, given the turmoil that we're seeing in the markets. And then finally, we're seeing some action to shore up kind of the firewalls and levies in the midst of this unprecedented storm, things like IMF reform. But we've also seen statements like the anti-protection statements in November that were really toothless, and were violated by 17 of the 20 countries, according to the World Bank. So we're really at an inflection point here to figure out, are we going to be able to address these challenges or even map away going forward. So we've got just an incredible panel here today to look at challenges, like are these gaps being bridged or are they being deepened between the U.S. and the E.U. on stimulus, whether China will add more in terms of monetary and leadership to the world system, whether the BRIC countries, which issued their first-ever communique in the finance ministerial, are going to be going along with the broader implications of where the G8 and some of the traditional countries want to lead the world, whether this is going to be more than the world's words or whether it's going to be the judicial pomp and circumstance that we see at G8 meetings without any real follow-up mechanisms or real impact. And finally, given that we've seen this spread from just being an economic issue to being a security issue and potentially a strategic issue with unrest and unemployment spreading from Latvia to China and, you know, risking kind of a repeat of some of the lessons of the Great Depression where we failed to see that unrest and unemployment led to authoritarian regimes' instability without any real roadmap for how to address those. Are we going to tackle those challenges head forward and to really grapple with those as we're looking at some of the core economic issues as well? So, as we address these today, we've just got a tremendous group, starting with Senator Brock and CSIS, counselor, trustee, head of the International Policy Roundtable, but who's really been at the cutting edge of many of the world's great developments on trade, including a father of the Uruguay Round that started the WTO, starting the real free trade movement in the United States with the first free trade agreements, but also were reminded as part of the Rio Group bringing trade and finance ministers together to address some of these issues. So, we're very proud to have them to address this in terms of particularly how it's affecting trade in the political situation going forward. Clay Lowery, who we've had the chance to work with in many government capacities. He's also president of the creation of many of the current financial structures we have going forward, including the G20 working with Secretary Geithner and was also intimately involved in launching the G20 Leaders Summit last November. So, he'll be able to provide an almost unequal perspective in terms of how these developed and how we got here. And finally, last but not least, we have David Schmick, whose book, The World Is Curved, was extraordinarily precedent in terms of looking at these challenges. And I think for those of us that has followed his work in the international economy, magazine, and elsewhere, you know, he's been ahead of the curve on so many of these different issues. And really free to speak his mind and kind of cut through some of the jargon and some of the traditional talking points we hear to address the key challenges we face. So, with that, I'd like to turn briefly to Senator Brock and to our other panelists to discuss this, and we'll open up to questions from you all and look forward to that. I'm going to focus on more of the political challenge first. The burden that these leaders face in trying to come up with some solutions in the G20 and beyond. Stephen mentioned the pledge that was made last fall by the G20. It was honored more in the breach than the observance. The United States, not least among those that broke the agreement, we passed a bar American and we bragged that we did it in a way that didn't violate the WTO. So what? It is a protectionist act and the rest of the world looks at us to make decisions. We even came down on Mexican trucks, as if they were a threat to our security. And you do have to worry that we're facing a very, very challenging time, not just economic terms, but political. The more we move to a global economy, the more we benefit the national. And the more we increase pain at the local. That's a hard combination for a member of Congress to face. We were very good at following the old political maxim. If you've got a problem, find somebody to blame, be sure they can't vote in your district. That's what protectionism is. And it has the potential for done great violence to our opportunity to crawl back out of this mess. We don't tell the American people that trade is not the problem, that nine out of 10 jobs are affected by productivity, technology, changing market circumstance, or on occasion, incompetent management. We just say, oh, it's somebody else, somebody else that's putting too much pressure on us. The bottom line is this is an extraordinarily dangerous time. We've, we've compounded this present situation with decades of fiscal irresponsibility, both parties refusing to deal with deficit, refusing to come to grips with the entitlement challenge we face, refusing to come to grips with some of the expenditures we're making that don't work. We have the highest expenditures per child in education of any country in the world, and some of the worst results. We have the highest expenditures per person in the United States for health, and some of the worst results, at least among the industrial world. We have the highest corporate taxes.  We, we borrow from China in order to buy their product as if they were an endless, an endless opportunity there. We live in denial. And we've been doing it for for too long. So if you look at the way you, you break that cycle with whether it's a G20 or G2 or G8. We really do have to understand that you can't borrow your way out of out of this situation. You can't stimulate people who've been burned by getting so far into debt that they're terrified. You've got to find a way to grow your way out. And there's a limit to how much a stimulus cannot can get you to do that. And my own judgment is that the only way we can grow is by doing business with others, where both of us maximize our efficiencies. And that's called international trade. If you want the only free stimulus available, it's called trade. But to get from there is hard. The question then can we use things like the G20 to raise the stakes for the conclusion of the Doha round, to raise the price that people have to pay for engaging in protectionist acts? Maybe we should consider getting much more aggressive with some free trade agreements. Maybe we ought to pass things like the Colombian free trade agreement. Maybe we ought to talk about free trade agreements with Europe, or Japan, where we don't have any environmental labor issues. But somehow we've got to kickstart this recovery with something more than is being done now. And somehow we've got to find the leaders that have the capacity, the will, the integrity to do so. And the United States has probably got the most attractive articulate candidate for that responsibility. It's going to be very hard because I don't see a lot of support for him to take the hard steps in the Congress. That's my concern. First of all, my name is Clay Lowry. I'm responsible for toothless agreements and the G20. And so I understand kind of unfortunately how we got here and from a historical sense about the G20. In the 1990s, we were suffering through a series of financial crises in emerging markets, Mexico, Asia, Russia. It created, in some respects, a lot of bitterness, a lot of bitterness towards the IMF and other international financial institutions. Towards the leadership of the G7. It created a crisis of legitimacy in international organizations. It revolved around some tricky technical issues, revolving exchange rate regimes and debt workouts. And there was a fear that important countries on this kind of let's call it our road to globalization, we're going to disengage. And so one of the solutions was to come up with a G20 process to have emerging market countries and industrialized countries come together to discuss some of these problems. Because of the technicalities involved, it seemed like it made more sense to just stay at the finance ministry's level and central bank governor's level. And that was basically the world we were at for 10 years. So we fast forward to 2008. And there's a different crisis that's evolved. This time, though, not coming from emerging markets coming from developed countries, primarily the United States, but not just the United States. Again, there's a lot of bitterness. Some of this bitterness is towards the leaders of the countries, towards the G7, towards international institutions, not necessarily the IMF, but other types of institutions like the regulatory institutions. There's a crisis of legitimacy. And there's a lot of technical tricky issues to talk about credit default swaps, CDOs, and how do you regulate some of these issues? So the Bush administration in late 2008, again, another tricky path on the important road towards globalization, what do you do about it? I think one of the biggest fears within the Bush administration was, we don't want to see a return to the 1930s and the dangers that we saw at that time. And how do you do that? And one way to try to prevent it was to create a way of coordinating and having a real discussion amongst different countries. The G20 was the approach taken, not because anybody in probably the Bush administration thought the G20 was a perfect body because I doubt anyone did, but because it basically was an existing body that was there for a purpose, and it could be utilized. A different reason, which is not as well publicized, is I don't think President Bush, and I didn't ask him this personally, but I don't think he felt like he was in a position to figure out, do you stay with the G7?  Do you go to something in between that? And felt like this was a decision that was more for the next president in the United States, not for him. And at that point, that was neither President Obama or Senator McCain at that time. So now we're, here we are a few months later. And I think that as President Obama goes into, as Stephen said, his first real shot at the world stage, there are six over, I would say six themes or topics that are kind of for discussion in this group. And they're not in any priority, priority order. They're frankly just the way I wrote them down. The first is how do you stabilize the financial system or the banking system? This is an area in which almost the whole world agrees that it has to happen somehow. And in fact, actually, if anything probably when Secretary Geithner and Governor Central Bank Chairman Bernanke went to the G20 finance ministers process a couple weeks ago, they probably, this is where they probably got the most criticism. What is your plan for stabilizing your banking system? And since then, we've seen Secretary Geithner's rolled out some more initiatives and tried to come up with a plan that he can describe. I think that this is going to be a major area of issue and frankly, one where the US government is going to be on its back foot. Second, is how do you stimulate the global economy? Senator Brock referred to that which is this is where you've seen kind of the arguments internationally. Do the Germans really want another fiscal stimulus package? The United States has a large fiscal stimulus package. Is it going to work? Should others be doing this? I thought that you know, Secretary Geithner tried to come up with this kind of 2% rule that the IMF would follow 2% of GDP. I thought it was I didn't think it was such a great idea. But I think that that idea is going away, mainly because there is clearly disagreement on whether or not large amounts of fiscal stimulus is what is needed at this point in time and whether or not it will be effective. Thirdly is on financial regulation. Financial regulation, one thing that's happened is the Europeans, this has been a major focus. Obviously, it's a big focus here in the United States as well. Some would argue is it should be the focus at this time or do you need to do it at a later stage? What I think that you will hear is the discussion among some, which is that we need a global regulatory system, which back in November was not really part of the argument. I know it was in the press, but it really wasn't part of the argument, I think mainly because nobody exactly knows what the heck that means. But now it's basically it's becoming back again. I don't, I still don't think anybody actually knows what it means, but it's whether or not can you actually have more regulatory convergence on issues. It will be interesting to see whether or not the G20 can come to agreement on some regulatory issues. The one that we've been hearing about them, maybe there is some agreement, is something like tax havens. Let me just say whatever you think of tax havens, they have absolutely nothing to do with the financial crisis we're in right now. The fourth area, and I made this separate just because it's becoming, I think it's going to be the area where you see the most agreement will be on the IMF. The IMF, there's a variety of different parts of it. There's governance issues. Why is it that China has a lower voting share than Belgium? I think that's the one way people always frame it. Why is it that the head of the IMF needs to be a European and the head of the World Bank needs to be an American? So there's some governance issues about how do emerging market countries become more, get more say. There's a different issue which is about resources. The United States is talking about tripling resources. Europeans are talking about doubling resources. China is saying, well maybe we'll put some more resources in if you give something on the first thing, which is more governance issues. There is a different piece of talk which is about the IMF coming up with new types of mechanisms to provide basically something that a lot of people thought was a big problem in the 90s, which is unconditional finance. So liquidity support. This is something that the IMF announced last week. It is something that they talked about back in November. So far, the demand for that unconditional support is still a problem because it is supposed to go towards the good countries. And the good countries say we don't need the IMF. So how are they going to frame that and work on that issue? A different issue that might start popping up and you see this with Ukraine is, is the IMF having enough conditionality? So they're very scared of the Suharto moment where Suharto, where Kamda Su is standing over Suharto and talking about you must do this, you must do that, which is probably not what he was actually doing. And now the IMF doesn't want to have that moment ever happen again, but does it now put itself in a position where it's actually not helping countries because they're not helping themselves? And then finally, there's another tricky issue which is about this whole thing about SDR allocations, which has gotten all very confused about what is liquidity support, SDR allocations, and what is a global currency, which gets into what China was saying this week. And if I'm happy to deal with questions on that, very confusing and ridiculous subject. The fifth area, which I wanted to mention was development. I think that the World Bank is done a service by basically pointing out how many people around the world are going to that are not part of the global financial system in any stretch of the imagination are going to become very much poorer because of what's happening. And so I think that you will see the countries trying to figure out how to deal with a few issues. Do we need to provide more resources for the development banks? We've already seen that they want to provide more resources for the Asian Development Bank. We'll hear about the Inter-American Development Bank, the African Development Bank, potentially the World Bank. And secondly, are there ways of providing greater trade finance, especially for the poorest countries, because it seems like trade finance has dried up. Is that because there's less trade, or is that because there's less finance? The sixth area, and I think Senator Brock had on it very well, sorry, we'll just basically hit on it, just say the word is protectionism. And that will be an area that the countries will have to concern themselves with because frankly it's starting to rise and it's going to get worse, is my view. So all of those are the topics and I'll let David explain how we're going to solve all those topics. In eight minutes no less. My name is David Svigg, it's great to be with you. And to chat for a little while about the calm, peaceful international financial system we have right now. I feel sorry in a lot of ways for Barack Obama. So many of these problems they're not of his doing, but he's, you know, he asked for the job and they're going to, it's very tough. I mean, when I look at, I don't know if they've taken off, but I think they have, they're going to fly into a summit where less than a week ago the WTO World Trade Organization said issued their forecast. They said for this year trade will be down between nine and 10 percent. And which by the way, I went back and I looked in the period from 1929 to 32, the three year period trade was down about 30 percent. So we're on course to, you know, we're on a Depressionary course from the standpoint of a decline in trade. And this is just economically related to the negative effects on trade. We haven't seen a political effects, that is, you know, a rise in protectionism that, that if we're not careful, it is still to come. And I expect it to come. But I was, I was also, you know, as I read this WTO report, I also picked up the IMF's latest forecast, which they will present again to the, to the G20 heads of state. And they're projecting for this year growth, GDP growth to be down by five percent. But as I began looking at their assumptions, they see that trade is going to increase, increase by four percent. So that, that tells me that the IMF actually believes that, you know, they just didn't get around updating their trade numbers that, you know, this is a, a very, very ugly situation that President Obama is entering. You know, where are we today? I mean, we are experiencing kind of a global title shift, a massive deleveraging of the world economy in which the value of virtually every asset is being reappraised downward. And it is, you know, government efforts are valiant to try to come to terms with what is essentially almost like a force of nature. But it's a little bit like to mix the metaphors. It's like, you know, spitting into a force five hurricane wind. It's very, very tough, given what we're experiencing right now. You know, the conventional wisdom is that we have a, the bursting of a subprime related mortgage bubble. And that has happened. And that's globally speaking. And we saw the bursting of a 1.5 trillion bubble. But the conventional wisdom maintains it's just kind of, you know, it's just one bubble. But I would argue that we probably face nine bubbles. And you look at globally speaking outstanding credit card debt, 2.5 trillion, emerging market debt, 5 trillion. Some people would say it's higher. You have at least 15 trillion in foreign exchange derivative exposure. The commercial real estate globally and the reinsurance industry, at least 25 trillion. You have the notorious credit default swap bubble that everybody talks about. There are a whole series of these things. Now, this, I don't want to be too scary in this scenario, but you can easily, in the back of an envelope, see why markets are nervous. Because you total up, you can get to $100 trillion very easily. And let's assume that there's a 10% haircut on these bubbles, that the bubbles deflate by 10%. That's $10 trillion. To put this in perspective, global GDP is about 60 trillion. So we're talking very, very big numbers.  I mean, you know, it's kind of good and bad on the positive side. The world has plenty of capital. The downside is, it's all sitting on the sidelines. And I think about 8 trillion in global money market funds alone. And in the 1930s, we just stuffed money in the, in the mattresses. Now we move in the short term government debt in global money market funds. But, you know, another conventional wisdom, point of conventional wisdom that I'd like to deburse is the notion that we got in the, into this problem because, you know, some banks lent some money to people couldn't afford mortgages. And it was simply a mortgage problem that got out of hand. But I would go back, I would make the case that the seeds for the current situation were planted long before with the fall of the Berlin Wall, which was, you know, a very important event. But with that event, and I'm going to simplify a bit, but you saw major economies emerge, China, India, Eastern Europe, large parts of the Pacific Rim. And they wanted to be like us. They wanted to be capitalists. And they were quite good at it. And once you got to the late 90s with the Asian crisis and the Russian default, they became even better. They, there was a desire, most of the emerging markets to set up their economies as giant export platforms. And to export to the industrialized world with the U.S. consumer being the, you know, the gluttonous U.S. consumer massively overleveraged being the, you know, the favorite target.  You saw this, you know, the emerging markets, you know, building up huge foreign exchange reserves as they exported to the U.S. and to Europe. And we, and that money was recycled back into our, into our treasury debt. And everything worked beautifully for a while. But I think, you know, when we, when we look at the kind of reporting on this, the last, you know, decade or two decades, you know, there's so much concentration on the gluttonous American consumer. And, and it was a reckless situation where you had people just consuming beyond their wildest imagination, going into debt, credit card debt and all the rest. But there was a, there's also a flip side to that argument and to that situation. And that's the situation that Barack Obama is going to have to confront. And the flip side is that the rest of the world, or at least the emerging markets, and I would throw in Germany and some of the other countries, became dangerously export dependent. And I think the argument was no one ever believed that the U.S. economy or its financial system could ever collapse the way it has. And so the assumption would be that we would continue to prop up the, the world economy. So you have this, you know, Obama is going into a situation where the very model under which the global economy has operated for the last two decades, the emerging market export model is what I call, has just made a crash landing. And even still, we hear the same questions saying, do you think the Chinese are going to buy our debt or do you, you think the American consumer once again steps forward and, you know, to, to carry the world forward, the world economy forward. Well, you know, if, if I had my way, I would have the president say, we need a new model. We need to rethink this whole system fundamentally, not just, you know, tinker at the edges. This is separate from the whole financial, you know, issue of a, of our complete lack of understanding of our financial paper and our turning over our financial destiny to 5,000 specialists, but that only know what this paper means and what its value is in a crisis. But I will end this with a couple points. You know, if you're watching the summit this week and you probably need a translator and not to translate, you know, the language because everybody will pretty much be speaking in English or at least have a translator there. You need a translator for the meaning. So when the German Chancellor says, we don't feel we need stimulus, fiscal stimulus or any additional fiscal stimulus, what she really means is the emerging market export model has crashed and European banks are massively exposed to the financing, as you pointed out, to emerging market trade debt. In fact, European banks are at least three times, and some argue six times as exposed to emerging market trade debt, as American banks are to subprime debt. It's just that the Europeans aren't talking about it and they don't want to, you know, it's very much hoping that no one notices, but they give you an example. The Austria, member of the European Monetary Union, 300 billion dollars of bank exposure, almost all to Eastern Europe, of course Hungary is collapsed next to it. The Austrian GDP is only 370 billion and so there's a significant exposure and that's why, Merkel, the translation is we're going to need every dime potentially to bail out our own banking system, but if in fact the world, if this trade trend that I'm talking about, trade growth trend, is actually a lot worse than the IMF projections, you know, the same thing with China, very similar type of situation where the Chinese leadership, they need to lecture the US. They need to say the Americans and the industrialized world, they got us in here because they got to deflect attention to the fact that China is a major social and economic bubble, potentially about the burst and they have huge expectations in the Chinese economy of, you know, the Olympics were supposed to be the coming-out party and it may in fact be the going-away party because they have, you know, their momentum-driven economy. I'm giving the glasses half empty side of this, but they're momentum-driven economy, heavily dependent on exports and they are trying desperately to stimulate their economy. I think it's very tough to do with an aging society, with no social security system, no safety net. The Japanese tried eight packages in the 90s, none of them worked. It's very, very tough to do unless I guess you drive around the villages and you knock on the door and say I want to see your toaster. It's an old toaster. Get in the truck. It's very hard to, you know, to force the kind of consumption needed. So anyway, I will end with this, that we are talking about, and we can go into it for a couple minutes, about the financial situation, which I had to specifically haven't gotten into directly, but I would say that, you know, we're fixated right now on how to bail out the banks, how to stimulate our domestic economy. The one thing we're not looking at is, with this collapse of the emerging market growth model, and with the collapse potentially of the European banking system, we are underestimating the potential for political risk. And we haven't figured, you know, we need to, we need contingency planning. Barack Obama needs to think through what happens if various things happen, because when the pie is expanding, everybody loves each other and the pie is shrinking, I think we have all types of scenarios. And I would say, is there anyone, there might be someone, anyone in this room who predicted that the Russians would march into Georgia? I don't find many people did. So the nature of political risk, the potential there, is the thing that I think is, that we're not looking at very closely right now in this country. And I think I've talked long enough. Thank you. Before we turn this over to questions, just to build on that last point, because I think it is so critical.  How do you see this rippling through the system, you know, the export model? What are the real risks you see to both democracy and stability around the world? And then I guess Senator Brock and Clay, if you could address, how do you think the U.S. political system, and both in the G20 and others, are going to react to this? And what kind of contingency plans or operational structures do they need to put in place to kind of weather this storm? Well, as I say, we already have, you know, a collapsing trade scenario. So once you add, I guess if you political risk, then the chances of the market seeing a protectionist shock, that rises significantly. I guess if you want to see a micro or a window into the potential future with emerging markets, look at Eastern Europe right now. I mean, they, you know, they are, they've done what other economies do when they're in trouble. They've slashed interest rates there. So their currencies have dramatically weakened. And in most cases, their debt borrowed from mostly European banks is, is, you know, is the arrangement is that has to be paid back in hard currencies, either in the Euro or use, or the Swiss franc. And, and of course, the local currency is plummeting. And so that means that they're going to eventually default on that debt. It's going to be very tough. And the IMF doesn't have enough money to bail out all emerging markets as this process unfolds. I mean, that doesn't matter if they increase the quota. They're talking about the big, big dollars, unless the Chinese, for some reason, step forward and, and put their massive reserves on the line. But it is, you know, I think the, again, to follow the European, what have they done? Well, the first thing you do is they do, you know, you can look at what they're doing, the German automobiles. Look at that.  I mean, it's, it's getting rough. And if, and as I expect that will spread, it could be a very ugly world. And I would love to, you know, one of the, one of the problems is that Obama doesn't have, when he looks at, he doesn't have the kind of strong leaders that he could reach out to that other presidents have had in, in Europe and, and elsewhere around the world. They see these, everyone seems to be, you know, politically very nervous.  I look at a country like Ukraine, which is obviously very geopolitically significant, and they're in trouble. And the IMF, obviously, has put together a package. It was a pretty significant package. And I don't think it's going to work. And so what will happen if that doesn't work, and the international community cannot rally around to provide more finance, because there's going to be a lot of people looking into internally, as opposed to externally. In some respects, maybe the more interesting thing is what's going to happen within our own country in terms of the politics. And it's pretty ugly. I mean, we were talking upstairs about whether or not does the pendulum switch too much from risk taking to absolutely no risk taking. And I would say that that's going to happen. It's going to happen because we're going to over-regulate. Even no one wants to, we're just going to do it. And then we're going to, we already have a situation where anybody now is just scared to put their head above the fray, because it's going to get slapped down. I mean, and I don't just mean the AIG compensation bonuses. I mean, just anybody who seems to basically be able to take risks seems to almost get into trouble within the political dynamics here in Washington. And so somehow, I think, and I'm glad to see that both President Obama and Secretary Geithner, I think, have recognized this a little bit, and have started to talk about how we need financial institutions to take risks. That is what they need to be doing. They don't need to take the risks maybe that was done three years ago, but they need to take some risks. And I, so I worry that that will create more of a problem within our own country about the politics creating even a worse problem for our financial system in terms of risk issues. Two thoughts. One, the great American job machine is called small business. Small business has no access to credit right now for IPOs for growth. And the willingness to extend credit is close to zero unless you've got AAA rating, which in case you probably don't need it. That poses a real serious challenge to our economic recovery. And it's going to be, it's hard to break that cycle right now. The other half of that, of the equation, though, has to do with trying to borrow our way to success. If you look at the rate of expenditures of our government, we're talking three and a half trillion dollars this year. Trillion dollar deficits almost as far as you can see in the future. Now money has to come from somewhere. You can borrow a lot of it. How many trillions does China have in reserve, David? Well, almost two. Almost two. So we can wipe out their reserves in about 60 or six months if they want to lend to us. Why would they lend to us? Because the other way we can expand money is by printing it. When you print money, the old rule of economic, Russian laws says bad money drives up good. The more money you print, the more you devalue your currency, the more you devalue your currency, the more you raise the cost of financing your expansion. So we face the unholy dilemma of either having to borrow or print. And the ability to borrow has a limit because we are increasingly less of a market to the country from which we want to borrow. And the printing will cause the currency to go down in value means interest rates go up and inflation goes up. There really is horrendous challenge to any member of Congress, much less the administration, to face the fact that we have some very hard things to do in this country. And we keep postponing those decisions. And it's just a challenge to see how we can turn the country around until we turn our political system around and get some people to take risk politically. That's hard to do. You've got a president with a capacity and whether he has the support or not, I'm not sure. Thank you. I'd like to open it up for questions. How about right in the back? Thank you, Zeng Xin from Cai Jing Magazine. Just China's central bank governor Zhou Xiaotuan suggestion about this ICDR making ICDR to a tradeable and reserve currency is rather actually for the longer term I think. But recently the Chinese vice-premier Wang Qishan suggested has made it clear that to inject into the IMF, he has prioritized the three ways of Chinese injection. First is for China to inject some capital in exchange for the quotas, of course. Second, you can make the quotas unchanged, but the IMF issue some more SDRs outside that that's the second way. And the list, but the third is the IMF to issue some debt to China and China will buy. China has made this clear. And also, Mr. Stroskal of IMF has said that all these three options is now very possible for China and IMF. So I wonder what do you think of these three options? What are the advantages and the difficulties of them? And also for the fourth, the longer term SDR reform, what's your will on that? Thank you. First, I think that it is a very legitimate argument for China to say if you want more money from China, we want more quota or we want a bigger say in what's going on at the IMF. I think that's a very legitimate request if you look. I think it was the, what I saw in newspaper this morning that had kind of who's underrepresented at the IMF and it looked to me, at least if I read it correctly, like besides the United States, the most underrepresented might be China. In Japan, I think was fairly underrepresented. So I think that that's a fairly legitimate thing. The question will be is in order for that to work, who gives up some power? And that usually means the Europeans. And so that's becomes a difficult issue. The second issue in terms of China basically saying that they are willing to buy bonds from the IMF, I think the trick there will be the IMF has never issued bonds in its history, to my knowledge. And so it will be a whole different world for the, for the IMF to get into to actually issue bonds. And so that means the membership is going to have to agree to something that will be significant given the fact that all most of the governments that are part of the IMF are going to also be issuing bonds to pay for all this fiscal stimulus. So at some point, there might be a little bit of a crowding out from everybody issuing bonds. I think the, there was a fourth skip to the SDR allocation. SDR allocation is an interesting idea, which is basically to try to help solve liquidity problems. And the, I think the only hold up would be is whether the United States agrees to it. I think that there are some within the Obama administration who are very supportive of an SDR allocation. There are some that question whether or not an SDR allocation is actually all that necessary right now, because is really what the problem in the world, a liquidity problem, or is there just a counterparty and solvency problem. I think it's an open question. I think that there's different sides of that debate. I'm not sure that right now the biggest problem we have out there is liquidity. And then finally is whether or not they're kind of the reserve currency aspect. I mean, I think the IMF would be the first to say that SDRs don't, are not a currency. I mean, they don't serve as a, as a medium of exchange. So, but I think I understand if you're in the Chinese government, why you're basically trying to figure out how do I move off of the dollar? But how do I move off of the dollar without driving the dollar down? And the reason is because our, so let's take David's $2 trillion of debt and not all of its dollars, obviously, but if so China says I want to move 10% of my allocation to some other currency. Okay, well that's selling $100 billion of US Treasury bills. That's significant. And that's, that significance could drive down the dollar, which China doesn't want to see happen because I would hurt the rest of their portfolio. So I think that what they're trying to figure out is how do you actually eventually move off of it? I find the SDR proposal a little bizarre, but at the same time, I think that they're trying to signal and I, you know, I, I probably should never, ever try to guess what China is thinking is, how do I move off of it in a way without harming the dollar in the short term? And I think that this is part of that idea. And this is maybe just kicking around some ideas. Well, I guess I would look at the, you know, the broader implications of the, of where the world economy is going, separate from the currency situation. If you look at the history, particularly in the, in the 30s, the, the countries that were the surplus countries, which in the scale of the US got hit much harder than the deficit countries. And, and if that is true today, then, you know, the, you look at the deficit countries, probably with the exception of China, Europe, other parts of Asia, Japan are going to suffer much more than ironically than the US. And if, if, if that's the case, we could end up in a situation where, you know, we have this US, this kind of two poles of the world, China and the US, with vastly different economic systems. And we're going to need to come to terms with, with that, that trade relationship.  My concern would be at some point, the Chinese trying to engage in currency depreciation. I mean, I think that is, you know, the beggar diner, my neighbor currency depreciation, along with, you know, disguise forms of protectionism, protectionism is, I think the global fear.  So I would worry that we end up with a world where everybody wants a weak currency because everybody wants to expand their way out of this, you know, using the export platform and, and it puts the United States in a tough position. That's why, you know, there was a guy, David Rothkoff, who wrote a piece in the Sunday Washington post outlook section on where are the leaders. And it was, I thought a very, you know, clever piece. It was a fun read too. But I mean, he's right. I mean, we're going to hold this together if we have leaders that kind of have a vision about, about what the dangers are. But I see the dangers there, thy neighbor currency, depreciation, protectionism. And then just as we saw in the 30s, you know, you see capital controls in one form or another, efforts to restrict capital as the great fear. Now, I'm my, my general view of the economy right now is I think that, you know, we was putting so much faith in the Obama stimulus plan. But I'm worried that, you know, we're moving, you know, so much of, you know, 70% of the 70% of the economy is the consumer and so much of the whether the economy succeeds or not, it depends on psychology. And we have a American, Americans collectively have just taken a $15 trillion hit to their balance sheet, to their, to their wealth.  It was insanity.  And, and now we're spending probably less than 50 cents. So what do we do? Do we return to the 70 or 80% level? Or do we return to something, you know, more like the 70s? And if, if in fact, we, you know, our propensity to consume as a, as a nation is never returns to even kind of the situation of the 90s, you then, then Obama's fiscal stimulus plan is far too small.  It's small because the Americans consumer has, you know, this kind of psychological is in a retrenchment mode. And I'm, I'm concerned with that. And just to repeat a little bit of Bill's point, if you are, my, my line is your, if you're well Warren Buffett, but I had to remind myself, you know, Warren Buffett no longer has a triple A rated company, but say, Warren Buffett in the handful that, you know, highly respected companies, because I think the insurance industry is one of those bubbles and the reinsurance that's coming. It's going to be a big problem and his company is big. But let's say you're Buffett and you have, and you're, and your friends who have triple rated companies, it's got to be frustrating.  He's getting a subsidized. He can borrow money for 2.9%. And, and then you have next to him kind of the, you know, the politically plugged in banker. I didn't say Goldman Sachs.  But here you are. You've done everything right. You know what your balance sheet is. It's an accurate reflection.  You pay at minimum 6% for money.  You see your son or daughter is sitting out in Silicon Valley and has a brilliant idea. It's going to be the next Steve Jobs. But if they're lucky, they're going to pay 12 to 14% for money. And as Bill said, they probably can't get the money because a venture capitalist will say, they'll never get an IPO. I'm just throwing money at a great idea, you know, in this kind of environment. And, you know, this is not a great way to have a financial system.   But, you know, it's unfortunate right now that there's so much distrust of Wall Street that I think no matter what Geithner comes up with, you know, it is going to be a complication because the public now assumes they're inside deals. And to tell you the truth, they are inside deals. But they, you know, and I would recommend there be much more transparency.  But there needs to be the pulling together of the world specialist in financial paper. And the chairman should be someone who's not from Wall Street. I mean, I got in trouble. I once said it was Jim Baker, you know, and Baker doesn't want to do that. So, but someone who's a proven problem solver but not from Wall Street puts these guys in a room and he says, look, we cannot bankrupt this country, you know, based on our fear of paper. And that's what we essentially have a web of paper that ensures the mortgage backed security or asset backed security market with another derivative pyramiding on top of that. But we have this, you know, we are paralyzed because we're so afraid of having to evaluate this paper. This group should know the counterparty risk, the second and third level, so that the American people can know. We know the whole story. So we know, for instance, if there's the credit default swap market, it's so bad that we the taxpayer money is going to, you know, to help Deutsche Bank or to help a French bank, you know, we should, we should have a much more, you know, a better understanding of the full nature of the problem. And I will there say, it's going to be my guess is highly international. So there should be burden sharing. This should be part of the G20, a discussion of how we unwind this paper. And if there needs to be burden sharing internationally, then we ought to all be in there and say, look, we cannot go down because we're worshiping at the shrine of the derivative market. We need to say to what what part of this market, for instance, was purely speculative. You can see I'm on a soap box here, purely speculative, just for trading profits, which which was a legitimate part of a kind of a hedging or ensuring operation for a company. But, you know, we just can't this notion that we can work behind the scenes and the public's just going to give us a pass on that. I'm not so sure in the long run that's wise policy. Anyway, let me just I'm sorry, I'm just jumping here. Here's the problem. Obama has got to walk the tightest line known to man. He's got to keep our confidence high enough to get things done. But he can't raise expectations to the point where we're going to get disappointed time. And you do that a few times and he's lost credibility and we've lost the ability to act. A lot of this is psychological and you've got to just accept that fact. And with all respect to David's point, the reason we're here is because we don't know how to measure risk in a world with derivatives and collateral debt obligations and all the rest. We've lost the connection between that local banker and the local homeowner. And if you break that tie and begin to slice and dice these obligations to the point where you don't even know what's in there and then you have to go to an AIG and get an insurance on it, there's no way to measure these things. That's where we are. And it's a really hard thing to change. The second complication is that if you want to deal with some of these issues and David's right, you're going to have to bail out some institutions we haven't talked about yet, tell me how we do it when we can't even get a majority of the American people to support betting on GM. How do you think they're going to feel if we want to bail out Dutch bank or UBS? It's not an easy sell. And then you've got to lay down the foundation of all this, which is as individuals, as families, as people, as communities, as a country, we have been spending way beyond our means. We've had negative savings in the United States certainly for the last 10 years. If you're going to shift back to the normal rate of savings, which is somewhere between 6% and 10%, that's going to take a significant whack out of our ability to consume. If you're going to do that, you're going to hammer China unless China is able to stimulate its consumption. China can't do it as fast as we would hope because their GDP is so much smaller than our civil leverage factor, or the mathematical model didn't allow them to move fast enough to solve our problem. All of this says that each piece of this, of this puzzle, is connected. And you can't do one without doing the others. If you try to do it that way, you're never going to get home. Let me just add this one more little point. You know, I feel for our Treasury Secretary, because he was there when Lehman Brothers went down. And in the whole Treasury and the Fed and entire Washington establishment completely underestimated the contagion effect. So there is a feeling now to be very, very careful about systemic risk to the international system having experienced Lehman. But I wonder if, in fact, that fear is keeping us from thinking big and thinking about outside, and I hate this cliche, but outside the box at finding solutions to dealing with this paper with a paper. Because if this were just any old other company, you know, the best stuff would be in a separate vehicle amortized over 40 years with some type of tax advantage and it'd be all over. But we're not thinking big, I believe, just because that Lehman experience was so traumatic as they saw the credit markets just seize up. And nobody wants to go through that again. So it's made us very risk-averse and it's made us also intellectually frozen. We can't think about anything that's outside of very, very incremental in our handling of this problem. And anyway. That's what it's like. Norman Bailey Institute for Global Economic Growth. I have a question for David Smick. But first, I would like to say that I think Mr. Lowey's question about whether we're in a situation of insolvency or liquidity was answered by your colleague. Bill Brock said you can't borrow your way out of a situation of over indebtedness. And David Smick said there's plenty of liquidity in the world.  I don't mean that to you personally, but it is. I had worse said today. David, now that the US government has, in effect, nationalized a good part of the economy and is telling private corporations, formerly private corporations, what to do and what not to do and who to hire and who to fire and who to merge with and so on and so forth, are we moving towards a corporate state, which in the 1920s, 1930s was sometimes referred to as fascism? Well, I'm not thrilled about it, about the direction we're moving in. I think we have a lot of confidence and the ability of government to handle this. But I will also, so philosophically, it's against everything I believe in. But I do think that if you take the taxpayer money, I do think it does make you different. And I think that you have to think long and hard about when you put a cap on a salary, because you don't know if you're essentially draining the financial institution of its talent. And I frankly think that you're going to end up with mediocrity. But on the other hand, you are different when you take the money. And you're then suddenly in the political arena. And I don't blame people for being angry. I mean, you can say it's a retention bonus.  I just hope it doesn't go beyond that, where we think for political reasons to. I mean, I hear from people who hedge funds in private equity firms that I say you're going to be involved in the TARP. I mean, in the public-private guidance plan.  But what happens if you make a couple hundred million dollars in a year? And then the next thing you know, you're dragged to the basement of the capital into a torture chamber. And somebody said, and Dick Cheney's doing the water boarding when I said no. But I mean, you're, you know, and you're saying to the Treasury and to the minister, but you said you'd protect me. I don't think they can, when you're talking about this kind of populist political outrage. So I think it's, you know, they're real dangerous. I can understand, you know, you're different if you take the taxpayer money. But it's very hard to stop when you play the populist game. It's hard to stop at any particular line. I think the administration finally called on to that. Last week. Thank you very much. I'm John Rutherford with Interaction, which is a group of NGOs. Clay is an excellent list of your themes. I would like you or anyone there to give elements. There's no solutions at this point, exactly. But the stabilization of the banking and financial system and the stimulus of the global economy both seem to be almost impossible. Europe's saying they have a safety net. They don't have their stabilization. I mean, what are the, what would be the elements? Not a total solution, but what would be the elements that would be useful in trying to address one or both of those issues? Well, I think that it is, I guess if we had a solution for that, we would have tried to come up with it.  It, is that I think that people aren't sure. I actually believe it's more solvency. But I think that a lot of people keep believing it's liquidity and including people that are talking about SDR allocations and so forth. Fiscal stimulus, which is what obviously this administration, the Obama administration thinks is what is needed. I think it is something that the Japanese, the Chinese, I would guess, I would guesstimate that the Brazilians, the Mexicans, most of the other non-European G20 would also say is exactly what needs to happen because they are most concerned right now, not about their banking systems, they're most concerned about economic growth and job creation. The Europeans, I think, I think David's translation is a good one. I think that the Europeans would also say we've already done a lot. And we are concerned not just for saving money for a rainy day, so to speak, but which could be a huge hurricane. But because they're basically, there is some concern that we're overdoing some of this fiscal stimulus, and it goes towards Senator Brock's point about when does your debt start becoming a little less worth, it becomes more worthless, and then your dollar starts dropping. So I guess that if I had a solution, I mean, I don't know if anyone has a solution. I think that basically the Obama administration is trying to put together a plan in which they have a stimulus package. They have some way of trying to stabilize the financial system, including trying to figure out how to deal with the toxic assets. And by the way, I've noticed that they're running into the exact same problems that the Obama, I mean, the Bush administration ran into. In fact, and they're trying to make sure that they address the international problems by doing more on emerging markets by basically boosting the IMF. The area I actually think that they're not doing nearly a good enough job on is the area that Senator Brock and David Smith, both, and actually Steve Sragi, both hit on, which is protectionism. Let me just give you another one. The fact that in the stimulus package, talk about being scared, if you come in and help out on the public-private partnership, does that mean you have to get rid of or you can't hire people that have H1B visas in this country? It is just a ludicrous bill. And this, by the way, was passed with bipartisan support. And but it's just ridiculous that basically that's how we're going to help solve this problem because we're going to hire a more qualified American than somebody that comes from India.  So I think that there are things that they can do. And the G20, hopefully, I mean, this was the overall discussion piece, helps us do a coordination to stay away from David's doomsday scenario of beggar thy neighbor currency policies and beggar thy neighbor regulatory policies. Yeah, I want to go to the specific policy that I would suggest. But before I do, let's admit that economic illiteracy is a contagious disease in Washington. And it's spread wide, particularly in place called the Hill. That's worrisome because you really do have to think out of the box. David said it, Clay, also. What have we not talked about? Anybody? Doha? The world trading round has been going on and on and on. We got close, but we never got to the point where we could reach an agreement. If you want to change the psychology of not just the United States, but of the world, how about committing to a significant reduction in trade barriers that now impede our recovery? Do that as a beginning.  A few countries, mostly one called India. OK, it's about time for a leader of the United States and the country and maybe our friends elsewhere to play some hardball. Doug got it, one country should not be able to bring the trading system to a crashing halt or refuse to allow the growth that will allow us to claw our way out of this mess. So it seems to me that if we want to have some serious movement to reduce the burden on the stimulus package and put the burden back on the economic genius of a trading system, tell the Indians to play or get off. Tell the Chinese, we need you and we're not going to take a no for an answer because your stakes are bigger than anybody's. If you do that, maybe we can shake the world up and quit whining about the fact that it's always somebody else's fault. Let me just make one more point because we've been talking about China and we're talking about how we finance our debt and all that. And let me just try to close the loop here a little bit. I'm a big admirer of Federal Reserve Chairman Ben Bernanke. I think he's a perfect guy that someone who's been a student of the 30s in charge when you're going through a period that has potentially some resemblance to the 30s. I think he loaded the Fed's balance sheet with a lot of dubious paper but it was all short term maturity and I had no problem with that. But I think there was a development that happened at the last meeting of the Fed, of the FOMC in which that was a huge issue and was barely mentioned in the press. And it relates to the Chinese and it relates to how we finance our debt. The Fed announced that it was going to buy long term treasury securities. And I think the message of that to the Chinese and to others was that's the crack open of the door for the monetizing of the debt. And I think that the Fed always, to be smart about it, always wanted to keep that option in case there's a doomsday scenario but had no intention of moving on that this soon except that they saw that the whole political base for bailing out the banks on Capitol Hill had totally collapsed. And so one that collapsed they immediately said we've got to do this or we're going to have a steeply slope yield curve. In other words, we're going to have long term rates continue upwards and short term rates even though we keep short term rates the same. And to tell you where things have been you had just before Christmas you know, the long term rate go from slightly more than two to almost three. And then the Fed has tried to bring it down. It's about two seven. But that was a very important underreported point. And I think the market doesn't think that Bernanke's never won some inflation but they don't know who's coming on. Who are the future Fed chairman? Maybe it's a political appointee from someone they don't know. You know, and you look at the history of back during the Nixon administration with Arthur Burns the pressure that can happen. So I do think that that, you know, that I wanted to close the loop because I do think that that is going to be a problem and the Fed's going to have to show with that it has great credibility in the future and is not, you know, doesn't consider. Now, you know, it seems absurd to think about inflation now except people who by bonds think about that all the time. Well, I think this has been a fascinating discussion out of respect for our panelists. I think we could go on all day on many of these issues even though it's not the most optimistic outlook out there. But thank you all for coming and thank you for participating and I think some very critical and important notes that going forward that we have to address. Thank you.