New York State and the Global Financial Crisis

WILLIAM WELD: Having myself dabbled briefly in New York politics a few years ago -- dilettanted, really, more than dabbled -- (laughter) -- I can attest that our guest, our honored guest today, was the most, at that time, universally liked and respected member of the legislature, mainly because of, in my view, the great good humor that he brought to every effort, to complement his high intelligence and mastery of the issues. He reminds me, in that respect, of a certain person who was recently elected to high office in Washington, D.C.

Please welcome a member of the board of the Achilles Track Club and a New York City marathoner, our governor, the excellent and honorable David Paterson. (Applause.)

Thank you, Governor. I remember your participation in that election a couple of years ago, and the great performance that you gave for the Legislative Correspondents Association when you were still a candidate, and all you have done for finance and in government.

And thank you for that very kind introduction.

By the way, Governor, you know how long the marathon is? (Pause.) Does anyone know? (Laughter, cross talk.)

QUESTIONER: Twenty-six miles.

GOVERNOR DAVID PATERSON: Twenty-six miles, 385 feet?

QUESTIONER: Right.

PATERSON: That assumes that you're standing in the front of the line. (Laughter.) I was running about five minutes, and I had a guide, and I saw all these people, and I said, "What's that?" And she said, "That's Mayor Giuliani. This is the starting line." (Laughter.) So I'm already tired. (Laughter.)

Well, thank you, also Richard Haass, who is the president and was kind enough to invite me here today. And to all the members of the Council on Foreign Relations, thank you very much for your service, for your input. People in governments all around the country and around the world look to you for leadership, and we appreciate your kind contributions, helping us negotiate what is a very, very, very difficult time in a very poignant moment in our history, in our history.

Foreign policy is evolving right before our eyes. The emergence of economics in the process expands day by day. In fact, I think we could surmise, very much so, after Clausewitz, that perhaps war is really the continuation of finance by a different means. (Soft laughter.) I wholeheartedly agree with that, as I am currently in negotiation on New York state's budget with legislative leaders. (Laughter.)

And so what I would like to do is to briefly touch on the important correlative issues of our national economic crisis and the president's response with a stimulus package, and then for a moment touch on the evolution of -- (off mike) -- and international finance, as we know it, in this day and age.

As much as foreign policy has evolved into the inclusion of finance as to one of its major factors for consideration, so too finance has inured in the direction of addressing new plateaus, including levels of national, international and even regional finance.

The economic strife has ravaged our country. Writing in Foreign Affairs, Roger Altman mentioned his belief that Americans have lost one-quarter of their net worth in 18 months.

The housing values in the beginning of 2006, which would have been assessed at $13 trillion, have fallen to $8.8 trillion, just as it is recently accounted for in mid-2008.

When you look at retirement benefits, the second-greatest asset for Americans after housing values, they have fallen by 22 percent, from $10.3 trillion to $8 trillion as of the last six months.

And the Central Bank of Europe, the Federal Reserve, have injected over $2-1/2 trillion into these institutions, of liquidity, trying to ameliorate this problem. These are the largest infusions in history, but they haven't worked. The International Monetary Fund estimates that the advanced economies will fall by 2 percent in 2009. And as of January 29th, the IMF now says that the debt-to-GDP in emerging countries has jumped from 2 percent in 2007 to 7 percent as it stands right now.

All of this has created a horrible calamity for New York state; for in New York state 20 percent of our revenues are derived from Wall Street. And in the fourth quarter of the fiscal year, where we are right now, the months of January, February and March, that number escalates -- that percentage rises to 30 percent.

We estimated our budget deficit, when we closed last year's budget in April, for 2009-2010 at $5 billion. By July, that number rose to $6.4 billion. With a 28 percent increase in our deficit over three months, I took to the airwaves and offered a televised address to New Yorkers, as Governor Rell of Connecticut will offer this evening, to alert people to how serious this financial crisis is, and to magnify the issue by comparing it to the Great Depression, which is the last time we've had this type of economic strife.

I was roundly criticized for this, and it was said that I mis- estimated the revenues. I did. I thought at that time, with the budget deficit increasing as it was, that our budget deficit would come in somewhere between nine and a quarter and nine and a half billion dollars. I did mis-estimate it. The deficit for 2009-2010 is now $15.4 billion.

It is three times higher than any budget deficit we've every seen, spare one. And that was right after the terrible attack on our country on September 11th, 2001.

But even at the time that we had that deficit, the economy was recovering. We were budgeting with the wind at our backs. We don't know where the floor of this crisis actually lies.

We know that at least 225,000 New Yorkers are projected to lose their jobs. We know that 671,000 New Yorkers are already not working. We know that the demand for food assistance is up 30 percent just in the last six months.

And the problem is no easier for New York City in spite of the fact that under Mayor Bloomberg, they did save. They did make necessary cuts. But they're still being obliterated in this crisis, such as are all the entities of local and state government around this country.

Before the crisis, the securities industry employed 5 percent of New York's residents. But the salaries that they derived accounted for 25 percent of earned income citywide.

Now that the city comptroller, William Thompson, estimates, along with the state comptroller, Tom DiNapoli, says there will be a 42 percent falloff in Wall Street bonuses, this now means that New York City will lose $1 billion.

This is why, in the past couple of months, I have worked with the governors of Massachusetts and New Jersey, of Wisconsin and Ohio and Michigan, as part of a committee from the National Governors Association, to present the president with what we believe would be the right economic stimulus package.

We are very pleased that his countercyclical proposals of assistance, to the federal Medicaid assistance percentage, along with education, along with child care credits and with extension of unemployment insurance and food stamps, will go a long way to help Americans at this very difficult time in our history.

The president also is offering to reignite the engine of our economy through repair of our infrastructure, repairs that have not been made in 50 years. In that regard, the projection is that $1 billion in infrastructure repair will yield 30,000 jobs.

New York State has 1,900 shovel-ready projects in road and bridge and transportation and a clean-water -- and wastewater-treatment proposals that are ready to go at this particular time.

The president is also proposing, over the next 10 years, to invest $150 billion in conversion of energy sources to energy efficiency and clean and renewable energy sources. In New York State, we were already ahead of the curve. Thanks to Governor George Pataki and Governor Eliot Spitzer, we have already grown to deferring 20 percent of our electricity use to clean and renewable energy sources. In my State of the State address a couple weeks ago, I have challenged New Yorkers to get to 45 percent by 2015. Realizing this program would create 50,000 jobs for the state, so it will be our state stimulus package, as well as converting to clean and renewable energy sources, which will not only be an infusion to our economy but also will protect our environment.

Now I would like to talk about some of the financial issues that we're presented with today and the financial crisis that's now worldwide. I hope we understand that there will be no immediate solution to this situation. There will be no quick fix. The solutions will come in stages. There is no single event or single action that can change the difficult situation we're in.

For example, the Bretton Woods conference of 1944, where the IMF was created, was preceded by the conference in London in 1933 and also the tripartite monetary agreements that were established in 1936. So the historic agreements that were arrived at at Bretton Woods really were the result of a lot of hard work that occurred in stages.

When the European Union decided to transfer to the euro as a method of exchange in 1992, here again, this was the result of decades of work that brought them to that -- to that decision. From the United States withdrawing from the gold standard in 1971 to the exchange -- the exchange rates that were derived in 1979, this was a process that was incremental that brought them to the establishment of the euro in 1992.

And so when these historic and large international and financial solutions are reached, they come in stages. They are established incrementally. I would expect that the stages may move more quickly now as the power and size of finance has grown really exponentially because of the issues that relate to deregulation and technology. But nonetheless we're going to have to recognize that our solution will have to come in stages.

And it in that respect that I raise this point that the nature of international finance has changed since Bretton Woods. There are those who are calling for a new Bretton Woods conference. And I think that that actually misses the point. The goals and the achievements at Bretton Woods would not work in this particular era. We're going to have to find our own innovations and use our own creativity to ameliorate what is a different kind of a crisis.

Now those who call for a Bretton Woods conference are hoping there will be a new international financial agreement, and I agree with that.

But just the use of the term "Bretton Woods" makes us hearken back to thinking about how issues were resolved in the past. In 1944, when those leaders met at that conference, they were trying to deal with the issues of global finance and the issues of national currency reserves. But now the issue of private capital is far more important than any issues of global finance. When those leaders met in New Hampshire in that red-brick building with a white roof to come to the decisions that they made in 1944, they were actually fearing what would really be to them a competitive currency devaluation at the hands of the government. Those who are trying to resolve today's crisis fear what has really been a regulatory arbitrage, which has led to damage done at the hands of private industry.

And so what we are probably going to have to do is to bring some new actors at the table for the negotiation this time. The private capital interest should be in the decision-making capacity of any resolution of any financial agreements because they are so inseparably involved. And the issue of private capital, particularly as it exists in relation to foreign policy and financial regulation, really just mirrors the fact that there are many actors now not state sponsored that are at the table just in the resolution of foreign policy generally.

And what is going to have to happen is that foreign policy and governments are going to have to adjust to this change.

Also, I think the most relevant point is that the financial structure of international finance has really evolved as well right before our eyes. The fact is that we could probably congregate finance into three basic levels. They would be national, international and also regional.

Most of the solutions that you're hearing about in past few days are national: national bailouts, national interventions, recapitalizing from the federal government many of the banks. You're hearing very few international solutions, save lowering the interest rates that was done correlatively and cooperatively by a few countries back in the end of September. But you're hearing absolutely no regional solutions at all.

Now, what do I mean by regional solutions? The banks of New York and the banks of London are quite different, and there are reasons for that. Regions compete for capital based on different investment conditions that they establish, different tax and probably regulation schemes, different legal and employment practices. And they vary from one place to another. So New York and London are certainly the epicenters of financial management in their regions, but you have places like Tokyo and Hong Kong and Singapore and Bahrain. They are also emerging centers, as there are emerging centers in Africa or, as I read the title to an article in late November when I was reading The Economist, it's "Shanghai, Dubai, Mumbai or goodbye." (Laughter.)

So the point really is what we are witnessing, in many respects, is the breadth of macroeconomics, in many respects, being curtailed and truncated by the traditions and the realities of microfinance.

So what works in New York may not work in London or Hong Kong. And it matters that the epicenter of United States financial policy is here in New York, because the conduct?? would be much different if it were Chicago, or the culture would be much different if it were in Los Angeles.

And that's what brings us to New York's role in the economic recovery in this country, and (suddenly ?) it affects the world. New York is one of the states, as are all the states, that regulates insurance policy. Because of the insurance companies that are domiciled in New York, we find that -- actually, that New York is the seventh-largest insurance market, based on the prevailing values.

And so in September of 2008, when AIG was teetering on the verge of collapse, it was New York that it fell to to try to assist them. It was me, as governor, who had to initiate what would be an administrative change in policy and a change in regulation to allow AIG to access $20 billion from its subsidiary resources in order to bail out the -- bail out their parent corporation. And eventually, through the New York Federal Reserve, the government brought in $85 billion to bail out AIG, and then even more resources after that.

But it fell to New York state to take the first action here. And just to give you an example: I had met the governor of Wisconsin at a governors' meeting, and I'm a new governor, and he came over and he put his arm around me. He said, "Look, if you ever have any problem, just call me." He said, "It is really not as hard as it may seem to you right now. But if you ever have a problem, pick up the phone and call me."

So in the middle of this AIG crisis, I pick up the phone and it's the governor of Wisconsin. And he is almost apoplectic. He says, "Governor, we have an insurance company, Capital (sic/Travel) Guard Insurance. It's the largest bondholder in the state of Wisconsin. It's located in Stevens Point, Wisconsin. You've got to get the federal government to save AIG. I don't know what'll happen to our economy if it goes under."

And I'm sitting there thinking, "If he's calling me" -- (laughter) -- "we have a bigger problem than I thought." (Laughter.) But that is when I realized what really is the power of regions in terms of evaluating measures and levels of finance.

So as governor of the state of New York, I soon realized that I have considerable regulatory authority over New York's financial institutions.

And what we're going to need right now is to establish what will be a strong but sensible area of reforming our national system of financial regulation.

I am delighted that President Obama, along with his new Treasury Secretary Tim Geithner, NEC Chair Larry Summers and Paul Volcker, are addressing this problem straight on.

I look forward to whatever is the appropriate way that New York can contribute to what will be a new way of regarding the savings and the retirement funds, not only of New Yorkers but of all Americans, such that they never be in peril again.

Now, how are we going to solve this crisis? Well, I would suggest that it is probably a combination of the old with the new. In 1907, there was a run on banks that was getting out of control when it was almost singularly stopped by one private financier, JPMorgan.

This is probably the most spectacular demonstration of the power of private finance that has ever been seen. In 1944, the Bretton Woods conference in many respects may have been the most extraordinary moment of government economic leadership that we saw in the 20th century.

For the 21st century, I suggest that there may have to be a coalition of these values, that we may have to actually connect the power of private financing with the strength of government regulation, to come to an overall agreement.

Let me leave you with this. We have just witnessed the greatest failure of financial regulation in modern history. As we try to preserve the innovation rights and the independence of business, we are going to have to find a way to regulate what is an evolving market at an evolving time in our history.

Thank you very much. (Applause.)

WELD: Thank you very much, Governor. We're now going to move into a question-and-answer period. I'm going to ask you one or two. And then we'll go to the audience. And I would ask those who are putting questions to please wait for the microphone to get to you and speak directly into it and begin by standing and stating your name and your affiliation. And one question at a time, please, to maximize the number of members who can ask questions.

Governor, 10 years ago, there was really no doubt that New York City was the capital of the world, or so it seemed to me. Nowadays, I think it's fair to say Washington, D.C., is the center of attention, at least domestically. And to the extent that Wall Street is the center of attention, it's somewhat unflattering attention, more often than not. And some of our friends in Asia and elsewhere around the world are openly predicting that the United States and Western Europe are going to be our planet's next emerging markets -- and won't that feel great?

I guess my question is a 38,000-foot question: What scenario do you see -- I assume underneath it all you're an inveterate optimist like me -- for the dissipation or the reversal of those unwelcome trends?

PATERSON: Well, I think that New York, heavily dependent as I described before, on the financial services industry, is going to have to find what would really be the innovative solution that we did during the building of the Erie Canal and the establishment of the Erie Lackawanna Railroad.

We started building the Erie Canal in 1817, and at that time New York had a population of about 3 percent of the national average. We were also doing about 3 percent of the business. But because of the manufacturing jobs that we created in 20 years, that number of -- that amount of business that we were doing went from 3 percent to 50 percent. New York by 1840 -- in the mid-1840s, New York state was doing practically 50 percent of the business that was conducted by the country. And the population grew from 3 percent to 13 percent. People moved where the jobs were.

Now people are moving away. So we are hoping that some of the cutting-edge industries -- I'll tell you right now, whoever finds the way to perfect the electronic battery to a plug-in hybrid electronic vehicle will revitalize their economy in years and years to come. And New York state, which has the greatest import of students in colleges and universities, and has a number of tremendous research centers, and is already ahead of the rest of the country in the development of electronic storage technology and is trying to get there in the development of a hybrid electronic battery -- these are the types of areas we're investing. And they are job-creating, they are obviously great for the economy and, hopefully, they will keep people in the state.

Right now, New York state is losing over a hundred thousand residents every year.

WELD: Thank you, Governor. You know, there was a report done for Mayor Bloomberg and Senator Schumer, I think, at the beginning of 2007 that analyzed New York as a financial center versus competition from London. One of their chief recommendations was a liberalization of our immigration policies nationally to promote the most skilled and competitive possible workforce, specifically in and around New York City. Do you think that idea holds promise?

PATERSON: Well, I think in New York state and in New York City, we have always welcomed that. New York has always been the international city and would like to attract the best and the brightest. But it's been in reverse.

Twenty-eight percent of college graduates in New York who were indigenous to our state are leaving. So our best and our brightest are going other places. So obviously it is a competition right now, even within the boundaries of the United States, for who is creating jobs through cutting-edge research. And we would invite anyone that wants to live here -- legally, of course -- to come and be among us.

WELD: There's no one so brave and wise as the politician who's not running for office and who's not going to be, which is why I can use the word "liberalizing."

Okay, we're going to move to more knowledgeable questions at this point. Members of the audience, please raise your hand. Sir?

QUESTIONER: Bob Katz (sp), major affiliation's with Yale University and -- (inaudible) -- for purposes of this meeting. David, we're having a lot of assault on New York and what we're all about in terms of the financial services industries. A lot of it may be self-inflicted, but do you have any ideas or recommendations for how we defend what I think is a crown jewel both of the region and, frankly, of the country in terms of things we have to offer the world.

PATERSON: Well, I think that it's very difficult to try and impress this upon those who are being asked to make a sacrifice. They will be going on television with ads probably reprinted from two years ago when the budget deficit was 20 percent of what it is now, almost as if they never heard of a financial crisis. The reality is that we are going to have to make some tough choices in our budget negotiations. But if we can, the budget that I have released would cut the $15.4 billion deficit, the $1.7 billion remaining from last year and the $13.7 billion from this year.

In addition to that, it would reduce a $51 billion indebtedness that this state actually owes to $7 billion over the remaining two years. If we were able to bite the bullet and take that pain for one year, we could move ourselves past all of the other states that have budget deficits right now.

There were 12 states that had budget deficits at the end of 2007. There were 25 by mid-2008. They owed $48 billion. There are now 43 states that owe over $155 billion in deficit right now.

We could get past this whole thing by embracing the fact that there has been overspending on the part of our state and we're also victims of a downturn in the national economy. It wasn't all us. And also, we derive 20 percent of our resources from Wall Street. Eight percent of -- 18 percent of our jobs are financial. The average in other states is 2 percent.

So we could actually get past this. And if we could, even if the deficit widens -- and there's no reason to think that 2009 is going to be any better than 2008 -- we'll be far ahead of the rest of the states. And I think that would really entice people to come here, to work here in emerging fields of medical and scientific research, of energy technology and even in manufacturing, as we're finding that a couple of companies that offshored their jobs to different parts of the world now find that there's a competitive workforce because so many -- so many companies have moved there. And also, the price of energy to transport goods back and forth across the Pacific and the Indian Ocean isn't as economical as it used to, and they're starting to come back and we are ready to welcome them.

By the way, Bob asked me to come on a march with the Cornell alumni after they beat the Columbia alumni, of which I'm one. And I was introduced to Happy Reichert, a Cornell alumni who is a little ahead of me. She graduated 1925, and is now 107 years old. So when you see Happy, Bob, please tell her I said hello. (Laughter.)

WELD: Right here.

QUESTIONER: Lucy Komisar. I'm a journalist.

There was just a GAO report done, at the request of Senator Levin, that showed that some hundred or more companies, including many of the ones that had gotten bailouts, had a large number of offshore subsidiaries. And we know that a main reason for offshore subsidiaries is to cheat on U.S. taxes.

What are you doing to make sure that the companies in New York are not using offshore subsidiaries to cheat on taxes, now that we so desperately need the money?

PATERSON: Well, I think, this is where we have to be very careful about the original bailout package, the $700 billion, which really vested all control in the Department of the Treasury, not even subject to perusal by the Justice Department.

This had to be a negotiation, because it really is egregious. And what we were doing was, in a sense, what they did in Japan, which was buying up the bad debt of all the banks and financial institutions, not changing any management and allowing them to fritter away resources in reckless schemes that often hurt the American taxpayer.

That has kind of been changed. Ever since Prime Minister Brown decided to recapitalize the financial institutions in Great Britain, it seems to have dawned on the United States. And now with the new administration, we are trying hopefully to be careful. But I think that's why the president reacted so viscerally to this idea of these firms getting bailout money and then the heads of these firms taking bonuses.

It's outrageous. Even the company that I referred to before, that New York State helped, the first thing they did, when they got money from the federal government is, they went on a retreat.

I mean, just the goal, just the -- you just have to wonder, what is going on in the minds of people who, knowing that we have 2 million Americans who have lost their houses, over the last couple of years, and over 2.5 million Americans who have lost their jobs last year, feel comfortable using resources in the manner that they have?

It is an absolute outrage. And so obviously on the state level, we don't have direct participation in the bailouts of these companies that the General Accounting Office reported on. But certainly in terms of the stimulus money, we're going to be very careful as to where it goes.

As a matter of fact, the administration did not want to give block grants to the states, because they weren't sure what we would do with them.

We don't have the best reputation for financial management.

But at the same time, there was a desire to put money into resources that would respond immediately. And that's why the negotiating whether it would be 90 days, 180 days -- I think they will settle at about 120 days -- for what the shovel-ready projects are. Because now everybody with a shovel says they're shovel-ready. The reality is, what we need are projects that are ready to go, because I think that there is a psychological stimulus that goes with the economic stimulus. If people see other people going back to work, then I think we will address the fear that so many Americans rightly have at this time.

WELD: Yeah. Sir. No, no, no.

PATERSON (?): That's okay.

WELD: One to a customer.

Sir?

QUESTIONER: Joel Motley --

PATERSON: I didn't answer your question.

WELD: It's fine, Governor. Go ahead, sir.

QUESTIONER: Joel Motley, Governor. When you first started alerting us to these problems, there was a lot of resistance, almost denial, coming out of the legislature. Do you have a sense that that's receding? And what do you attribute, hopefully, a sense of realism that may be settling in to?

PATERSON: Well, I think at first, when I issued the warning, it was two months before the collapse of Lehman Brothers and the subsuming of Merrill Lynch by Bank of America and, obviously, the problems with AIG. However, I think by now everybody should understand that there's going to have to be extreme sacrifice.

I've been disappointed when I have meetings with people who come in and they say, "What we're going to do is we're just going to budget for a $10 billion deficit, (where ?) 5 billion (dollars) is coming from the federal stimulus package. I don't understand how anybody in government, or even lobbying, could say something like that. How do you count money that's not in -- they haven't even -- they haven't even passed a bill yet! But it just shows the cognitive dissonance that seems to exist when trying to address these types of problems.

This is a serious time for people, and -- for people losing their jobs and losing their homes. It is a very difficult issue for me, who's been an advocate in the legislature for 21 years, to turn around and now start vetoing legislation that I helped sponsor, and actually cutting resources from programs that I've advocated for.

I'm not saying that the programs were any less helpful now than they were then. But this is where we are in this budget deficit. When you hear amounts like 700 billion (dollars) in a bailout package or 819 million (dollars) in a stimulus package, you have no idea of what those numbers really mean. It starts to sound like Monopoly.

The reality is, 15 billion (dollars) is 15,000 million (dollars). So how many dependent clauses have I heard with "Governor, I know we're having an economic problem, but there's this program, and it's only a hundred million dollars. What's a hundred million dollars next to 15 billion (dollars)? You've got to save this." A hundred million and a hundred million and a hundred million keep adding up, and that's what gets to 15 billion.

I'm hoping that people will look at California to see what can happen to New York. California is not sure that in a couple of months they can meet their financial obligations. They already have a cash flow problem. They have a $41 billion deficit. And no matter what the governor tries to do, people hold on to their bonded field of rhetoric that is really inappropriate and should be disqualified at this time.

WELD: Yes?

QUESTIONER: John Beatty (sp) from UBS. In certain instances, governmental intervention helps to stimulate development of new financial products. By way of example, the Resolution Trust Corporation that was set up to purchase bad assets helped in the development of the private label securitization market.

What policies do you think that New York state can initiate to help stimulate the development of new financial products once the economy starts to recover?

PATERSON: There's a long assumption between now and when the economy starts to recover. But I'll try to think forward and just say that governments have traditionally invested in places where private industry is less apt to do so -- for instance, research and development, where we would like to take the colleges and universities of New York and make them work the way they do in California and Massachusetts.

And so I can't tell you exactly what the areas are of innovation in the next few years. But I would certainly assume that obviously issues of transportation, as -- when the prices of oil and gas go back up, we think that high-speed rail, such as it exists in Europe, would be a great product to bring to the United States.

New York suffers because you can't get a flight from Buffalo to Albany or Syracuse to Buffalo now. High-speed rail would shorten up the distances in our state and generate economic development to the upstate regions.

Obviously, the issue of trying to convert a lot of information and technology, particularly in the health care, to computerization and make it far more accessible would certainly be a way.

But I think that a government invests in energy research where -- if you notice, there have been very few private companies that have invested in ethanol, because it really is not energy return on energy invested as yet. That has to be researched. And so I think it's not as much the end result as it is the catalyst for the opportunity to find those problems where government plays the greatest role.

WELD: In the back.

QUESTIONER: Esther Newberg, ICM. Governor, what's your involvement with homeland security? And what percentage of state budget would focus on New York City? And what might you tell your new senatorial appointment about how much more money New York City needs?

PATERSON: Well, New York City was obviously the epicenter of the attack on our country. And the basis for funding of homeland security during the last administration boggles the mind. New York per capita got less resources than the state of Wyoming, which got four-and-a-half times more in per capita resources than New York. And I'm not suggesting that the terrorists have ruled out Wyoming as a possible spot to hit -- (laughter) -- but it just seemed very unusual, and I think manifestly insensitive at a time when New Yorkers are still reeling from that crisis.

We still have emergency service workers sick from -- from their involvement after the fact. We still were urged to go back to work by the EPA, and now that's led to illnesses to people who were working on those sites for months after the crisis.

And we are still probably -- we -- I'm not allowed, from security clearance, to tell you, but we are still a region very much under threat.

We are obviously sharing the state resources with New York City, where we think it is the right proportion. And at this particular time, particularly with the downturn of our economy and obviously a decrease in morale in the country, we see this from the prism of the -- view that (demonic ?) terrorists evaluate as probably an enhanced time when they might be trying to organize.

So in spite of the fact that globally there has been considerable disruption to the leadership of al Qaeda -- the surge in Iraq did great damage to them -- but still there is an ever-present threat, maybe not as much from the larger terrorist organizations but from individuals. You now have the problem of the increase in individual attacks from women, who -- as opposed to men over the past few years. And we are taking that to heed and consider it a priority in the governance of this state.

WELD: Right there.

QUESTIONER: Thanks. Keith Richburg from The Washington Post. In his budget message the other day, Mayor Bloomberg talked about the $770 million cut in education, and he said basically that now that the state is getting it back from the federal government, he said -- his words, there's "no excuse" for Albany not to give it to the city. In fact, what he said is: There's just no excuse for not giving that money. It's somebody else's money. And he said that equaled something like 14,000 teachers. I mean, how would you answer the mayor on that?

WELD: I think that if we do get the stimulus money back from the federal government, that it will go a long way to ameliorate the issue of the 14,000 teachers. I think that there are ways in which the city, among other entities, was hit a little harder than other parts of the state. There are ways that the city was hit less than other parts of the state. So it is a holistic remedy that we have to discuss.

We got together with the mayor last Wednesday and had a very productive conversation. And we will go forward as well. And I am guilty of this just as much of the mayor, but you have to tell everyone that you have to understand the cuts that you're giving, and then you look to the source beyond you and act just like the advocates that you were lecturing. (Laughs.) But I've done that to the federal government, as well. (Laughter.) So I'm just as guilty as the mayor.

WELD: Yeah?

QUESTIONER: (Off mike) -- from LECG. Governor, along with 49 other state administrations, you govern or regulate the insurance industry. Would you favor federal regulation of the insurance industry?

PATERSON: Well, I think that the kind of regionalization in state insurance regulation probably would help if the federal government did come in.

This is the reason that we tried to make the insurance company accountable for the credit default swaps. And then they tried to say that we have no authority. As long as they're domiciled in our state, we suggest that we do have that kind of authority.

But I think federal regulation, particularly with the long tentacles of these types of companies -- and it's almost -- even -- one of the biggest problems that we had with AIG wasn't as much that they were holding back information from us, but they had no central bookkeeping assessment, and therefore they didn't even know what their own debt was. And I think, if you remember, during that period in mid-September, every day their debt grew by $10 billion. And even when the federal government gave them $85 billion, they had to go back and give them a number 40 (billion dollars) -- another 40 (billion dollars).

I think, both particularly for these large firms, that asking a state to try to keep track of them when they barely keep track of themselves, that federal regulation certainly might be in order, particularly on some aspects of insurance; maybe not all of them.

WELD: In the front.

QUESTIONER: Ted Sorensen from Paul Weiss. Governor, in our globalized economy, you preside over an -- a state economy which is larger than most national economies in the world. So you're not only competing with other states, but with other governments around the world, many of which have export-subsidy programs to help their local providers, whether it's providers of goods or services.

I generally recall that 30, 40 years ago, we started an export- subsidy program in this state. I have no idea if it's still around, but I wonder whether there is one and whether you would encourage one.

PATERSON: I think at this point, perhaps -- if I could expand upon your question, Ted -- as we look at the economic stimulus package in this country, we might be making a little bit of a mistake. And I think that export subsidies would be in order. We don't have them in the fashion that they existed during the Rockefeller administration. What I would say, though, is that it's interesting to hear what seems to be a discussion that's arising over a sort of protectionist doctrine, where the United States would disengage from the rest of the world. And even the other economies are talking about doing the same thing.

But of all the places that, I think, should not disengage from the rest of the world and should be exporting is the United States. And let me tell you why.

Wall Street revenues were down 40 percent last year. We know that. It was a painful year for all of us. But if you evaluate the other economies around the world, we probably fared better than anywhere else.

All of these places that were threatening us; remember when Russia was playing the oil card last summer, when they went into Georgia, and threatening everybody in the world. Do you hear them now? They pray every day that they can even open their stock market. They're in such bad shape.

China, the South Asian markets; everyone is suffering. The European economy is somewhat in denial. And what I'm saying is, there is one entity that can borrow money right now -- the United States Treasury.

So we are in excellent position, I think, to interact with the rest of the world, because we can actually make money for our taxpayers by exporting, by filling the void, in a lot of these countries that can't get credit, and bringing them supplies and letting them pay for it.

Not every country was cheating in the payment of their debts. Countries like Brazil, they are countries that would like to engage in foreign trade but can't get the credit.

I think this is an immense opportunity for the United States to go the opposite way of the initial gut reactions of fear and to manifest our resources in exuberant -- I think what we need to recognize is that the issue of power is relative; it's not absolute.

Relative to the rest of the world, our capacity to influence markets around the world is greater than it was last year, even though we are in a downturn of our own economy.

And I think we have to see past the fear and the anxiety and invest right now in creating subsidies for exports, and move forward and show the world who the economic leader is once and for all in this time of crisis.

WELD: Right there, sir.

QUESTIONER: Thank you. Governor, Phil Dropkin from the Gerry Foundation and from Granite Associates. If we may, let's just talk about tourism for a moment. As you may be aware, the Gerry Foundation has developed a performing arts venue in upstate New York which is a very significant economic driver for a very -- rather impoverished area. I'm wondering, recognizing the difficulties that the state has, what role do you see the state having in helping to promote tourism in those areas of the state that have historically suffered?

And on a personal note, I also run marathons. I would very much appreciate it if you would eliminate the last 365 yards. (Laughter.)

PATERSON: I almost eliminated it for myself by falling down about 400 yards from the end some years ago.

MR. : (Laughs.)

PATERSON: But let me take a step back in order to answer the question. Tourism is floundering in New York. Traffic on the throughways during the holidays was down, for Labor Day and for July 4th.

The American consumer has wised up. After $950 billion of credit card debt and after people -- a 40 percent increase in bankruptcies over the last couple of years, people are not spending money.

And when we had the National Governors' Conference during the transition period and President Obama came to talk to us about the stimulus package, Governor Sanford of South Carolina, Governor Perry of Texas, Governor Palin of Alaska raised the issue of piling debt on top of debt. And that is obviously a concern, because the debt that we are running up right now could be a house of cards if we don't react to it.

But this is exactly why the president wants to invest in a stimulus package right now. He wants to reignite the engine of our economy.

The average American citizen was saving 9 percent of our salaries in the '80s. That figure went under 1 percent in the early part of this decade. It's back up to 6 percent. People are saving. If you make tax cuts, they're holding the money. If you give back rebates, they're saving the money. And what we need to do is to get people in -- spending money again, traveling again, being tourists again. But as Paul Krugman wrote in The New York Times in October, the individual virtue has become the public vice. People have gotten it, but we need people to spend right now. And this is the enticement.

Now, almost 40 percent of the stimulus package is a tax cut. And I would just say that I'm delighted that we're having the stimulus package, but if you're cutting taxes and your states are in such dire resource that they have to raise taxes, it's a wash. The American consumer won't remember who cut and who raised, they'll just remember that they have less available cash than they have had and will go back to not spending.

So in terms of tourism, we see that as an ancillary problem beyond resolving this budget deficit. If we don't resolve this budget deficit, we're not going to have the tourists that we so blissfully want to come and see the treasures of New York.

WELD: Yes.

QUESTIONER: Governor, Joe Rose, Georgetown Company.

The scale of the fiscal problems that Albany's facing now would seem to require a level of reform not just with financial institutions, but also with state government, and you clearly understand that. Do you see any indication that the legislative leaders are going to buy into some of the kind of things that are required, and at the scale and at the time period that's needed?

PATERSON: What I'm trying to get the legislative leaders -- and they've pledged cooperation -- is not to look at the moment, but to look at 10 years from now. Look at 18 months from now, because everything that's happened in California seems to happen to New York somewhere between 18 and 24 months later. They had a $15 billion budget deficit last July, we have one right now. So that gap is actually closing.

We've got to address this crisis. It's painful. It's hard to tell advocates, I'm sorry, but we're going to have to cut this because in the long run it will do better. The advocates, from their hearts, really are assessing the pain of the sacrifices. They're right, but it has to be a shared sacrifice. Every New Yorker has to be involved that way.

I don't think, as I said before, the people really understand what a $15.4 billion budget deficit really is. Let's look at it: ($)15 billion is about (a tenth ?) of ($)120 billion. So a lot of people say, well, gee, that's 8 percent, you ought to be able to find some waste and cut 8 percent out. But that's not true. Seventy percent of the resources that New York gets comes from special dedicated revenue streams and federal money that goes directly to counties. We have to cut fifteen-and-a-half billion dollars out of an available 56 (billion dollar) to $62 billion hole. That would be like asking all of you, after paying your mortgage or your rent, after paying tuition or the cost of food and the cost of fuel, or income taxes and property taxes that you may have, or monthly payments on an automobile, that you've got to cut, after taxes, all of that, by 25 percent. And then you'll see what dire circumstances we're in.

You'll probably see some commercials in the next few days where real people will look in the camera and ask me: How can you do this? It's not how I'm doing it, it's let's be revenue-neutral. I'm ready to negotiate. I'm ready to be flexible. I'll take any one of these cuts off the table if someone will replace them with revenue- generating sources. And I'm not talking about trying to tax the rich, whatever part of them are left -- (laughter) -- at a -- at a -- to the tune of $15.4 billion. There is no tax the rich tax plan that can even come close to that. It is going to have to be a shared sacrifice or New York won't be able to -- will lose points on its credit rating, won't be able to borrow, and will compact the problem rather than solving the problem.

WELD: Governor, that was a tour de force. Thank you very, very much.

PATERSON: Thank you. (Applause.)

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WILLIAM WELD: Having myself dabbled briefly in New York politics a few years ago -- dilettanted, really, more than dabbled -- (laughter) -- I can attest that our guest, our honored guest today, was the most, at that time, universally liked and respected member of the legislature, mainly because of, in my view, the great good humor that he brought to every effort, to complement his high intelligence and mastery of the issues. He reminds me, in that respect, of a certain person who was recently elected to high office in Washington, D.C.

Please welcome a member of the board of the Achilles Track Club and a New York City marathoner, our governor, the excellent and honorable David Paterson. (Applause.)

Thank you, Governor. I remember your participation in that election a couple of years ago, and the great performance that you gave for the Legislative Correspondents Association when you were still a candidate, and all you have done for finance and in government.

And thank you for that very kind introduction.

By the way, Governor, you know how long the marathon is? (Pause.) Does anyone know? (Laughter, cross talk.)

QUESTIONER: Twenty-six miles.

GOVERNOR DAVID PATERSON: Twenty-six miles, 385 feet?

QUESTIONER: Right.

PATERSON: That assumes that you're standing in the front of the line. (Laughter.) I was running about five minutes, and I had a guide, and I saw all these people, and I said, "What's that?" And she said, "That's Mayor Giuliani. This is the starting line." (Laughter.) So I'm already tired. (Laughter.)

Well, thank you, also Richard Haass, who is the president and was kind enough to invite me here today. And to all the members of the Council on Foreign Relations, thank you very much for your service, for your input. People in governments all around the country and around the world look to you for leadership, and we appreciate your kind contributions, helping us negotiate what is a very, very, very difficult time in a very poignant moment in our history, in our history.

Foreign policy is evolving right before our eyes. The emergence of economics in the process expands day by day. In fact, I think we could surmise, very much so, after Clausewitz, that perhaps war is really the continuation of finance by a different means. (Soft laughter.) I wholeheartedly agree with that, as I am currently in negotiation on New York state's budget with legislative leaders. (Laughter.)

And so what I would like to do is to briefly touch on the important correlative issues of our national economic crisis and the president's response with a stimulus package, and then for a moment touch on the evolution of -- (off mike) -- and international finance, as we know it, in this day and age.

As much as foreign policy has evolved into the inclusion of finance as to one of its major factors for consideration, so too finance has inured in the direction of addressing new plateaus, including levels of national, international and even regional finance.

The economic strife has ravaged our country. Writing in Foreign Affairs, Roger Altman mentioned his belief that Americans have lost one-quarter of their net worth in 18 months.

The housing values in the beginning of 2006, which would have been assessed at $13 trillion, have fallen to $8.8 trillion, just as it is recently accounted for in mid-2008.

When you look at retirement benefits, the second-greatest asset for Americans after housing values, they have fallen by 22 percent, from $10.3 trillion to $8 trillion as of the last six months.

And the Central Bank of Europe, the Federal Reserve, have injected over $2-1/2 trillion into these institutions, of liquidity, trying to ameliorate this problem. These are the largest infusions in history, but they haven't worked. The International Monetary Fund estimates that the advanced economies will fall by 2 percent in 2009. And as of January 29th, the IMF now says that the debt-to-GDP in emerging countries has jumped from 2 percent in 2007 to 7 percent as it stands right now.

All of this has created a horrible calamity for New York state; for in New York state 20 percent of our revenues are derived from Wall Street. And in the fourth quarter of the fiscal year, where we are right now, the months of January, February and March, that number escalates -- that percentage rises to 30 percent.

We estimated our budget deficit, when we closed last year's budget in April, for 2009-2010 at $5 billion. By July, that number rose to $6.4 billion. With a 28 percent increase in our deficit over three months, I took to the airwaves and offered a televised address to New Yorkers, as Governor Rell of Connecticut will offer this evening, to alert people to how serious this financial crisis is, and to magnify the issue by comparing it to the Great Depression, which is the last time we've had this type of economic strife.

I was roundly criticized for this, and it was said that I mis- estimated the revenues. I did. I thought at that time, with the budget deficit increasing as it was, that our budget deficit would come in somewhere between nine and a quarter and nine and a half billion dollars. I did mis-estimate it. The deficit for 2009-2010 is now $15.4 billion.

It is three times higher than any budget deficit we've every seen, spare one. And that was right after the terrible attack on our country on September 11th, 2001.

But even at the time that we had that deficit, the economy was recovering. We were budgeting with the wind at our backs. We don't know where the floor of this crisis actually lies.

We know that at least 225,000 New Yorkers are projected to lose their jobs. We know that 671,000 New Yorkers are already not working. We know that the demand for food assistance is up 30 percent just in the last six months.

And the problem is no easier for New York City in spite of the fact that under Mayor Bloomberg, they did save. They did make necessary cuts. But they're still being obliterated in this crisis, such as are all the entities of local and state government around this country.

Before the crisis, the securities industry employed 5 percent of New York's residents. But the salaries that they derived accounted for 25 percent of earned income citywide.

Now that the city comptroller, William Thompson, estimates, along with the state comptroller, Tom DiNapoli, says there will be a 42 percent falloff in Wall Street bonuses, this now means that New York City will lose $1 billion.

This is why, in the past couple of months, I have worked with the governors of Massachusetts and New Jersey, of Wisconsin and Ohio and Michigan, as part of a committee from the National Governors Association, to present the president with what we believe would be the right economic stimulus package.

We are very pleased that his countercyclical proposals of assistance, to the federal Medicaid assistance percentage, along with education, along with child care credits and with extension of unemployment insurance and food stamps, will go a long way to help Americans at this very difficult time in our history.

The president also is offering to reignite the engine of our economy through repair of our infrastructure, repairs that have not been made in 50 years. In that regard, the projection is that $1 billion in infrastructure repair will yield 30,000 jobs.

New York State has 1,900 shovel-ready projects in road and bridge and transportation and a clean-water -- and wastewater-treatment proposals that are ready to go at this particular time.

The president is also proposing, over the next 10 years, to invest $150 billion in conversion of energy sources to energy efficiency and clean and renewable energy sources. In New York State, we were already ahead of the curve. Thanks to Governor George Pataki and Governor Eliot Spitzer, we have already grown to deferring 20 percent of our electricity use to clean and renewable energy sources. In my State of the State address a couple weeks ago, I have challenged New Yorkers to get to 45 percent by 2015. Realizing this program would create 50,000 jobs for the state, so it will be our state stimulus package, as well as converting to clean and renewable energy sources, which will not only be an infusion to our economy but also will protect our environment.

Now I would like to talk about some of the financial issues that we're presented with today and the financial crisis that's now worldwide. I hope we understand that there will be no immediate solution to this situation. There will be no quick fix. The solutions will come in stages. There is no single event or single action that can change the difficult situation we're in.

For example, the Bretton Woods conference of 1944, where the IMF was created, was preceded by the conference in London in 1933 and also the tripartite monetary agreements that were established in 1936. So the historic agreements that were arrived at at Bretton Woods really were the result of a lot of hard work that occurred in stages.

When the European Union decided to transfer to the euro as a method of exchange in 1992, here again, this was the result of decades of work that brought them to that -- to that decision. From the United States withdrawing from the gold standard in 1971 to the exchange -- the exchange rates that were derived in 1979, this was a process that was incremental that brought them to the establishment of the euro in 1992.

And so when these historic and large international and financial solutions are reached, they come in stages. They are established incrementally. I would expect that the stages may move more quickly now as the power and size of finance has grown really exponentially because of the issues that relate to deregulation and technology. But nonetheless we're going to have to recognize that our solution will have to come in stages.

And it in that respect that I raise this point that the nature of international finance has changed since Bretton Woods. There are those who are calling for a new Bretton Woods conference. And I think that that actually misses the point. The goals and the achievements at Bretton Woods would not work in this particular era. We're going to have to find our own innovations and use our own creativity to ameliorate what is a different kind of a crisis.

Now those who call for a Bretton Woods conference are hoping there will be a new international financial agreement, and I agree with that.

But just the use of the term "Bretton Woods" makes us hearken back to thinking about how issues were resolved in the past. In 1944, when those leaders met at that conference, they were trying to deal with the issues of global finance and the issues of national currency reserves. But now the issue of private capital is far more important than any issues of global finance. When those leaders met in New Hampshire in that red-brick building with a white roof to come to the decisions that they made in 1944, they were actually fearing what would really be to them a competitive currency devaluation at the hands of the government. Those who are trying to resolve today's crisis fear what has really been a regulatory arbitrage, which has led to damage done at the hands of private industry.

And so what we are probably going to have to do is to bring some new actors at the table for the negotiation this time. The private capital interest should be in the decision-making capacity of any resolution of any financial agreements because they are so inseparably involved. And the issue of private capital, particularly as it exists in relation to foreign policy and financial regulation, really just mirrors the fact that there are many actors now not state sponsored that are at the table just in the resolution of foreign policy generally.

And what is going to have to happen is that foreign policy and governments are going to have to adjust to this change.

Also, I think the most relevant point is that the financial structure of international finance has really evolved as well right before our eyes. The fact is that we could probably congregate finance into three basic levels. They would be national, international and also regional.

Most of the solutions that you're hearing about in past few days are national: national bailouts, national interventions, recapitalizing from the federal government many of the banks. You're hearing very few international solutions, save lowering the interest rates that was done correlatively and cooperatively by a few countries back in the end of September. But you're hearing absolutely no regional solutions at all.

Now, what do I mean by regional solutions? The banks of New York and the banks of London are quite different, and there are reasons for that. Regions compete for capital based on different investment conditions that they establish, different tax and probably regulation schemes, different legal and employment practices. And they vary from one place to another. So New York and London are certainly the epicenters of financial management in their regions, but you have places like Tokyo and Hong Kong and Singapore and Bahrain. They are also emerging centers, as there are emerging centers in Africa or, as I read the title to an article in late November when I was reading The Economist, it's "Shanghai, Dubai, Mumbai or goodbye." (Laughter.)

So the point really is what we are witnessing, in many respects, is the breadth of macroeconomics, in many respects, being curtailed and truncated by the traditions and the realities of microfinance.

So what works in New York may not work in London or Hong Kong. And it matters that the epicenter of United States financial policy is here in New York, because the conduct?? would be much different if it were Chicago, or the culture would be much different if it were in Los Angeles.

And that's what brings us to New York's role in the economic recovery in this country, and (suddenly ?) it affects the world. New York is one of the states, as are all the states, that regulates insurance policy. Because of the insurance companies that are domiciled in New York, we find that -- actually, that New York is the seventh-largest insurance market, based on the prevailing values.

And so in September of 2008, when AIG was teetering on the verge of collapse, it was New York that it fell to to try to assist them. It was me, as governor, who had to initiate what would be an administrative change in policy and a change in regulation to allow AIG to access $20 billion from its subsidiary resources in order to bail out the -- bail out their parent corporation. And eventually, through the New York Federal Reserve, the government brought in $85 billion to bail out AIG, and then even more resources after that.

But it fell to New York state to take the first action here. And just to give you an example: I had met the governor of Wisconsin at a governors' meeting, and I'm a new governor, and he came over and he put his arm around me. He said, "Look, if you ever have any problem, just call me." He said, "It is really not as hard as it may seem to you right now. But if you ever have a problem, pick up the phone and call me."

So in the middle of this AIG crisis, I pick up the phone and it's the governor of Wisconsin. And he is almost apoplectic. He says, "Governor, we have an insurance company, Capital (sic/Travel) Guard Insurance. It's the largest bondholder in the state of Wisconsin. It's located in Stevens Point, Wisconsin. You've got to get the federal government to save AIG. I don't know what'll happen to our economy if it goes under."

And I'm sitting there thinking, "If he's calling me" -- (laughter) -- "we have a bigger problem than I thought." (Laughter.) But that is when I realized what really is the power of regions in terms of evaluating measures and levels of finance.

So as governor of the state of New York, I soon realized that I have considerable regulatory authority over New York's financial institutions.

And what we're going to need right now is to establish what will be a strong but sensible area of reforming our national system of financial regulation.

I am delighted that President Obama, along with his new Treasury Secretary Tim Geithner, NEC Chair Larry Summers and Paul Volcker, are addressing this problem straight on.

I look forward to whatever is the appropriate way that New York can contribute to what will be a new way of regarding the savings and the retirement funds, not only of New Yorkers but of all Americans, such that they never be in peril again.

Now, how are we going to solve this crisis? Well, I would suggest that it is probably a combination of the old with the new. In 1907, there was a run on banks that was getting out of control when it was almost singularly stopped by one private financier, JPMorgan.

This is probably the most spectacular demonstration of the power of private finance that has ever been seen. In 1944, the Bretton Woods conference in many respects may have been the most extraordinary moment of government economic leadership that we saw in the 20th century.

For the 21st century, I suggest that there may have to be a coalition of these values, that we may have to actually connect the power of private financing with the strength of government regulation, to come to an overall agreement.

Let me leave you with this. We have just witnessed the greatest failure of financial regulation in modern history. As we try to preserve the innovation rights and the independence of business, we are going to have to find a way to regulate what is an evolving market at an evolving time in our history.

Thank you very much. (Applause.)

WELD: Thank you very much, Governor. We're now going to move into a question-and-answer period. I'm going to ask you one or two. And then we'll go to the audience. And I would ask those who are putting questions to please wait for the microphone to get to you and speak directly into it and begin by standing and stating your name and your affiliation. And one question at a time, please, to maximize the number of members who can ask questions.

Governor, 10 years ago, there was really no doubt that New York City was the capital of the world, or so it seemed to me. Nowadays, I think it's fair to say Washington, D.C., is the center of attention, at least domestically. And to the extent that Wall Street is the center of attention, it's somewhat unflattering attention, more often than not. And some of our friends in Asia and elsewhere around the world are openly predicting that the United States and Western Europe are going to be our planet's next emerging markets -- and won't that feel great?

I guess my question is a 38,000-foot question: What scenario do you see -- I assume underneath it all you're an inveterate optimist like me -- for the dissipation or the reversal of those unwelcome trends?

PATERSON: Well, I think that New York, heavily dependent as I described before, on the financial services industry, is going to have to find what would really be the innovative solution that we did during the building of the Erie Canal and the establishment of the Erie Lackawanna Railroad.

We started building the Erie Canal in 1817, and at that time New York had a population of about 3 percent of the national average. We were also doing about 3 percent of the business. But because of the manufacturing jobs that we created in 20 years, that number of -- that amount of business that we were doing went from 3 percent to 50 percent. New York by 1840 -- in the mid-1840s, New York state was doing practically 50 percent of the business that was conducted by the country. And the population grew from 3 percent to 13 percent. People moved where the jobs were.

Now people are moving away. So we are hoping that some of the cutting-edge industries -- I'll tell you right now, whoever finds the way to perfect the electronic battery to a plug-in hybrid electronic vehicle will revitalize their economy in years and years to come. And New York state, which has the greatest import of students in colleges and universities, and has a number of tremendous research centers, and is already ahead of the rest of the country in the development of electronic storage technology and is trying to get there in the development of a hybrid electronic battery -- these are the types of areas we're investing. And they are job-creating, they are obviously great for the economy and, hopefully, they will keep people in the state.

Right now, New York state is losing over a hundred thousand residents every year.

WELD: Thank you, Governor. You know, there was a report done for Mayor Bloomberg and Senator Schumer, I think, at the beginning of 2007 that analyzed New York as a financial center versus competition from London. One of their chief recommendations was a liberalization of our immigration policies nationally to promote the most skilled and competitive possible workforce, specifically in and around New York City. Do you think that idea holds promise?

PATERSON: Well, I think in New York state and in New York City, we have always welcomed that. New York has always been the international city and would like to attract the best and the brightest. But it's been in reverse.

Twenty-eight percent of college graduates in New York who were indigenous to our state are leaving. So our best and our brightest are going other places. So obviously it is a competition right now, even within the boundaries of the United States, for who is creating jobs through cutting-edge research. And we would invite anyone that wants to live here -- legally, of course -- to come and be among us.

WELD: There's no one so brave and wise as the politician who's not running for office and who's not going to be, which is why I can use the word "liberalizing."

Okay, we're going to move to more knowledgeable questions at this point. Members of the audience, please raise your hand. Sir?

QUESTIONER: Bob Katz (sp), major affiliation's with Yale University and -- (inaudible) -- for purposes of this meeting. David, we're having a lot of assault on New York and what we're all about in terms of the financial services industries. A lot of it may be self-inflicted, but do you have any ideas or recommendations for how we defend what I think is a crown jewel both of the region and, frankly, of the country in terms of things we have to offer the world.

PATERSON: Well, I think that it's very difficult to try and impress this upon those who are being asked to make a sacrifice. They will be going on television with ads probably reprinted from two years ago when the budget deficit was 20 percent of what it is now, almost as if they never heard of a financial crisis. The reality is that we are going to have to make some tough choices in our budget negotiations. But if we can, the budget that I have released would cut the $15.4 billion deficit, the $1.7 billion remaining from last year and the $13.7 billion from this year.

In addition to that, it would reduce a $51 billion indebtedness that this state actually owes to $7 billion over the remaining two years. If we were able to bite the bullet and take that pain for one year, we could move ourselves past all of the other states that have budget deficits right now.

There were 12 states that had budget deficits at the end of 2007. There were 25 by mid-2008. They owed $48 billion. There are now 43 states that owe over $155 billion in deficit right now.

We could get past this whole thing by embracing the fact that there has been overspending on the part of our state and we're also victims of a downturn in the national economy. It wasn't all us. And also, we derive 20 percent of our resources from Wall Street. Eight percent of -- 18 percent of our jobs are financial. The average in other states is 2 percent.

So we could actually get past this. And if we could, even if the deficit widens -- and there's no reason to think that 2009 is going to be any better than 2008 -- we'll be far ahead of the rest of the states. And I think that would really entice people to come here, to work here in emerging fields of medical and scientific research, of energy technology and even in manufacturing, as we're finding that a couple of companies that offshored their jobs to different parts of the world now find that there's a competitive workforce because so many -- so many companies have moved there. And also, the price of energy to transport goods back and forth across the Pacific and the Indian Ocean isn't as economical as it used to, and they're starting to come back and we are ready to welcome them.

By the way, Bob asked me to come on a march with the Cornell alumni after they beat the Columbia alumni, of which I'm one. And I was introduced to Happy Reichert, a Cornell alumni who is a little ahead of me. She graduated 1925, and is now 107 years old. So when you see Happy, Bob, please tell her I said hello. (Laughter.)

WELD: Right here.

QUESTIONER: Lucy Komisar. I'm a journalist.

There was just a GAO report done, at the request of Senator Levin, that showed that some hundred or more companies, including many of the ones that had gotten bailouts, had a large number of offshore subsidiaries. And we know that a main reason for offshore subsidiaries is to cheat on U.S. taxes.

What are you doing to make sure that the companies in New York are not using offshore subsidiaries to cheat on taxes, now that we so desperately need the money?

PATERSON: Well, I think, this is where we have to be very careful about the original bailout package, the $700 billion, which really vested all control in the Department of the Treasury, not even subject to perusal by the Justice Department.

This had to be a negotiation, because it really is egregious. And what we were doing was, in a sense, what they did in Japan, which was buying up the bad debt of all the banks and financial institutions, not changing any management and allowing them to fritter away resources in reckless schemes that often hurt the American taxpayer.

That has kind of been changed. Ever since Prime Minister Brown decided to recapitalize the financial institutions in Great Britain, it seems to have dawned on the United States. And now with the new administration, we are trying hopefully to be careful. But I think that's why the president reacted so viscerally to this idea of these firms getting bailout money and then the heads of these firms taking bonuses.

It's outrageous. Even the company that I referred to before, that New York State helped, the first thing they did, when they got money from the federal government is, they went on a retreat.

I mean, just the goal, just the -- you just have to wonder, what is going on in the minds of people who, knowing that we have 2 million Americans who have lost their houses, over the last couple of years, and over 2.5 million Americans who have lost their jobs last year, feel comfortable using resources in the manner that they have?

It is an absolute outrage. And so obviously on the state level, we don't have direct participation in the bailouts of these companies that the General Accounting Office reported on. But certainly in terms of the stimulus money, we're going to be very careful as to where it goes.

As a matter of fact, the administration did not want to give block grants to the states, because they weren't sure what we would do with them.

We don't have the best reputation for financial management.

But at the same time, there was a desire to put money into resources that would respond immediately. And that's why the negotiating whether it would be 90 days, 180 days -- I think they will settle at about 120 days -- for what the shovel-ready projects are. Because now everybody with a shovel says they're shovel-ready. The reality is, what we need are projects that are ready to go, because I think that there is a psychological stimulus that goes with the economic stimulus. If people see other people going back to work, then I think we will address the fear that so many Americans rightly have at this time.

WELD: Yeah. Sir. No, no, no.

PATERSON (?): That's okay.

WELD: One to a customer.

Sir?

QUESTIONER: Joel Motley --

PATERSON: I didn't answer your question.

WELD: It's fine, Governor. Go ahead, sir.

QUESTIONER: Joel Motley, Governor. When you first started alerting us to these problems, there was a lot of resistance, almost denial, coming out of the legislature. Do you have a sense that that's receding? And what do you attribute, hopefully, a sense of realism that may be settling in to?

PATERSON: Well, I think at first, when I issued the warning, it was two months before the collapse of Lehman Brothers and the subsuming of Merrill Lynch by Bank of America and, obviously, the problems with AIG. However, I think by now everybody should understand that there's going to have to be extreme sacrifice.

I've been disappointed when I have meetings with people who come in and they say, "What we're going to do is we're just going to budget for a $10 billion deficit, (where ?) 5 billion (dollars) is coming from the federal stimulus package. I don't understand how anybody in government, or even lobbying, could say something like that. How do you count money that's not in -- they haven't even -- they haven't even passed a bill yet! But it just shows the cognitive dissonance that seems to exist when trying to address these types of problems.

This is a serious time for people, and -- for people losing their jobs and losing their homes. It is a very difficult issue for me, who's been an advocate in the legislature for 21 years, to turn around and now start vetoing legislation that I helped sponsor, and actually cutting resources from programs that I've advocated for.

I'm not saying that the programs were any less helpful now than they were then. But this is where we are in this budget deficit. When you hear amounts like 700 billion (dollars) in a bailout package or 819 million (dollars) in a stimulus package, you have no idea of what those numbers really mean. It starts to sound like Monopoly.

The reality is, 15 billion (dollars) is 15,000 million (dollars). So how many dependent clauses have I heard with "Governor, I know we're having an economic problem, but there's this program, and it's only a hundred million dollars. What's a hundred million dollars next to 15 billion (dollars)? You've got to save this." A hundred million and a hundred million and a hundred million keep adding up, and that's what gets to 15 billion.

I'm hoping that people will look at California to see what can happen to New York. California is not sure that in a couple of months they can meet their financial obligations. They already have a cash flow problem. They have a $41 billion deficit. And no matter what the governor tries to do, people hold on to their bonded field of rhetoric that is really inappropriate and should be disqualified at this time.

WELD: Yes?

QUESTIONER: John Beatty (sp) from UBS. In certain instances, governmental intervention helps to stimulate development of new financial products. By way of example, the Resolution Trust Corporation that was set up to purchase bad assets helped in the development of the private label securitization market.

What policies do you think that New York state can initiate to help stimulate the development of new financial products once the economy starts to recover?

PATERSON: There's a long assumption between now and when the economy starts to recover. But I'll try to think forward and just say that governments have traditionally invested in places where private industry is less apt to do so -- for instance, research and development, where we would like to take the colleges and universities of New York and make them work the way they do in California and Massachusetts.

And so I can't tell you exactly what the areas are of innovation in the next few years. But I would certainly assume that obviously issues of transportation, as -- when the prices of oil and gas go back up, we think that high-speed rail, such as it exists in Europe, would be a great product to bring to the United States.

New York suffers because you can't get a flight from Buffalo to Albany or Syracuse to Buffalo now. High-speed rail would shorten up the distances in our state and generate economic development to the upstate regions.

Obviously, the issue of trying to convert a lot of information and technology, particularly in the health care, to computerization and make it far more accessible would certainly be a way.

But I think that a government invests in energy research where -- if you notice, there have been very few private companies that have invested in ethanol, because it really is not energy return on energy invested as yet. That has to be researched. And so I think it's not as much the end result as it is the catalyst for the opportunity to find those problems where government plays the greatest role.

WELD: In the back.

QUESTIONER: Esther Newberg, ICM. Governor, what's your involvement with homeland security? And what percentage of state budget would focus on New York City? And what might you tell your new senatorial appointment about how much more money New York City needs?

PATERSON: Well, New York City was obviously the epicenter of the attack on our country. And the basis for funding of homeland security during the last administration boggles the mind. New York per capita got less resources than the state of Wyoming, which got four-and-a-half times more in per capita resources than New York. And I'm not suggesting that the terrorists have ruled out Wyoming as a possible spot to hit -- (laughter) -- but it just seemed very unusual, and I think manifestly insensitive at a time when New Yorkers are still reeling from that crisis.

We still have emergency service workers sick from -- from their involvement after the fact. We still were urged to go back to work by the EPA, and now that's led to illnesses to people who were working on those sites for months after the crisis.

And we are still probably -- we -- I'm not allowed, from security clearance, to tell you, but we are still a region very much under threat.

We are obviously sharing the state resources with New York City, where we think it is the right proportion. And at this particular time, particularly with the downturn of our economy and obviously a decrease in morale in the country, we see this from the prism of the -- view that (demonic ?) terrorists evaluate as probably an enhanced time when they might be trying to organize.

So in spite of the fact that globally there has been considerable disruption to the leadership of al Qaeda -- the surge in Iraq did great damage to them -- but still there is an ever-present threat, maybe not as much from the larger terrorist organizations but from individuals. You now have the problem of the increase in individual attacks from women, who -- as opposed to men over the past few years. And we are taking that to heed and consider it a priority in the governance of this state.

WELD: Right there.

QUESTIONER: Thanks. Keith Richburg from The Washington Post. In his budget message the other day, Mayor Bloomberg talked about the $770 million cut in education, and he said basically that now that the state is getting it back from the federal government, he said -- his words, there's "no excuse" for Albany not to give it to the city. In fact, what he said is: There's just no excuse for not giving that money. It's somebody else's money. And he said that equaled something like 14,000 teachers. I mean, how would you answer the mayor on that?

WELD: I think that if we do get the stimulus money back from the federal government, that it will go a long way to ameliorate the issue of the 14,000 teachers. I think that there are ways in which the city, among other entities, was hit a little harder than other parts of the state. There are ways that the city was hit less than other parts of the state. So it is a holistic remedy that we have to discuss.

We got together with the mayor last Wednesday and had a very productive conversation. And we will go forward as well. And I am guilty of this just as much of the mayor, but you have to tell everyone that you have to understand the cuts that you're giving, and then you look to the source beyond you and act just like the advocates that you were lecturing. (Laughs.) But I've done that to the federal government, as well. (Laughter.) So I'm just as guilty as the mayor.

WELD: Yeah?

QUESTIONER: (Off mike) -- from LECG. Governor, along with 49 other state administrations, you govern or regulate the insurance industry. Would you favor federal regulation of the insurance industry?

PATERSON: Well, I think that the kind of regionalization in state insurance regulation probably would help if the federal government did come in.

This is the reason that we tried to make the insurance company accountable for the credit default swaps. And then they tried to say that we have no authority. As long as they're domiciled in our state, we suggest that we do have that kind of authority.

But I think federal regulation, particularly with the long tentacles of these types of companies -- and it's almost -- even -- one of the biggest problems that we had with AIG wasn't as much that they were holding back information from us, but they had no central bookkeeping assessment, and therefore they didn't even know what their own debt was. And I think, if you remember, during that period in mid-September, every day their debt grew by $10 billion. And even when the federal government gave them $85 billion, they had to go back and give them a number 40 (billion dollars) -- another 40 (billion dollars).

I think, both particularly for these large firms, that asking a state to try to keep track of them when they barely keep track of themselves, that federal regulation certainly might be in order, particularly on some aspects of insurance; maybe not all of them.

WELD: In the front.

QUESTIONER: Ted Sorensen from Paul Weiss. Governor, in our globalized economy, you preside over an -- a state economy which is larger than most national economies in the world. So you're not only competing with other states, but with other governments around the world, many of which have export-subsidy programs to help their local providers, whether it's providers of goods or services.

I generally recall that 30, 40 years ago, we started an export- subsidy program in this state. I have no idea if it's still around, but I wonder whether there is one and whether you would encourage one.

PATERSON: I think at this point, perhaps -- if I could expand upon your question, Ted -- as we look at the economic stimulus package in this country, we might be making a little bit of a mistake. And I think that export subsidies would be in order. We don't have them in the fashion that they existed during the Rockefeller administration. What I would say, though, is that it's interesting to hear what seems to be a discussion that's arising over a sort of protectionist doctrine, where the United States would disengage from the rest of the world. And even the other economies are talking about doing the same thing.

But of all the places that, I think, should not disengage from the rest of the world and should be exporting is the United States. And let me tell you why.

Wall Street revenues were down 40 percent last year. We know that. It was a painful year for all of us. But if you evaluate the other economies around the world, we probably fared better than anywhere else.

All of these places that were threatening us; remember when Russia was playing the oil card last summer, when they went into Georgia, and threatening everybody in the world. Do you hear them now? They pray every day that they can even open their stock market. They're in such bad shape.

China, the South Asian markets; everyone is suffering. The European economy is somewhat in denial. And what I'm saying is, there is one entity that can borrow money right now -- the United States Treasury.

So we are in excellent position, I think, to interact with the rest of the world, because we can actually make money for our taxpayers by exporting, by filling the void, in a lot of these countries that can't get credit, and bringing them supplies and letting them pay for it.

Not every country was cheating in the payment of their debts. Countries like Brazil, they are countries that would like to engage in foreign trade but can't get the credit.

I think this is an immense opportunity for the United States to go the opposite way of the initial gut reactions of fear and to manifest our resources in exuberant -- I think what we need to recognize is that the issue of power is relative; it's not absolute.

Relative to the rest of the world, our capacity to influence markets around the world is greater than it was last year, even though we are in a downturn of our own economy.

And I think we have to see past the fear and the anxiety and invest right now in creating subsidies for exports, and move forward and show the world who the economic leader is once and for all in this time of crisis.

WELD: Right there, sir.

QUESTIONER: Thank you. Governor, Phil Dropkin from the Gerry Foundation and from Granite Associates. If we may, let's just talk about tourism for a moment. As you may be aware, the Gerry Foundation has developed a performing arts venue in upstate New York which is a very significant economic driver for a very -- rather impoverished area. I'm wondering, recognizing the difficulties that the state has, what role do you see the state having in helping to promote tourism in those areas of the state that have historically suffered?

And on a personal note, I also run marathons. I would very much appreciate it if you would eliminate the last 365 yards. (Laughter.)

PATERSON: I almost eliminated it for myself by falling down about 400 yards from the end some years ago.

MR. : (Laughs.)

PATERSON: But let me take a step back in order to answer the question. Tourism is floundering in New York. Traffic on the throughways during the holidays was down, for Labor Day and for July 4th.

The American consumer has wised up. After $950 billion of credit card debt and after people -- a 40 percent increase in bankruptcies over the last couple of years, people are not spending money.

And when we had the National Governors' Conference during the transition period and President Obama came to talk to us about the stimulus package, Governor Sanford of South Carolina, Governor Perry of Texas, Governor Palin of Alaska raised the issue of piling debt on top of debt. And that is obviously a concern, because the debt that we are running up right now could be a house of cards if we don't react to it.

But this is exactly why the president wants to invest in a stimulus package right now. He wants to reignite the engine of our economy.

The average American citizen was saving 9 percent of our salaries in the '80s. That figure went under 1 percent in the early part of this decade. It's back up to 6 percent. People are saving. If you make tax cuts, they're holding the money. If you give back rebates, they're saving the money. And what we need to do is to get people in -- spending money again, traveling again, being tourists again. But as Paul Krugman wrote in The New York Times in October, the individual virtue has become the public vice. People have gotten it, but we need people to spend right now. And this is the enticement.

Now, almost 40 percent of the stimulus package is a tax cut. And I would just say that I'm delighted that we're having the stimulus package, but if you're cutting taxes and your states are in such dire resource that they have to raise taxes, it's a wash. The American consumer won't remember who cut and who raised, they'll just remember that they have less available cash than they have had and will go back to not spending.

So in terms of tourism, we see that as an ancillary problem beyond resolving this budget deficit. If we don't resolve this budget deficit, we're not going to have the tourists that we so blissfully want to come and see the treasures of New York.

WELD: Yes.

QUESTIONER: Governor, Joe Rose, Georgetown Company.

The scale of the fiscal problems that Albany's facing now would seem to require a level of reform not just with financial institutions, but also with state government, and you clearly understand that. Do you see any indication that the legislative leaders are going to buy into some of the kind of things that are required, and at the scale and at the time period that's needed?

PATERSON: What I'm trying to get the legislative leaders -- and they've pledged cooperation -- is not to look at the moment, but to look at 10 years from now. Look at 18 months from now, because everything that's happened in California seems to happen to New York somewhere between 18 and 24 months later. They had a $15 billion budget deficit last July, we have one right now. So that gap is actually closing.

We've got to address this crisis. It's painful. It's hard to tell advocates, I'm sorry, but we're going to have to cut this because in the long run it will do better. The advocates, from their hearts, really are assessing the pain of the sacrifices. They're right, but it has to be a shared sacrifice. Every New Yorker has to be involved that way.

I don't think, as I said before, the people really understand what a $15.4 billion budget deficit really is. Let's look at it: ($)15 billion is about (a tenth ?) of ($)120 billion. So a lot of people say, well, gee, that's 8 percent, you ought to be able to find some waste and cut 8 percent out. But that's not true. Seventy percent of the resources that New York gets comes from special dedicated revenue streams and federal money that goes directly to counties. We have to cut fifteen-and-a-half billion dollars out of an available 56 (billion dollar) to $62 billion hole. That would be like asking all of you, after paying your mortgage or your rent, after paying tuition or the cost of food and the cost of fuel, or income taxes and property taxes that you may have, or monthly payments on an automobile, that you've got to cut, after taxes, all of that, by 25 percent. And then you'll see what dire circumstances we're in.

You'll probably see some commercials in the next few days where real people will look in the camera and ask me: How can you do this? It's not how I'm doing it, it's let's be revenue-neutral. I'm ready to negotiate. I'm ready to be flexible. I'll take any one of these cuts off the table if someone will replace them with revenue- generating sources. And I'm not talking about trying to tax the rich, whatever part of them are left -- (laughter) -- at a -- at a -- to the tune of $15.4 billion. There is no tax the rich tax plan that can even come close to that. It is going to have to be a shared sacrifice or New York won't be able to -- will lose points on its credit rating, won't be able to borrow, and will compact the problem rather than solving the problem.

WELD: Governor, that was a tour de force. Thank you very, very much.

PATERSON: Thank you. (Applause.)

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