How The World Recovered: The 2008 Financial Crisis Ten Years Later

Peter Robinson: 10 years ago this year, the worst financial crisis since the Great Depression hit the United States and spread to other countries, including the United Kingdom. Then and now, with former fed governor Kevin Warsh and former Chancellor of the Exchequer, George Osborne, the chancellor and the governor on Uncommon Knowledge now.

Peter Robinson: Welcome to Uncommon Knowledge. I'm Peter Robinson. Kevin Warsh served as Special Assistant to the President for economic policy and executive secretary of the White House National Economic Council in the administration of George W. Bush, and from 2006 to 2011, he served on the board of governors of the Federal Reserve System, better known, of course, as the Fed. Mr. Warsh is now an advisor to a number of companies and a fellow at the Hoover Institution here at Stanford.

Peter Robinson: First elected to Parliament in 2001, George Osborne served as Chancellor of the Exchequer in the Conservative government of Prime Minister David Cameron from 2010 to 2016. Roughly speaking by the way, Chancellor of the Exchequer, which is a medieval title, corresponds to both our Secretary of the Treasury and our Director of office and management in the budget, runs the money and the budget of the entire government and represents one of the ancient great offices of state. Mr. Osborne is now editor of the Evening Standard in London and a visiting fellow again here at the Hoover Institution at Stanford. Kevin and George, welcome.

George Osborne: It's good to be here.

Peter Robinson: What happened? Crisis of 2008. You were on the Board of Governors, you were shadow Chancellor, that is to say you were one of the important, you were Leader of the Opposition in Parliament when the crisis hit. What did it feel like? How long did it take to realize how bad it was?

Kevin Warsh: So it took us probably longer than it should have to realize how bad it was. When things started to fall apart in 07, 08, we knew things were bad, but we didn't know there would be a full on panic. I'd say by the time we got to somewhere between March and the summer of '08, we got it, and it wasn't easy to get but we finally figured out that we were on the verge of something quite dark.

Peter Robinson: Bear Stearns almost goes under, Fed bails them out or arranges for a bailout and then Lehman Brothers does go under. What was that date?

Kevin Warsh: That was around a week ago 10 years ago, so mid September 2008.

Peter Robinson: And when Lehman went down, what was that like, Kevin? That was a precipitating event. The skies are getting darker and darker. Suddenly Lehman goes down. Lightning thunder, it's bad. Is that right?

Kevin Warsh: So that is the conventional view. It's not happened to be my view, but that is the view.

Peter Robinson: You were the captain of the ship at the time or a captain.

Kevin Warsh: Well, I didn't always feel like I was a captain, I felt more like I was down in the galleys getting beaten up. But I'll give you my sort of quick summary of that. The conventional wisdom of course, is it all came down to Lehman weekend and somehow the authorities in the US in negotiations with the authorities in Britain had to figure out what to do with Lehman. Should Barclays Bank buy it or the rest? My judgment going into that weekend and my judgment 10 years later, is this ship had sailed. We were already on the precipice of dark things. Had Lehman Brothers never existed, the crisis and the financial harm would have already been done.

Kevin Warsh:  It was the weeks and weekends and months before that, that really laid the predicate. Lehman I think has played a much bigger role in the narrative than I think it deserves.

Peter Robinson: I see. All right, you are shadow Chancellor in the Conservative Party in the waning, what turned out to be the waning months of the Labour government of George Brown. You're not privy to, I beg your pardon, Gordon Brown.

George Osborne: There was a British politician called George Brown in the 60s as well.

Peter Robinson: My history of British politics isn't that good. It was just a plain misspeaking I'm sorry to say. So what is it like for you?

George Osborne: Well, we were spectators because we were in the minority, we were in the opposition. But we have this election looming and essentially, the election had been planned on the basis of the economy was going to be relatively well, and suddenly that dramatically changed. We'd had a bit of a taste of it in Britain a year earlier with the run on Northern Rock, which was a mortgage lender in the north of England. But it looked like that had been managed. It was only sort of brewed in the summer of '08, that we realized actually that it was the precursor of things to come rather than a one off event.

Peter Robinson: Correct me if I'm just playing into a caricature, but the Tory party would have plenty of connections in the City of London. Did you have people ringing you up financial figures in the city saying, George, this is serious. Did you have anything taking place?

George Osborne: I certainly had conversations with people who said. we're on the edge of something very bad. In fact, there was a guy in finance who I met at an American conference, although he's British and I'm British, at American Enterprise Institute conference and he said, just watch what's about to happen. So, though we were spectators, the actual events. Of course being in Parliament, we were required then to take a view on how we're going to vote on various bailouts as and when they came. And start to think about the cleanup job which I thought would be coming my way pretty quickly.

George Osborne: And in particular, the fiscal cleanup job because Britain had suffered both a hit to its revenues because of the impact on the financial sector, which was a big contributor to government revenues, and had already gone into the crisis actually ill prepared in my view onto that Labour government because it had already been running a budget deficit after years of economic growth. So we were ill prepared and had taken a structural hit. So on the day I became the Chancellor, we had a 12% budget deficit which was the largest of any of the major countries in the world.

Peter Robinson: I want to come to that in a moment. First, then Fed Chairman Alan Greenspan testifying to Congress in the autumn of 2008, "The crisis has turned out to be broader than anything I could have imagined. Those of us who looked to the self interest of lending institutions to protect the shareholders equity," what he's saying there is those of us who believed that free markets were self correcting, "are in a state of shocked disbelief." Then and in the decade that has followed, what effect have the events of 2008 had on your beliefs in the free market?

Kevin Warsh: So the cheeky answer to that is, well, maybe we should try capitalism, which we weren't practicing quite as perfectly as we purported going into it and perhaps we should give it a shot now.

Kevin Warsh: I would say secondly, that's the thing about panics, panics are fundamentally different in 2000 years of economic history than recessions. The Fed was created after the panic of 1907 to respond to these things. 100 years later, the Fed was a panic responder. So what would normally happen in recessions where markets clear at lower prices and policy response tends to be fundamentally different in regime of panic. So even if those who thought that free market principles didn't hold up so well, I would suggest that panic environments are fundamentally different.

Peter Robinson: Got it. George?

George Osborne: The view I took at the time was that this really was different from a normal downturn, and this didn't require therefore the normal stimulative policies that you might deploy. I was quite taken at the time by the work of Ken Rogoff and Carmen Reinhart on financial crises and the long tail that it was going to leave.

Peter Robinson: A chancellor who reads economic theory. Was that sound?

George Osborne: In fact, we tried to get Ken to come and work for the British government which he was keen to do but he had very good family reasons why he couldn't move to the UK. But he was certainly a source of counsel and of course at the time, the prevailing economic opinion articulated by people like Larry Summers and others.

Peter Robinson: Larry Summers is the Harvard economist who-

George Osborne: Yeah, and by the way, I think is a very smart-

Peter Robinson: No one doubts his intelligence.

George Osborne: and engaging person. He and others were absolutely of the view that what was required was massive fiscal stimulus. I didn't take that view. I thought we were, particularly for the UK not having a reserve currency, we were facing a potential double whammy of a fiscal crisis on top of a banking crisis. I think where I disagreed actually with some of the policymaking for example in the European continent, I was all for monetary stimulus. I was actually not against very low rates, quantitative easing in that situation. But that was combined with a fiscally conservative position.

George Osborne: So that was the sort of policy stance that we took in. It was one that I agreed with Mervyn King at the time, who was the governor of the Bank of England, who of course came to an independent judgment but we worked together on it. I guess what I didn't appreciate at the time was the 10 years on here we are talking about it and really the political impact of that financial crisis, essentially the system not delivering the rewards to working people that they had come to expect because of the impact of our large financial crisis has of course had a massive impact on the politics of Britain, Europe and United States.

Peter Robinson: Kevin, here in the United States, the Fed flooded the system with liquidity and then engaged in another couple of rounds of so called quantitative easing, one huge round of 2012, another that lasted from 2013 to 2014. And you'll correct me if I get these figures wrong but as best I can work it out, the Fed added about two trillion to its balance sheet. All right, you were throughout this period, you raised warnings and cautions, and you're still doing so.

Peter Robinson: The word that gets attached to both of you actually, although for different reasons, you just touched on, I want to come back to it. The word that gets attached to you is austerity. Austerity. Warsh wants austerity, he doesn't want too much money in the system. Let me quote to you the Nobel Prize winning economist Paul Krugman. "Warsh is wrong about everything." Would you care to explain yourself?

Kevin Warsh: Well, first of all, I should say I take that as a badge of honor. That's done really more for my career than praise that I could have gotten from any quarter. So I'm quite pleased with it. Economics is one of those funny things where those of us who have studied it and practiced it, like George and I, we recognize that it isn't physics. And there are others that think that economics is quietly fine tuned, they know exactly what to do. So when George takes office, Dr. Summers, and many others have the perfect prescription.

Kevin Warsh: But of course, history has shown us that that perfect prescription hasn't worked so well. So again, we see politics entering economics because economics doesn't answer all these questions. And the more broad fundamental question. my friends on the right, including many of your and my friends here at Hoover, in the darkest days of the crisis where like George, my judgment was this is a panic, we have to be incredibly aggressive.

Peter Robinson: Aggressive pushing liquidity into the system.

Kevin Warsh: Pushing liquidity in the system, that's the goal and objective of the Federal Reserve to respond to panics. So quantitative easing one and the 14 other programs we rolled out in the darkest days of the crisis, I was a leader, I was a champion. Bernanke and I were really-

Peter Robinson: Ben Bernanke, then the Fed chairman.

Kevin Warsh: Were side by side. Where the differences appear is in the post crisis era around the time that George takes office in England, And we come to recognize this a global financial crisis. It's not about US housing, it's not a narrow thing, it's a global panic. By the time we get to 2010 and 11, the economy is growing at around 2%. The economy is at a fundamentally different place, we're in a different regime. So then there's a question What should the policy be. Should the policy be acting in a period of economic growth, even mild economic growth as though we're in a crisis? Or should the regime change with the underlying dynamics.

Kevin Warsh: So my friends on the left then got very upset and said, well, in the crisis, you were for quantitative easing one. In the post crisis era, why aren't you for quantitative easing two through twenty-seven. Because the world changed. And you go back to the George's last point, part of the reason why the politics in both of our countries are strained as they are is because I think policy didn't adapt to the new regime. Quantitative easing outside of crises works very well for people that already have large amounts of assets.

Peter Robinson: Kevin, hold on. Quantitative easing, pushing money into the system. There was no inflation, it didn't cause, two things, it didn't cause inflation and you're a New Yorker. Everybody in New York was making a lot of money. Why don't you just pipe down.

Kevin Warsh: George and I have friends on the right who predicted hyperinflation from things that George and I were pushing. Neither of us did. It is used as an effective cudgel 10 years later by the likes of prominent New York Times columnist but it's belied by the facts.

Kevin Warsh: After we get into this period, what we're concerned with is what all Americans especially those on the left and center left should be concerned about, is monetary policy having huge distributional consequences in times of economic growth. 52% of our fellow Americans in the US do not have any financial assets, have no balance sheet wealth. And so we wonder why quantitative easing has become a dirty word on talk radio. Why Rush Limbaugh talks about QE and aggressive Federal Reserve because real Americans haven't gotten a wage increase until about 12 months ago.

Kevin Warsh: So quantitative easing works through what Chairman Bernanke describes as the portfolio balance channel, and it was the right thing to do in crisis. I'll give it to you another way. It works through the wealth effect, and the wealth effect works best for the wealthy.

Peter Robinson: Right. George, as Chancellor, you cut, again the austerity debate, you cut public spending, you cut public payrolls, fewer employees when you left as Chancellor than there were when you came on and you cut taxes. All of this again, the word that attaches to that is austerity. If I may, I would like to quote Paul Krugman on George Osborne. Couldn't make this up, "Osborne is articulate and he has a vision that's completely at odds with everything we actually know about macroeconomics." George, would you care to defend yourself?

George Osborne: People will take a judgment on how we did in government. But I was pretty proud of what we did. We turned the country around, got people into work. It was a combination of dealing with the fiscal overhang, the budget deficit, giving the country a clear direction. I think a lot of certainly, in political office, part of the job is to just create confidence, you've got to plan and you know what you're doing and there's a direction for the country. And at the same time, try and make the country more competitive.

George Osborne: One of those steps I took was to dramatically reduce the corporate tax rate from 28% to 17, it's going to be 17% in the legislative changes, something of course the US has copied recently.

Peter Robinson: Did you catch that, we're copycats now.

George Osborne: We take it as a compliment.

Peter Robinson: Special relationship and all.

George Osborne: Yeah, we take it as a compliment. I'm a supporter by the way of that corporate tax cut here in the United States as well. I know it's controversial, but as an outside observer, I think it will make the US economy, you know, structurally more competitive. And so, we were trying to do things that were addressing the aftermath of the crisis but also things that were for the long term competitive benefit of a country.

George Osborne: Where I absolutely agree with Kevin is I think is a challenge for conservatives is how do you address this challenge of the free market or the system is not delivering returns to labor equivalent to the returns to capital. Obviously, there's a classic space that Marxist come and fill, the book's called Das Kapital. But I think conservatives-

Peter Robinson: Kevin and I are keeping a very careful eye on what you're about to say next.

George Osborne: I think conservatives need to find their own answers and that's to my mind at least about spreading capital, making sure that the proportion of the population who do have savings, who do have decent retirement, who do have property increases, that's a very conservative aspiration. I think controversially, I also thought you had to do more to increase the returns on labor.

George Osborne: One of the tax cuts we did was to reduce income tax for the low paid by increasing the tax free threshold, which is a bit controversial in conservative circles, sometimes people don't like the idea that you're taking people out of tax, that that disconnects them with the system. But it was a very effective tool for increasing people's take home pay at a time when they were not getting those take home pays from the economy, the take home pay increases.

George Osborne: And ultimately, if you are someone like me who's pro business, believe in free markets, etc, the working person has got to be our ally. And if they're not seeing the returns or they're not benefiting or they think only the rich people in New York are benefiting, then it's not going to work for you. Your ideas are not going to carry in a democracy. Still would say, certainly speaking to the UK, that's the kind of urgent task for British conservatives.

Peter Robinson: After we get through Brexit. I'll come to that, hold on. Time out. I'll return to Brexit, I'll return to Brexit. So, a couple of the large issues today, and here I'm simply indulging myself, I want to hear what the two of you have to say about this. China, several months ago, President Trump impose tariffs on about $50 billion in annual flow of Chinese goods into this country. Early this fall, he announced tariffs on another 250 billion. 250 billion plus 50 billion, that gets it up, tariffs now and about half of what we bring in from China each year starting in most cases at 10% and rising to 25%. Those are big tariffs.

Peter Robinson: Now, A, first of all, is this the right approach? Just in general, is this the right approach? That's A. B is, what is the administration actually up to? I now ask you to do something probably not that easy, read the mind of Donald Trump. Is he negotiating or does this administration believe in protectionism as a good in itself?

Kevin Warsh: So I'm has been government bureaucrat. I had met with the president only in the context of a couple of meetings after he became president, and my faithful interview with the president to be chairman of the Fed where he chose the other guy. So perhaps my sense of his priorities aren't exactly right. So with that said, I'd say this. The piece that's quite positive about what's happened is the American population and the President is now seems to my mind to be holding out China as the last deal that would be done.

Kevin Warsh: But Democrats and Republicans now have identified China as a problem. The benefit of course is we seem to be making progress anew in the last six months and our relationships with Europe, trying to put Britain at the front of the queue, not the back of the queue as part of perhaps a new agreement coming out of Brexit. We have a new and hopefully improved deal with Mexico and Canada. And I think without the existence of China as a potential colder war enemy of the next 20 years, I'm not sure we'd be seeing this progress. So we have to look at the global trade community and ask what's happening.

Kevin Warsh: On the China question, I can't read they President's mind.

Peter Robinson: Hold on, I want to make sure I understand that. So everybody views China as a threat and therefore we're able to make real progress. Renegotiate NAFTA on better terms, with Mexico, we hope to get to China. And after roughing up Europe we're actually making progress on trading. That's the argument?

Kevin Warsh: It is.

Peter Robinson: Okay, terrific. I mean, terrific that I actually understand it. Go ahead.

Kevin Warsh: No, it means I didn't sit very well. What about with China. I think the Chinese might perceive that they have a problem with the president or the Trump administration. My judgment is that this sentiment had been just below the surface for a long time, perhaps during the Bush years and the Obama years. And even if you fast forward to a time that the President is no longer president, two, four, six years from now, this new view of China, this new view of two great powers coming into some contact will be a dominant economic and national security dialogue for the next 20 years.

Peter Robinson: You grant that.

Kevin Warsh: So my judgment is that great powers don't make the fight about soybeans or Boeing airplanes. Great powers don't sit down at a summit and say the question really is what's going to be our trade deficit next year. Great powers have the discussion of which you're familiar going back to a different time and that's the discussion that needs to be had. And it is possible that this set of fights that are happening around tariffs are really just a beginning to a great power discussion between the two great powers of the 21st century.

Peter Robinson: George on China. Is China about to do to the, about, this is something that would take place over decades, is China going to do to the United States what a century ago we did to the United Kingdom, that is to say, simply displace the United States as the preeminent economic and military power on the planet?

George Osborne: I don't think it's going to happen in my lifetime. Yeah, I think the United States is still-

Peter Robinson: That lets me off as well, thank goodness.

George Osborne: As long as I'm careful [inaudible 00:22:23]. I think the United States remains the most innovative and dynamic economy in the world. Here we are in Silicon Valley. It's still an incredible source of innovation and productivity in the global economy. But, but, but, but, China is clearly reemerging. It's been the largest economy for 18 of the last 20 centuries. So we shouldn't be surprised that it's going to be the largest economy as well in this century. And like all powerful countries with strong economies, it will start to throw its weight around, it's already doing that. We shouldn't be surprised about that. I remember there was a country that unilaterally declared the Monroe Doctrine without consulting anyone else.

George Osborne: So you would expect in East Asia ...

Peter Robinson: That was after you burned Washington.

George Osborne: That was a point president Obama made to us when we visited the White House. He showed us the scorch marks. I think you'll find in East Asia, you know, growing Chinese assertiveness which is what you would expect of a country of that size, power and renewed political will. The question is how are we going to deal with it. Much bigger challenge if you are a near neighbor, much bigger challenge if you're a Vietnam, Philippines, South Korea, Japan. But again, that's, you know, been a long holiday history, managing that relationship with the Chinese continent.

George Osborne: I think for the West, we have a choice. Do we either try and contain China or do we try and co-opt. If you try and contain it or confront China, I personally doubt that the West has the political will. Indeed, the collapse of the TPP agreement demonstrates really-

Peter Robinson: Transpacific Partnership.

George Osborne: The political systems in the West do not have the stomach to try and construct a series of alliances around China economic and military to deploy resources on the region in the size that would be required to attempt to containment. It would also quite probably lead to a confrontation that could be extremely violent and destructive.

George Osborne: There is another option which we in my view should at least try, which is cooption. In my experience dealing with the Chinese and the Chinese Communist Party, they put out an absolute premium on stability and that is part of the history of that country. They equate stability with the continued existence of the communist party, we might disagree with it but that's their view. All I know is that they are potential partners in a stable global order. And if that means a bigger table for them in international organizations which you would expect given their size, fine because that's an outlet for their ambition which is a lot healthier than what normally happens with rising powers which is they're going to invade their neighbor.

George Osborne: I'll give you one example. China wanted to create something called the Asia Infrastructure Development back. Now, there is already a-

Peter Robinson: What era, what time-

George Osborne: This was about 2014.

Peter Robinson: When you were chancellor?

George Osborne: Yes. 2014, 2015. Now, there is something already called the Asian Development Bank, different organization. And actually the United States and Japan in my view made a mistake and they shut China out of that organization, the Asian Development Bank. Wouldn't give it a bigger role when asked for it. So the Chinese leadership said we'll create a parallel institution, the Asia Infrastructure Development back. Britain was the first of the big Western powers to sign up to it. Now, all but the United States have.

George Osborne: I would argue that crazy multilateral development banks getting your currency into the IMF basket of currencies, these are all great outlets for Chinese ambition because they are essentially supporting a global order that the United States in particular, Britain as well helped create.

Kevin Warsh: And they're potentially quite insufficient. But to George's point, perhaps we try. We can have the members of all the multinational institutions we want but we won't know what their end game is. I should say just two quick things if I might be, the first, the transition from Britain to the US from one century to the next, those that preach secular stagnation in the US, the great and the good and economics profession who cover this, the one thing they're implicitly saying is our best days of growth are behind us. We had our century. They're not quite putting it this way but we need to step aside and let someone else have this century because we somehow have lost the will, the ability, I don't believe a bloody word of that.

Peter Robinson: You don't.

Kevin Warsh: And there's plenty of good economic data over even the last 14 months that would suggest maybe we're not stuck with 2% forever. We could grow again, the 21st century could be ours. So my own judgment is we shouldn't give up on any of this. This isn't just a provincial American speaking. But projecting the strength on the world is essential.

Peter Robinson: Let me frame it this way. They're bigger than we are. 1.3 billion as against 330 million of us. And how many of you?

George Osborne: Well, they always were bigger. That's not a new feature.

Peter Robinson: That's not new, bear with me. How many of you are there?

George Osborne: 65 million.

Peter Robinson: 65 million. And soon, this will take place within your lifetime, George. I can tell you look, Hale, they'll have a bigger economy, they'll be able to buy more aircraft carrier, they'll just have more purchasing power as a nation, not per person. So the only hope over the long time of staying long term of staying in the game is innovation, is growth. So the question is, does democracy, do free markets do things that we have inherited, we can screw them up but we've inherited, do those institutions give us an advantage over their system of state control which is of course now explicit, they're still formally communist. Does that give us enough of an advantage to play the long game?

Kevin Warsh: It gives us a massive advantage and it's under appreciated not least on college campuses like the one where we're meeting. You were right that China is bigger but they're also older and poorer. So the questions for-

Peter Robinson: Demographically old.

Kevin Warsh: The questions for them are they've gotten old before they've gotten rich, and they've decided that maybe they need to get young again. They also find themselves having grown from a poor country to one that has GDP per capita, some measure of wealth per individual around $7,000. There are some experiments in that. Going from where they are to where we are GDP per capita five or six times that, we have no experience of that happening in all of economic history absent a revolution.

Kevin Warsh: So the challenges they have are very real. They've come to the big table. They can be members of these multinational organizations. But we ought not think like we did perhaps of the Japanese a couple of decades ago, they have it all figured out and we're just wasting away.

George Osborne: So I've just read a terrific book I was just telling you about before we had about a KGB defector call Oleg Gordievsky in the 1980s. And of course what he revealed, he was a British spy, was that we thought this Soviet apparatus was all thinking, all knowing, brilliant, had all these amazing plans. The KGB turned out of course, they were absolutely hopeless and on their last legs and collapsed famously at the end of that decade.

George Osborne: Now, China is not the Soviet Union. But I suspect if you're sitting in Beijing, you are thinking we're sitting on top of this huge population. There is no retirement provision. There's no health care. Environmental degradation is a serious problem. And if you actually listen to the Chinese president, that is what he addresses. His plans are all about trying to fix many things that we would take for granted in the West.

George Osborne: I'm a massive believer in democracy, free markets, innovation, that that brings and creativity, and by the way, the basic human rights that that supports. I think it's notable that in, here we are, the home of tech, some of the greatest companies in the world born here in the last 30 years. What's the one bit of the Chinese economy that has really impressed over the last 10, 15 years. It's been the tech sector. What's interesting about the tech sector? It was the one bit that the Chinese Communist Party wasn't running. It was the one bit that was not state owned industry.

George Osborne: Interesting question now, for China, as this assertive regime starts to take more of an interest in the tech sector, will the creativity in the Chinese tech sector continue? We shall see.

Peter Robinson: [inaudible 00:30:58]

George Osborne: As I say, it's an amazing civilization, the Chinese civilization. They're very industrious people. But I think if we're sitting here thinking they've got the master plan we haven't, they've got a Politburo that runs everything, we've got a divided Congress or divided House of Commons, that's a grass is greener fantasy. I think they've got a lot of challenges which they are embarrassing in how they're addressing but they are quite domestic focused. A lot of their effort and energy is focused on the problems they've got at home rather asserting themselves abroad.

Kevin Warsh: George and I think would both say we'd rather have our cards than theirs, Peter.

Peter Robinson: Got it. Thank you. I feel better. I feel better.

George Osborne: Our Mahjong tiles rather than theirs.

Peter Robinson: Brexit. Brexit. Referendum in 2016. British voters decided by about 52 to 48% to leave the European Union despite the urgings of Prime Minister David Cameron and his government. Notably, especially notably, the then Chancellor George Osborne to vote remain instead of leave. Okay, you know what's coming. Roughly.

Peter Robinson: Ross Clark in the London spectator in April, in a paper this is as when you're chancellor and as the issue is percolating, the referendum is coming. "In a paper signed off by George Osborne, which the former chancellor should not be allowed to forget." I'm doing my bit to keep it in your memory, George. "The finest minds at the Treasury came up with two scenarios for the aftermath of the vote to leave the EU." In one GDP is down about, what does it say, 3.6% after two years, unemployment would rise by half a million. There's a second scenario that's even worse. In the event Britain does vote to leave, and two years later, GDP is up not down by about 3% and unemployment had fallen not risen, and indeed fallen by this past spring to the lowest level since 1975.

George Osborne: Well first of all, the last thing I wish is ill on the British economy which I worked very hard to turn around. But it pains me to point out we've gone from the fastest growing of the G7 nations to the slowest. We've gone from the fastest growing of the-

Peter Robinson: Since the referendum.

George Osborne: Almost on a dime.

Peter Robinson: Really?

George Osborne: From the fastest growing of the EU countries to the slowest, in fact, now I think we're competing with Italy on how slow we're going to grow. We devalued our currency by 15%, which made the whole country poorer even if they didn't really feed it and then you feel it when they travel abroad. But it's imported inflation, squeeze living standards and we haven't even left.

George Osborne: So, there were two predictions made by the Treasury when I was there. The first was what would happen if we voted to leave the EU and then left, triggered the exit procedure and went. And for various modeling reasons we also couldn't assume that the independent bank would do anything but that didn't actually happen. We haven't left the EU. We did another model that was what's the medium term consequences of leaving EU. That prediction is virtually identical to the prediction which the government currently adheres to and has produced it's a Brexit spot in government is virtually identical to the prediction that the Bank of England operates off and other international bodies and private sector forecasters make.

George Osborne: It pains me to say this because it's the last thing I want for my country. But there is absolutely no doubt Britain is poorer because of the Brexit vote, and relative to what it could have been, its economic performance has been much weaker. That is sad. There's still a lot at stake at how we leave the EU. The form of our relationship with the EU.

Peter Robinson: And you will leave the EU March 2019.

George Osborne: My view, that is certainly the most likely thing that's going to happen. There is a question about whether there'll potentially be a second referendum before we leave. But I think the most likely outcome as we go the end of March. What's clear is there's zero agreement in the British cabinet, in the British Parliament, in the British body of politic about what the long term relationship with the EU should be. That's still very much for grabs.

George Osborne: Are we a close partner of the EU like Norway Switzerland or do we have no relationship that is particular with the EU that we don't have with other countries in the world. In my view, if you cut yourself off from your nearest trading partners where half our trade goes then we will be doing further damage to our economy. By the way, just going to make one point, Peter. The EU, Britain joined the EU under a conservative government. Conservatives believe in free trade agreements, conservatives believe in western alliances. The idea that the EU, it was always the left in Britain that was against the EU and it pains me as a conservative to see my movement cut in half with half of the conservative saying that somehow conservative to suddenly want to pull out of an international-

Peter Robinson: Margaret Thatcher got more and more skeptical.

George Osborne: No, no. Margaret Thatcher created the single market that is the thing we are choosing to leave. She created-

Peter Robinson: That's the whole point-

George Osborne: That it was a-

Peter Robinson: It started as a single market and then more and more of this political unification nonsense.

George Osborne: And we stayed out of the euro and that was negotiated again by conservative Prime Ministers John Major building on the work of Margaret Thatcher. So Margaret Thatcher campaigned to keep Britain in the EU, took massive steps to integrate the single market. Signed the single European act and would never, and indeed this was confirmed by her closest advisor who's still alive, Charles Powell would never ever have voted to leave the EU. And it's a foe conservative memory that somehow sound conservatives are anti-European. That was never the case, is not the case now and it's-

Peter Robinson: Watch the fine economist Kevin Warsh agree with the following proposition. Brexit represents a huge opportunity for Britain. There will of course be transitional costs, it's experiencing some right now. There will of course be some time getting the politics of it all sorted out. But the opportunity to enter into trade agreements with the United States, why shouldn't we even bring Britain into NAFTA? It's painful for George, we can understand why, he's just articulated it quite brilliantly. But really, it's a huge opportunity. Watch Kevin Warsh agree with that.

Kevin Warsh: So I would say no country is an island but of course, I have George next to me. So I would hesitate. I can think of one or two. Part of the defense and George certainly doesn't need my help is in all these forecasts, we didn't know that the US would be suffering after year 10 of huge economic resurgence. The global growth is coming higher and again, a parochial American view, when the US economy booms, that has huge benefits for everyone else.

Kevin Warsh: Second to your point. If the United-

Peter Robinson: Meaning things would be even worse in Britain if our economy weren't booming.

Kevin Warsh: George and his colleagues, yes. George's colleagues have a much more difficult task in forecasting because it's a small island nation with whom the world wants to do business. When the world slows down, it's a little bit of a challenge than when the world speeds up.

Kevin Warsh: Second, the United States would be serving its own interests and I should think the interest of George and his successors by putting Britain at the front of the queue. There are obviously restrictions for the prime minister in terms of the negotiations she could have with the US given that she still remains a member of many of these obligations pre-Brexit. But it would strengthen her hand if the Europeans and others thought that there was a viable alternative to be part of a new NAFTA, to be the strongest trading partner with the US, to make that relationship even more close. But it's not obvious that the US has been putting Britain front and center and I would suggest that would be a step in the right direction.

Peter Robinson: All right.

George Osborne: Can I just, let me pick up on that.

Peter Robinson: I'm taking pot shots at the man who used to be the chancellor, of course you can talk back to me.

George Osborne: I'm a great believer in a stronger economic relationship even then we have with the United States. But I've never thought of it as a binary choice. It's sometimes said we have to leave the EU to do more business with America or more business with China. That's not the case. Germany sells twice as much to China as a portion of its GDP than we do. We were trying to sign the TTIP, which was the Transatlantic Trade and Investment Partnership with the United States while we're in the EU as part of an EU agreement. You can do more trade, but let's be clear, leaving the EU is the biggest act of protectionism in British history. We are introducing tariffs, barriers, regulatory barriers to trade-

Peter Robinson: That's the default position?

George Osborne: Even if you get a free trade agreement with the EU and that's proving elusive, at least in terms of the discussions inside the British system with the Europeans. Even if you remove the tariff barriers, that is only one part of what creates a free trade area in the modern era. It's standardization of regulation and the product specification and all that kind of thing.

George Osborne: Even if you get the best possible trade deal possible with the European Union, in deed, the model being touted by some is the Canadian Trade Agreement the EU has. It is still a massive act of protectionism. Yes, Canada, fine, has reached this point where it's got a good deal with the EU from a position where had no deal. We're already part of this single market that Margaret Thatcher created. We are pulling ourselves out of it to go to the Canadian position. That is protectionism. Doesn't matter how you dress it up, doesn't matter if you say you're a free trade champion conservative who believes in all these things.

George Osborne: The facts are, it introduces barriers to trade with some of the biggest most productive economies on our doorstep, like the French economy, the German economy, the Dutch economy, the Belgian economy, which we are closely integrated with. I'm all for doing more business with the US, all for doing more business with the rest of the world. It shouldn't come at the price of doing more business with Europe.

Peter Robinson: Last questions, full stop, because we're getting short on time and you're wanted in London, I'm told, and you're wanted all kinds of places. The political disarray in your country, we'll come to our country but in your country is just remarkable. Two years after the referendum ...

George Osborne: Not unconnected.

Peter Robinson: You mentioned that the cabinet is divided, the house is divided them, both parties are divided. The country is unsure, all right, if you had ...

George Osborne: That's because essentially the system cannot deliver the promises that were made for Brexit and that is tearing the Conservative Party apart.

Peter Robinson: You know the Prime Minister, you know her likely successors. It's a small world in London and it's a small world at the top of the Tory party. You know them all. If you had three sentences, I give you know more since we're running tight on time to offer to the Prime Minister, whoever he or she may be a month or two from now, what would you say?

George Osborne: You've got to have a strong relationship with the European continent because however pro-Atlantic and pro-American you are, you're not going to be able to tow this island off into the middle of that ocean. It's still going to be 20 miles off the coast of France. And that's going to be our principal economic partner that free trade conservatives believe in doing free trade with our neighbors.

Peter Robinson: Your advice.

Kevin Warsh: Because that's my advice to George?

Peter Robinson: Couple of sentences were a little on the long side but you still get [inaudible 00:42:22] for that. Yes. So what would your advice be to the Prime Minister whoever he or she may be in, well, two months?

Kevin Warsh: With any good fortunate it's someone I've known for 25 years so we wouldn't just be restricted to three sentences. Absent that, my advice would be this is a seismic a time in global trade as we've had for 30 years. The last 35 years, we've all been looking at our economies in a time of more integrated, globalization, integrated the capital markets, integrated trade. On the doorstep in the US, on the doorstep in China and throughout Europe, that fundamental premise that a more integrated global economy is good is being challenged. This is that seismic moment.

Kevin Warsh: We will decide whether we're going to have a strong reformed integrated global economy with fruits and wisdom for everyone or we're going to race to our corners, and if we have corners, there's likely to be a Chinese-centric economy and an American-centric economy. And for those that are friends with both like in the United Kingdom, they might feel as though those are two systems they can build into. The reality is we would all be much worse off.

Peter Robinson: All right. That was a bit more than three sentences. All right, this country and we close it out here. Economist Martin Feldstein, as we record this, this is a piece that appeared in The Wall Street Journal just yesterday. Another, I'm quoting him, you both know, you know.

Kevin Warsh: I know Marty well, so does George.

Peter Robinson: "Another long deep downturn," I usually try to end these programs on a kind of upbeat, "Another long deep downturn may soon roil the US economy and the Fed will not have enough room to cut rates." Rates are already low and we're headed, the cycle is old and we're headed into a recession. This could be a catastrophe. Kevin, cheer us up.

Kevin Warsh: So, I'll cheer you up as best I can. Marty is right in this extent, there will be another recession, it will be dark. The idea that somehow we figured everything out and this boom will go on forever defies thousands of years of economic history. As a result, policymakers in the US today must do what George did some time ago there which is prepare for a future that we do not know. We need to buy insurance in the good time so that when times are bad, we can put a floor under our economy and that the recession doesn't race away from us.

Kevin Warsh: My judgment on this is similar to Marty's, not that we're on the front end of recession, in fact, the economy has been improving the last five quarters and has real momentum that neither the Federal Reserve nor the International Monetary Fund nor fine scholars you've referenced ever predicted.

Peter Robinson: Because we copied his corporate tax cut but, go ahead.

Kevin Warsh: Good economic policy is really important and stopping trying to strangle the US economy might be equally important. In spite of our very best efforts do harm to this economy since the crisis-

Peter Robinson: Hold on, you give the Trump administration high marks for economic policy.

Kevin Warsh: I give the Trump high marks for regulatory and tax policy.

Peter Robinson: All right, fiscal policy, we still a big deficit but that's another show.

Kevin Warsh: Spending is a totally other show. We need to buy insurance now and I think Marty is right in this sense. When the next recession happens, the Federal Reserve will not have either the ammunition or the credibility on current course to respond. That is something that is very difficult for the current chairman to create because that was a problem long in the making.

Peter Robinson: Well, wait a minute, how do you fix it? You can't just end there. How do you buy the insurance?

Kevin Warsh: Well, I think you do it by, in my view-

Peter Robinson: Raise rates even more quickly than they're doing now?

Kevin Warsh: So what I would have done-

Peter Robinson: Then you won't be welcomed back on the Island on Manhattan.

Kevin Warsh: Now you're now you're getting really tough and I won't reveal the discussions I had with our president. But my judgment in 2010, 11 and 12 was similar to my judgment 2018. The quantitative easing we did in the crisis was right in QE1 and wrong subsequently. We go into this period of the strongest economy today in the US since 2004 and yet we still have an emergency size balance sheet. We should shrink the balance sheet first. Put that emergency ammunition back in our pockets because we might need to use that and other things later. Rebuild our credibility in the strongest economy in 20 years.

Kevin Warsh: So the future which neither Marty or I can predict very well, we will have some ability to respond. Balance sheet first, interest rates next.

Peter Robinson: Got it. All right. Kevin has just offered advice to President Trump. It would be only good manners to let our visitor have the last word, don't you reckon?

Kevin Warsh: But I'd like it to be directed to President Trump.

Peter Robinson: Exactly. We've done the Prime Minister. Now what would your advice be to the President of the United States who's already copied your corporate tax rates cuts?

George Osborne: I would say the tax changes have been the right ones, and I don't buy, you've usually been throwing various academic economists at us through this interview. The idea that you could pick a moment in the cycle when it's the right time to do your tax cut is nonsense. Politics is the art of the possible, and if the President had not moved with the Congress in that first year in office to get the tax change, it would never have happened. And the US has a much more sensible corporate tax rate and offshore tax regime that stops loss profits being trapped overseas. So I think that's been a really good economic change with lasting benefits for the US, and indeed, forced to other countries in the world become more competitive.

George Osborne: Second, I think the deregulations happening in many of the agencies has been a good thing. I disagree on some of the environmental things but broadly speaking, I think it's been a good thing.

George Osborne: So those are two big ticks that the administration get. The big query I have is over trade policy. What is ...

Peter Robinson: What's he really up to.

George Osborne: At the moment, it's been, we talked about this earlier, there's been all the saber rattling, it's not unheard of US administrations to take action against Europeans and others. And now it's beginning to look a bit worrying. The scale of the confrontation with China on trade, and you were giving the numbers earlier, looks to me like the one thing that you could predictively say would have a real damage to American growth and global prosperity. So, that's where I would be most concerned and my advice to president who I think checks the Dow every day and all that is you don't have to inflict that self harm.

Kevin Warsh: I understand he quite enjoyed his trip to Britain.

Peter Robinson: The president.

Kevin Warsh: The president.

Peter Robinson: I think Prime Minister May may not have enjoyed it quite as much. He let her have it. I told a lie, that wasn't the last question, here's the last question. It's loose and it's objective and so forth, but I'd still like to know, are you optimistic about, I'll come to you, but are you optimistic about this economy and the politics of this country over let us say the next three years?

Kevin Warsh: It is within our power to make the next three years a boom, to continue the strength of the last 14 months. The country is divided. That division didn't begin with President Trump, it's been going on for a long time. The division of our politics has much more to do with the financial crisis, the panic and the response than most modern commentators would give credit. 52% of our fellow Americans are finally getting a wage increase because they didn't get any asset wealth from quantitative easing in 2018 and 19.

Peter Robinson: On the contrary, all those 52% might have had was a savings account and the low interest rates meant they earned essentially nothing on their savings. Right?

Kevin Warsh: That's right. If the economy does what it is showing traction to doing, real Americans are going to get their first real wage increase in a generation. Animal spirits can be back. There is every reason to believe that our politics will follow our economics instead of the other way around. I am an optimist. There are real risks. But this can be America's century and so I'm not going to end on a dark word in spite of your best efforts to make me negative. We've got a challenge to do. The US leads the world on many of these issues. The president leads this country. In a very non provincial sense I would say it is in this administration's hands to make the next three years really boom.

Peter Robinson: Well, that was pretty damn encouraging. Match that? What about the next three years for Britain?

George Osborne: The central task facing Britain is to manage Brexit and to come up with a relationship with the European Union that is close productive and delivers the benefits that current membership does both economic benefits, security benefits-

Peter Robinson: Are you optimistic you'll pull it off?

George Osborne: I'm not particularly optimistic but that doesn't mean there isn't a route through. I think ultimately, remember that when kind of populace and the nativist say to our populations, what the hell have you got to lose, peace, stability and prosperity is a hell of a lot.

Peter Robinson: George Osborne, Kevin Warsh, thank you.

Kevin Warsh: Thank you, Peter.

Peter Robinson: I'm Peter Robinson for Uncommon Knowledge and the Hoover Institution. Thanks for joining us.