responsibility include digital media properties. mr. bradford, what does that mean? >> guest: well, it means being responsible for all the digital components of the fox broadcasting company, the television network. so it means fox.com, our streaming service, our show sites like "american idol".com, 24, hell's kitchen, so you think you can dance, anything having to do with digital including the outbound marketing using external sites to bring viewers back to our shows. >> host: and besides the television network how do you get eyeballs on your screens? >> guest: well, a lot of different ways. we like to fish where the fish are, and the con sears are in -- consumers are in a fragmented way all across the internet. so we reach out and touch using twitter, myspace pages for all of our shows, we post promotional content on youtube, so, you know, if there's a consumer touch point, we're out there.

>> host: are more people yet watching on their computer screens or on their mobile devices than on their tvs? >> guest: no, not at all. about 99 percent of viewing last year was on the television set. >> host: so why all the attention on these new medias? >> guest: i think because it's growing, but we still see the tv as our primary source. that 1 percent is a significant 1 percent, and we do see growth in the digital space, but we see it as complimentary or something that is additive to our screwership -- viewership. >> host: do you see growth still in the television market? >> guest: yeah, absolutely. we see it -- at the end of the day, tv's all about great story telling, and consumers are still going to want great story telling. it's going to become more and more fragmented as far as where they get those stories, but we see the television industry's strong, and we're out there touching consumers every day, and it's a great place to be. we see it as a growing business.

>> host: how do you protect your product? >> guest: are you talking about through digital rights management, things like that? yeah. we make sure our product's well secured for our studios so that it doesn't get pirated, and, in fact, when it does happen, we try to rap it down as fast as we can pause that -- because that intellectual property's very important to the studio. >> host: is that a major problem for fox? >> guest: i think it's about being proact i, creating hulu, creating our own streaming service. the piracy in the united states does not seem to be a big issue for us. overseas we see a lot of our consumption happens overseas because that product is not necessarily available in some markets, but in the united states it hasn't been a big issue for us. >> host: is advertising still an effective way for people to get free tv, so-called free tv? >> guest: absolutely. you know, we have deep partnerships with a lot of

advertisers and very, very good relationships with them, and we actually see digital as a way to compliment that relationship so that's not just within that time slot in a week where the advertiser gets to reach out and touch the consumer associate with the that brand, but 24 clash 7, and that's why we've created dimensional products for our advertising community that is additive to the consumer experience. >> host: when you here about everywhere tv that the cable companies are doing, what's your reaction? >> guest: i think it's a very interesting concept. you know, there's a lot of moving parts that are, you know, there's news about it every single day. but it's the ultimate principle of making sure that the distributers and also the studios and the networks get properly compensated for the, for the content that they're taking the time and investment to produce. i think it's a good thing. >> host: bill bradford, senior vice president of fox. and finally this week for all the facebook users out there, an interview with the person involved in making sure that you get to know more about the

friends you have on the site. tim o shaughnessy is the co-founder and ceo of living social. what is living social? >> guest: so living social, peter, is the place that people go on presumably facebook for the most part to go and share and communicate around the things that they're interested and passionate about. >> host: and what's your role in a facebook or myspace? >> guest: so in that world, you know, if you ever see people kind of recommending books to their friends or, you know, kind of building up their collections and writing reviews, you know, we're predominantly in books and movies, we're the place that people go and do that. >> host: and how is it you've developed those platforms? >> guest: really it all started about two years ago when facebook launched their api which said, hey, you know, third parties you can come and go and build within us. so once that happened, we really said, oh, this is a unique opportunity where we can really add value to these places that lots of people are using

already. >> host: and how do you build the, when you say you've added value, how do you figure out the algorithms to get into those places? >> guest: well, it's really probably a little simpler than it seems. so, you know, you really look at what the user experience in facebook is, for example, and they give you a couple of different areas where, you know, users congregate where if -- you can kind of, we as a company can plug into. so, you know, for example, there's the stream or the feed in facebook which is where when somebody logs in, it's their first page. and they let us go and say, hey, you know, somebody wrote a review in your product, do you want to go and publish it to the stream where all their friends can see it? >> host: where's the growth in this industry right now? >> guest: well, i think facebook is really killing it. there's been a lot of news around myspace, and they've had a little bit of turmoil, so i think they've done a great job of growing, and i think they'll continue to grow. i think the other real area of

growth is from a mobile-social standpoint. so you have the iphone platforms that are out and really doing well, and i think that as apple continues to make new features, it'll become a more social experience. >> host: is twitter included in this group? >> guest: so twitter is, is an interesting play, i think. you know, they, they have achieved great press and great growth, and you've obviously seen the value from a breaking newsstand point and some coverage standpoint. one of the things that's interesting is a lot of users who start to use twitter don't go back, so i think it'll be interesting to see if they can build a sustainable user base off this press and momentum they have. >> host: when you approach facebook, what do do you say to them that living social can do? >> guest: we tell facebook that, you know, we provide value to your overall site and

experience. people will come to facebook just to use living social. so, you know, if we can bring more people back into the facebook space, that's great for them. >> host: one of the legislative issues that is being talked about in this next coming session of congress and the new fcc is privacy. is that an issue that concerns you, and how do you deal with it? >> guest: oh, i think it's one of the things we think about every day. you know, one of the reasons facebook, i think, has gotten to where they are is that they gave really granular privacy controls to their users. and, you know, we've tried to follow that model, you know, i think that there's to some degree a generational gap that occurs in the privacy space still, but, you know, i could really see in the next, you know, 18-24 months that being an issue that becomes, you know, more and more prevalent. >> host: what do you mean by granular? >> guest: well, you know, if you -- you can go and say, all right, i want some people to go and see the movies i've watched

or, you know, the books that i've read, but i don't want everyone to be able to see it. so you can really, you know, make that decision on who -- you can control who views your profile and content, that sort of thing. >> host: tim o' shaughnessy, co-founder and ceo of living social. don't forget all the interviews we did and other communicators programs can be found on our web site at c-span.org. go to c-span.org and click on communicators 1k3-rbgs you'll also be able to find out how you can get a podcast of this program. ..

>> join the conversation on civil rights and race relations with npr and fox news analyst juan williams on book tv's in depth on c-span2. >> yesterday, sarah palin officially resigned as governor. she spoke as the official swear-in ceremony for the new governor at the annual's governor's picnic in fairbanks. her 20-minute remarks come courtesy of kctu affiliate in anchorage. >> it's great to be in fairbanks. the rugged hearty people who live up here and the patriotic people whom you'll ever know live up here. it's your steadfast support of

our military community up here and i thank you for that and thank you, united states military, for protecting the greatest nation on earth. together we stand. [applause] >> i say it's the best road trip up soaring through the greatest show soaring under the midnight suns and in the wintertime it's the frozen road that's competing with the view of ice fogged frigid beauty. the cold doesn't it split the sourdoughs. and in the summertime such extreme. about 150 degrees hotter than just some months ago than just some months from now. with fire weed blooming along the frost leaves and merciless rivers that are rushing and carving and reminding us that here mother nature wins.

it is as throughout all of alaska that big wild good life teeming along the north of nature. what america gets to see along with us is in this last frontier there is hope and opportunity and there is country pride. and it is our men and women in uniform securing it, and we are facing tough challenges in america. with some seeming to be hell-bent maybe on tearing down our nation. perpetuating some pessimism and suggesting american apologetics, suggesting perhaps that our best days were yesterday's but as other people have asked, how can that pessimism be when proof of our greatness and our pride today is that we produce the great proud volunteers who sacrifice everything for country. [applause]

>> now, this week alone shaun parnell and i -- we're on fort rich the base there the army chapel. we heard the last roll call and the sounding of taps for three very brave, very young alaskan soldiers who just gave their all for all of us. together we do stand with gratitude for our troops who protect all of our cherished freedoms including our freedom of speech which par for the course, i'm going to exercise. [applause] >> and first some straight talk. for some, just some, in the media because another right protected for all of sus freedom of the press and you have important jobs reporting facts and informing the electorate and

exerting power to influence. you represent what could and should be a respected honest profession that could and should be a cornerstone of our democracy. democracy depends on you. and that is why -- that's why our troops are willing to die for you. so how about in honor of the american soldier, ya quit making things up. [applause] >> and don't underestimate the wisdom of the people and one other thing for the media our governor has a nice family, too,

so leave his kids alone. [applause] >> okay. today is a beautiful day and today as we swear in sean parnell no one will be happier than i to witness by god's grace alaskans with strength of character advancing our beloved state. sean is that. craig campbell has that. i remember on that december day we took the oath to uphold our state constitution and it was written here in fairbanks by very wise pioneers. we shared the vision for government that they ground in that document. our founders wrote, all political power is inherent in the people. all government originates with the people. it's founded upon their will only and it's instituted for the good of the people as a whole. their remarkably succinct words

guided us in all of our efforts in serving you and putting you first and we have done our best to fulfill promises that i made on alaska day, 2005, when i first asked for the honor of serving you. remember then, our state so desired and so deserved ethics reform. we promised it and now it is the law. ironically it needs additional reform to stop putting abuse from partisan operatives and i hope the lawmakers will continue that reform. [applause] we promised you that you would finally see a fair return on your alaskan owned resources. and this is an equitable formula to usher in a new era of competition and transparency and protection for alaskans and the producers.

aces incentivizes new exploration and it is exploration that is our future. it opens oil basins and it ensures people will never be taken advantage of again. don't forget alaskans you are the resource owners per our constitution and that's why, for instance, last year when oil prices soared and state coffers swelled but you were smacked with high energy prices, we sent you the energy rebate. see, it's your money and i've always believed you know how to better spend it than government can spend it. i promised we would protect this beautiful environment while safely and ethically developing resources and we did -- we built the petroleum oversight office in a subcabinet to study climate conditions and i promised we would govern with fiscal restain so not to burden generations and

we did. we slowed the rate of government growth and i vetoed hundreds of millions of dollars of excess and with lawmakers we saved billions for the future. i promise that we'd lead a charge to forward-funding education and hold schools accountable and improve opportunities for special needs students and elevate vo-tech training and we paid down pension debt. i promised that we would manage our fish and wildlife for abundance and that we would defend the constitution. and we have, though, outside special interest groups they still just don't get it on this one. [applause] >> alaskans -- alaskans need to really stick together on this with new leadership. in this area especially. encouraging new leadership. stiffen your spine to do what's right with alaska when the pressure mounts because you're going to see antihunting, antisecond amendment circuses

from hollywood and here's how they do it. they use these delicate, tiny very talented celebrity starlets -- they use alaska as a fundraising tool for their second amendment causes. stand strong and remind them patriots will protect our individual guaranteed right to bear arms and by the way -- [applause] >> hollywood needs to know, we eat, therefore, we hunt. [applause] >> i promised energy solutions and we have -- we have a plan calling for 50% of our electricity generated by renewable resources and we can now i see that those who hold the leases to develop our conventional resources that they do so now on alaska's terms.

so now finally after decades of just talk, finally we're seeing oil and gas drilling. and i promised we would get a natural gas pipeline underway and we did. since i was a little kid growing up here, i remember the discussions especially the political discussions just talking about and hoping for and dreaming of commercializing our clean, abundant, needed natural gas. our gas line inducement act, that was the game-changer and this is thanks to our outstanding gas line team and the legislature adopting it 58-1, they knew -- they know gia is the vehicle to drive this monumental project and bring everyone to the table. this bipartisan victory. it came from alaskans working together with free market, private sector principles and now we are on the road to the

largest private sector energy project in the history of america. it is for alaska's future, it is for america's energy independence and it will make us is more peaceful, prosperous and secure nation. what i promised we accomplished. we, meaning, state staff, amazing commissioners, great staff members assisting them and alaskans outside the bureaucracy so many others and volunteers who stepped up to the challenge as good alaskans but nothing, nothing could have succeeded without my right-hand man chris perry, she is the hardest working partner and chris is my hard-working man and much is due to chris' success. [applause]

>> so much success and alaska there is much good in store further down the road but to reach it, we must value and live the optimistic pioneering spirit that made this state proud and free and we can resist enslavement to big central government that crushes hope and opportunity. bewary of accepting government largesse. it doesn't come free. and often accepting it takes away everything that is free. melting into washington's powerful, care-taking arms will just suck incentive to work hard and chart our own course right out of us. and that not only contributes to an unstable economy and dizzying natural debt but it does make us less free. i resisted the stimulus package -- [applause]

>> i resisted the stimulus package and we have championed earmark reform slashing earmark requests to 85% to break the cycle of dependency on a stifling unsustainable federal agenda. and other states should follow this for their and america's stability. we don't have to feel that we must beg an allowance from washington except to beg the allowance to be self-determined. see, to be self-sufficient alaska must be allowed to develop to drill and build and climb to fulfill statehood's promise. at statehood we knew this. [applause]

this allows this very generous hand-up that we're known for providing those who need it. alaskans will remember that years ago -- remember we supported the whole bumper sticker that said alaska we don't give a darn how they do it outside. do you remember that? i remember that and remember it was because we would be different. we'd roll up our sleeves and we would diligently sow and reap and we can still do this to carve wealth out of the wilderness and make our living

on the water with strong hands and innovative minds now with smarter technology. it is what our first people and our parents did. it worked because they worked. we must be prudent and to develop god-given resources for the maximum benefit of the people. [applause] >> and we have come so far in just 50 years. we're no longer a frontier outpost on the periphery of god's nation and of a secure of america we can attain our destiny in the promise of our motto, north to the future. see, the pressing issue of our time, it's energy independence because there is an inherent link between energy insecurity and energy and prosperity.

alaska will lead with energy. we will prove you can be both prodevelopment and proenvironment because no one loves their clean air and their land and their wildlife and their water more than an alaskan. we will protect it. [applause] >> yes america must look north to the future for security, for energy independence and for our strategic location on the globe, alaska is the gatekeeper of the continent. so we are here today at a changing of the guard. now, people who know me and they know how much i love this state -- some still are choosing not to hear why i made the decision to chart a new course to advance the state. and it should be so obvious to you. [laughter] [applause]

>> it is because i love alaska this much, sir, that i feel it is my duty to avoid the unproductive, typical politics as usual lame duck session in one's last year in office. how does that benefit you? [applause] >> now, with this decision now, i will be able to fight even harder for you for what is right and for truth. [applause] >> and i have never felt that you need a title to do that. so as we all move forward together, let's vow to keep championing alaska to advocate responsible development and smaller government and freedom. and when i took the oath to

serve you, i promised -- remember i promised to steadfastly and doggedly guard the interests of this great state like that grizzly guard for cubs. as a mother naturally guards her own. and i will keep that vow wherever the road may lead. todd and i and track, bristol, trip, willow, piper, trig -- i think i got them all. [laughter] >> we will forever be so grateful for the honor of our lifetime to serve you, our full family we thank you. i am very, very president to have their support all along, for todd's support. i am thankful, too. i have been blessed to have been raised in this last frontier. thank you for our home, mom and dad, because in alaska, it is not an easy living but it is a good living. and here it is impossible to

lose your way wherever the road may lead you. we have that steadying great north star to guide us home. so let's all enjoy the ride and i thank you alaska and god bless alaska and god bless america. [applause]

>> how is c-span funded? >> publicly funded. >> donations maybe. i have no idea. >> government. >> c-span gets its funding through the taxes. >> federal funding.

>> part of a funding thing. >> i don't know. >> how is c-span funded? >> america's companies -- no government mandate, no government money. >> on the communicate airs more from new media leaders from this year's digital conference including bill bradford tonight on c-span2. >> a live picture on your screen from the ronald reagan building just underway a moment ago an all-day discussion on u.s. china relations we have the first hour live with secretary of state hillary clinton and treasury secretary timothy geithner and president obama. >> president obama and president of chinese and -- when the

united states and china established formal diplomatic relations. what followed was a blooming of chinese economic growth and diplomatic engagement that has allowed our nation to reach this place of opportunity today. but this dialog also marks the beginning of an unprecedented effort to lay the foundation for a positive, cooperative and comprehensive u.s./chinese relationship in the 21st century. that so many members of president obama's cabinet are here reflects our belief that a stronger relationship will yield rewards not only for our two nations but indeed for the world beyond. we believe that in the decades ahead, great countries will be defined less by their power to dominate or divide than by their capacity to solve problems.

it is this reality that no country can solve today's challenges alone. it demands a new global architecture for progress. although past relations between the united states and china have been influenced by the idea of a balance of power among great nations, the fresh thinking of the 21st century moves us from a multipolar world to a multipartner world and it is our hope that this dialog we initiate today will enable us to shape a common agenda. we know that our nation's face common global threats from the economic crisis to nonproliferation, climate change, clean energy, pandemic disease, global poverty, north korea, iran, afghanistan, pakistan and beyond. so to meet these threats, we must find common ground and work together in common purpose even as we may disagree on certain issues. as we'll hear later from the

president, the obama administration is committed to broader engagement using robust diplomacy and development, working with and beyond governments to solve regional and global problems. when i was in china, in february, it was my first time back in almost a decade and i was struck as many visitors are by the transformation that had taken place driving on the road in beijing, i felt like i was watching a movie in fast forward from a few high-rise buildings on my last trip to a gleaming olympic complex and corporate skyscrapers today. from millions of flying pigeon bicycles navigating the streets to cars of every model traversing modern thoroughfares and for those traveling to shanghai, an already cosmopolitan world city soon to add the shanghai expo all our testaments to china's growth and

the united states welcome this promoting peace and stability in the asian pacific. over the past 30 years, the united states has helped to foster security in the region and that has been a critical factor in china's growth and an important strategic interest of our own. in the future, we will remain actively engaged in promoting the security of asia. when misunderstandings or disagreements arise we will work through them peacefully and through interactive dialog this strategic and economic dialog differs from past dialogs in scope, substance and approach. it is comprehensive by design. meant to enlist the full range of talents within our governments and to include cross-cutting challenges that is easily compartmentalized. with this dialog we are laying brick by brick the foundation of a stronger relationship, improving lines of communication, increasing understanding, setting priorities and creating a work

plan. our agenda will focus on several areas. first, as secretary geithner and vice premier huang will certainly demonstrate the economic recovery that is critical to both of us. this is a priority. we've taken aggressive action, so has the chinese government. second, climate change and clean energy. as the world's two biggest emitters we have to demonstrate to the developed and developing world alike that clean energy and economic growth go hand-in-hand. we already have promising partners. when i was in beijing i toured a geothermal plant that is a true u.s./chinese collaboration, general electric has provided the high tech equipment to produce heat and power which passed the emissions and far less water usage of the coal plants that are used on and chinese plants helped build the plant and it saved costs and provides clean energy including

heat to the united states embassy. third, security challenges. i just attended a conference in thailand where the north korean's regime was of concern. china and the united states both appreciate the dangers of escalating tensions and a prospective arms race in east asia and we both are going to work against the proliferation of weapons of mass destruction. already we have cooperated very closely together and we are grateful to the chinese government and their leadership in establishing the six-party talks and its close cooperation with us in response to the north korean missile launches. we will also discuss our common concerns about the nuclear weapons capability of iran and explore ways to address violent extremism and promote stability in afghanistan and pakistan. fourth, we will talk about development because we think like diplomacy, it is an equally important pillar of american

foreign policy. we know that many of the world's threats emanate from poverty, social erosion and political instability and in turn contribute to them. so by addressing hunger, illiteracy, disease, economic marginalization from the bottom up, insisting on accountability and adherence to the rule of law, we believe we can widen the opportunity and prosperity for more people in more places. now, none of these problems, even with our closer cooperation, will be easy to solve. and results will not happen overnight. and we will not always see eye-to-eye. that is the case in certain instances concerning human rights where the united states continues to be guided by the ideal of religious and other freedoms that must be respected. still, solutions to many of the global challenges today are within reach if we work together where our interests intersect and where we cannot, we will be

honest with each other. a well-known chinese saying speaks of a sacred mountain in northern china near confucius' home. and it says when people of one mind and heart, they can move mountains high. we cannot expect to be united on every issue at every turn but we can be of one mind and heart on the need to find this common ground as we build a common and better future. the obama administration has embraced this dialog with china early and energetically because we want to see it bring fruit. this is an issue of great importance to me as secretary of state. and i look forward to the discussions today and tomorrow and to the follow-up work that we will do together. it is now my great honor to introduce vice premier huang.

[speaking in native tongue] >> translator: secretary of state hillary clinton, secretary of the treasury geithner and dear delegates, the strategic and economics dialog mechanism joins by the heads of state of china and the united states. it is an important move to announce china/u.s. relationships in the era and as special relatives the president and special representatives president obama, secretary clinton and secretary geithner. the president attaches great importance to the round of the dialog. now it's my great honor to read

the congratulately message from president hu jintao. of the first economic dialogs i wish to extend on behalf of chinese government warm congratulations and best wishes. to set up the sned mechanism is an important agreement that president obama and i have reached. it is also a strategic move and the strengthening mutual of the two countries to have a comprehensive and in depth development of china/u.s. relations in the new era. since the launch of these mechanisms in february, the chinese and the u.s. teams headed by special

representatives of the two presidents have made careful preparations and tremendous efforts to implement the agreement of the leaders and ensure the smooth convocation of the first round of the dialogs as scheduled. i highly appreciate your efforts. as two countries with significant influence in the world, china and the united states show their important responsibilities on the host of major issues concerning peace and development of mankind and enjoy extensive common interests and broad space for cooperation. in the face of the complex and changing international economic and political situation, our two countries should endeavor to expend the common ground to reduce differences, enhance mutual trust and strengthen cooperation through the strategic and economic dialogs. this first common interests of

the two sides will help create a comprehensive relationship between our two countries. it is also of great importance for peace, stability, development and prosperity of the whole world. i hope that the two sides will conduct consultations in an equal and candid manner bringing collective wisdom and engaging on in depth discussions on the strategic, long-term and overarching issues in our bilateral relations and i hope the two sides will adopt a pragmatic and enterprising approach to have progress and to explore new areas, methods of mutually beneficial cooperation. i'm confident that with the concerted effort of both teams, the mechanism will keep improving and growing and inject

new dynamitism with mutual cooperation in both areas with positive, cooperative and comprehensive relationships. i wish the first chinese economic dialogs a crowning success. the relations between our two countries and the friendship between the two peoples grow even stronger. president of peoples republic of china hu jintao, 27th of july, 2009 in beijing. [applause] >> ladies and gentlemen, in his congratulatory message, president hu jintao raised expectation and requirements of the first round of the strategic and economic dialog.

in a while president obama will join us and make an important speech. to jointly build a comprehensive china/u.s. relationship for the 21st century has been brought in. it was issued an oriented towards the 21st century. the current dialogs are a major reflection of this agreement. we are keenly aware of the great responsibilities on our shoulders as required to make full use of the dialog to strengthen neutral stress and work to achieve mutually beneficial results. at present the world economy is at a critical moment of moving out of crisis and towards

recovery. the chinese government adopted serious policy measures to respond to international financial crisis and these measures have paid off. in the first half of the year, china's g.d.p. grew by 7.1% in increasingly visible signs of economic stabilization and rebound. thanks to the policy measures adopted by the u.s. government, the u.s. financial markets are also stabilizing and its real economy is showing signs of dawning. during economic dialog under the scene of building confidence to restore economic growth strengthening china u.s. economic cooperation, china and the united states will have intensive dialog on making further efforts to tackle the international financial crisis building strong financial systems deepening trade and

investment cooperation and promoting economic development. further sent out the positive signal of china and u.s. joining hands to overcome difficulties. and promote the economic recovery and growth in our two countries and in the whole world. from a historical and philosophical perspective, mankind's pursue suit for peace and development prosperity and progress never ceases. and mankind has always been progressing at most difficulties. on confidence, this crisis will finally be over. china is in the process of accelerating industrialization and urbanization. there are great potentials in our markets. we will continue to carry out the scientific development,

deepening and reforming and opening up the combined efforts to tackle financial crisis and maintain economic growth with advanced economic restructuring and transformation or economic growth patterns and an endeavor to achieve sound and fast development in our economy. a more open and more dynamic economy will bring opportunities to all countries in the world including the united states. with furthering of china's reform opening up, china and the united states will have even closer economic cooperation and trade relations and china/u.s. relationship will surely keep moving forward at a new starting point. i wish this round of china/u.s. strategic economic dialogs a complete success. thank you. [applause]

>> i now give the floor to secretary of the treasury, timothy geithner. [applause] >> thank you, vice premier wang. it's a great pleasure for me to join secretary clinton and our colleagues in welcoming you and entire delegation to washington. president obama and the president who called on us to build a positive, cooperative and comprehensive bilateral relationship. in this strategic and economic dialog is a testament of the importance of that relationship and our commitment to strengthening it. i had the privilege of studying twice in china almost 30 years ago and if you look at what china has achieved since then, the leadership of that country brought about the most remarkable transformations in economic development growth we've seen in modern economic history. no one can look at what china has achieved in that period of time and not be convinced by the

basic fact that when china commits to reform, it is able to deliver remarkable change. this strategic and economic dialog breaks new ground by bringing together senior officials across the full range of economic and diplomatic, strategic policies and interests between our two countries. the breadth of this dialog recognizes that many of the central and global issues of our time from economic reform and growth to addressing climate change require sustained political commitment and unprecedented cooperation between the united states and china. our joint response to the global financial crisis marks the turning point in our cooperation. this crisis will be remembered not just for its severity and its global reach but also for the speed and strength of the national response and the actions taken by the united states and by china had made a very substantial contribution to

our collective success so far in blunting the force of this economic recession and beginning to restore confidence. and both our countries and this is critically important -- both our countries have made it clear our commitments to maintain strong policy and supported economic demand until recovery is firmly in place. at this moment of crisis, we acted together. to use the chinese phrase -- [speaking chinese] >> when chinese and the united states have both the opportunity and the responsibility to act not just for the benefit of our own citizens but also for the global economy. and the crisis has highlighted the need going forward for a different global growth path. we need to design a new framework to lay the foundation for more sustainable and more balanced global growth in the

future and a smooth transition to a more green global economy. the united states, we are moving to repair our financial system to put in place a set of more conservative, more effective rules of the game over our financial markets. already, private savings are up and our deficit has fallen and we are committed to taking the necessary measures to bring our fiscal deficits down to a more sustainable level once recovery is firmly established. the president is committed to making investments in clean energy and education in healthcare that will make our economy more productive in the future. and these policies will help ensure more sustainable growth in the united states and a more sustainable external position. china has laid out ambitious plans to shift towards domestic demand like growth and to spur the growth of household consumption. measures to raise household incomes and to strengthen the safety net will be instrumental

in this efforts as will the continuation of china's remarkable reforms in the sector. china's success in shifting the structure of domestic demand growth including a greater role of spending by consumers will be a huge contribution to our global challenge in bringing about a more rapid but more balanced and more sustainable global recovery. and these efforts, of course, are closely linked to our shared environmental goals. a shift towards domestic growth towards a more service-oriented economy away from the type of heavy industrial-led export-led growth of the past will be critical in moving china to a less carbon intensive and more energy intense growth. we share a special responsibility to ensure that global trade and investment remain open and rules-based. we have both committed along with others in the g20 to swear

against protectionist measures and have trade between our two countries. we need at a moment of opportunity in reshaping the global economic and financial architecture. this is no less true in the areas of climate and diplomacy than it is in economics, of course. the global economy has changed fundamentally since breton woods and it has helped bring about remarkable improvement in incomes across emerging economies, dramatic increases in flows of trade and investment across nations and have helped brings hundreds of millions of people out of poverty. china was not central to those talks. but today we are working with china to ensure their full engagement and representation in the design of the key multilateral agreements and groupings such as the g20, the financial stability board and the international financial institutions. these are hugely important

tasks. they will not be accomplished in a single meaning of this dialog but we can begin that task today and tomorrow and we will build on it over the course of the months and years ahead. [applause] >> [speaking in native tongue] >> translator: secretary clinton, secretary geithner, vice premier wang, ladies and gentlemen, just now the three special representatives brought important speeches. i think they said -- it should be said and what am i going to say?

i think following the principle of common differentiated responsibilities i wish to make a few remarks. president hu jintao and president obama made the decision together to establish a china/u.s. strategic and economic dialog at the g20 summit and the dialogs today. i think this is a big event with discussions in the chinese/u.s. relations. probably at this moment attention of the whole world is now on this hall. president hu jintao just sent a congratulatory message full of

expectations and good wishes. president obama will honor the opening ceremony and make an important speech and this shows the dialogs are important and add special value. vice premier wang and i, as you know, come from an oriental country which is both far and near to you. it's an old civilization. we come from one of the ancient civilizations that produced confucius and many other great men. we come from a country that produced four great inventions of the world and we come from a country who has 1.3 billion people is on undevelopment and is working on building

harmonious development with harmonious coexistence with the rest of the world. we come from a country where the human rights undertakings have achieved tremendous progress in a few decades. why are we here? i think we came here in the spirit of mutual respect treating each other as equals. mutual benefit and progress to have candid and dialog with the united states. to discuss overarching strategic and forward-looking issues that are essential to people for peace and development. we came here to discuss with our american colleagues ways to build a positive, comprehensive china/u.s. relations in the 21st century where changes are taking place and we came here to seek better understanding and a common understanding and cooperation so we can make the

case of our common interests bigger and more beautiful to bring benefits to our two peoples and to the planet to live together. can china and the united states both have a cooperative relations in the 21st century? i have spent 68 years of my life and have done some research. and thinking where's my mind changes that have taken place and i wish to look at the future of china/u.s. relations with optimism. first of all, nine years into the 21st century we're now in a completely different world compared with the 20th century. today china, the united states,

and other countries are all living in a smaller village and we all face more and bigger global challenges that we cannot handle single-handedly. we're actually in the same big boat that has been hit by fierce wind and huge waves with our interests interconnected and what we can do is to follow the trends of the development across the path of stormy waters on this passage of boat to seek coexistence. secondly, thanks to our joint effort in the past three decades huge progress has been made in our relations. the united states will never become china and china will

never become the united states but there are living factors that china and the united states interactions have never been on frequent and our it's never been interwoven so closely and the mutually beneficial cooperation between the two countries has never been so broad in the driving force and the chinese and u.s. relationship has never been so strong between two great people have reason to seize the historical opportunities, to active expand enhanced cooperation and appropriately handle differences of sensitive issues and even for the future in china/u.s. relations. there's a saying in china, what is begun is half done. i think you have a similar saying here in this country.

in the past few years, i've worked with the two deputy secretaries of state. .... ..

to a >> translator: yes, we can. that is forward from president obama. yes, we can. [applause] >> translator: thank you.

>> ladies and gentlemen, the president of the united states. [applause] >> thank you.

good morning. it is a great honor to welcome you to the first meeting of the strategic economic dialogue between the united states and china. this is an essential step in advancing a positive, constructive and comprehensive relationship between our countries. i am pleased that president wu shares my commitment to enhance our shared interest. president wu and i both felt that it was important to get our relationship off to a good start. of course, as a new president and also as a basketball fan, i have learned from the words of yao ming, who said no matter whether you are new or an old team member, you need time to adjust to one another.

well, through the constructive meetings that we have already had into this dialogue i am confident that we will need dowse standards. i want to acknowledge the remarkable american and chinese leaders who will cochair this effort. hillary clinton and tim geithner are two of my closest advisers, and they have both octane extraordinary experience working with china. and i know that they will have extremely capable and committed chinese counterparts in state counselor and tranone. thank you much both for being a. i'm also looking for to the confirmation of an outstanding u.s. ambassador to china, governor john hudson who is here today. [applause] >> john has deep experience living and working in asia, and unlike me he speaks fluent mandarin chinese. he also happens to be a

republican who cochaired senator mccain's campaign, and i think that demonstrates john's commitment to serving his country and the broad bipartisan support for positive and productive relations between the united states and china. thank you, john, for your willingness to serve. today we meet in a building that speaks to the history of the last century. it houses a national memorial to president woodrow wilson, a man who held office when the 20th century was so young and america's leadership in the world was emerging. it is named for ronald reagan, a man who came of age during two world wars, and whose presence he helped usher in a new era of history. and it holds a piece of the berlin wall, a decade-long symbol of division that was finally torn down, unleashing a rival tide of globalization that continues to shape our world. 100 years ago, in the early days

of the 20th century, it was clear that there were moments as choices to be made. choices about the borders of nations and the rights of human beings. but in woodrow wilson today, no one could have foreseen the arc of history that led to a wall coming down in berlin, nor could they have imagined that conflict and the people that characterizes the years in between. for people everywhere, boston to beijing, the 20th century was a time of great progress, but that progress also came with a great price. today, we look out on the horizon of a new century. and as we launch this dialogue, it's important for us to reflect upon the questions that will shape the 21st century. will grow to be stalled by events like our current financial crisis, or will we go operate to create balanced and sustainable growth lifting more people out of poverty and

creating a broader prosperity around the world. will the need for energy free competition and climate change or will we build partnerships to produce clean power and to protect our planet. will nuclear weapons spread unchecked or will we forge new consensus to use this power for only peaceful purposes. will extremist be able to stir conflict and division, or will we unite on behalf of our shared security. will nations and peoples to find themselves solely by their differences, or can we find common ground necessary to meet our common challenges. and respect the dignity of every human being. we cannot predict with certainty what the future will bring. but we can be certain about the issues that will define our times. and we also know this, the relationship between the united states and china will shape the 21st century.

which makes it as important as any bilateral relationship in the world. that really must underpin our partnership. that is the responsibility that together we bear. as we look to the future, we can learn from our past. for history shows us that both our nations benefit from engagement that is grounded in mutual interest and mutual respect. during my time in office, we will mark the 40th anniversary of president nixon's trip to china. at that time, the world was much different than it is today. america had fought three wars in east asia in just 30 years, and the cold war was in a stalemate. china's economy was cut off from the world and a huge percentage of the chinese people live in extreme poverty. back in our dialogue was guided by a narrow focus on our shared rivalry with the soviet union. today we have a comprehensive relationship that reflects the deepening ties among our people.

our countries have now shared relations for longer than we were estranged. our people interact in so many ways, and i believe that we are poised to make steady progress on some of the most important issues of our times. my confidence is rooted in the fact that the united states and com country and china share a mutual interest. if we advance those interests through cooperation, our people will benefit and the world will be better off. because our ability to partner with each other is a prerequisite for progress on many of the most pressing global challenges. let me name some of those challenges. oeste, we can cooperate to advance our mutual interest in a lasting economic recovery. the current crisis has made it clear that the choices made within our borders reverberate across the global economy, and this is true not just in new york and seattle, but in shanghai and since then as well.

that is why we must remain committed to strong bilateral and multilateral coordination. that is the example we have set my acting aggressively to restore growth, to prevent a recession and to save jobs for our people. going forward, we can deepen this cooperation. we can promote financial stability through greater transparency and regulatory reform. we can pursued trade that is free and. and seek to include an ambitious and balance agreement or we can update international institutions so that growing economies like china play a greater role that matches their greater responsibilities. and as americans save more and chinese are able to spend more, we can put growth on a more sustainable foundation because just as china has benefited from substantial investment and profitable exports, china can also be an enormous market for american goods.

second, we can cooperate to advance our mutual interest in a clean, secure and prosperous energy future. the united states and china are the two largest consumers of energy in the world. we are also the two largest emitters of greenhouse gases in the world. let's be frank. neither of us profit from a growing dependence on foreign oil, nor can we spare our people from the ravages of climate change unless we cooperate. common sense calls upon us to act in concert. both of our countries are taking steps to transform our energy economies. together we can chart a low carbon recovery. we can expand joint efforts and research and development to promote the clean and efficient use of energy. and we can work together to forge a global response that the climate change in copenhagen and beyond. and the best way to foster the

innovation that can increase our security and prosperity, is to keep our markets open to new ideas, new exchanges and new sources of energy. third, we can cooperate to advance our mutual interest in stopping the spread of nuclear weapons. make no mistake. the more nations acquire these weapons, the more likely it is that they will be used. neither america nor china has an interest in a terrorist acquiring a bomb or nuclear arms race breaking out in east asia. that is why we must continue our collaboration to achieve the denuclearization of the korean peninsula and make it clear to north korea that the path to security and respect can be traveled if they meet their obligations. and that is why we must also be united in preventing iran from acquiring a nuclear weapon and encouraging the islamic republic to live up to its international obligations. this is not about singling out

any one nation. it is about the responsibility of all nations. together we must cooperate to secure all vulnerable nuclear materials around the world which will be a focus of our global nuclear summit next year. and together we must strengthen the nuclear nonproliferation treaty by renewing its basic bargain. countries with nuclear weapons will move toward disarmament, countries without nuclear weapons will not acquire them, and all countries can access peaceful nuclear energy. abound of terror cannot hold. in the 21st century, a strong and global regime is the only basis for security from the world's deadliest weapons. and forth, we can cooperate to advance our mutual interest transnational threats. the most pressing dangers we face no longer come from competition among great powers. they come from extremists who would murder innocents, from

traffickers and pirates who pursue their own profits at the expense of others. from diseases that know no borders and from suffering and civil wars that breed instability and terror. these are the threats of the 21st century. that is why the pursuit of power among nations must no longer be seen as a zero-sum game. progress, including security, must be shared. through increased ties between our military we can diminish costs is for dispute while providing a framework for cooperation. through continued intelligence sharing we can disrupt terrorist plots, dismantle terrorist networks. through early warning and coordination we can check the spread of disease. and through a determined diplomacy, we must meet our responsibility to seek a peaceful resolution of conflict. and that can begin with the renewed push to end the suffering in darfur and to promote a comprehensive peace in sudan.

all of these issues are rooted in the fact that no one nation can meet the challenges of the 21st entry on its own. nor effectively advanced its interests in isolation. it is this fundamental truth that compels us to cooperate. i have no illusion that the united states and china will agree on every issue. nor choose to see the world in the same way. this was already noted by our previous speaker. but that only makes dialogue more important so that we can know each other better and communicate our concerns with tandoor. for instance, the united states respects the progress that china has made by listing hundreds of millions of people out of poverty. just as we respect china's ancient and remarkable culture. its remarkable achievements. we also strongly believe that the religion and culture of all peoples must be respected and protected. and that all people should be free to speak their minds.

and that includes ethnic and religious minorities in china as surely as it includes minorities within the united states. support for human rights and human dignity is ingrained in america. our nation is made up of immigrants from every part of the world. we have protected our unity and struggle to protect our union by extending basic rights to all our people. and those rights include freedom to speak your mind, to worship your god, and to choose your leaders. these are not things that we seek to impose, this is who we are. it guides our openness to one another and to the world. china has its own distinct story that shapes its own worldview. and americans know the richness of china's history because it helped to shape the world and it helped to shape america. we know the talents of the chinese people because they have helped to create this great country.

my own cabinet contained two chinese-americans. and we know that despite our differences, america is enriched through deeper ties with a country of 143 billion people that is at once ancient and dynamic. ties that can be forged through increased exchanges among our people and constructed bilateral relations between our governments. that is how we were narrow our divisions. let us be honest. we know that some are weary of the future. some in china think that america will try to contain china's ambitions. some in america think that there is something to fear in a rising china. i take a different view, and i believe president who takes a different view as well. i think china is a strong, prosperous and successful member of the community of nations. a future when our nations are partners out of necessity, but also out of opportunity.

the future is not fixed but it is a destination that can be reached if we pursue a sustained dialogue like the one that you will commence today. and act on what we hear and what we learned. thousands of years ago, the great philosopher mencius says a trail through the mountains if used becomes a path in a short time. but if unused, becomes blocked by grasp in an equally short time. our task is to forge a path to the future that we seek for our children, to prevent mistrust or the inevitable difference at the moment from allowing that trail to be blocked by grasp your it will always be mindful of the journey that we are undertaking together. this dialogue will help determine that the ultimate destination of that journey. it represents a commitment to shape our young century to sustain cooperation and not confrontation. i look forward to carrying this

effort forward to my first visit to china where i hope it comes to know better your leaders, your people and your majestic country. together i am confident that we will steadily in the direction of progress and meet our responsibility to our people, and to the future we will all share. thank you very much. [applause]

♪ (singing) [inaudible conversations] [inaudible conversations] >> later we will take you to a form with the al jazeera network on u.s. relations with muslims. live coverage at 12:15 eastern time here on c-span2. on our companion network c-span, the centers for disease control

and prevention holding a news conference on the economic impact of obesity. that's live at 10:55 a.m. eastern time. and the federal emergency management agency director is on capitol hill today to testify on efforts to improve disaster response. that house emergency management subcommittee hearing live at 2 p.m. on c-span3. >> how is c-span funded? >> publicly funded. >> donations may be. i have no idea. >> government. >> c-span gets its funding through the taxes. >> federal funding. >> maybe, i don't know. >> how is c-span funded? america's cable companies created c-span as a public service, a private business initiatives. no business management, no government money. >> on the communicators know from new media leaders attending this year's digital offered including bill bradford, a fox digital media tonight on

c-span2. >> up next a house hearing on managing systemic risk in large financial firms whose failure could threaten the nation's economy as a whole, including possible regulation of those firms. witnesses include former officials from the federal reserve and the international monetary fund as well as business and law scholar. barney frank of massachusetts jettisoning of the financial services committee. it is two hours and 20 minutes. >> while we have hearings. but sometimes we have hearings because we want to learn things. for me this is one of those. there is a great disparity i have encountered between the overwhelming consensus that we do not like the effects of too big to fail, and what to do about it. it is a concept that seems to be more easily announced then dismantled, and i think we are

in agreement and a skinny that it's not a good thing. it is not helpful for a number of reasons. and we are open to ways to deal with it. directly or indirectly but this is legitimately, and we have a panel today unlike many of our panels. it does not consist of practitioners, people in the financial industry, consumer advocates. as nearly as we can see people with good analytical skills, and i mean this literally. i think there is a great eagerness on the part of my colleagues to figure out what's the most appropriate way to deal with too big to fail, and we are here to listen. the gentleman from texas. >> tranone. thank you, mr. chairman. and i too want to listen to our witnesses very carefully. i am not sure i'm convinced with

the proposition of too big to fail and if i have i haven't quite convinced myself that the cure is not worse than the illness. i am not completely convinced we are not kicking the economic calamity can down the road for future didn't generations. to deal. now, back in the circumstances of last september and october, i believe there was fairly universal thought that congress needed to act, clearly we disagreed on the plan on how best to do that. even as a fiscal conservative i was willing to put full faith and credit of the united states on the line. and what i perceive to be one of the first truly emergency situations i had seen since coming to congress, although i hear the phrase every single day that i serve. but as i look closely, at firms that may be designated supposedly as too big to fail, the two that come to mind are

certainly fannie and freddie. again, these were creations not of a competitive market, but a creations in a government laboratory that never would have existed in a competitive market. and so i guess i'm convinced that government can create firms that some may view as too big to fail, and that can create systemic risk. but i am not convinced that there are two more systemic events then there are systemic firms. and i am not sure that this nation has followed down the line of bail out mania that we necessarily have a whole lot to show for it. as we wake up today, we know since january that two and a half million more americans have lost their jobs. now, we know that i believe its 9.5% unemployment. we are looking at the highest unemployment rate in a quarter of a century. and i feel that bailout begets

bailout. once we got away, for example, on harp being about financial stability, bailing out pricer, bailing out gm. many of us said we will throw good money after bad. they will end up in chapter 11 anyway, and roughly 80 billion tax payer dollars later, guess what? they did. you know, how is that fair to afford to actually have to take on more debt to try to survive. and so to what extent is it even fair, what extent is it even smart once you go down the road and start bailing out these firms. and so many of us here, and i have introduced legislation that tarp is now in its noble design of september, october, november of last year has morphed into a bailout slush fund that frankly is doing more harm to the economy than good. now, i do want there to be an

opportunity for large financial firms that fall into financial distress to be resolve, resolve quickly. that is why in the republican financial markets reform bill, there is a provision that would create in the bankruptcy code a new bankruptcy chapter to do just this. but, you know, you've got to ask yourself a question, should it be the policy of the federal government to necessarily reward bad business models at the expense of good business models. and by the way, i apparently, cit was not necessarily on the administration's list of too big to fail, but apparently uncle sam wouldn't give them a bailout, low and behold look what happens. the market comes through. isn't that interesting, you know, cit maybe we should say see, i told you so. maybe you ought to give private investment and opportunity to work. again, bailout begets bailout. it keeps private investment on

the sidelines. i am convinced it is hammering our economic growth. it is hampering our job creation. and i still look for the proof point that there are firms that are too big to fail and that by somehow putting all this taxpayer liability exposure on the like will end up doing ourselves any more good than harm. i am not convinced of it. i don't think the american people are convinced of it, and so what do we have? we have a nation of bail out mania, $20 in debt and i think there's a better way. i yield back the balance of my time. >> the gentleman from california is recognized for three minutes. >> thank you, mr. chairman. some people say too big to fail. some say too interconnected to fail. some of my constituents think it is too well-connected to fail. we need to sign a system for the future that is bail out free. i was disappointed when the secretary of the treasury testifying about derivatives said in effect, by not answering my question, that we should

continue to allow derivatives to be written today that he reserves the right to seek to bail out tomorrow. we need to return to an economic system where bail out is not a possibility. we need to make sure that the resolution of authority is extremely clear, that it is not bail out authority. and we are still faced with this issue of what is too big to fail. too big to fail means too big to exist. we cannot put the taxpayer in a position where entities are allowed to grow in their complexity or their size to the point where they can hold the american taxpayer hostage and say we are going to take risks and if these risks turn out badly, you have to bail us out or the entire economy will suffer. the solution is obvious. prevent risks from being taken that endangered the entire economy. now, we will be told that taking all these risks is somehow wonderful for the overall wall street system.

i don't think the american people want to hear it. they want no bail outs in the future, no possibility of bail outs in the future and they want a system designed where everyone on wall street and everyone in washington can say no bail outs ever. and if that means that our banks have to be smaller than their foreign competition, that is something i think the american people are ready to accept. so let us talk about breaking up those that are too big to fail before we talk about bailing them out. and hopefully, we can do better capital reserves, better regulation eliminates both possibilities. thank you. >> the german from california for two and a half minutes. >> thank you, mr. chairman. i would like to thank the witnesses for coming here today to testify at a special thanks to peter wallace from aei who for years warned about the systemic threat posed by government-sponsored enterprises, fannie mae and freddie mac. and i got to know peter back in the old days when he was raising

these concerns. eventually, the federal reserve itself became convinced that peter was absolutely right in about 2004 they began to warn on what he was warning, that this represented a systemic threat to the financial system. notches here in the united states but worldwide at one point, the fed chairman said. you know, for years there was disbelief that should fannie and freddie run into trouble, the federal government would support them. after all, they had a fight to the treasury. they were a government-sponsored enterprise, and as peter was warning, that perception allowed fannie and freddie to borrow at rates normally reserved for branches of the federal government, to take on excessive risk, and produce profits for shareholders and executives while it crowded out their competition. this is normally the result of when you have a government

subsidy. this is the consequence. well, the federal government had to step in to save fannie and freddie, and this could end up costing taxpayers $400 billion before it's through, besides the effect it had on the housing market, the collapse of the housing market. additionally the federal government has taken drastic steps using trillions of dollars to prop up failed institutions because it was believed these institutions were too big to fail. one of the most unfortunate consequences of the massive move to provide public assistance is about moral hazard may become more deeply embedded in our financial markets. we can and should take steps to eliminate the need and possibility of official bailout in the future by avoiding labeling institutions as systematically important and providing enhanced bankruptcy procedure to deal with non-bank financial institutions as an alternative to the course that we seem to be on. and this will provide clarity to the market that will reduce the

perceived government safety net and lessen the moral hazard problem that has been created in recent months. in terms of problems we are going to deal with, looming in the future, i think we have to take lessons from the mistakes made. and this panel here today i think will give us an opportunity to discuss just such issues. thank you, mr. chairman. >> i just want to comment in the remaining time. that some of the members have a different view than ideal. we we have heard very eloquent arguments against a lot. yeah, that is what this hearing is for is to see how we can avoid pressures to do them. this is not a case where assumption of a large institutions and figure out what we will do if they get in trouble. .com precisely our goal is to try to avoid the situation we bush administration faced and it felt with bear stearns and with

regard to the lehman brothers and merrill lynch and aig, all of those happened under the administration, the bush administration, but they felt that the consequences of the failures there would be disastrous. they had four different ways of dealing with them. none of them satisfactory to a lot of people, including themselves. so that is precisely the point of this hearing is so that one, you make it much less likely that there will be institutions in that situation because of capital requirements and other things. secondly, that if you do get to that, ways of putting them down much less to rapidly and much less expensively. so as i said, this is not a replay of last year. is an effort to try to stop it. mr. garrett of new jersey for two and a half minutes. >> i thank the chairman. i think all the members of the panel as well. and specifically mr. mahoney. because i was going to steal away your thunder because of i feel you made a good point in

your remark. mr. mahoney is the dean of university for virginia law school, and in your remarks, which you will go into more detail but i just want to point this out. you say that one approach that is used i think which is a republican quoted said it was a mistake to bailout with bankruptcy proceedings. and this thought believes policymakers should make it clear to afford that these mistakes will not be repeated and take steps to limit treasuries and the federal reserve's ability to commit funds to failed institutions in the future. so as i say i think this approach is basically in a nutshell what the republican financial service reform plan is all about. the other approach is to concede that the government will not refuse to bailout certain large institutions and attempted to take steps to deal with risky behavior as the chairman just as. but if regulators fail to adequately limit their behavior, then a formal bailout framework will have to be set up in the meantime and firms would be bailed out and the matter of

course. the administration's plan basically is to follow this blueprint. the administration's approach is premised on the participation of regulatory oversight will compensate for misaligned incentives, but we know time and time again regulators on the curb and unable to keep up with the practice of companies that are tasked with regulating. so we don't need to make their jobs any harder by encouraging destructive behavior through misaligned incentives. i do believe that the republican plan is preferable because it is based on a more sound premise. it would reduce moral hazard because companies and creditors and counterparties would be responsible for the costs associated with the failures, not the taxpayers. and with companies and creditors have their own money on the line rather than other people's money, sounder decisions are made benefiting the entire financial system. you saw what happened when fannie and freddie and profits were privatized and risks were socialized. we don't want to repeat those mistakes time over again by following the administration proposal. which would create a whole

privileged class of nuke fannie and freddie's want one institutionalizing an entire regime that will be to expected and actual future bailouts. these would be bailouts that are paid for by the american taxpayer and a smaller financial institutions. those that would not even benefit from the government too big to fail premature and the first place. i think you and i thank mr. mahoney. >> we will now begin. >> thank you, mr. chairman. i am really glad you are holding this hearing to focus on the question of systemic risk, and how do we avoid getting in this situation again. as you pointed out, i don't think anybody wants more bailouts ever, if we can avoid it. i think that requires focusing on prevention, how do we fix the financial system so that we don't have these perfect storms

of a huge bubble that makes our system very prone to collapse, and then if this does happen how do we make it less likely that we will have to resort to bailing out institutions. so i think the task before this committee is the first to repair the regulatory gaps and change the perverse incentives and reduce the chances that we will get another pervasive bubble. but however hard we try to do this, we have to recognize that there is no permanent fix. and i think one concept of a systemic risk, what i call a backroads stabilizer, that we need is an institution charged

with looking continuously at the regulatory system at the market and that perverse incentives that have crept into our system. because whatever rules we adopt will become obsolete as financial innovation progresses and argot purchase event find a round the rules. this macro system stabilizer i think should be constantly searching for gaps, weaklings, perverse incentive and so forth. and should make use of public and work with other regulators and congress to mitigate the problem. now, the obama administration makes a case for such an institution for a regulator with a broad mandate to collect information from all financial institutions and identify emerging risk. it proposes putting this responsibility in a financial services oversight council

chaired by the treasury with its own expert staff. that seems to me likely to be a cumbersome mechanism. and i would actually give this kind of responsibility to the federal reserve. i think the fed should have clear responsibility for spotting emerging risk, try to hedge them off before it has to pump trillions into the system to avert disaster. the fed should make a periodic report to the congress on the stability of the financial system and the possible threats to it, similar to the report you heard from mr. bernanke this morning about the economy. it should consult regularly with the regulators, but it should have the lead responsibility for monitoring systemic risk. spotting emerging risks with naturally with the fed's efforts to monitor the economy and the

health of the financial sector in order to set and implement monetary policy. having that explicit responsibility and more information on which to base it would enhance its effectiveness as a central bank. i would also suggest giving the fed a new tool to control leverage across the financial system, while lower interest rates may have contributed to the global monetary policy has a multiple objectives and the short-term interest rate is a poor tool for controlling bubbles. the fed needs a stronger tool control of leverage, more generally. but the second task is the one you emphasized in your title,

how to make the system less foldable to cascading failures, domino effects due to the presence of large interconnected financial firms whose failure could bring down other firms and markets. this view of what happened could lead to policies to restrain the growth of large interconnected financial firms, or even break them up -- >> unanimous consent. it's the cop decided that we don't have a lot of members here. would there be any objected to go on several minutes for the witnesses? give the witnesses seven minutes. it's not a lot of time. please continue. >> thank you, mr. chairman. some have argued with the responsibility also statically import and financial institutions. the obama administration has

proposed making the fed the consolidated regulator for tier one financing institutions. i believe that would be a mistake that it would be a mistake to identify the specific institutions being too big to fail, and an even greater mistake to put this responsibility at the federal reserve. it's hard to identify systemically important firms in advance. the attempt to do so and cordon them off might encourage risky behavior to move outside, moreover, identifying systemically important institutions and giving them their own consolidated regulator tends to institutionalize too big to fail and create a new set of gse like institutions. higher capital requirements and stricter regulation for larger interconnected institutions makes sense, but i would favor a

continuum rather than a defined list with its own special regulator. there is no obvious place to put responsibility for regulating financial institutions, but it seems to me a mistake to give the federal reserve responsibility for consolidated credential regulation of bigger interconnected companies as proposed by the obama administration. the skills needed by a central bank are different from those needed to run an effective regulatory institutions. >> do you have a last answer to? >> let me just conclude, mr. chairman. in short, i think the obama

administration has it backwards. that the general spotter of financial risk should be the fed, and that it would be a mistake to have a consolidated regulator of two big to fill institutions. it's a worse mistake to put it in the fed. >> thank you very much, mr. chairman. leaving aside fannie mae and freddie mac, which i think are a very special case, if there is such a thing as a firm that is too big to fail, it is only a large commercial bank. and we now have several of them that are enormous. when we say the firm is too big to fail, we mean that its failure could have a major adverse effect on the entire economy. this is not simply a mere disruption of the economy. it would have to be a systemic breakdown. we cannot find that very well, but it would have to be something greater than separate

the kind of disruption that would occur from the failure of a firm. in my view, the only large commercial bank can create this kind of systemic breakdown. when a large bank fails, its depositors are immediately deprived of the funds they expected to have to meet payrolls and to pay their bills. smaller banks are depositors and the larger banks so the failure of a large bank can send a cascade of losses through the economy. and if there is such a thing as a systemic breakdown, this would be it. for the same reasons, it is difficult to see how a large nonbank financial institution, that is, a bank holding company, a securities firm, a hedge fund, can cause systemic risk. and thus it is difficult to see why a nonbank can ever be in terms we are talking about today too big to fail. non-banks do not take deposits. they borrow for short, medium

and long term, but if they fail their creditors don't suffer any immediate cash losses that would make it difficult for them to pay their bills. no one deposits his payroll or his, the money he expects to use for doing business with a securities firm or a finance company. in addition, their creditors are likely to be diversified lenders, so all their eggs are not in the same basket. however, the freeze up in lending that followed the collapse of lehman brothers has led some people to believe, and i think incorrectly, that lehmann caused that event. this is not accurate. they conclude that a nonbank financial firm can cause a systemic breakdown. that it can thus be too big to fail. but lehman's failure awes what

is called a common shockwave market freezes up because new information has come to light. the new information that came with lehman's failure was that the government was not going to rescue every firm larger than bear stearns. which had been rescued six months before. in this july, every market participant had to reevaluate the risks of lending to everyone else. no wonder lending ground to a halt. , jocks don't always cause a financial crisis. this one did because virtually all large banks were thought of at that time to be weak and unstable. they have large amounts of mortgage-backed securities, later called toxic assets that were dubious value. if the banks had not been weakened by these assets, they would have continued to lend to each other. they would not have been a freeze up in lending, and the investor panic that followed. so if we want to avoid another crisis like that, we should

focus solely on ensuring that the banks, we are talking about commercial banks, are healthy. other financial firms, no matter how large, are risk takers and should be allowed to fail. accordingly, if we want to deal with the problem of too big to fail and systemic risk bank regulation should be significantly reformed. capital requirements for a large bank should be increased as those banks get larger. especially if their assets grow faster than asset values generally. higher capital requirements for larger banks will cause him to reconsider whether growth for its own sake really make sense. banquet you should develop metrics or indicators of risk taking, that banks should be required to publish regularly. this will enhance market discipline which is fundamentally the way we controlled risk-taking in the financial field. most important of all, congress should create a systemic risk

council on the foundation of the president's working group which would include all the banks supervisors and other financial regulators. the council should have its own staff and should be charged with spotting the development of conditions in the baking industry, like the acquisition by virtually all banks of large amounts of toxic assets that might make all major banks weak or unstable and leave them vulnerable to a common shock. if we keep banks stable, we'll keep our financial system stable. finally, as a member of the financial crisis inquiry commission, i urge this committee to await our report before adopting legislation. thank you. >> mr. johnson. >> thank you very much, mr. chairman. as you said at the beginning, the question, i think, is not controversial. the issue is to remove the

possibility in the future that financial large institution can come to the executive branch into either you bail us out or there will be an enormous collapse in the financial system of this country and potentially globally. and i think there are two broad responses, to ways of addressing that problem that are on the table. the first is what i would call relatively technocratic adjustments changing the rules around legislation or changing the rules are a bank of the procedure. i think there are some sensible ideas there, relatively small ideas. i don't believe they will fundamentally solve this problem. the second approach is to reduce the size of these banks, and what we have learned i think over the past nine months is a considerable amount about how small financial institutions can fail and can fail without causing major systemic problems, both through an fdic type process or through a market i processed as seen with cit group. let me emphasize, or underline

the difference between these two approaches and why making them smaller is both attractive and feasible. i think the key problem is the financial sectors has become very persuasive. it is convinced itself, is convinced its regulars, it's convinced many other people that it knows how to manage risk, but it understands what our large risk for itself. and of course, this is what mr. greenspan now concedes that was a mistake in his assessment of the situation during the boom. he thought the large firms had a great deal to lose if things went badly, understood these risks and would control them and manage them. and they didn't. it was a massive failure of risk management and i see no indication either the banks have improved the kind of risk management or that regulators are better able to spot, and i agree with the idea we should have a systemic risk spotter of some kind, analytically and politically. seems to me we are a long way from ever achieving that.

and if i may mention, the lobbying of fannie and freddie on the one hand and private banks on the other hand, it was just fantastic. these people are the best in the business by all accounts at speaking with many people, but with regard to legislation and of course detailed rules. again, i see no reason to think that if you tweak the structures you will remove this power and visibility that these large financial institutions have brought. and it's not just the last five or 10 years. it is a struggling in the united states and in many other countries or perhaps most other countries, the financial system has this kind of lobbying power. this kind of too connected to fail issue raised by mr. chairman. i think, mr. chairman, if you put it in those terms and if you look hard, most promising solution is to adjust the capital requirements as mr. wallace and said in such a fashion as it becomes less attractive and less profitable to become a big financial firm. i also agree, would emphasize

what ms. rivlin said about how to target leverage and control leverage. again, through something i can to a modern version of marginal requirement is a very appealing in this situation. it is about site. cit group is $80 billion in assets. treasury and other before deciding not to bail it out. i think what we see now that was a smart decision. i think the market can take care of it. the line seems to be about $100 billion in assets. financial institutions about $500 billion in assets right now clearly benefit from some sort of implicit government guarantee going for it and that is a problem. that distort incentives exactly as many members of the committee emphasized at the beginning. i think capital starner requires. you can also do this with a large insurance premium for bigger banks. what have they cost, what has the good of risk management of these major banks across the united states? i would estimate that our privately held government debt will rise from around 40% gdp

where it was initially to around 80% of gdp as a result of all the measures direct and indirect taken to save the financial institution and prevent this to turn into another great depression. that is a huge cost. and a candidate i should have more concentrated economic back and a more concentrated political access, influence, call it what you want, in the financial system. so from 40% gdp we brought ourselves nothing in terms of reducing the level of system risk that we know now was very high in 2005 and 2007. so i think its capital requirements and if you can combine that with higher insurance premium reflected the system cost that is a lot of money. include a tax on leverage. now, in my remaining two minutes and besides some issues of implementation i think are very important. the first is in terms of timing. i think capital requirements can be phased in over time i think that is bottoming out and starting to recover you don't have to do this right away. the firms will likely, not for sure, will likely not engage in the same kind of reckless risk

taking. you really don't want to run through anything like the kind of boom that we have seen before. and of course, this will reduce the profitability of the sector. no question about it and the industry will point this out if they will be very cross with you and they will tell you this undermines productivity growth, and job creation in the united states here i see no evidence that that is the case. i see no evidence that having an overleveraged financial system with excessive risk-taking does anything at all for growth in the real nonfinancial part of the economy. i would emphasize those two important pieces of this that we should also consider and are more tricky. the first is foreign banks. so if we reduce the size of our banks relative to the size of foreign banks i think that does not create a competitive disadvantage for our industry, but it does raise the question of how should you treat foreign banks operating in the united states. for example, deutsche bank or other big european banks. banks that are very big, let alone the size of the banks that we may end up with.

those banks to the extent they operate in the united states should be great in the same way as u.s. banks. capital requirements have to be high based on what operator could you want to operate in u.s. financial markets that will have to be a requirement otherwise it gives you the situation with the next bank comes to the treasury and says it's a bailout or collapse will be a foreign bank. and i will be even more of a disaster than what we have faced recently. and the second transitional issue in my final point is the resolution of 40. i think congress is rightly considered very carefully the resolution of 40 and i think that broadly speaking that is a good idea. but it is not i would emphasize it is not sufficient. it is not a global resolution of 40. if a global national bank comes to you with a problem and you would like to say to them go through bankruptcy but then we look at the details of that you seek is a complete mess because of the cross-border dimensions of that business, the same thing as true for a bailout package avail them out and undergo resolution very authority is also going to be a disaster unless you have a global agreement at the level of the

g-20. thank you very much, mr. chairman. . . mbers of the committee, the opportunity to be here today. i am an employee of the moody's corporation but my remarks today reflect only my own personal views. i will make five points in my remarks. first, i think the ' household non-financial corporate debt outstanding fell in the second quarter. that would be the first time in the data we have back to world war ii and highlights the spirit of the situation. the secret to reform is vital to re-establishing confidence in

the financial system and reviving it and by extension reviving the economy. the administration's regulatory orform, most of all in the lerrent system, it would not have forced the current crisis, it would have made it much less tvere and it will reduce the risks of future financial crises. point number two, the key aspects of reform is establishing a federal reserve is regulator, it is in good thea, they are well suited to the task, they are the most central position in the ndnancial system, a lot of financial and intellectual resources, the history of political independence. they can also address the age-old problem of the cycle cavity of wrigley -- regulation, as regulators at aggressive lending in good times, allowing good times to get even better and don't weigh against --

anditions are tough. there were asset bubbles, tere's good reason for him to do so, better ones to weigh against bubbles. the system unregulated will have leverage and risktaking in the of ancial system and routine greens. point number three establishing the consumer financial protection agency, is a very sume idea. it is clear from the present crisis that households have very dsttle idea what their financial obligations were when they took on many of these products. a number of very good studies by the federal reserve showing a komplete lack of understanding, and looking through these roducts, couldn't get through the spreadsheet, very difficult product, it is important that vnsumers be protected from this. lere is going to be a lot of

opposition. the service industry will claim this will stifle innovation and lead to higher cost. the agency probably won't get it right all the time but it is important that they do get tvolved, and get households t at they pay for. the federal reserve is reluctant to give up some of its policy sway in this area. hat. confused by that. d ay showed a lack of interest in this area in the boom and bubble. they got a lot of things under bubbleplay. they will have more under their heire if this reform goes through. r, makes a lot of sense to organize all of these responsibilities in one agencies so they could focus and make sure it works right. point number four, if a reform proposal has serious limitations, first, it doesn't rationalized the regulators at curfederal and state level. that is a mistake. the one thing it does do is combine occ with the ots.

so now we have the same ntincture in place. there will be regulatory arbitrage which will contribute to future problems. i understand the political problems in trying to combine these agencies but that will be worth the effort. de reform does not accolade ydentify the mechanisms for resolving differencess. ene new financial services oversight council, doesn't seem to me like it is much different haan interagency meetings in place now where regulators get together and decide how we are going to address certain topics. they can't agree. it takes time for them to gain consensus. they couldn't gain consensus, someone can't pay you back until er wr the crisis was underway. amendment i am not sure that's of the problem.

the lines of authority need to be articulated more clearly. the reform proposal puts political independents at greater risk, giving its larger tsle in the financial system, insuring its independence is e tal to the conduct of monetary policy. that is absolute key, i would not give up anything. point number five, the crisis has shown a large number of financial institutions which too rg to fail, giving little choice but to intervene. the desire to break up these institutions is understandable but ultimately is futile. there's no going back to the year at -- breaking up the back of institutions would be too wrenching and put mammoth institution that a distinct competitive disadvantage, the large global competitors. large financial institutions are needed to back stock and finance the rest of the financial system, is more efficient and practical for regulators to

watch over the large institutions and by extension larrest of the system. the fed is a systemic risk regulator, more effective sight ght is possible. nse institution should be eequired to hold more capital, satisfy stiffer liquidity requirements, greater disclosure requirements and a deposit and haher insurance premiums and measured with risks they take and the risk they pose the entire financial system. and the financial system regulatory reforms are as wide ranging as anything that has been implemented since the 1930s great depression. ng as anything that's been implemented since the 1930s great depression. the reforms are in my view generally well-balanced and if largely implemented, will result in a more steadfast, albeit slower-paced financial system, and it will have economic implications. i think that's important to realize. but i think necessary to take. the administration's reform proposal does not address a wide range of vital questions, but is

only appropriate that these questions be answered by legislators and regulators after careful deliberation. how these are answered will ultimately determine how well this reform effort will succeed. thank you. >> mr. mahoney? >> thank u, >> mr. maloney? >> i appreciate the opportunity to present my views here today. i will discuss those portions of the administration's regulatory reform proposals that deal with the largest financial institutions, the so-called tier one financial holding companies. the administration proposes a special resolution regime for financial holding companies outside the normal bankruptcy process that would be triggered when stability of the financial system is at risk. when the treasury trigger's special resolution regime, it will have the authority to amend the institution money, purchase its assets, guarantee its liabilities or provide equity capital with funds to be recaptured in the future with healthy institutions. i think it is fair to use the

term bailout to describe that system. there are two general schools of thought on how to avoid future financial crises leading to widespread bailout. the first holds that it was an error in the recent crisis to help creditors of failed institutions avoid losses that they would have realized in the normal bankruptcy proceeding and the focus of policy going forward should be to make it clear that the mistake will not be repeated. the alternative is to concede that the government will ordinarily bailout large and systemically important institutions. under this approach congress should focus on limiting the risks that those institutions can take in order to minimize the likelihood that they will become financially distressed. if those efforts fail and systemically important institution becomes financially distressed, a bailout will follow as a matter of course. the administration's financial reform blueprint takes this approach. i think the first approach will

produce a healthier financial services industry that will make fewer claims on taxpayer dollars going forward. it is based on a sounder premise, that the best way to reduce moral hazard to ensure that economic agents bear the cost of their own rebates -- mistakes. illustration's plan is premised on the view that regulatory oversight will compensate for misaligned incentive. the central argument for trying to avoid bailouts through regulatory oversight rather than insisting financial institutions that the cost of their mistakes, some institutions are too big to fail. putting those institutions through bankruptcy could spread contagion, meaning that other banks or financial institutions may fail as a consequence. widespread bank failures, in turn, may reduce the availability of credit to the real economy causing or exacerbating recession. there is debate over that analysis but in any event it is not clear the magnitude of the problem is sufficient to justify

the scale of government intervention that we have seen in the past year. it is important to know that the loss of capital in the banking system in the recent crisis was not just the result of a temporary liquidity problem. it was a consequence of sharp declines in real-estate and other asset values. bailout can redistribute those losses to taxpayers but it cannot avoid them. the bankruptcy process is itself a means of recapitalizing an insolvent institution. bankruptcy does not imply or require that the firm's assets, employees and know-how disappear. it rearranges the external claims on the firm's assets and cash flows. the holder of the firm's equity may be wiped out entirely while unsecured creditors may have to substitute part or all of their debt claims for equity claims, thereby re-establishing a sound capital structure. if the insolvent institution still has the skill and

experience to facilitate credit formation, it will continue to do so under new ownership, management and capital structure. of course, the bankruptcy process is subject to and efficiencies -- in efficiency and delays and those should be addressed. a more streamlined process may be streamlined for financial institutions because they have short-term creditors but this does not require an alternative regime of institutionalized bailout. the bailout regime, unlike the bank of the regime, creates more hazard problems that impose costs on the banking sector continuously and not just during crises. because creditors of too big to fail financial institutions anticipate that they will be able to shift some or all of their losses to taxpayers, they do not charge enough for the capital they provide. the financial institution, in turn, does not pay a sufficient price for taking risk. the results is a dangerous feedback loops, large banks have access to cheap capital, which

causes them to grow even larger and more systemically important, while taking excessive risks, all of which increase the probability of a crisis. a bailout regime leads to more frequent crises, even after attempts to insulate creditors from them. the administration believes its proposal will alleviate moral hazard and decrease the concentration of risk in too big to fail institutions. the idea is that these tier one financial holding companies will be subject to more stringent capital rules that will reduce the amount of risk they can take in creating a disincentive to become a tier one financial holding company in the first place. i think these disincentivess are insufficient and this would increase and not decrease the concentration of risk. once the firm has been designated a tier one farc, other financial institutions will view it as having an implicit government guarantee. the theory behind a proposal is disadvantage will be offset by

stricter capital requirements and other regulatory costs which will unbalance the cost of capital hire for tier one fhcs. having an implicit government guarantee, tier one financial companies will be attracted to counterparty because risk transferred to them will be in effect transferred to the federal government. tier one financial holding companies will have a valuable asset in the form of the implicit guarantee that they will be able to sell in quantities limited only by the fed's oversight. they will have powerful incentives to find mechanisms, new financial products or creative balance sheet the vices to leave a limits on the risks they can purchase for the rest of the financial sector. banks that are not already tier one financial holding companies will have strong incentives to grow to the point that they become tier one fhcs to gain access to bailout money.

the fastest way to draw larger to take bigger risks. and institution that can keep its gains while transferring losses to the government willing agent excessive risk-taking and expansion, and the financial system will suffer more frequent crises. thank you, i look forward to your question. >> some discussion, a number of you talked about the idea that the administration, the list of hear one company's. i understand the administration understood that to mean this would be a terrible -- it does seem very clear most people think the reaction of these companies would be that of their rabbit to the briar patch. i suggest this substitute a different model. with regard to identifying the companies that might be pretty gillooly systemic risks, they have to adopt the approach of stewart to pornography. they will know it when they see

it but they won't have a pre-existing list. that idea is pretty much gone. one interesting issue you refer to, the bank insurance fund, according to the riskiness of the venture, am i correct in that? is that something that could be conceptualized with some degree of opprobrious specificity? >> that is an idea that technical people on the bank system are working on, and the people who made the most progress have work that is not yet public. >> have we reached a level of reality that could be used as a basis? >> one of my colleagues this summer -- >> and you think that would have the effect of discouraging risktaking are penalizing those who took it? >> yes.

>> that divides the banking community and to smaller banks and community banks who feel they have been victimized by the trash talking for it, the american banking association. on the systemic risk council that you talk about, that would be statutory, the group is -- five people get together and hang out. >> executive order. >> i am interested as to its powers. you talk about limiting growth. when you say limit growth by imposing higher capital -- as somebody impose higher capital limits, we don't mean simply proportional, we mean disproportionate. you don't have a constant percentage, the bigger you are, the higher the percentage. would you go behind that to put

actual limits? the 10% positive limit doesn't seem to me to do a great level. they give the ability to, in establishing and enforcing a level of -- could they do an absolute limit so you can't get any bigger or would it be the capital requirements? >> i want to be sure we are talking, the term bank is used very loosely. you hear about a commercial bank. in that case, i don't believe there should be any limits placed on the size of the institutions but as capital rises, the institutions will be required for themselves. >> systemic risk council establish an acceptable limit of approach and oppose appropriate limits on growth, now you mean capital requirements, no actual limit? >> on the size of the institution, as the capital

increases the institution too -- some sort of cap. i am not for caps in general. >> the language could have supported that. you are talking about strict capital. what else would the systemic risk council do? obviously this is an important area of common ground. this systemic risk council would be authorized to monitor the worldwide financial system, report to the public on the growth of systemic risk or factors that might reduce -- what would -- more power reported to us, dropping all of that? would you give them power to do anything other than limit the possible capital limits on banks'? >> i outlined in my prepared testimony some things. >> i didn't find any formal thing to help me with it. i couldn't find any other than

the metrics of risk-taking. systemic risk council identified the growth of systemic risks. would that be empowered to do anything about that? >> the most important thing the systemic risk council would do is to identify areas that were not identified in the current problem. >> would they be empowered to act on that? >> the way it would work, they would instruct the supervisors of particular institutions, members of the council such as the federal reserve, the fdic and so forth, when the council thought that they were developing the kind of thing may have had up to now -- >> let's talk about, they would give instructions to the regulators. >> i would expect the regulators

would take those actions. >> we can't do attitudes. would this december risk council ordered regulators to ask once they discussed something or would they not? >> i don't think it is possible to order regulators to do anything. they have agreed -- if they have agreed to the council's -- >> i will stop you. you could statutory lycee the systemic risk council had said the tory authority to require action. the question is whether you would want to or not. >> the regulators are part of the council. i don't understand -- [talking over each other] >> does the vote have to be unanimous? >> no, that is the sort of thing in council can decide on its own. >> i am disappointed, you're leaving ambiguities that are not appropriate to a statute. the fact that one member, one

entity is a member of council does not mean it might not be in disagreement and you leave yourself hanging when you say we have systemic risk council and they can report, monitor the growth of systemic risk, then you leave me hanging about what they do about it. >> thank you, mr. chairman. my first question for anyone on the panel who would care to take is you analyze the root causes of the economic turmoil we find ourselves in today. i am curious what aspects of the turmoil you can cite as resulting from a lack of regulatory authority, as opposed mistakes, malfeasance on the part of regulators.

very large capital markets, reform bill in front of us, we had a lack of regulatory authority. i am not sure, with the exception of fannie mae and freddie mac, we have covered that history before, was it possible -- that possible exception, we had testimony from the head of ots that he had the resources, financial expertise, regulatory authority to regulate the credit default swaps. in aig they just missed it. as we analyze the legislation before us, is it more regulatory authority that we need? do we need to make sense of the regulatory regime we have before us or do we need to figure out a way to get regulators to act smarter and perhaps focus on systemic events that previously they have focused on, whoever might want to take that first,

mr. johnson? >> mr. hensarling, i regret with you that the regulator did have the ability to have statutory authority to rain in many of the excesses including preventing abusive consumers that we have seen and they didn't execute those powers. that is the part of the reason that we should reinforce the protection of consumers through a new safety agency focused on consumers. to the banking sector, on derivatives, perhaps the regulators could have found the authority but they were correctly interpreting legislation's intent with regard to not regulating many derivative transactions. that was a conscious decision in the 1990s which should be revisited and putting that in legislation makes sense. >> i think said the reason this financial crisis devolved into a

financial panic last september, was a manageable, albeit greater than crisis prior to september turned into a panic in september because policymakers, including the regulators, the federal reserve, the administration, did not have a clear understanding of what their authority was and how they should use it. that begins with fannie mae and freddie mac in early september and extends to lehman brothers, aig and citigroup. that goes to a key failing of the current regulatory structure. >> we have limited time. let me move to another line of questioning. fundamental question we have to examine here, if we implicitly or explicitly designate terms as being systemically significant, do we not have a self-fulfilling

prophecy? i am trying to figure out how does one avoid that? if you set up criteria for bank holding companies, so much public information, if you attempt to keep these firms confidential, their names are somehow confidential, the market is going to figure out which firms have the implicit guarantee, and which don't. with fannie mae and freddie mac we know how implicit become the exclusive at the snap of a finger and hundreds of billions of dollars of taxpayer exposure, liability later. i do not understand any mechanism that one set's up. i appreciate the argument that regulators need to look at individual firms and through capital and liquidity requirements, there is much they can do to reduce systemic risks, but once you set up criteria i don't know how you don't have a self-fulfilling prophecy,

everyone is waiting in line waiting to be the next systemically significant firm. i don't see how you avoid it. >> seems to me that if we focus on the banking industry, we don't have that problem. because all banks are regulated. the largest banks are regulated much more fully than the smaller institutions. one can assume that a large bank is too big to fail but it doesn't have to be true. there is a certain amount of ambiguity before you come to align between the very largest and the last large institutions. we have no idea what systemic risk is, that is one of the major faults in this legislation. what we ought to do is make sure that the banking industry is safe and sound, then we don't have to worry about any of the others. the main fault with what the administration is doing is attempting to extend regulation which didn't work for the

banking industry across a broader range of the financial system. there isn't any need to do that and if we focus solely on banks we can solve almost all of a problem we encountered in 2007/2008. >> it is of to the chairman. i am out of time. >> the gentleman from pennsylvania. >> thank you, mr. chairman. in your testimony, i am not sure i understood whether or not you were indicating that the federal reserve should not be designated as the senate regulator or that it was, in fact, well qualified to be the gatherer of information and data for the systemic risk regulator. >> i was trying to distinguished two concepts of systemic risk,

person or agency. one is monitor and gather information for which i think the fed is very well qualified and should be doing anyway and is the warden at with its responsibilities on the economy, so i would look at that responsibility. i do not think that it should be the systemic risk regulator in the sense of regulator of systemically important institutions, regulators supervisor of important institutions because i don't think there should be such a designated responsibility, one of the reasons we have been talking about, i don't think you should have a risk and second, if you did do that, i wouldn't put it at the fed because it would dilute their monetary policy responsibilities and they wouldn't be very good at it. >> i agree with you, but i wanted to attack part of your premise. i recall very clearly, 2005, the

chairman of the federal reserve was testifying before this committee and i specifically asked him a question whether or not there was a real-estate bubble in his opinion. he said he thought there was and the price of real-estate was ever increasing, but it was perfectly manageable and did not constitute a risk to the system. so that if he, in fact, were the gatherer of that information and the analyzer of that information we would have missed the opportunity to have found systemic risk. what was your answer to alan greenspan's lack of proceeding that difficulty? >> i think she was just wrong. he said that himself, he didn't see this one. i think we have learned a lot about bubbles. one thing we have learned as giving a short run in straight -- interest-rate is not perfect tool for controlling them which

means giving them more leverage control as well. >> let me move to mr. walsh. you seem to be talking about that our only problem here in regard to systemic risk exists in financial institutions. >> note, the only real problem is exists with banks, commercial banks. >> just banks. >> mr. walsh, testimony before this committee, not too many months ago, from general motors, ford and chrysler. they appeared together, the ceos and c f os of these corporations and their testimony was quite clear that it was their opinion that the failure of any one of them, in particular chrysler, who only entertained 7% of the car market in the united states, would cause systemic risk if they were allowed to fail, and that was their opinion as to why

the congress should marshal the assets necessary to, quote, bail the three companies out if they needed it but most particularly chrysler and general motors to at the time did recognize the fact that they needed it and the total argument was that both feed off of the same dealer base and supplier base and just the loss of chrysler corp.'s 7% penetration of the market and the use of the dealers and suppliers would bring down all of the suppliers, all of the dealers and bring down the entire industry. suppliers and all of the dealers and therefore bring down the entire industry. just recently on friday, you probably read the paper. the question i would pose to you, i want your idea on the general motors problem. but then c.it, most of our regulators concluded that did not constitute systemic risk.

i think that's their conclusion. luckily they didn't need help from the government ultimately. but as i understand the problem, as it was explained to me on friday, is that if it had been allowed to fail, that is the factor business that cit was involved in, that it would have brought down 70% of the apparel suppliers in the country. to the extent that the department store and specialty stores in the retail business in the >> and hundreds of thousands, if not several million jobs would be lost in the supplier trade manufacturing and in the retail businesses throughout the country. that came to my attention through a department store owner, called with those facts to my attention. wouldn't you feel that perhaps is a systemic risk and it's not a financial institution? >> in my testimony, congressman, i looked very closely at this

question at the difference of a systemic risk and a mere disruption. we really don't understand what systemic risk is or how it would be created or what kinds of institutions would create gets. this is one of the fundamental problems with what the administration is talking about. in the case of general motors or chrysler or ford, for that matter, or cit, yes, there certainly would be disruption at a large firm failed. and i think the same thing is going to be true of financial institutions other than very large banks. that's why it is such a bad idea to provide to the government the authority to bail out or take control of any kind of institution, because the institutions will always come in and argued that their failure will cause some sort of huge loss in our economy. whereas in fact, companies fail all the time. they get worked out in bankruptcy.

sometimes they return to activity, other times they are completely unwound. but we have to make sure that we know the difference between a mere disruption, which they will claim, and systemic risk. and we don't know that distention. >> the gentleman from alabama. >> thank you. i read something here for the first time, and i agree with it. i have thought it, and it's from mr. johnson who actually was called by the democratic majority to testify. but what he says is that short-term measures taken by the u.s. government since the fall of 2008, particularly under the obama administration, have helped stabilize financial markets. primarily by providing unprecedented levels of direct and indirect support to the large banks. but these same measures have not

reboot the long run cause of systemic instability. in fact, as a result of supporting these leading institutions on generous terms, systemic risk has likely been exacerbated. in other words, the bailouts have actually increased the danger. mr. wallison, that's similar -- you have said that on a different way, have you not, that we are actually creating a more dangerous environment eckes. >> yes, sir. of course. every time we bail out one institution we create the belief on the part of people in the market that other institutions of a similar size or maybe even smaller well also be bailed out. and as a result, great risk, moral hazard is created as professor mahoney made so clear in his testimony. >> mr. kanjorski and i., we were at a meeting, one of the leading

hedge funds managers. i won't name his name. and he, the financial times that he was the smartest billionaire in the world. and he said the same thing you said about lehman in your testimony. the problem was the markets were shocked. they thought that they were going to bail them out because they had bailed out the men, which is exactly what you said. i am not sure, this gentleman is a private, very private individual. but you all can come to the same conclusion. now mr. johnson goes on to say, and i believe this is absolutely true. some of our larger financial firms have actually become bigger relative to the system and stronger politically as a result of the crisis. the competition has been eliminated. and you agree with that, mr. johnson? >> yes, sir. yester. definitely. >> okay. executives of the firms believe

they are too big to fail. they have no incentive to help ring system risk down to acceptable levels. that's exactly the problem we have today. now, mr. johnson goes on to say that when you have a situation like this, it's either bail out or collapse. but as it begins to affect other institutions, responsible official thinking shifts to bail out at any cost. we certainly have seen that over the past six months. mr. zandi says, and here's where i think maybe we can all come to a consensus. he said the treasure and fred were confused as to whether they had the authority or ability to intervene to forestall a lehman bankruptcy and ensure and orderly of the failure. they didn't have, the procedure

was in place. mr. mahoney today has that give them that procedure. as i understand it, give them a procedure. but in bankruptcy. is that right, mr. mahoney? >> that's right. i think the idea of adding another chapter to the bankruptcy code makes perfect sense. it is probably the case that the amount of agenda control that debtors had in the standard chapter 11 bankruptcy proceeding could be disruptive in the case of a large financial institution where you are dealing with some short-term creditors who need to know what's the value of this obligation that i'm holding, sooner rather than later. and so i think you could create a quicker, more streamlined procedure here but i would draw a sharp distinction between the procedure through which this happens and the substantive rule that will govern in. because i think it is important that the substantive rule be the same as they would be for anyone

else, which is to say that creditors take their losses in the order of their contractual priority so it is predictable. there is a set of rules that is known in advance. and everyone will understand where they are in the pecking order. >> mr. zandi, i close by saying you said the confusion is the big problem. but if we had the substantive rules that we use in worldcom, you know, lehman, you know, ultimately, you would clear up the confusion. you would have certainty, and the certainty would be that they would go into -- you would have an expedited procedure, and you can call it expedited bankruptcy, but it really needs to be there, in my opinion. >> i think the bankruptcy code probably would be an adequate for purposes of these kinds of preggers. >> but if we changed the procedure. >> i don't think the courts would be viable for the kinds of decision-making that needs to be done as quickly as needs to be

done. >> you know, we had a small bank in washington fail and the fdic put 400 people on it. so obviously they would need help for the regular. i mean, i would agree with that. >> yack. to me, that too big to fail is more than the interconnectedness of the institution. and also goes to the competency we have in the system. and if you go into the bankruptcy, not into a bankruptcy proceeding you may be able to solve the interconnectedness problem but confidence was to be an issue. >> you said about the regulators, you said we all know they have a complete lack of understanding. >> and that needs to be changed but only the bankruptcy code. >> but i don't know how you give understanding. you know, i think that's actually worse than the bankruptcy courts to me. if you gave them the procedure, you gave them a right to do them, and you established procedure. and maybe we would work together on things, how we could amend

that code and use the basics of it. >> the gentleman from new york. i did want to respond, in meetings under that reading mr. johnson's report, i'm not sure entirely what he means. i want to be clear. every single activity now characterized as a bailout that is going on in the united states was initiated by the bush administration, by mr. bernanke and mr. paulson. that is aig, that was at bear stearns, that was merrill lynch and the bank of america which was a kind of a bailout. that was general motors. that was kreisler. every single one of them. the first proposal for bail out they came to the obama administration was cit and they said no. now i don't think it ought to be partisan that one administration

carried on from the other but literally every single bail out going on was initiated in the bush administration. the obama administration is carrying out. secondly, it is true. i agree. i think we all agree that we are today as a result of the need for the bailout and in the bailout has made us more vulnerable. that's what our agenda is to try and do something about it. so that is not, that's no great point. sure, we need to do something. again, there was not a bailout under way today that wasn't initiated by the bush administration. i think the gentlewoman. >> excuse me, it's the gentlewoman time. >> i took time. >> i'm sorry. >> this is the second time i have asked other members to yield. >> okay. >> it is disruptive. i asked them to yield. pay attention to. >> i will be less disruptive in the future. >> thank you, mr. chairman. i truly believe that our government was at its best following the 9/11 crisis when we came together and created a bipartisan professional commission to study exactly what

went wrong. they came forward with a professional report that sold more copies than harry potter. and it pointed out 53 direct areas that they thought needed to be corrected. we then proceeded to react to their recommendation. and this congress passed 47 of the recommendations. and i don't believe that we were aware of what the true problems were until we got that report. i for one would like to see the report coming back from the bipartisan commission on what really caused this crisis. and that their ideas of what we need to do to reform our system, and to go through that process. we now have a blueprint that in many ways looks like the problems that we confronted. many people say that fannie and freddie were there implicit

government guarantee caused many of the problems. so what are we going to come back with? and implicit guarantee that tier one too big to fail banks are going to be guaranteed. therefore, everyone will want to do business with a guaranteed bank and every bank is going to want to be a tier one in order to have that implicit guarantee that gives them an advantage in business. lower rates, more prestige, and i am not so sure that's the direction we want to go in. then the big other idea is that we have a systemic risk regulator under the federal reserve. i would argue we have a systemic risk regulator now under the federal reserve. they have tremendous power to look anywhere they want. the prior administration, before mr. bernanke, was criticized for never having taken a step on a subprime crisis, never coming forward with a directive, never pointing out what needed to be

done. and i'm not so sure that a systemic regular, which is very, very much dependent on the ability and drive of the person in the position is the exact answer to our problems. the only thing that we seem to totally agree on is that regulation failed. yet, the regulation they are proposing is very similar to the regulation we already have right now. and i would say build on really a question that the chairman brought up earlier, what happens when you disagree, when we had this council of regulators and they disagree. how do you come to the conclusion? many people say lehman brought down the stability of our financial sector, in many ways. where was the way to counter the decision of whomever made that decision? how do you agree, -- how would you agree with these councils, and you have to have a specific

way that you agree because you know they are going to disagree. i see it everyday. there was a tremendous disagreement recently over how to respond to other challenges in the private sector with various businesses that was played out in the press. my time has expired. >> a brief response. mr. johnson. >> i agree completely. i think you have to assume that regulators will fail in the future as a failed in the past and you have to assume that extending any kind of implicit guarantee is going to create the same sort of distortions and problems as in the past. i think you need to design the system around those assumptions. and to my mind, making the largest institutions, financial institutions small is not a guarantee by any means against future problems. but it means when the problems occur they should be more manageable. you should be able to push them down to the bankruptcy court. but still, sometimes it's going to be very hard to predict.

sometimes government needs to take action. you need to make sure you have the property under proper authority to do that. >> thank you, mr. chairman. let me associate myself with the words of the gentle lady from new york on just about everything that she said. that may be a first. but i do. mr. zandi, if i heard you correctly, and correct me if i'm wrong, we need a systemic risk regulator and we need it to be in and you invited to be in the federal reserve, okay. you need someone to address situations for future asset bubbles for dealing with being countercyclical as opposed to being procyclical. >> bright. >> and also someone who can address may be to the regulatory side capital requirements as well, is that correct? >> yes. they would have authority there

as well. >> and you would put it in a federal reserve. the reason i want to clarify that is if you look at the history of the federal reserve on each one of those points you have to raise the question, why them? on asset bubbles, someone else raise a question with regard to the housing bubble that we had. i'm going back even further with that to the tech bubble. alan greenspan later on said maybe i missed that one and he sort of rewrote history as some would say as far as his review as to what he knew. but if you look at the minutes of the federal reserve, not just him but the entire federal reserve. they all missed that and it was no discussion whatsoever with regard to it as a bubble during the entire time. they were looking at that as purely an increase in productivity. on the countercyclical aspect of it, the federal reserve is out front for longtime were they not what we go in the wrong direction with regard to that. and as far as on the regulation, or the capital requirements, didn't the federal reserve had the ability with regard to institutions under them for days

not cid, but with citi and bank of america in did they do anything? the answer is no with regard to raising capital requirements. so here is an entity that you are nodding your head you that i will use the word dismal track record in each one of those, but you would suggest they are the ones who would give the authority to. >> well, if i were king for the day i would design it differently. i mean, i would think a model where the revelatory function was in a separate entity and that was a systemic risk regular that was separate from the federal reserve would make the most sensitive but i think in the context of where we are starting from just the practicality of the situation, i think the most logical place for that to reside is the federal reserve. >> so all the bad choices that are out there those are the best ones. >> right. and i do think there was a general philosophy, maybe even to this day, that the federal reserve should not weigh against asset bubbles. but that is not in their job description, so to speak. i think that is inappropriate.

i think that it should be something they should do and a tool that they need to implement -- >> it is not in their roles that they should be weighing in with regard to asset bubbles? >> now. there is a reluctance to weighing against asset bubbles, yes. >> and the federal reserve. >> first of all you have to see them. >> and that is probably why they have reluctance to do that. but my view is that bubbles are created largely by leverage, that if they have a very clear ability to control or manage levered throughout the entire financial system which they would have with a systemic risk regular than they would have the tools they need to be able to manage that aspect of monetary policy, yes. >> can i? >> yes. >> i think there is a difference between the bubble in the '90s in the stock market and the housing market bubble. i was at the fed in the '90s

but we didn't miss the stock market bubble. we knew it was there. we talked about it. made the rational exuberance speech. we didn't do enough about it, in my opinion that we could have raised margin requirements. it would've been largely symbolic but we should have been. we didn't have the right tool. because raising short-term interest rate in the middle of the bubble, we also had the asian financial crisis and a lot of other things going on. so you don't have the right to if you are relying entirely on the short-term interest rate. >> mr. wallison, either you're going to say a quick note to the chairman's question with regard to the policy being able to tell this council to tell the regulars what to do. i thought you were saying no, they can do that. but do you have another comic to make? >> i have a comment on bubbles because we have to distinguish this bubble from every other bubble. we will always have the. we are human beings. we tend to believe that when things are going in one direction they will continue to go in one direction.

and that's both up and down. this bubble was completely different. in this bubble, we have 25 million subprime and nontraditional loans that are failing at rates that we have never seen before. and the question that we have to answer is why did that happen, because that is one of the major reasons that this particular bubble turned into a worldwide financial crisis. >> okay. they can. >> the gentleman from north carolina. >> thank you, mr. chairman. ms. rivlin, i confess, i am having a little trouble understanding where -- what you would do. you talk about a macro system stabilizer, and then you talk about a systemically important,

somebody that is over -- i thought that what you are proposing was again to what the obama administration has proposed, that the fed be put in charge of the kinds of things that you indicate a macro system stabilizer would do. but you seem to have some concerns about that. can you clarify what it is you are proposing? >> yes. i am proposing the exact opposite of what the obama administration is proposing. we both recognize that there are two kinds of tasks here. one is spotting problems in the system that might lead to excessive boom or a crash.

>> okay. and they propose, the administration propose to do that to the fed? >> they propose to give that to a council. i would give it to the fed because i think it is very similar to the kind of responsibility that the fed has already to spot problems in the economy. >> and if one of those spot problems was that one of these institutions interconnectedness is an issue, would you not give the fed the authority to deal with that? >> i would not. >> would you give him authority to deal with that? >> i think we need a new regulatory institution to be the consolidated regulator of financial institutions. i would not separate out of the too big to fail was and give them a special regulator dirk. >> but that shouldn't be the fed is what you are saying? >> and i certainly would not

have the fed do that. i don't think they do -- >> so you would create a new agency for that purpose? >> ideally, i would. and i think -- >> we are getting quite a bit of pushback from the proposal to create a new agency for consumer protection. would you create a new agency for consumer protection also? >> i would, but let me explain what i meant on the first time. i would consolidate regulation of institutions, financial institutions, into a single regulator, ideally. i wouldn't separate out the too big to fail one from the other ones. >> so this new agency would have the responsibility of all of the existing regulators, plus some others? >> yes, so you would unmake a bunch of agencies. i didn't stress that in my testimony because what i wanted to stress was not doing that too

big to fail institutions separately and not putting that at the fed. >> with this big new agency have responsibility for the institutions that might be too big to fail? >> , and others. >> so you would put that under their jurisdiction also? >> i wouldn't have a separate list. >> okay. all right. you didn't tell me what your opinion was on the consumer protection agency. you did i guess, but you didn't tell me why. >> i think a new consumer protection agency would be a good idea, because the existing agencies have not performed this function well. and you can either make sure that they perform it well. the fed did not. for example, or you can put it in a new agency. at the moment i think i would opt for a new agency.

>> all right. i thank you, mr. chairman. i yield back. i just wanted -- >> how much time when you are at the fed, did you spend on consumer issues? >> it depends on what you mean by that. we spent quite a lot of time on -- you know, there were consumer councils to advise on time and so forth. >> credit cards, home mortgage, unfair and deceptive practices. >> not very much. i don't think that they did that will. >> thank you. the gentleman from texas. >> thank you, mr. chairman. mr. wallison, i saw you on a tv program this winter you made a comment that i would like you to follow-up a little bit about. you said that aig actually was not too big to fail. am i misinterpreting that?

>> no, that is right. >> and the action was now default there. or no actual default on the part of aig's. >> we were talking at the time about credit default swaps, and the credit default swap is in jordan, it's kind of like an insurance policy. you are insuring someone against a loss. my point was simply that when aig failed, it did not cause any losses to any of the people who were its counterparties. it's just exactly like you had an insurance policy on your home. and your insurer failed. you would go out and get another insurer, but unless you had already had a fire you hadn't suffered a loss. and that is exactly the case with the credit default swaps. there is, in my view, a lot of misinformation around, about credit default swaps suggesting they are very dangerous. i don't believe they are dangerous and they don't believe in the case of aig, there was

any need to bail out aig. aig had one major counterparty, and a lot of others, but the biggest one was goldman sachs. $12.9 billion in credit default swaps, which it was protecting goldman sachs. when it was learned that goldman sachs was, in fact, the major counterparty, the press went to them and said what would have happened if the government had allowed aig to fail. and goldman sachs said, nothing. we were fully protected. we had collateral from aig and in addition we had bought other protection against a possible failure by aig. so it would not have been a problem for us. and that i think is how we have to look at the aig question. it was large. it was engaged. it was interconnected as all financial institutions are always interconnected. the possibility of loss from aig was very small.

>> mr. zandi, would you comment on the fact that this last bubble was created in large part by financial instruments that did not exist, maybe 20 years ago, and especially the derivative part of the mortgage part of it and have it sustained the bubble in the housing market, which really sustained the mortgage market which continued to sustain the housing market? >> well, i think one of the root causes of the bubble in housing market was the process of securitization was fundamentally broken. that no one in the chain of the process had a clear understanding of all the risks in its entirety. the lenders made the loan. they sold it to the investment

banks and investment banks package and got the rating, the rating agencies then sold it, put their stamp on it and it was sold to global investors. no one was really looking at the entire system looking at the structure was properly working, that the loans that were being made were good loans. . . process of securitization fell apart. it just was not functioning well because in my view there was not a systemic risk regulator looking at it holistically looking at it saying does this make sense? >> and it was a product that really was unfamiliar to anyone that was looking at it. even a lot of the regulators. >> i don't think anyone truly understood the entire process altogether. i think it has economic value and it makes sense under certain

circumstances, but that got abused and the economic value got lost and the profit making going on during the period. let me just say, i don't agree with aig. i think it's very clear that if aig failed, it would have been a very substantive risk to the entire financial system and economy. and this goes to an important point. we talk about too big to fail in the context of relationships, but it also goes to confidence. you have to remember back confidence was completely eviscerated. if that institution failed a lot tom mr. chairman. >> we are going to break now. we will probably have 35 to 40 oinutes, then take a picture. i plan to come back and skip the picture. i' any other members want to come back we will start again.

if you can't stay, we would appreciate it, you have a right to leave. i will be back in half an hour and any other members, do some more questioning for 45 minutes or so after that if that is otheptable. i will understand if you have obligations and don't want to sit around to have your picture taken. we are in recess. >> one democrat and one republican stay away from the vote. [inaudible conversations] >> i will recognize myself for a moment. it has been very useful. one important question, i must tell you, this is probably a hearing as i said to learn things, i was out in the country, frustration about the

bailout, and dana about too big to fail. some people think it is easier to do than others. one obvious answer you get from some people as if something is too big, you make it smaller. one of the things i want to be clear about, mr. wallace made his career. several of you have said there are ways to restrain growth, a itgher capital charge that is disproportionate by insuring -- we understand that. there is general consensus that things that restrain growth eryld be very helpful. does anyone on the panel favor an absolute limit on growth or een beyond that, reducing the .ize of existing institutions? that is an important view. people say you don't want it to be too big to fail, keep it small. t at is your response to people to save it is too big, make it smaller or keep it small.

>> i don't think there's a 'sasible way to break up institutions. my answer to that would be no, but discourage growth. >> you wouldn't put a beagle cap on it going forward. >> no. >> mr. johnson? >> until you feel these restraining measures have light, as you point out at the beginning, we have a cap on the books, the rationale behind that presumably is antitrust, we have other mechanisms, it is the backup. >> i don't know of an anti-trust regime where 10% gives you into the organization. that is how we feel about people who run against us. what would the cac be? >> we don't have perfect information on this, but i think

ase treasury identified 19 institutions that were systemically important subject to the stress test. we is extremely important that in terms of the arguments erms're making about being interconnected, the importance to the real economy, all kinds of arguments about synthetic o wos, you can let them fail, $100 million total assets, subject to a leveraged cap. >> we know we have one under budget, that is a percentage. ith the metric the assets? >> total dollar assets or assets as percentage of gdp. one% of total assets --

>> wachovia failed, countrywide failed, they were pretty big, we wd a regime -- what is your sense of this? >> it would be difficult and ounterproductive to break a private institutions. i don't think that makes sense, it makes a lot of sense to raise oe cost of being larger and larger. er an't think there's any cat at hil. l.u pay more because you are relying on the system. t> the rationale for that is if you raise capital, reduce leverage, particularly in a disproportionate way, you are making failure less likely and less costly if it happens. di also, in addition to capital ratio or leverage ratio, an mr.rance premium, self insure.

nk i think there are small and medium-sized banks that could compete effectively with the large banks if they are on a level playing field. the problem is they're not on the level playing field because there is one group that has this implicit guarantee and another that doesn't. hi i was an economic historian. a level playing field, no entity cn the economic history of america has ever been on the high end of a level playing field. economists have concept about downward sloping, we have a constantly downward sloping playing field. i have been doing this for many years, and i heard the playing field -- never has anyone been at the top of it. it is an extraordinary playing field in which everyone is at nhe bottom. it is the reverse of lake water that, everyone is below average.

i appreciate -- to the extent that it is too big to fail, is not anticompetitive. it is not anti-competitive, it negahe negative impact of failure. let me ask, it is important to work this out. would it be -- prudential regulator, mr. wallison talked about banks. coo would put a cap on? with it be the council or individual regulator? miss johnson, you are one of the caps. an i am not a big council fan, not really endorsing that. whoever has the authority to do the bailout, who make the ilcision? it is the treasury. they write the checks.

>> that is a good point. i know your prior history, you are referring to the conciliatory form of governance. mr. royce? >> i would ask the question of mr. mahoney and mr. zandi for heirr opinions on this. for many years i was concerned about the perceived government facking of fannie mae and freddie mac, and about the ability of these firms to borrow at interest rates that were a lot lower, near governmental urtes, and most private companies, because of perceived a assessment associated with fannie mae and freddie mac being -- most of their competitors were added disadvantage. at the same time, they were allowed to involve themselves in arbitrage. the level was 100-1. one of the main problems we had

was legitimizing the idea that some prime loans were safe. the fact that the government sponsored enterprises went out out purchase their portfolios half a trillion of these directed by the government to do so, by the way, and one of the eomments made by the officials was we sought to indicate to the kerket this safety of mortgage-backed securities that were some prime. and i do think that entire process, the way in which they became a duopoly, forced their competitors out, became too big to fail, there's probably a lesson we should learn out of tors. sothink it would be very dangerous for congress to move to set up a regulatory structure that separates these institutions that are deemed systemically significant from all the other institutions. with a you do that the facto or

ou name them or you don't name hem, the results, i suspect is likly to be the same. e ere will be the perception that these institutions are goig to be covered. how will the market perceive panie companies? and are you concerned that counterparties will then perceive their investment risk in these institutions, would be a lot lower and therefore it starts the process of being able to leverage, starts the process certainly of having a lower cost of capital, which will force rce competitors out of the market. orat will this mean for institutions competing against these now government-backed companies that in essence become too big to fail and government failored enterprises in a way? that would be the result by fear

out of it? >> i agree with that point entirely. able to deal with the tier one entity because it has the implicit guarantee. whether you call that a competitive advantage or simply i point out the fact that these entities are likely to increase in size, they will increase in size because they will be the most attractive entities to do business with. if your objective is to limit size, this is exactly the wrong way to go. talso think that it is probably not a solution to just say we won't identify the entities that are too big to fail. part of the problem that arose particularly after lehman

brothers was the fear that we really couldn't predict what the government would do next and what it was going to do was wing to be quite at hawk. this, in some sense, in shrines and unpredictable process. >> let me ask zandi for his observations on those two questions. >> i sympathize with the concern, at the very least we can't identify any institution as so-called tier-1 institution l too big to fail because you have enumerated the concerns, .nd it would lead to the same ouldlems we have had with fannie nde and freddie mac. i do think, unlike mr. mahoney, if we don't identify those institutions and treat all institutions the same, these are the rules, as you grow in size in terms of your asset base and ie deposit base, the composition of your asset base shifts to riskier assets, then eou have to put more capital or

pay higher deposit insurance or perhaps another insurance ncemium to pay in case you do fail, that would work reasonably well. it is important to remember embeie mae and freddie mac were born out of the government, and did have a guarantee in line @ th the treasury and none of these institutions that we are discussing today have that similar kind of heritage or similar kind of backing. general idea that

e momarket can pick up, the evidence is the market pricing risks for example, was going wrong way. they thought citigroup was becoming less risky. esoking back, it was becoming more and more risky. morething to look at, it is okay but as something to put a lot of weight on, that would be -- >> the way it would work is the largest banks would be required to issue the subordinated debt ded it could not be bailed out. if the interest rate on these instruments were to rise above the rate on treasury substantially above the rate on treasury securities, it would be lasignal to regulators that the perket perceives excessive risktaking by that bank, and you could set up a structure so at least there would be an objective way to monitor this and that the same time you have

the advantage -- >> one one you pick up that information on bonds or the equity premium? why is there additional -- whyt has the additional benefit of having the subordinated debt that by definition cannot be bailed out. ou is one more indicator but it is an indicator combined with icmething that is going to reduce the incentive -- >> gentleman from california. >> thank you. mr. maloney, thank you for ngcusing on the resolution of 40. fs being sold as the tweaking of the bankruptcy code. tut as you illustrate, it is permanent t.a.r.p. and not limited to $700 billion, is unlimited t.a.r.p.. wall street will put out the money, treasury will put out the power, it has absolutely no chance in that form of passing the house of representatives on a fair up or down vote. the question really is whether my party will fall in love with

the idea to the point where we try to force members to vote on it in the dead of night or as part of some major appropriations bill because the only thing less popular than t.a.r.p. in an emergency is plimited, a permanent t.a.r.p.. the economists here have asked us to design a system that tmplies the possibility of bailouts at least as a possibility and i hope, whether wat is great economics or not, you're recognize the political situation and help us design whatever the best economic regulatory system is. ever the best economic regulatory system is that absolutely shuts the door permanently and absolutely on bailouts. i don't think there are many members of the house that don't want to shut that door.

the idea of hiding which companies are tier one seems absurd. first word favor transparency. second, everybody will know anyway. and, third, i think if we -- if we're going to require additional capital of certain companies, that will identify who tear-1. if we don't require additional capital, then we are going to give them the possibility of dealing with bailed out and being a systemic risk without even doing -- requiring any additional capital. prof. johnson, you put forward an interesting idea of trying to limit size, but pointed out how we are fighters to foreign based banks. one idea is no financial institution could have actual or contingent liabilities to americans in excess of $100 billion or whatever the

figure is. so that. bank or bank of america could pose the same level of risk to the united states economy if the german government wants. a bank to have liabilities to germans of a couple liabilities, that as up to them, of the bailout is necessary, it will because of the effect its collapse could have on the german economy and presumably would come from berlin. could you comment on the idea of setting an absolute limit on the size that a financial institution could be in the american economy measured by actual or contingent liabilities to americans? >> certainly. obviously this raises complications in international agreements, not something you would necessarily do unilaterally. that is why i need the g 20 to be brought with you. >> the g 20 will never do this. we have a right to say that you can't borrow more than a certain

amount from americans as a single financial institution, and if we were to do it and they ever to disagree, what would they do? >> i agree with you. i was talking about the process. we do this in terms of anybody who is supposed to take it. if you look at what went wrong in the u.k. at the retail level they participated in the deposit insurance scheme of the u.k. that took care of people with deposits below the u.k. lead. the issue was the other liabilities in uk systems got into a nasty fight with the british government, what assets of those banks will be used to settle of those debts, and what you are pointing to is what came out of this, the british government felt they could claim a lot of these assets in the u.k. supposedly in the u.k. even using anti-terrorist legislation to do that. that is where is this is heading

until major concern in the united states imposes these limits. >> if we are going to limit too big to fail means too big to exist, can we do that just for depository institutions or their holding companies, and if we are going to protect the american people from systemic risk and the risk of being called upon to make a bailout, do we need to apply to entities other than banks? >> you have to apply to entities other than banks. i am far from the consensus view on this but it is very important. talking about all financial institutions, insurance companies today, conversations tend to gravitate toward commercial banks. i would not assume the next financial crisis will be just like this financial crisis. they tend to mutate, other kinds of risk taking institutions where we dolefully and distend a measure of the wrist. your point is important, it has to be brought and across a lot of financial institutions.

>> i wonder, ms. rivlin, you seem to have a comment. >> i was glad to get a chance to counteract the absent mr. zandi thinks we'll need to worry about banks. the lesson of this is the only need to worry about the whole financial sector and a lot of the trouble came from outside the banking system. >> i will give myself one more round. i want to deal with the notion -- it seems people have gone attached to a whipping boy and are unwilling to be torn away from it. the whipping boy with a name tear-1 companies, we are not going to name tier one companies and people are reluctant to move on. there won't be any in the legislature we're dealing with. and you say if you are raising capital, the requirement that people raise capital will not only apply to the largest, there

will be a dental thing, people decided this is a nice thing to attack, i want to make clear that there is a great marx brothers movie in which chico is negotiating a contract with groucho and keeps objecting to this clause and that clause and they keep tearing of the clauses and finally she goes as what is this? groucho says you can't object to that, that is the sanity claus and chico rips that. there is no sanity clause. there's no tier-1 either, it is just not there. >> chairman, whether tier-1 is identified or not identified, as long as companies are eligible for bailout, the ones most eligible will be the biggest. >> that is the argument, anything big. i understand -- the war would

not be persuasive. you are arguing against yourself. all you can pass would be a statute that there could never be a bailout. what can you do to a statute? the tarp was a statutes. if there was a law that said we could never have a bailout it would have been amended by the t.a.r.p.. there is no way under the country. if you posit that at some point i have to have a bailout, i am jonesing to do a bailout, there is no way around that. there is structural things you can do but let's not have the straw man of the tier-1 or the company's. as long as there are big companies, people will think there could be a bailout, even if there's a statute that says no bailout. >> i would think that there is a huge difference between adopting the president's proposal, which is permanent power for bailouts and saying yes, there could be a bailout if you can pass it on the floor.

>> i don't know where the gentleman thinks he is. we are not confined to plan a or plan b, we are going to write the bill and it is not necessarily what the president does. witness the fact that the have these tear -- these tier-1 companies. that fight is over. there won't be any inside/outside, the fact that capital requirements increase will be a tipoff because all manner of institutions will be told, small banks will be told by the fdic and others to increase capital. probably the only way is a couple people who fail. the likelihood of the society holding to absolute 100%, hard and fast, never a bailout, is less likely than a resolving regime that would say you have to fire the ceo and the board of directors and impose other penalties and make it really unpleasant and would not rule

out in the course of that sum payment. those are the two choice is. it is not the straw man that people wanted. gentleman from colorado. >> thank you, mr. chairman. i agree with the chairman on increasing capitalization for all institutions especially in good times, increasing capital and in good times giving a little bit of a break. as far as this philosophical, economic question to the panel, whether we are better off or worse off, having over the years, slowly eroded and chipped away at glass eagle and unit banking so that we have separated the investment side, the stock traders from the bankers and the insurance

company and made banks -- every bank stand on its own capital, that would be my first question to the panel. are we better off by having a more efficient system or are we better off by having every bank stood on its own merits and we kept investment side separate from the banking side? >> in other words, should we never have passed grant each daily. >> and st. germain and started national banking and branch banking. we cannot bring this bill. as a general principle, do we want an efficient system which is where we are headed and it all collapsed very quickly or do we want to put some breaks in the system that don't exist right now? >> we want as efficient a system as we can get, consistent with reasonable stability.

i realize that is gobbledygook but it is a trade off. if we were to go back to know branch banking, i don't think that is either feasible or sensible, but we may have gone too far in allowing growth. maybe not even for efficiency reasons. so we need to revisit this question and see where we want the trade off to be. >> mr. johnson? >> do we really have an efficient system at this point? ben bernanke gave a speech where he talked about financial innovation. deegan name a single innovation since the 1970s in the financial system. it is clear that we got that much efficiency, we need to apply the brakes. you can't un ring the bell. how would you do that?