BIO 2012: Of politics and markets, former US Treasury chiefs explain economic struggles

From the beginning of time, the world has had financial crises, former US Treasury Secretary Henry Paulson noted.

''I think you'll never do away with this problem,'' he said. ''The best you can hope is to manage and mitigate it and have the tools to deal with it,'' Mr Paulson said during a 19 June lunch-time discussion with Clinton administration Treasury chief, Robert Rubin, and Jim Greenwood, head of the Biotechnology Industry Organization (BIO), at the biotech group's annual convention in Boston.

While people tend to blame the banks for financial downturns – ''and for good reason,'' since they ''made all kinds of mistakes and they always do'' – Mr Paulson argued that the true root cause lies with poor government policies.

''We have policies that urge people to borrow too much and save too little,'' he insisted.

While household income in the US did not grow during the 10 years before the current global economic crisis struck, by 2007, household debt in the nation was double any sustainable level, Mr Paulson pointed out.

"It comes back to bad government policies," he charged, adding that the US has "done very little to correct the government policies."

While he was Treasury chief during the Bush administration, Mr Paulson said he was faced with dealing with a "failed" and "outdated" regulatory system in the US, which he said had a lack of emergency powers.

"I think it's been improved, but it still is deficient in a number of ways," he said.

"I always argued we needed better regulation not more," Mr Paulson said. "If you ever have to rely on regulation to save us, that won't be enough, because unless you think the banks are trying to blow themselves up, it's hard to believe that regulators are ever going to uncover all the problems in advance."

Mr Rubin, who served as Treasury secretary from 1995-1999, said that while the specifics are different for the US, Eurozone and Japan – the three major industrial economies of the globe – "roughly speaking," they all are in the same position, with "unsound, unsustainable and, I think at least, deeply dangerous fiscal situations."

But, Mr Rubin contended, "These are substantively solvable problems."

"They are complex and difficult and they would take difficult measures. But they are substantively solvable," he said.

The problem, Mr Rubin said, comes down to "politics, political will and the effectiveness of government."

"We are at a stark crossroads" with facing the fiscal challenge, he said.

But in the US, the Eurozone and Japan, the financial issues have been "kicked down the road rather than solved," Mr Rubin said.

And, he said, "The more we kick it down the road, the more difficult it becomes to correct it."

While the US may have an "unsustainable and, over time, a longer and more deeply dangerous fiscal situation," Mr Rubin also said the nation has a "resilient political system over the history of our country."

But he said the political system currently is not taking the effective measures that are needed right now.

Mr Paulson argued that one of the issues facing Western democracies, and perhaps all democracies overall, is that "voters want things they don't want to pay for."

As for Europe, Mr Paulson said he is "not optimistic in the short term."

He emphasized that it's difficult for people outside of Europe to understand how committed Europeans are to the monetary union.

Mr Paulson predicted that, even under the best of circumstances, the situation in Europe will "drag on for a long time."

"There will be economic stress there, because you're dealing with great complexity in terms of coming up with solutions that may work, and you're dealing with something that's very politically ugly,” he said.

One of the things Mr Paulson said he dealt with as Treasury secretary was the collision of politics and the markets.

In Europe, he said, "you're seeing that big time."

And, Mr Paulson added, "When markets collide with politics, markets ultimately win. You don't know when it will happen, but the markets have the last word."

While the political process grinds on in Europe, the leaders there must take the right steps to ensure the financial system is stable, "so we don't have a systemic bank failure or a messy large country exiting the Eurozone,” he said.

"Right now what's happening is the leaders are doing what they can do. They're doing politically what they can do politically, but it's not sufficient for the markets," Mr Paulson said. "You've got governments bailing out banks, and someone needs to decide who is going to pay for it and what you are going to do to restore competitiveness. And it's not easy."

While the economic problems in the US and Japan and other part of the world should not be taken lightly, "Europe is a whole other order of magnitude in terms of the risk it poses, not only to the Europeans, but to the global economy," Mr Paulson said.

Mr Rubin said the Eurozone is going to need structural change of its banking and fiscal unions.

But, he said, "That is going to take a long time to work out."

In the meantime, there is the pressing urgent problem of the question of whether Europe can achieve a "sustainable interim stability that will last them until they can address the long-term issues," Mr Rubin said.

"So far, they have been behind the curve through this whole period," he asserted. "Markets will absorb it until they stop absorbing it."

"I think there are very serious risks that unless the European political leaders reach some viable solution in the reasonably near future, that is to say to the balance of this year or somewhat beyond that," Mr Rubin said.

Although Europe "is a drag," Mr Paulson said he believes the US "continues to muddle along," although he said the current growth is not enough to make a dent in unemployment.

Nonetheless, he said banks in the US are "much better capitalized than they were," and that he's got "great confidence in the people in Washington right now," specifically current Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke.

"They've been through it before," he said.