be certainly the government providing the liquidity for housing finance which to me is a bit of an uncomfortable situation. >> so, when i talk about the goc's, i would say i spent 15 years on wall street and that defines one border and four and a half years in treasury that defines the other border. people say the goc's are in between. no, they're way on the other side of government. that's because -- it's funny, but that's because the gocs are like their own bureaucracy, but ones that are profitable. that meant overtime there was no incentive to change anything they did. they were disincentives. the only competitor to freddie

mack was -- and goldman competing with citi bank and deutsche bank or whatever. there's a culture changing quickly and a mind set at the gocs right with bringing on the problems and the idea they could lose money never entered anyone's mind. what do they need going forward? i think the idea they could be privatized is laughable. i think there's no way that they could survive initially as a private company. i also don't think they will be fully taken over, you know, by hud either. i agree with phil. i think there will be a hybrid model. there's one that makes sense is the goc's either are, you know, they're in a first loss situation. should they be taking losses? maintain them up to a certain

level, but beyond that, they are backed by the government or they are buying insurance from the government. it's hard to imagine the gocs going away because as we talked about, goc reform is basically short for what's macroeconomics, socioeconomic housing policy. if we think health reform or dodd-frank touches this directly, if any, goc reform will take us that much further. >> just a quick, i think i agree with most of what others have said. i think the key from where i sit is to try to distinguish between their public policy or social function to promote a health market and a market for long term debt, and i think where the real tensions arose over the last ten years was the goc's were given a much more exceptive --

expensive, risky role in promoting social policies, and if we can do something in the next year that strips that responsibility and invests in a strickly funded government agency and leave the goc to do what they were created to do to promote securitization, i think we'll be a lot further ahead than where we are now. >> the only thing i add to this is one of the unique things the goc experience gives us is some insight into the conservativeship process and the fact that, you know, at the time when the crisis was hitting, thankfully congress gave to the treasury department and regulators the ability to place the gocs into conservativeship to save the system, and that is now here for all large financial institution. it wasn't there at the time of aig or lehman, but some experience on the

conservativeship side could be a road map to how that might be done in the future and if god forbid there's another situation where actions like that need to be taken, so it's just one more facet to the issue. it's not just the housing policy issues that need to be grappled with, but the effect of what happened when major players were brought into conservativeship, and how difficult it is to bring them back out and how do you resolve the other side? >> yeah, steve, you obviously saw it very close as you were the lead lawyer on aig. >> one of them. [laughter] >> yeah, one of them. let me ask if you were a treasury like now, what all would be going through your mind? if you had to give one piece of advice to treasury right now, what would it be? >> i think -- that's tough. there's so many big issues right now out that they have to deal with. i think part of the advice is to, you know, focus and get a

few things right. you're not -- the legislation requires a pretty aggressive time frame. there's nothing you can do about that. on the systemic risk counsel with which treasury chairs, i think there's a need to put in the time to really think through those issues and try to get them right, and in some ways, you know, priority number one to get solid answers that give certainty to the market place because it makes it difficult for companies to operate with uncertainty and you don't know what the rules will be. picking those two things and working them and growing out from there i think is naturally what has to happen. that's certainly one of them. the other is, it's just a part of life, i think, when you have everyone talking about phrases about seeing you around corners. it's easier to say about the past than in the future, you know, sometimes you look like

chicken little and don't know what the next bubble or important issue is, and i think going into that with the sense of humility of knowing it's difficult to know what's going to happen. it's important to have the resolution authority done well and thoughtfully as it is to predict every new crisis coming down the road because you'll never be able to predict everything, but if you have a solid foundation, there's a way to deal with the crisis and resolve it well. i think that's a critical piece. >> i would say i would agree. i start with resolution authority. in the class i'm teaching now, we have the students think through an fdic takeover of a bank, and an example used $5050 million of assets. --

$55 million of assets. this is something the fdic does all the time now, and you know, what, 80 or 70 years of experience with, so $55 million, two branches, just imagine the next aig or lehman or whatever firm it would be. if they think about the worst case, and obviously that's something with the t.a.r.p. we had done some thinking about it, but, you know, had we done more between march and september, that would have been certainly a useful dimension. >> yeah, i -- i think the first thing i would do is manage expectations with the lsr. i'm in the camp that these things are systemic risks and they are not clear if they are preventable or not, but i think

one the things they can do is just manage expectations among fsoc members and build an environment where data is shared, no so much with the predictive analysis to understand what's going to happen next, but when a problem occurs in realtime, they have the data and the relationships and the wherewithall to better enter with resolution authority. when i talk to people about this, if you had perfect hindsight and i'll say the darkest day is september or october 2008 when the private preserve fund broke the bike. that's, to me, is when the world was truly falling apart. if you had insight to that, what would you have done? would you stop the goc's stop growing in the 1990s, stop bank growing in the 2000s, would you have been concerned about all the liquidity coming in from

asia to finance the markets? would you look at the growth and derivatives? would you, you know, if you were the treasury or secretary in 2006, would you go in front of congress and say, we're in a housing bubble, we need to slow things downright now. i think it has to be in a predictive role, it's politically, it's almost suicide. i would think that the first step would be to encourage data shares, collaborative working agreements to better understand what's going on in the market so if a problem occurs, they're not acting as ad hocly as they did in 2008. >> yeah, i absolutely agree. in some sense, that was the darkest moment in the days the private preserve fund broke and commercial paper shut down, and imagine if there had been an agency that said, no, no, really it's just the one fund. there's others in trouble, but they downstreamed funds and they're okay. they're not breaking the buck.

maybe you don't have the same fright. it sparked really the panic. you know, that would be just a home run' if the fsoc or ofr could do that. >> the one example on that is the feds. no matter what you think of the bernanke fed or whatever, you have to give them an a-plus for how they reacted since. what they did and all the things they've done was because they acted. they didn't have to go to a meeting necessarily, you know, build collaboration among members, and to move policy forward. i think that's another good lesson there. >> i guess i would disagree with almost everything that was said. [laughter] just for the sake of argument. you know, -- >> are you my wife? [laughter] >> you know, i do think that

prevention is worth a pounded cure. i think that, you know, one of the lessons of the crisis is how amazingly well most emerging market economies have skated through it in large part because they went through crisis five or ten years ago and learned some lessons. i think there's, there is a lot that can be learned from that experience in terms of crisis proofing your economies, making sure that you have sufficiently rigorous and tight regulation, sufficiently rigorous and sufficiently tight on leverage and supervision and financial innovations, i think these things can be enormously effective and are really worth pursuing. i think what i would encourage the treasury or the fsoc is to

focus on those preventive measures to beef up quality supervision in particular, to enforce and empower the supervisors to take action when they see individual firms taking on access risk or when the system looks like its building risk, i think these things can be affective. >> it's sort of a delegate balancing act. how much regulation is good, how much is not, and what can be learned from emerging markets. i remember as a senior person in the merging markets, he made the comment to me that i hope the financial crisis is not seen as an emerging markets in such a way that the innovation that's going on isn't stopped, the financial innovation. if this is seen as an excuse for really pulling back on financial innovation which is to some

extent quite limited in emerging markets. it is sort of a delicate act and regulation always seems to be playing catch-up, and never manages to get in front of the market. you have emerging markets with lots more regulation and some emerging markets it's like we make sure the markets don't get ahead of the game, and here was certainly the case when financial innovation was getting for ahead of the game, and so it's a delicate balance as to how do you optimize it. >> okay, can i keep this going? >> sure, sure. >> so, to me when the world changed was august, september 2007, and prior to that point i was in the camp of the subprimes contained and this and that. in august 2007, that's when countrywide went under and the asset commercial paper froze up and funding markets froze up. i remember thinking this is a

lot different from how in my mind people seeing the initial subprime crisis play out. there's members of of the bear stearns and one of the thing about the hedge fund is the subprime market took a hit, but the way these bonds were trading in the market place they were trading let's say at this market value, but because the faults were increasing so much, their economic value was actually plummeting, but because everyone said, oh issue, gosh, there's a market nor these bonds. when we fast forward to 2007, i was on the phone pretty much every day with treasury, fed, just trying to explain like i think things are different here. you need to take a closer hard look, really senior people, okay, almost at the top of the food chain, and they didn't get

what i was saying. i get back to the initial comments as i agree in a perfect world, it's great, but where will you get the qualified people at the top making qualified assessments saying this is a real risk, and this is a bubble. when oil hit $150 last summer and came down, it got cut in price in half to $75. nothing happened. we survived the california real estate crisis of 1994. we survived, you know, 1998lcm. we survived 2001 nasdaq failing. it's hard to say why is the street just complaining to you about things not being efficient and where are things just not systemic? it's a difficult and challenging thing to do. >> i think if i can jump in, it raises the difference between

economic policy and supervision. you know, there's the need for regulators on the ground in the financial institutions to be individual lent in -- vigilant watching institutions from inside where they sit, and tim was talking about it's a different function, i think to be the head of the monetary policy or systemic resisting counsel in look -- risk counsel in looking at the big picture. they need to be smart at the macrolevel and sharp at the supervision level. >> chris, what do you expect? anything new coming out next month at the g-20 meetings? >> well, you know, frankly, i can't say. both i don't know and if i did, i couldn't tell you. i think what you've seen out of the finance ministers and governors is essentially just a staging for what's going to come

out of the leaders. i suspect what we saw this weekend is what will be validated and confirmed in the forthcoming summit. >> on that note, let's open it up to questions from the audience, and please let me ask you if you come forward, introduce yourself, and i encourage students and clients to go ahead and start asking questions. >> thank you, let me take advantage. currently at this particular moment when a bank lends to small business or entrepreneur they need five times capital. this creates discrimination on that side of the balance sheet.

there are more things to systemic risk than banks failing. the banks not performing their function is just a systemic risk. how much do we need, a clear identification of the purpose of the financial system in order to regulate and move forward because in the boston regulation there's not one single word about what they are regulating for. >> yeah, that's a good -- yeah, that's a very good point. i agree with you. implicit in the court is -- in the u.s. you say we're protecting the deposit insurance fund and preeing the taxpayer, and this is very much a pre-crisis, you know, you want a lot of private capital ahead of the taxpayer to buffer the taxpayer, and obviously we've seen over the last year or two,

the effect of the financial system not doing its job, and in terms of the administration is still wrestling with this. my guess is it's going to be just as effective not adds the first one, and we'll another one in the year. yeah, i don't have a good solution. i guess the only other thing i would say is a diversity of funding sources is probably the best we could hope for. you know, in the u.s. we have the banks system like say europe, but then there's a nonbank. you know, my guess is venture capital and private equity and other sources of funding and so it's the overall regulatory environment would hurt them, and there's nonfinancial steps to be taken to give assurety on the health code and tax costs to help the general economy and funding, but that's outside of banking. i agree with the premise of the

question. it's a tough one in trying to protect taxpayers and making sure you don't go too far. >> just a quick follow-up. i mean, i think that the question is an important and profound one. the only comfort i can give you, and this may or may not give you much in that respect, but there has been a lot of work down in the community to look at just the questions that you're asking, looking at the extent to which higher capital dampens average growth, and the extent to which higher capital reduces the risk of a systemic event, and there's some papers the committee put out in the last month or so that nicely articulates that and nicely attempts at a calibration. the unfortunately fact is and others have cited them, but the

unfortunate fact is among the g-20, statistics suggest the risk of a systemic crisis is once in 25 years, and the average cost of the crisis is in the range of 20-60% of the gdp or higher. that's what we're thinking about. the trouble is trying to calibrate the right number in terms of your capital requirements, your risk requirements, and weights to prevent the risk of a systemic event without hurting the financial sector to do what it's supposed to do. >> yes. >> good afternoon. i'm a first year mba student here at georgetown. my question is about the professor you mentioned, the need to sort of balance regulation so that we're not

stifling the financial innovation in the market, and my question is about the overall social value of this innovation, and what are the real risks to stifling it somewhat? it seems to me that the innovative process and the credit default swap led to the crisis that sees some of the more basic functions of the market, the commercial paper, the availability of credit, what is the social value of these financial innovations? why do we have to be so concerned that they're continued to allowed to be developed because they vice president brought aside some large profits to a few people who are able to gain a lot from them. what social value do they bring, and what do we have to be concerned about? >> sure. that's a good question. i'll go first. i'm still very much an optimist on the possibility and the positive possibilities of

innovation in the financial sector, and, you know, sure, there were problems with innovation. you know, it goes back to what, you know, what's the cause of the crisis? i don't think cds or cdo is the source of the crisis. there's lots of sources and lack of transparency made things worse, but i don't think that caused the crisis. ultimately, there was bad lending decisions made and lots of people to blame for that, and ultimately they're economic losses underly crisis and the reform that tim alluded to is a part of information because i just not nanny and freddie but let other firms compete in the idea that there could be more innovation and housing and

finance and just so say a lot of subprime loans went bad, a lot didn't. that's the trick. if you, you know, save, the, you know, these people from a loan who can't afford the house, well, then there's other people who have to wait many years to get in a home, and that's the tradeoff to society, but to me there is that, there is a tradeoff. >> is there a wide sentiment in the public's mind? first you the crisis and the flash crash and high frequency trading, and i think that a lot of people are starting to wonder is this financial innovation really good for society in general? again, i'm with phil that there will be some problems that these financial innovations, but if you look at the whole thing is

financial innovation good, it has generally benefited society, but do you need -- to what extent do you need high frequency trading and to what extent do you 1r to have your servers located with the exchanges? a lot of questions are being asked on how fast do we need to go on this in >> i have permission to say one more sentence. i worry about the broader issue of inequality and opportunity. some of the concerns over the negative effects of innovation is sort of i think are better adjusted through policies that improve on that and education and training are, you know, would be important to have underneath there. >> one thing on cdf's, and we have an expert on what it's like to be short here, but if you look at the cbs, it's let's say you're a small mid sized banks,

which i'm not sure exist anymore, but if you're located in the midwest, and a lot of lending is based to the auto industry, and you're worried your exposure to those industry should it go it a downturn is too high because that's your lending platform, go back through the years, and there's banks selling credit protection to maintain your mission and your profitability and your lending market. i think there's a vibrant vital role for bangs and other entities to protect themselves against some type of credit loss. >> i was just going to say innovation is good. innovation that is geared towards avoiding regulation is bad. innovation that promotes leverage by household and corporate beyond their capacity

is pay is really bad. [laughter] >> when we -- with regard to systemic risk when we drafted some of the new dad-frank rules, the role of exchanges were important with the aspects of exchange, trading and exchange trading in the perspective of market to market and the systemic risk funks. there are huge changes coming down the pipe with derivatives and current level there required by exchange and clearing of parties in the future, so what is the impact on systemic risk of that regulation coming out, and secondly, are the new swap exchange facilities and mechanism to co-op that? >> it's a perfect question, but

tomorrow we have a whole panel looking at derivatives and settlements. we will address though issues in more detail tomorrow. >> i happen to sit on the board of directors which is the largest derivative of future trading house in the world. these are things we're looking at carefully. i heard your question earlier to the secretary, and a tremendous amount of the rule writing. this is the uncertainty behind dodd-frank and a tremendous amount of rule making still has not yet been done that will impact exactly what you are talking about. i think a lot of people are expecting a lot of, you know, # a lot to develop. ii'm not sure people are expecting a longer life span, but there's no question you could see, you know, many more of those exchanges hit. to highlight, this is a big

uncertainty out there. i know cme customers ask us what's going to happen? how's this affect ore business? it's a very valid point. >> i think it's one the realm sleeper issues of dodd-frank and there's systemic risk on the institutions themselves. there's a short important section of the bill with payment systems and clearing systems and that thing. a lot of authority to the regulators to write rules are rather boundless in the authority, and it's a bigger issue being more prominent going forward and if you take derivatives with more centralized clearing, you shift the risk in the clearinghouse and the critical nature of making sure the clearinghouse is well supervised and is not creating risk itself i think is a very important question. ..

the interoperability of fees changes in these ctp's is absolutely critical because you don't want to lock things up in one ccp in ways that allow that to fail. you need to be able to allow some degree of flexibility for the ccp to be able to exchange

and ad against each other. and this is becoming a very important international issue because a lot of these bodies are operating across border. >> any other questions? with that, i'd like you to join me in thanking our panelists. [applause] >> this week in on booktv's and depth, jonah goldberg, best-selling author discusses the election results, the conservative movement and the next wave of leaders on the right.

>> we continue our coverage now of the recent conference on the implementation of the new financial regulation law. in this portion, one of the people who worked on the new regulations, donald kohn, worked for the fed for 40 years. this portion is about 35 minutes. [inaudible conversations] >> moving right along, as they say, we now come to the final part of today's program, which

is a keynote speech by a person with a very broad experience and understanding. and so, they should be a true high point of the program. donald kohn served as vice president of the federal reserve system in 2006 to 2010. in that role he advised ben bernanke throughout the 2008 and nine financial crises and also served as key advisor to mr. bernanke's predecessor, alan greenspan. he is now a senior fellow at the brookings and duchenne. dr. kohn is a 40 year veteran of the federal reserve. prior to serving on the board he was an advisor to the board for monetary policy, secretary of its open market committee, director of the division of monetary affairs and deputy staff are for monetary and

financial policy. he also held several posts in the ports division of research research and statistics, including associate or, chief of capital markets senior economist. he began his career as financial economist at the federal reserve bank of kansas city. he also served as chairman of the committee on the global financial system, a special bank panel that monitors and examines broad issues related to financial markets and systems. dr. kohn has written extensively on issues related to monetary policy and its implementation by the federal reserve. these works are published in volumes issued by various organizations including the federal reserve system, the bank of england, the reserve bank of australia, the bank of japan, the bank of korea, the national bureau of economic research and

his own institution now, the brookings institution. he received as much or parts of economics from the college of wooster in ohio and his phd from the university of michigan. we are proud to resent that their donald kohn. [applause] >> thank you. it's a pleasure to be here. you've been talking about financial reform all day and i guess what's next? is that the name of the conference? i wish i'd been here. it's an interesting question. and i'm going to veer off a little bit here and talk about the economy. so you've been talking about the financial background for what's next. and not give you a little bit on the macro economy and the environment. i'll be working in there and i'll try to relate the two subjects at least a little peck, the impact of financial reform on the economy for a few minutes in my top.

so my overview of the economy is we are in for a slow climb out of a deep hole with low inflation for some time into the future. why slow? although the recession was deep a slow recovery has been experience following other recession that occurred in the context of hijacked and banking crises. in this case, we have household who need to repair their balance sheets. households accumulated very large volume of death as you know on the basis of racing house values. and they looked at service burdens have declined substantially with the documentary straight, that levels are still very high and many bones, particularly loans backed by mortgages by houses are under water, so there's a lot of pain to work through on the debt side of the household

downstream. in addition, households were counting on high and rising house prices to fund the kids education, their own retirement. and with the decline in house prices, they're going to have to save the old-fashioned way by not spending. by not consuming all their income. and that's building their wealth and paying down the debt in that kind of way. the savings rate has risen from the neighborhood of 1% or under 2% a few years ago to about 6% most recently. so every dollar that goes around, household has been taking a few more pennies out of that dollar and putting it toward saving. and of course this is absolutely necessary to build a strong, sustainable expansion and economy over time. but as this happens, as the saving rates have been for more is taken out and not spent, of course that's a big headline for

the u.s. economy in terms of growth. not only households a bouncy repair to do, but financial institutions as well. they came over leverage. they were vulnerable to violence because they were financing long-term asset, mortgages and particularly short-term liabilities. as they became worried about their own vulnerabilities, about the recession on their borrowers, future credit losses, they need to rebuild capital. make up for past losses in a tight terms and conditions of lending very, very substantially. and once again, this is something they need to happen. terms and conditions were let go way too easy. in the fear and problems of the recession, they became very, very tight. securities markets are open for corporations. as you know, corporate bond markets have a lot of flows there. book for borrowers that are dependent on banks, hospitals, small businesses, credit is still quite tight.

this is marked even in the real estate area for little mortgages. some securitization markets are reopening, but some, such as jumbo mortgages are still impaired. the third problem is we entered the recession was an overhang of houses and probably an overhang of consumer as well. these houses and durables will purchase to easy credit including second mortgages, home equity lines of credit for household durables and this overhang, this excess supply of houses and durable goods needs to be worked out. so this is not a garden-variety recession that began from the federal reserve gets worried about a session tightens monetary policy very tightly, slams the brakes on spending as spending is cut back, then the federal reserve uses policy and there's a pent-up demand that

didn't get done in a tight policy. that's not what happens here. for the reserve tight policy some but not a lot. over 2004, 2005. and it wasn't -- the recession was caused by an oversupply of houses and other things rather than tight monetary policy and cutting back on demand that way. they have fundamental problems in the bundle. there were too many houses. they were houses that were too large, large or they could afford in the prices were too high and it's going to take a while to work through these problems. we need to apportion losses between homeowners and lenders for mortgage modification foreclosure cannot process is clearly working imperfectly and many dimensions and will take longer that we previously thought. we need to get peoples and houses and apartments they can afford over the long-term,

convert owners to renters they can't afford and need to work through the overstock of houses, our most serious problem. houses don't depreciate rapidly. the overhang has been accentuated in the recession by weak household formation. there's going to be quite a few extra houses. a run of foreclosure, short sales shatter inventory will keep the supplies coming of people trade down. so relative to a normal recovery, the economy space and had one of work it. the uncertainty about the future course of the economy. this is a recession. the depth of this recession, the sudden onset of the crisis created a lot of uncertainty. this is not an experience any of us fortunately have had in our lives. so it's hard to know how to react, how things are going to happen if there's a huge amount

of uncertainty and i think the uncertainty has been compounded for households by the very weak labor market. business has found ways to produce more with fewer workers. there was a substantial increase in productivity in 2009. businesses have been very cautious about hiring. they've expanded hours, rather than adding to payrolls. the labor market feedback on consumer confidence in the dudley and consumer spending. so it kind of a nonfirst appear between weak labor markets and consumer spending in these things. now a lot of these factors that i've talked about, maybe not the productivity one, but some others are typical of debt and banking crisis, but i think were facing some economy that are not typical of such crises. one is the global character of the recession. global integration of farmer markets says it spread rapidly, globally act to.

investors that financial firms pulled back everywhere at the same time when their access to liquidity and credit worthiness was called into question. emerging market economies have come back from the contrast this cause, but many of our major trading partners -- industrial trading partners are still very weak. we cannot rely on demand from these trading partners to pull us out of this recession. regulatory uncertainty is always with us. and it's not the main force blocking spending. i think that's concerned about how the uncertainty and concern about how the recovery is going to go. but certainly tax and regulatory uncertainty as weighing on the wrong side. tax that congress couldn't even tell us what our tax rates are going to be on january 1st, much less what they're going to be over the next decades as we eventually come to grips with our government deficits and debt

problems. on regulation, health care changes, justified perhaps on various public policy grounds, but they're adding to uncertainty about what a new hire will cost over coming years. i think many of these headwinds that have been holding us back will and are updating in the economic recovery will strengthen, but it's going to be a gradual strengthening from here. households are rebuilding net worth through the saving of us talking about and i'll slowly get more comfortable with their balance sheet positions as that relative to income falls and with the drop in one of the decline to household housing prices largely behind them. the savings rate is unlikely to rise by anything like that 1% to 6% increase resold over recent years. it could go up somewhere. not clear whether well or not, but it go up somewhere.

where the heaven of that very substantial rise in savings rate would be very surprising to have that happen. n. the financial sector is being rebuilt with greater earnings. problem loans are already beginning to have banks and other lenders i think are probably begin to compete a little more vigorously for new credits. you can see some hints of this in the federal reserve surveys. i guess the last we had was august with got another one in november. but any loosening of credit is from a very, very tight bubble. securitization markets are continuing to open to sink some of this in to see mbs market. credit is beginning to ease up some. in honor of this complication i ask myself what the effects of financial reform, regulatory reform dodd-frank higher capital markets and private sector reactions to the crisis are likely to have on the recovery, how they're likely to damp the

recovery. i think the key point here is that the political process, g20 liters at the financial side her rather than the tax payers must equipped to absorb tail risk. must be equipped to absorb the kind of shock to the system that we have had over the last couple of years. now, tail risk, that kind of shot the odds-on that can be reduced by a number of things, structural things in the financial markets. my guess is the fact of a about riveted markets today in central counterparties and things like that. that could be very helpful in reducing the complexity and the odds-on structural -- structural problems. the federal reserve and fsoc, financial sector oversight committee -- council is charged with looking for and balances, asset price, discontinuities,

problems that might be building up and taking action to defuse those. and that also i think we'll take the pressure off the financial sector. but even with that sort of trying to reduce the tail risk, the risk was badly misunderstood in this price before the crisis. i think better understanding and word search and a fat tail risk by the financial sector implies higher rate on credits relative to the cost of funds on a broad variety of credits. other lenders hold more capital, the more liquid is part of the equation that transfers the risk back from the taxpayers to the private sector. moreover, the implementation of the dodd-frank and basel iii wide to uncertainty until the implementation is better specified and spat out. ultimately, these extra costs of having the financial sector rather than the tax payer bear potential -- potential risk of

another dash of another crisis are ultimately borne by the customers of the bank's lending customers who want to lend short-haul departed and bar with 30 year mortgages are going to find that the spread between the borrowing and lending rates are widened out. but, so i think there will be an effect on the cost -- the cost of credit by having the financial sector absorb these risks. but if the requirements are phased in slowly, credit availability should continue to improve, given that it is much tighter than it needs to be as the economy returns towards prosperity. so there will be a damping effect, but i think it's quite limited. and there's a very positive long-run trade-off for these changes, the extent that the requirements and changes in practices make our system saved

her, more resilient, less subject to the sort of crisis we've just been through. that crisis is having substantial continuing costs, reducing the possibility of incurring those costs again it seems to me as a very, very positive aspect of regulatory reform and higher capital and liquidity. so i think that the appian, the fading of the headwinds from credit availability will still occur despite -- despite the efforts made to make the financial system safer. overhangs of durables are probably disabilities, another had been fading a bit are disappearing. those things do appreciate and business capital spending. we see evidence of pent-up demand in the business sector. this is capital spending for equipment has been very strong over recent quarters. productivity is likely to be faster growth is rapidly.

i don't think productivity will fall back again, but it's not going to be as strong as it was last year. and having faster than strengthens the economy, will be passed through to the labor markets and therefore think that will help also confident that we could get into more of a positive feedback than this negative one that we have now. i said it was a slow climb out of a deep hole. let's talk about the hole for a second. one of the controversial aspects of the current situation is how much of that unemployment, the five percentage in unemployment over the past four years of structural and how much as a consequence of the business cycle. some of structural. structural unemployment has risen both as a consequence of extended unemployment benefits, which tend to keep people in the labor market to keep them from accepting jobs they otherwise might not accept. and also job matching issues. skills for available jobs,

willingness and ability to move to new work. so we're going to have fewer people building houses, fewer people in financial shares, fewer people in consumption sectors. those people need to find jobs in other sectors. they need the skills to find the jobs and the other sect errs. so there's some structural unemployment. some unemployment benefits are phased out of time in coming years. but i think most of what we're seeing is cyclical. most of it is absence of demand, rather than a structural. the job losses are widespread, suggesting that it's not just in a couple sectors, where people need to feinberg. it's very, very broad all over the economy. so it's not just about job matching. i think as they say at least a majority, a majority of the five percentage point increase in unemployment represents real

slack in the economy. and we can see this in the inflation, behavior inflation and compensation. inflation, core cpi inflation was in the two, 2.5 range a few years ago. it's now one or even a little under in the most recent data. and now suggest there's a very competitive environment out there. there's plenty of slack in the economy and people competing for sales. because i see the slack as quite large and only diminishing very slowly over coming years, i see inflation staying quiet though for several years. slack will continue to make the pricing environment is in goods and labor environment highly competitive, putting downward pressure on inflation. inflation expectations seem to be anchored above the current level of inflation and assuming these remain anchored -- and not come back to this when i talk about monetary policy and the second, i'll be exerting upward

pressure on inflation. so you have expectations appear come inflation down there, people at teen has the same function or a basic 2% rather to pull up the inflation rate. the slack in the economy and the competition for jobs and to sell products is tending to pull the inflation rate down. the roughly in balance. i think you can see these very low levels of inflation persisting for some time. now, expectations to play. i just want to emphasize the key role expectations play in the inflation formation and they hope to find some of the risks and i'll come back to the slater is the same discussion monetary policy. so what can policymakers do about those? i think in the case of fiscal policy, unfortunately the alternatives are somewhat limited. this is a textbook situation, a classic situation for fiscal

stimulus, private demand sufficient, federal reserve is holding interest rates low so the risk of crowding out with additional fiscal stimulus of raising rates on additional fiscal stimulus is is though. but there are very, very widespread problems to additional fiscal stimulus. one of skepticism in the political system about the efficacy of that stimulus. we had a slug of stimulus a couple years ago. it's hard to see the effect -- the counterfactual is always a very difficult argument to make, isn't it, and the political urbina? so if we hadn't done this, things would have been worse. that's an experience i have the federal reserve quite a bit in the last few years. if we hadn't taken our actions on the quiddity, purchase of securities and whatnot, i think things would've been a lot worse. but it's hard argument for people to grasp when you come to the crisis and it wasn't worse

than otherwise would be. but there is widespread skepticism about whether it would work. and i think without a long-term plan for dealing with the unsustainable deficit situation, short-term stimulus just makes problems potentially worse. you come into the next few years with even higher debt. so i think there are -- there are a number of reasons to think that fiscal stimulus, however the economic textbooks that taught your georgetown i'm guessing, whatever they would say about this situation will and the political urbina be very difficult -- very difficult to get through. and as long as long-term payout to fiscal policy is unsustainable, they will be uncertainty about the eventual outcome of that uncertainty place on damping the recovery. uncertainty is not good for people to make forward-looking commitments to spend capital spending, higher people, things like that.

i don't know what to do about that. i think the political system has to come to terms with that. i do think that the system will have to make quickly a decision about what the near-term tax rates will be in that will believe some insurgency. make a decision, people work around it. on the regulatory side, as i noted some regulations necessary aspect of achieving social goals, but i think we need to make sure that were subjecting regulations to rigorous cost-benefit analysis. i think we need to reduce the uncertainty as quickly as possible, but the regulations in place, whether it's in the financial sector or in other sectors, so folks can know what they're dealing with and can work around it. and the government needs to recognize analysis opportunities

for higher people. we need to be careful we don't dampen out. what about monetary policies. i want to emphasize that i have no inside information here. i've been out for two months i guess. i was a part of the september fomc deliberations and obviously haven't been part of anything since then. i'm not going to predict what the fomc might do. my advice is to listen to the committee and its chairman. they're much more informed about what they might do. but they make a few points about the potential for possible additional steps by the federal reserve and hope to help you understand some of the issues the committee and the federal reserve is grappling with. point number one, the federal reserve has a mandate, the legislative mandate for high employment and stable prices.

the chairman the other day to find stable prices as 2% inflation. he called that the mandate consistent inflation rate why did he say 2%? that doesn't sound like price stability, it even with errors and biases in the price indexes close to 1%. the higher inflation rate should over time could be slightly higher nominal interest rate. so if you're nominal interest rates would be about 3% with a 1% inflation rate over longtime, a long period, they should be about 4% with a 2% inflation rate over a long period. the higher nominal interest rates in good times means that as a shock if the economy. the federal reserve has further to reduce a downward shock against the economy. the federal reserve has further

to reduce interest rates before it could zero in order to cushion the economy can set shot. so having a 2% inflation definition of price stability gives a little more flexibility and ability to the federal reserve to head its other -- it's other mandates a maximum employment. someone is driving unemployment up in driving employment town, it has more room to lower interest rates and cushion that. that's why we call it the mandate consistent inflation rate. as i noted both employment and inflation are likely to run short of their goals for some time. for going to be running with the high unemployment rate is only declining well below the almost 2% rate that the chairman was talking about for a while. i don't expect deflation. i don't expect recession, but i don't expect them to be mayor.

the outlook i've outlined for you is not to have those two variables near what the legislation would ask for. as i've also noted declining expectations are an important downside risk. i said inflation was being held around 1% by two opposing forces, the slack in the extra people looking for work in businesses looking to sell stuff in a very -- in a weak economy was kind of putting downward pressure on inflation. inflation expectations were counterbalancing that and pulling inflation not. inflation expectations begin to decline that counterbalancing force starts to add and inflation could go down. and declining inflation expectations as the committee pointed out in a class -- in america this last meeting implies that real interest rates, interest rates after inflation are rising.

>> it's not the most likely outcome. but it is a risk. and it's clearly one that the f long c is concerned about as they pointed out. monetary policy is not the reason that the recovery is so modest. i pointed to half a dozen head winds to recovery, and mostly involving balance sheet repair and over hangs of houses and things like that. interest rates are incredibly low, liquidity is plentiful in every sector of the market.

even though monetary policy isn't the problem, monetary policy potentially even as the zero lower bound can help ameal rate the effects. lowering intermediate and long term interest rates. interest rates already at zero. if the federal reserve were to decide to purchase for intermediate longer term securities, certainly that would put some downward pressure on the intermediate and long term rates. helps to boost asset prices. you are discounted the expected future earnings flows from corporation, rental flows from houses a lower rate, that will raise asset prices. sounds like a conductive thing to do at a time when the economy is fighting against balance sheet constrains.

there are some negatives the open market is going to have to weigh. this is about comparing cost and benefit. the benefits are hard to calibrate. we have very little experience, fortunately, this kind of policy under these sorts of circumstances. so it's hard to say what additional purchases -- what benefits they will bring. it's unlike moving interest rates around on which we have decades of experience doing that and can track the effects through the economy. we don't have that kind of experience with buying assets. soso -- and to some extent, the channels are a big clogged. you think about lower intermediate and long term interest rates. one channel that might be positive would be rebuyed on houses so that borrowers have lower obligations and have more income after house -- after interest income. but to the extent that revise

inhibit the housing to mortgages, that's going to dampen the response. uncertainty dampens the response to lower interest rates. more people uncertain about the future. they are less likely to respond to a small decline in the cost of capital. a second problem, the more the fed buys, the more it will have to work at eventually committing, that is selling or getting rid of those securities at some point. it is -- the federal reserve has worked very hard at developing the tools, the instruments to do that. i think this has been a very constructive aspect of the policy that's run by chairman bernanke. but it is absolutely critical that the public have confidence that the central bank can head off inflation when it needs to do so. i think this is especially important t a time when fiscal

policy and the trajectory for the debt and the deficit are not seen as sustainable and under good control. and people do worry about the intersection of fiscal and monetary policy. and the temptation for the fiscal authorities to lean on the monetary authorities to monetize that debt. so i think it's absolutely essential that the federal reserve continue to make the case that it has the tools to exit this policy when it wants to do so and not only the tools, but the will to do so. i believe it does in both cases, everyone at the federal reserve and it's in the drinking fountains, i think. it's in the water, in the dna, i'm not sure what the right metaphor is, allowing inflation to rise to uncontrollable levels. people have lived through, in my case, or studied the 1970s.

that was a very bad time. the central bank is very aware of its part of its mandate for stable prices. and it will take the actions necessary, and i'm completely confident that it will take the actions necessary to meet that piece of the mandate. it's important that people not think otherwise. and finally, i think, the purchase of intermediate and longer term treasury security, driving down interest rates does distort asset prices to a degree. you are inducing people to take on more credit and interest rate risk than they otherwise would. in a sense, overriding the market judgment of people is the whole point; right? of the exercise. buying the security and trying to drive down the interest rates more than they otherwise would be. but they are at some point. so it's a deliberate disportion of asset markets in many

respects. drive up equity, try to elevate and keep house prices from calling so fast. that's one -- that's the way we exit the economy. exit this weak growth period more quickly if that's what they decide to do. but there are risks there. you are inducing people to bring purchases from the future to the present with these low interest rates. at some point, as the economy recovers, the distortions will unwind. we don't want that unwinding to threaten financial stability. so the federal reserve and the other regulators are and need to step up supervision to make sure the institutions are taking on more risk than they can handle, than they know what they are doing with, and they will be ready for the event issue exit from the low interest rate policy.

will the me say something about the international policy that's received height and attention. this is a difficult essential globally. we have slow youth in economies -- slow growth in economies all around the world. there are some exceptions, but not many. and it's a reliance on monetary policy to help the economies grow, fiscal policies, thinking about the uk as being tightened quite substantially. and in places in europe as well. so you have fiscal policy, either neutral or tightening, or relying on monetary policy. that means you have very low interest rates. this is putting upward pressure on exchange rates and asset prices in emerging market economies which are growing more quickly now. so to some extent, this easy monetary policy is having

effects that are not entirely welcome in other economies. but i think we must return to higher levels of resource utilization in the united states. this is a very serious situation. it's not in anyone's interest for the u.s. or industrial economies to stay weak for long. in the u.s., we have a huge reservoir of unused labor, lots of unemployment, longer the people are unemployed, the less attachment they have to the labor field, job skills deteriorate. we are also seeing the longer the weakness persists, the more there are protectist for safeguarding against imports, which would be very, very dangerous to the global economy and the u.s. economy. but when we return to higher levels of spending, we cannot

replicate where we were four years ago. where we were four years ago was u.s. consumers spending almost all of their income and accumulating huge amounts of debts. u.s. builders building more houses than anyone would want. and u.s. financial institutions producing some tockic assets in the financial sector. we've seen that movie. it didn't end very well. we need to come -- when we come back to higher levels of employment, we need less residential investment, less financial sector activity, and more investment and higher net in the lower current account deficit. though we cannot count on the u.s. consumer driving global

markets. so the rest of the world needs to lift it's demand. there's a global demand gap, if the u.s. isn't going to fill it, and can't fill it, and shouldn't fill it, then the rest of the world is going to have to step in. and the parts of the rest of the world are the ones that have the surpluses, right, in their current account that are depending on exports to the u.s. they are not going to be able to do that. they are going to have to have to increase domestic demand. both for their own sake and for the sake of the global economy. now logically, i think most of the policies that will bring about the realignment are demand-type policies. the industrial countries, including the u.s. need to have more sustainable fiscal policies over time, dampening demand from the government sector. but -- and the emerging market economies need to have more domestic demand. so they fill that gap. so mostly it's about effecting

demand. but it's also about changing to make that effective, we're going to have to change some relative prices of the stuffed produced here, and the stuffed produced there. i was glad to see the g20, the g20 pledge for more market determine exchange rates. i think that would be a very, very constructive move. they also pledge to resist protectionist pressures, and strengthen multilateral cooperation. so i think, you know, the devil will be in the details or maybe a better cliche would be it'll be implementing that that's going to be critical. but i think it was -- it was helpful, i think, to see the g20 finance ministers centralized governors recognizing the tensions in the global economy and at least saying the right things about addressing those tensions and coming out with more sustainable patterns of

growth globally than we've experienced in the past few years. that concludes my presentation. i'll be happy to anxious the -- happy o -- to answer questions. unless you guys are into the cocktails. i would be after listening to me. >> given the point that you made that we dug a deep hole and it's going to take a long time to get out, which is going to keep pressure on the aggregate moneys and credit because of people deleveraging and credit losses, how long -- and given the fact that the banking system is still broken dealing with the issue and you are not getting the multiplier effect, how long can you do this for and are there any limits? >> do what for? >> quantitative using? >> quantitative using.

>> are there any limits to how big you can allow the balance sheet before it gets problematic? >> i think the effects come not so much, at least so far, have not come from the creation of reserves per se. which are absolutely correct. they are sitting there. banks don't seem to be anxious to put them to work. you can't see this. the loan growth is negative or very, very slow, depending on the category, the loan pricing suggest that there's still not aggressively seeking loans. i agree, that's not working. but i do think the aspect of quantitative easing, we've seen this over the last couple of months since chairman bernanke started talking about in jackson hole, the lowering of interest rates, elevating prices, and the exchange rate a little bit, that can have positive effects on the u.s. economy, even if banks

aren't using -- aren't trying to use those reserves to expand their balance sheets. it could be better -- the whole process would be faster, i think, as if banks felt more comfortable and more confident that risk adjusted there were some opportunities out there to make loans and they started funding small businesses in particular. but it's -- that's not a necessary condition for this quantitative easing type of stuff to work. as to the limits in some theoretical sense, i think the limits -- the limits -- there isn't many limits. but i think the limits are the -- are kind of the negatives that i was talking about. the cost that i was talking about. so the federal reserve needs to be absolutely certain that people still have confidence that it can and will exit when it needs to exit. it needs to be very, very careful about these distortions

in asset prices, even if to some extent they are quite deliberate. but it needs -- the supervision and regulation of key financial institutions needs to keep up with those distortions, people need to be careful about what happens when it unwinds. yes? >> i understand the levels of quantitative that you are being talked about on the order of $100 billion a month multiplied out by a year. we were talking about $1.2 trillion a year. how is that monetizing the debt, and how are foreign observers not to view that as debasing the currency? >> well, i don't think, without commenting on the amounts that might be done, i think in a sense it is monetizing the debt because it's buying the debt and creating reserves with it. but that moneytyization has no

indication in my mind for the inflationary outcome. i believe the federal reserves has the tools to demontize the debt. we -- been two months i'm still saying we, we have worked hard to absorb the reserves and raise interest rates when it's time. buying if they decide to go ahead and do this, they would be buying government securities in a sense that's monetizing the debt. but i think when people say monetizing the debt, the reason that's a scary term is because it implies a threat of inflation down the road. that the fiscal and monetary authorities will be tied together so tightly, the monetary authorities won't be able to stop monetizing the

debt. and that's not an issue in the united states. the monetary authorities will stop monetizing the debt when it's the appropriate time too -- time to do that. i'm completely confident of that. people should not be concerned that the securities will compromise the federal reserves ability to control inflation. yes? >> we have been talking about financial regulations here. and capital requirements for banks, they discriminate a lot between different types. how much do you think the distortion that the fact they are required the banks to have 8% lending. when they lend to that. but when they lend to the public sector, it's zero percent. how much does that introduce distortion in the rates as we are seeing them right now.

>> so it shouldn't introduce distortion. because if it's done correctly, then those capital requirements should be proportional to the risk. so i think it's not a distortion to say to a bank if you are doing something risky, you have to hold more capital. if you are doing something that's not risky, you have to hold less capital. i don't see that as the distortion. now if the capital requirements aren't well calibrated to the risk, then there will be distortions. but the effort is to come bait the capital requirements. and there shouldn't be distortions if it's done right. all right. now it really is times for drinks. thank you very much. [applause] [applause] >> thank you, dr. kohn. just to remind you, fourth floor is where the cocktails will be

in the fisher room. thank you for being here. i'll look forward to seeing you this evening. [inaudible conversations] [inaudible conversations] [inaudible conversations] [inaudible conversations] >> recapping some election results for you. there are still three governors races that are too close to call.

>> this weekend on the american history tv, we'll show art created by japanese-americans created in camps, and we'll take a look at the increasing political and economic freedom of women in the early american republic. american history tv all weekend every weekend on c-span3. >> saturdays, landmark supreme court cases on c-span radio. >> the school calls it a voluntary bible reading statute. there's nothing voluntary about the bible reading. >> this week in part 2, involving prayer in public schools and freedom of religion, mr. schempp felt students should not be required to read from the bible before class. saturday at 6 p.m. eastern on c-span radio in washington, d.c. at 90.1, nationwide on xm channel 132, and online at

c-spanradio.org. >> c-span2, one the c-span's public affairs offering. weekdays, live coverage of the u.s. senate, and weekends booktv. 48 hours of the latest nonfiction authors and books. connect with us on twitter, facebook, and youtube, and sign up for schedule alert e-mails at c-span.org. >> the national council on u.s.-arab relations recently held a conference on u.s. foreign policies and the arab world. in this portion, the role that energy plays in the u.s. foreign policy. it's just under an hour. [inaudible comment] >> ladies and gentlemen, please take your seats. one of the most misunderstood of

the issues between the u.s. and the arab world in terms of how the american public perceives it, we have moved from a consensus four or five years ago on energy security to a situation where in the last two presidential state of the union addresses and the last two of the previous administration, state of the union addresses, call for ending america's -- lessening america's reliance on foreign oil. for most specialist, this has been a code war for arab and islamic oil. it's not that americans are in favor of driving less, it's just that the political policy implications have been driving less on arab and islamic origin oil. we have been randa fahmy hudome.

he's a member of the department of energy, and working in the sectors in the u.s. department of energy, he heads her own firm, he's been intimately involved with libia, and the with oil and gas producers of arabia and the gulf. chairman, randa fahmy hudome. [applause] [applause] >> thank you, dr. anthony, and thank you to the national council for not only sponsoring this seminar on energy, which is your right, is so important with respect to our relations between the u.s. and the arab world, but also for all of the world that the national council does throughout the year. many of you may know about the model arab league and other types of events. but this past year, dr. anthony, in the national council sponsored an event on capitol hill, which was intended by

policymakers, the men and women who advise, it was probably one the most enlightening sessions they had. i'd like to quote ambassador al jaber. sometimes it becomes the silly season. right now in the political election season of america here, it's the philly season, but those of us who have to live in washington all year round are constantly bombarded by the philly season here. some the troops that i like to talk -- some of the truths that i like to talk about, and some of the truths on the panel with respect to energy, source, supply, and security has to do with the real facts of energy supply, not only throughout the world, but here in america. for instance, as dr. anthony said, we often times like to talk in even sorts of ways about the relationship between the united states and arab world when it comes to petroleum,

truth, the majority of oil imported into the united states comes from canada and mexico. truth, the united states is going to be petroleum dependent for the next 20 years. that being said, countries like qatar, united emirates and saudi arabia are moving forward. truth, since the oil embargo, the oil producers, particularly in the arab world, have return used oil as a weapon and promise to never do that again. finally, on the issue of price, the truth of the matter on why the price of gasoline flux -- fluctuates, i saw tom daggitt, he would dog the opec oil

producers and producers in saudi arabia. his question was the same? what's the price of oil? what sets the price? the truth of the matter in 2008 when you saw the price of gas rise and the price of oil rise on the market, it was the specklators from wall street who were driving up the price of oil. congress finally understood that when they not only held hearings, but implemented new regulations regarding that. as i mention today, we are here to hear more truth on source, supply, and security. our first speaker is jay pryor, who's going to talk a little bit about partnership and the quest for energy security. jay is presently the vice president of chevron in the corporate business development. he's been at the corporation for 31 years, which is the hallmark and trademark of the an excellent corporation. they retain their best and brightest, he's worked in asia,

europe, and nigeria. he worked at the efficiency center in qatar where they trained science and students on energy and efficiency issues. so jay, please take the microphone. thank you. >> well, thanks, randa, for such a nice introduction. i hope i deserve only half of that. it's a pleasure to be here again, to share with you some of chevron's perspectives that are the dynamics of reshaping our industry. in a role of business development, i spend a lot of times in airplanes. probably far too much time for someone that's a petroleum engineer, but it gives me a lot to think about. a lot of time by myself to really contemplate issues around

the industry, energy consumption, demand and supply, and those sort of things. not to mention the complexity that i've seen in my 31-year career and how much it's changed and become much more complex both from an energy technology point of view, but just the pure geopolitics of energy. the global financial crisis has shifted the focus away from our long-term energy supply issues. but trust me, that issue has not been resolved. people everywhere have similar aspirations. they all want reliable and affordable energy. they want it to be produced responsibly. they want things that energy can provide: light, heat, mobility. and in some cases, 24-hour texts, tweeting, e-mails.

: could be going on by then? that would take a lot of energy, and most of the estimates the world energy demand has kind of gone through a little of this we talk about increases between 30

to 40% by 2013. what's interesting to note is a sizable volume of that demand will come from the middle east itself. in fact, the middle east total energy demand is projected to grow roughly 90% between 2007 and 2030. that will be 10% of the global growth. apart from asia, that will be the fastest-growing region of the world. mr. knees -- middle easterners expected to grow and on an absolute basis match the growth of india to meet those demands projections sound very big. enemy even daunting. the more you understand about energy and its critical or criticality is a building block of economic growth you will understand the sheer size and scale of these issues. the world's energy needs go far beyond the capacity of one

resource for wan technology. as talked about under any scenario, leal and natural gas will be the largest part of that portfolio for at least the next three decades. so what does it mean for us to achieve energy security? well, i think there are probably three things we need to focus on. integration, diversity and importantly, partnership. in a region like the middle east, greater integration can enable each resources holder to have the capacity of developing their resources to the best advantage. we will say more efficiently. what happens when countries realize you get a best economic return on assets by sending resources to the best use consuming them at home when economically abroad there more advantageous becomes a problem.

this is important not simply on individual countries but also on global energy markets. when energy is consumed more efficiently all people benefic. we talked about energy efficiency and hershel from feels strongly about that. internally, we decrease the amount of energy we consume per unit by 20% in the last 15 years. we think leadership in this area is needed when it incorporates diversity countries of all types, all abilities can meet their needs in a variety of ways and approach variety of energy types and resources. of course the question of uncertainty around energy security and supplies don't really involve the resources themselves on a petroleum engineer and there is plenty of molecules out there. instead, uncertainty really hinges a level of collaboration taking place.

this raises third and most important issue of energy security, and that's partnership in a sense, our ability to partner will power the future. to meet the world's future and current needs strong interaction is needed between the ioc, and 0c comer resource holding government, and of course the general public. and not simply more activity, but a greater understanding and an in-depth understanding of each other's issues. we are seeking to increase introduction even as the nature of the partnership gross much more complex. partnerships have always been critical. but from the near east, to the far east, from africa to asia and other regions and between i visited a lot of these over a year and i can tell you some of the issues they think are important. partner countries are going much beyond just seeking a

world-class project is a limit capability or technology or built to even help maximize the value of the resources. many can do that themselves. i think free press release are starting to emerge. in the conversations i've had with a lot of the owners and operators in the region's. safety and operational excellence is now an issue that's discussed openly again. environmental stewardship always has been an issue but a lot more discussion these days about those issues. greenhouse gases, issues around water, land use, all of those are big issues. innovative approaches to energy production and economic development, in other words, power to well hit or how do you get the molecules to be usable in a way communities, and of course the overall world population can use it to read

this is creating a lot more complexity in our traditional park our ships to but i can tell you, let me give you a couple with samples. one partnership we formed was a very new and interesting partnership. in russia we just signed a deal to work on with the black sea deep water area and around the rich. 8600 square kilometers in the russian black sea. this interesting this is close to the resort city, which is of course a warm water recreation area in russia in the black sea. also it will be the host to the winter olympics and a couple years. what they were very interested in was talking about environmental stewardship and how to keep a focus on the right things to develop a new region of deep water in the black sea. this will be the first development in the deep water scenario in the black sea.

accordingly, activities need to be conducted to make it more efficient and make sure that most current, up to date leading technologies for the deep water will be employed in addition to management systems that mitigate any potential for an accident. turning some of the older partnerships. many of you know i've been in this forum before i know prince turki is sitting here in the audience but we have been proud to be in saudi arabia since the 30's. the first discovery there and first production of oil that was exported was in the 30's and chevron was proud to be one of the early partners. we have to keep looking forward, not looking in the past. many on conventional resources in the kingdom pose an opportunity to look at things in

a different way. we are looking at three fields, and in 2004 had produced a around 3 billion barrels in what's called a petition neutral zone between the kingdom and kuwait. in 2009 we implemented a steam flout pilot project first in the world to talk about the fields ability to produce in the carboniferous are for certainly started the injection and we would like to see the results are promising. what's important about this, not only is the technical expertise but the partnerships we have with the kingdom a round the petroleum services polytechnic and supporting educational programs that will empower young people to be a part of this develop from day one. in both cases the meskill

solutions were created for partnerships while securing global energy supplies. we see this as a way of the future, and any color of continued business growth. stronger partnerships create deeper market integration, create deeper diversity of supply and pathways to the greater stability and predictability of co-production. as i said earlier, partnership will power the future. thank you. [applause] >> thank you very much. now we will have a presentation by dr. hermann franssen, one of those names legendary names i heard when i served at the department of energy, someone who has had an extraordinary amount of expertise in the energy industry. he is president of international energy associates, but his previous post of include senior

advisor to the minister of petroleum omon of the international agency. at the department of energy he was director of the office of international market analysis and served at the congressional research service setting those members of congress a little more straight on the issues of energy. so dr. franssen. >> thank you very much. madame chair, i want to thank you very much for inviting me to this conference as you have done on occasions in the past, and if our mutual friends who see what you have done with this conference would have been very proud of how the conference has developed over the years. i was asked to talk about the relationships and of the importance to the world and to the united states. this is just from the statistics, the bible of the

analysts to show the great importance of arab oil in the world, it is 60%, about 65%. it is huge compared to anything else in the world. why am i optimistic about the growth of the demand for oil? the world i was born in was a world of gray hair with 2 billion people and now we have about 6.5 billion people going to 8.5 billion people by 2013. and most of the growth, most of the growth is taking place in asia and countries like brazil. china alone has taken 400 million people out of poverty into the economy and the current plan is to take another 400 million out of the areas into the economy and that requires energy including oil

and natural gas and india is about 50 years or so behind china. they will go through similar cycles. now, what is so good for those who are involved in the oil and gas business? maybe not so good for the political point of view is those countries are very poor in terms of leal resources and somewhat less poor in terms of gas resources, so the need when they go the need to import more and more oil. now this is important. a lot of things on this, but what it shows is the return to normal positions. the 18 twenties and china together are close to 50% of world gdp. the declined in 1950 the reach about rock bottom and about 5% of the world economy. now they are back to significant and perhaps as early as 2020

china will have surpassed as the number one economy in india and likely to be 50% of the e.u. economy. these, ladies and gentlemen, are the new giants and in the process they will need a massive volumes of energy. you see the changes project it will this will do to this sector. look at china, look at the middle east itself because it has enormous economic growth in the middle east is the second largest in terms of the demand than india or asia, latin america. on the other hand, the old world, oecd, we have the problem of the demand in part because of the population growth we no longer have population growth in europe and japan is actually declining. the united states is still going but finally, both mr. bush and mr. obama we have initiated a

once and for all changes from building the the least efficient in the world to just as efficient princeton asia. now changing patterns are going to be very important. china and india together, 2.5 billion people, have 20 billion barrels of oil compared to the 28 billion in the united states and 12 billion in europe. add these giants of the industrial world and the giants china together and compare that with the gcc to read the gcc alone holds up to 5 billion barrels and plus iraq and iran some 750 barrels. what ever we have is a tiny fraction of what he would find in the middle east. between the countries i just mentioned, the import 32 billion in the middle east is the

biggest area of exports of our export over 17 million barrels a day. now, we think we are not going to be in a situation of importing much more oil to the latest assessment of the international agency, and sorry, the eia shows 25 years from now will import just as much oil as we do today. despite massive efforts to improve efficiency despite the efforts to go into the competitive forms of energy. china is expected to go from four to 13 million barrels of oil imports in china from just over two to close to 7 million barrels a day. what does it mean? it means the competition for oil is going to be heating up in the coming decade and thereafter. now, on the supply side, it doesn't look that optimistic when you look at the declining

in the existing provinces. the decline rate has been between four and 7%. i think the companies like halliburton would know a more accurate number but these are the numbers posted by the eia and others. so what that means in the coming century we have to find another saudi arabia in terms of production capacity to meet all of the needs of additional oil in the world. the production you see this yellow area with the iowa e projects we will need for the middle east. we do not know whether they are going to increase the capacity to that level because the way we design debt on the kneal colonial way of looking at the world we do this and then you are forced to do that. it's interesting to see saudi arabia said he didn't really

favor additional exploration for oil. why? because we reserve some of it for our future generations because it is not going to be so much easier to we've away from oil and gas and derivatives and the king is a very wise man. a matter of supply security always found it insulting all the previous administrations talk about replacing middle eastern oil imports. 75% of the imports from the middle east would be the place to 20, 25. then in an address for the national governors' conference and spent a lot of time worrying about the energy because the civil strife because the pirates control the spirits. guerini parents in this room [inaudible] [laughter] and president obama before he became president energy security

requires the flow of money to all of the regions that are hostile to america and its allies and the official left side of the white house in 2009 had a similar type of text. why search christa the? it's been populated to the 1973 embargo. the only time in the past three decades when the supply was disrupted why? because in the middle of the war we've been telling our arab friends to resupply the weapons. that's why it happens and the panic created a massive increase of not so much embargo itself. what about our own sanctions? the sanctions of the market than the embargo ever attempt to do. and what about china's recent policy of the embargoes for

japan. why? it is in the east china sea and the oil for the future society and economy. so imagine that the websites of the kingdom of saudi arabia would have something like we have the dependence on american weapons and food because the american people really don't like us. secondly, it is in a consequence because why, legalese fungible even if we buy zero from saudi arabia and zero from the middle east on the disruption of supply of market forces itself it goes up for everybody. the chinese have the same price of leal as we do and the europeans do. this shows our dependence on the persian gulf oil, arab oil.

it's about 50% of the total import left than 10% of the total consumption of oil. so it is minuscule really. it's not all that big. and trying to reduce it further has another side to it. when he become import less on the gulf also treat less with the gulf, you treat less somebody else will take your spot. i was surprised when i had to give a talk where i spent ten years and when i left oman who was it? china by far. china is in iran and developing a big field in iran. so the world is changing very rapidly. there are those who believe you including our former vice president and other forms of

energy is easy. it's pretty quick. we can do it in ten years. that never happens before it usually takes about half a century to do this kind of a job. it is a massive effort i believe it is going to take as many decades to achieve that and we still need to improve the lot. we have been very good in moving efficiency so we are going to have much more efficient guards in the future, but i have some doubts we're going to see a rapid increase of the electric and driven cars and post 2015. i'd just don't see it coming, but it will happen, and even in this scenario you still get the same number by 235 as we have today. all of this depends the transformation to the forms of

energy of the massive government infusion and the technologies because they don't pay for themselves. you have to subsidize them. here you see under jimmy carter how much we were spending on r&d. we were no longer the leaders and we did do nothing on which the gum but there is of the new technologies of others. we see this kick up their a the end. following the program that's not squinted be the same growth in the enclaves for the new forms of energy and we have in the congress coming in in november these are the areas they're going to attach, so forget about these massive increases. i just have to go very quickly to the conclusions. the conclusion basically adds that the demand for oil is fascinating and it will continue to grow rapidly outside particularly in asia and the oil

production is reaching a plateau and this comes from the likes of the head in the jim schlesinger, and a lot of other people, so don't dismiss it likely to read that means the growth of additional tools and leal in the future will come from the middle east. the transformation is going to to lot of time and as a result of it, we are going to see more dependence on the middle east in the decade ahead until we succeed in the transformation process and we are going to have major rivals in china and india and others with access to that oil in the middle east. so, china is already at par right now in parts of saudi arabia that in a few years' time

china will import more than we do from saudi arabia. so supply security has already dealt with the last point is the future supply depends on stability in the region and much have been discussed in the last day and a half. the u.s. hasn't contributed as we have heard from the various speakers. we are part of the problem. we have not been the broker in the conflict as we heard on the previous panel. and we have seriously upset the balance of power in the region by the invasion of iraq. isn't it amazing to see that maliki had to go to your on to form an alliance with a person who is like much -- muqtada al-sadr in the diplomacy of mr. mahmoud ahmadinejad, so she

owes mr. ahmadinejad a great deal and having achieved that. and instead of coming to washington, tehran and what a difference. the other is the alliance which has made by people in the region but host just use one when he was the prime minister of russia, and he says then when we have alliances every as a writer and a horse, and russia will always be a writer. unfortunately in the alliance we have is one other small ally in the region we have always been a horse, a belgian horse to read we want to have continued access in the future we need a stable

middle east. and the stable middle east closer to islam. thank you very much. [applause] >> thank you, doctor, for that comprehensive presentation. next we are going to hear from rayola dougher, senior economic adviser to the american petroleum institute media relations department. i know all of us here in america greatly appreciate the work of the american petroleum institute and educating the american public about petroleum markets. in this capacity, rayola serves as a principal spokesperson in the media, and she's often found testifying in front of congress on these issues, which is not an easy thing. prior year to the american petroleum institute, to rayola was with the institute of analysis, and she is also very involved in the oil and gas

industry in working in court in the american petroleum institute on educational issues. so rayola, thank you so much. >> i'm hoping when i get up here my slides will magically appear. they haven't yet. >> so just bear with me for one moment. >> well, i'm going to bring it then. it's nice to be here. it is an honor for me and as some of you may know, the american petroleum institute is a national trade association for u.s. oil and natural gas companies. and we have about 400 member companies and they represent all aspects of the business. and the u.s. oil and gas industry supports over 9 million jobs in the united states. we can't for over 60% of the nation's energy needs.

we pay hundreds of billions of dollars in taxes that goes to the federal and state government, and since of the year 2000 we have invested almost $2 trillion in u.s. energy projects. what happens to investments and the resources are critical to the united states energy supply. and when we look to secure that supply it is within the context and the framework of the world's energy market. i'm going to go ahead because i have a nice picture of the world. let's see. here we go. and i really like this because i think it really helps underscore the importance of energy and the quality of our lives and most of us take it for granted. we come home at night, flip on a switch and it's there, its magic. but for an estimated 20% of the population of the world, don't have basic access to electricity and there are women in africa

today that sent several hours a day collecting firewood. so it is clear energy really is in the economic growth. it creates more jobs, higher income and better quality-of-life for all of us. and when we look to the global energy consumption outlook, we are going to be challenged to be able to sustain this economic growth but it does look somewhat optimistic going from $63 trillion of the world to 104 trillion to it almost doubling going from 500 of energy to 739 in just another 25 years or so so that's going to take a lot and it's going to be a challenge for all of us and i think the formula is pretty simple for the united states. it's the implementation that's the challenge and that is to consume less, provide more come supply more and invest in these new technologies.

and when we look to how much energy the country's use it is a function of a lot of things. our wealth, whether and a lot of other variables. the united states uses less energy on average per capita than the rest of the world which kind of surprised me a little bit. japan of course, we are way ahead of japan, behind china in terms of consumption per dollar of gdp. and we have been proven all lot over the past 20 or 30 years or so. we use about 42% less energy for every dollar we produced. and moving forward, we are the department of energy is looking to our gdp almost doubling it in 25 years. our population increasing by about one-third, and yet we are on a path to consume about 60% of the industry we do today. and that's the good news in the sense that our biggest source of

supply moving in the future is going to be saving energy. it's going to be consuming less. without it we would be on a half almost doubling our energy consumption in 25 years. and instead, we are going to increase may be another 15% or so, 14, 15% but if you look at the chart you will see most of the energy we use today, and even most of the energy we are going to use in 25 years is going to come from fossil fuels over half from illegally and natural gas. and the picture for the world is no different. except slow for the curve. it's a little also and kind of exciting, too, if it plays out this way in terms of the economic growth happening and taking off and the rest of the world. it just really comes about but it's going to be a terrific challenge, and there are some who you can hardly see the world, but it's behind their. there are some who proposed one

way to enhance america's energy security is energy independence which is code for getting off of oil. and i think a lot of the support for this notion comes from the mistaken idea that somehow we can isolate ourselves from the world's oil market, and in fact, our security lies exactly in that marketplace. it lies in our mutual interdependence, it lies in supporting and encouraging the relationships rather than china over them and it flies too in a variety of options in terms of diversifying our sources of supply. most americans are pretty shocked to know we get most of our supply from canada, and we do have opportunities with the development of oil in canada to move forward with them and place of their imports if we so choose to do so. we have a lot of resources in the united states and we are

very aware among the countries of the world in terms of keeping a lot of these resources off-limits to development and we have options in that regard, but we will never be totally energy independent in terms of global oil trade challenge at the head we are going to need about at least according to the department of energy 26 million barrels a day more in 25 years than we have today. it is the equivalent of all of the allin north america. interestingly they show enough to take a little bit in the united states supply and a lot of this will hinge on development offshore areas and the rest of the country. but the biggest development in this country has been in the development of unlocking shale gas. it has been in the past war, five years has been a big game changer in terms of our region of the energy future, and the

shale in the texas area right now is providing about 6% of the energy we use and forecast for a conservative forecast looking shale in pennsylvania, york and west virginia show that they could actually provide about 15% of the natural gas the nation needs, so it is the enormous and it's very exciting for us and for our energy future and in terms of natural gas use, the growth of natural gas is going to be even faster than the growth in oil worldwide. again, you can see a lot of the growth coming out of asia, but the united states is still plays to add more to the supply than we are to our demand. and investing of course is the third tier. investing in new sources of energy, new technologies, the oil and gas industry invest more than any other come all industries combined in a new low carbon emitting fuels and technologies, and from her body

ovules to allergy to wind solar geothermal we have about $50 billion since the year 2000. out of a total of $133 billion. in fact one out of every $5 spent in the united states on the hydrocarbon is being spent by oil and natural gas companies and we hear an awful lot about green jobs and green jobs and let's get off oil slick and a green jobs. we are the biggest investor in green jobs in america today. so we are all for them. this chart is from exxon mobile by like it. it shows the united states share of the fuel, how we fuelled the country since 1859 with forecasts going up to i think 2030 or 2035. if you think about 100 years ago or so, coal was king and the turn of the last century and there were articles of the time worried of running out of coal

and us today many people are worried about running out of oil just think the changes if you were at the start of a century ago and you were looking out to the future, just think all the changes that happen and that century the cars, the automobiles, the men on the moon, our communications system have the instant communication with one another. the have no idea what was coming and i think if anything that is now accelerating in our lives, and we have no idea either, and that leaves me very optimistic actually about the future because i feel we have a lot of possibilities. we are going to have technologies we have not envisioned that are going to change our lives moving forward but in the meantime, we are in the present and transitions to take time. and we do need elected appoint officials to understand the challenges we face as a nation, the challenges we face as the world to fuel the future and we would like to see them focus on

increasing production from all sources of fuel and encouraging that production, encouraging energy efficiency, encouraging investment in new and renewable sources of fuel and technologies, allow the markets to work. they are much better than the government doing this efficiently. refrain from the new taxes because if you have more taxes you have less investment and you have fewer supplies. we want to grow that tax base and those jobs and we want to grow that energy and finally, recognize and support the need to produce it in a global marketplace. because of the end of the day we are all in this together. thank you very much. [applause] >> thank you, rayola. we will now have the question and answer period. we a fabulous questions from the audience and i think we will only have time for one of peace it looks like, is that right? so i'm going to start with a fun

question since this is such a fine panel. this is for you, dr. franssen to the obama administration is having a heart palpitations that the presidency of opec will be assumed by the country of iran. if you were advising the u.s. administration what would you tell them to do? and if you were advising opec what would you tell them to do? >> the u.s. administration said that there is no consequence so don't do anything. it really doesn't mean anything. opec is like nato. an organization which includes luxembourg and the united states opec no one with a cloud of spare capacity to can enforce what opec wants to do, saudi arabia. and saudi arabia has concerns

from the gcc partners. so taking that into consideration i'm not worried because the real power rests with the gcc and so. yeah. saudi arabia has been extremely responsible manager of the global oil markets. many times the disruptions of supply had a spare capacity and we get used this time and again to reduce the upper impact on prices. they did not succeed in 2007, 2008 because the demand had grown so rapidly that the demand was surpassing supply. there was about 2 million barrels of the spare capacity for 1 million barre cay to refine it so the speculator is then came into the market of the financial institution and pushback on $50 a barrel.

but the role of opec is still run basically by the gcc and by of all the confidence in the gcc and saudi arabia to make sure that we remain moderate, reasonable for as long as we can, reasonable why? $60 today is the marginal cost of developing and finding and producing new we'll this from deepwater. so the current price is slightly above the marginal cost of finding and producing an additional barrel and is very closely observed by our friends at the gcc. stomachs of the obama administration has nothing to worry about. speed, this question is for you. can you talk about the impact of the bp oil spill on the american petroleum industry and any of legislation that congress either has passed or intends to pass during this lame-duck session regarding the fee address of this particular problem?

>> it's had an enormous impact on the oil industry. first and foremost it came as a big shock to all of the people who work in this industry that it ever could have even happened to read and our decades in the gulf of mexico we have struggled over 40,000 successfully, over 2,000 in the deep water. so the fact of this incident really took everyone by surprise. what we've done is an industry we've gone back with four different task forces and looked at offshore safety again, the control, the blowout preventer, you name it, and gave recommendations back to the government in terms of tightening up whether any gaps in the system, how can we make this a safer, how can we make it better and so we have been working closely with the government on this. this is something the american petroleum institute has done since 1919.

we have over 500 recommended practices and we are constantly revising them as technology evolves. but our concern now is that this moratorium, although the moratorium has been lifted its eight to facto moratorium on the industry because the permitting process are concerned it's not going to be done in a manner that would allow was to get back to work sooner than later. when we look at the shallow water to others they didn't have a moratorium yet the permitting process has been slowed down in the past six months the of had permits prove on them and 12, a dozen or so approved. normally that would be done in the amount so that is concerned about that and concern about legislation moving forward. but this is going to mean a specially liability limits if there is no liability limit, and some in congress have proposed, what this could mean is that it could put a lot of drillers out of business in the gulf of

mexico so we have to have a better formula than that. but at the end of today, i think we are going to end up with a safer industry and we are hopeful we can move ahead sooner rather than later and getting back to work in back to bringing the energy the nation needs. thank you. >> thank you come rayola. jay, we have one last question for you and i will read from the cluster. it is well known the future stability of iraq depends upon the ability of the international oil companies to rejuvenates iraq's leal ministry. however, 20 years of the embargoes and sanctions mean there is very little experience in iraq with the iraqi people within the ioc. what are they doing it or need to do to ensure their efforts are coordinated and complementary in putting iraq back to its rightful place both as an oil producer and a powerful ally in the middle east? >> very thoughtful question. i think it touches on a lot of

dimensions of our industry. that are probably misunderstood as a certain degree. many of the ioc and resource holders, when you think about the importance, generally a lot of technical people, not a lot of military strategists or security people employed in these companies, and i think what is very important to understand is long-term stability is very important energy development. so it is price stability, capital to the market, security, stability to create transport sectors and infrastructure sectors to support anything from roads, bridges, pipelines, power, your name at. that'll takes people. people is the common denominator of our industry. we began training iraqi people right after the bullet stopped flying the first time and we

trained over 1,000 iraqis outside of iraq and the new technologies directly applicable to the gas production, not the other industrial things but very much what you have to do in any circumstance you have to employ local people and bring up their standard of living, standard of education, ability to help in the process. note ioc is going to come into this. it's not possible to do it that way. that is an old fashioned into a realistic way of looking at things. as a doctor earlier, partnership is the key to work directly with the iraqi people and their neighbors in the region they are going to be very helpful in this process i believe. the ioc has a role to play but it is a long-term process. don't expect miracles overnight. i probably made ten trips in iraq the last three years personally feel like there's a lot of progress being made if we are allowed to be in the right

environment in the region that you will see development of that resource. over the next ten or 20 years it won't happen by next week or next month but over the next ten or 20 years that industry will be back to its normal place in their region. >> terrific. thank you very much to the panel. it was a terrific overview. [applause] fall of the issues. now that we have the audience educated on this issue let's go out and educate the american public. >> thank you. we have time now for a networking but a word of thanks to c-span, which is filmed all of yesterday's proceedings and today, and while we have more than a thousand people who registered for this conference an all-time record high, c-span alone has enabled millions more to view these proceedings, so we are fortunate and appreciate that. now it is not working time.

-- sorry, sorry, sorry. thanks for that conversation introduction. we transition now to address our james. sorry for that slip up.

and provide a boost to defense

contractors. we spoke with the bloomberg news reporter about his article on the subject. >> changes on capitol hill. republicans gaining 60 seats in the house. they also gained a majority of the chairmanship in the committees in the house. one of those committees is greatly affected as a house armed service committee. toni writes for bloomberg years, covers defense issues for the publication. that web site and has an article about what may be a hit in the house armed services committee as republicans take over. tony, first of all the loss of members including the chairman, ike skelton, what does that mean for the structure of the committee? >> one thing this is the republican version of the bomb. you leave the building standing but wipe out the democrats. one thing we will definitely do is give the new republican majority is stronger hand at reshaping the oversight agenda on the committee. and some of the procurement modernization priorities i think

because you wiped out the senior leadership of the democrats so this is going to strengthen the hands of roscoe bartlett of the world, the chairman buck mckeon, walter jones, mark four and -- thornburn. >> defense secretary robert gates talked about cutting defense spending back in august he announced his plan. is the house armed services under republican leadership now likely to go along with that view? >> they are going to look at very closely gates plan. this is a shift of dollars from overhead and administrative costs into weapons, procurement and research. this is oftentimes a very fuzzy mess, and the republicans in the budget comes in in february, they are going to be very carefully scrutinizing whether in fact savings or shift to weapons and research counts.

>> u-boats republicans may take a muscular approach towards china. explain that. >> my impression from talking to some of the members, they are going to emphasize more strongly than the democrats keep received real and perceived threat from china's is asymmetric weaponry and research, cyber warfare, the new anti-ship ballistic missiles, supersonic cruise missiles that can go after a u.s. carrier and vessels, they are going to look more closely and stir the debate on whether china's modernization would reshape some of the u.s. priorities, procurement and research priorities to counter those perceived and real threats. >> what about the policy issue that's been out there, don't ask don't tell, it's going to happen with that? >> this is curious. back in may when patrick murphy, who's been defeated -- >> from pennsylvania.

>> when his amendment passed the floor in late may, only four republicans voted for it. the sense i was getting at that time was the work are giving -- the republicans were against the nature of what the democrats were doing. the republicans seemed to want to wait until the december 1st review firms the pentagon before they make their mind. but questioned the leadership should be pressed on is are they supposed to read healing the don't ask don't tell, or are you basically waiting to make up their mind for which the pentagon review? debt is still an undecided question. i'm not sure what the answer is at this point. >> what about a timetable, is that done in the lame duck or the 112? >> the december 1st is supposed to be due. congress is going to be in session apparently until early december and a second there's going to be the lame-duck session from 50 to the 19th and then they are coming back again. the house any way at the end of the month.

that would leave -- they would leave like december fired. that wouldn't leave a lot of times unnecessarily this is going to take until next year and it is going to be a tough sell for the administration, but the gop leadership position on this needs to be fleshed out. are they waiting to make it a little bit decision based on the pentagon report? >> tony covers for bloomberg news and you can read it bloomberg.com. thank you for the update. our coverage of the national council on u.s. air relations continues now. in this 35 minute portion the u.s. ambassador to saudi arabia

on u.s. policy in the region. [inaudible conversations] ladies and gentlemen, please you can bring your coffee to the table and your seat. we are going to comments this morning session, and we have the distinct privilege of having the deputy commander of the united states central command, lieutenant general john allen, a united states marine corps. we have an unusual situation where he is a graduate of the united states naval academy with honors, and we have raising this morning's session as yesterday,

and a quarter of a century later, plus one he became of the naval academy the first marine corps officer in the history of the institution to become. as before he's an intellectual and academic and an educated in addition to being a commander in a leader of the men and women in our armed forces those who have been deployed, mobilized in the forward presence general allen. [applause] >> thanks very much for that terrific introduction. it's great to see the cadets this morning. from my understanding vmi, had my picture taken with them. i was honored to have that happen by the way from the institute and west point and the naval academy. we will see how that goes a little bit later, what we?

es dr. anthony said, i was the first marine commandant at the naval academy. i have been so far the only marine, of the naval academy and my knee classmates from the class a bicentennial class of 1976 say they will call this the great experiment, and we will see where that goes. i would normally get undressed up for a conference like this. [laughter] it certainly is worthy of a little bit of polish on the morning light today. but i have to apologize to you from the outset i have to walk straight off the stage to go to the retirement of our great 34th, thought of the marine corps and then immediately into the change of command between our great general jim conway and soon to be institute general jim amos. so with that -- [speaking in native tongue] it is a pleasure to discuss with

you the future of arab-u.s. relations. given my profession, my current assignment, my personal experiences, i believe that there are a few areas of more critical importance to the nation than having a solid understanding of not only where we are, but where we see our relationships with progressing in the arab region. before i begin my remarks this morning, and because of the central command region embraces so much of that portion of the middle east that is home to our arab friends, i would like to take a few minutes to describe the u.s. central command in our area of responsibility. centcom, as we call it, is both the smallest of the six regional u.s. combat commands, and as we are proud to note the one with the greatest number of challenges. the region embraces 20 countries from egypt in the west to kazakhstan in the north, to pakistan in the east to yemen

and the water of somalia in the south. it's an area of more than 4 million square miles, three major economic and geographic chokepoints, the suez canal, and the street. and a number of regions, areas in that portion of the world where the central government's strained with varying levels of success to extend their writ of their authority. sometimes it is called under government species. but that's really not the issue. it is this training of the central government to extend their rich because in those on government spaces there is some form of government. our region includes 530 million people from at least 22 major ethnic groups who speak 18 major languages and in a new marble dialect. and they ascribed to four great religions. the 64% of the known oil

reserves and 46% of the known gas reserves, the area is abundantly rich in energy resources in a desperately poor and in fresh water. .. with little economic hope. central command is of course overseen major operation in iraq

and afghanistan as well as a wide campaign against al qaeda and its extremist allies. overall though, at central command region remains an area in which the most pressing security challenges include transnational extremist groups in states that pursue destabilizing actions. that is of course but one of the reasons that we keep a very close eye on iran. these are the challenges on which we all focus our efforts every day, recognizing in some cases there are combinations of transnational groups and state, particularly to stabilizing actions and projecting those on other states within the region. indeed, the nexus of the challenges were sovereign state support militia proxies or extremist elements in other countries, that nexus is of

particular concern for us. and never region that concern is shared, not you shared in our region, but shared in the adjacent regions and certainly in our homeland today. however, even while we're concerned with these challenges and continue to carry out two major military operations, building enduring partnerships in the region is a major goal of the central command, helping to increase the capabilities of other nations security forces to address the challenges endemic in the region. nearly 200,000 u.s. military personnel and tens of thousands of american civilians are deployed into centcom's areas of responsibility. connecting mostly multilateral operations, we've run the gamut from extensive counterterrorism and counterinsurgency operations with a number of like-minded nations to active counter piracy, counternarcotics,

counter human trafficking, operations both at sea and ashore, but just as importantly we are engaged in stability and report engagements with the fragile government. in humanitarian and disaster relief operations throughout the region, pakistan comes to mind immediately and the tremendous flood that is in many respects change the political dynamic. you may be thinking this doesn't sound like the domain of the military. and do the differences between some of the traditional functions performed by the military and their state department, those traditionally dvds of state and defense have in fact narrowed over the last decade. consequently, we remained very close court nation and in cooperation with their state department colleagues not only in this town, but also many embassies throughout the region. and we work very close to oppose government agencies will conduct an military exercises, as many as 40 year in our region coordinating substantial

security assistance efforts throughout the region. there were such a large number of potential topics to discuss this morning, i like to discuss the close ties to centcom and by extension of the united states enjoys within the area of operations and the hard work we have committed to ensuring these relationships remain vibrant and strong. i like to begin by technology my admiration of the national council of u.s.-arab relations. your tireless work has done more than stabilize and improve the vital understanding of the larger american population regarding the contribution of arab-americans. it's done more than not. it is also improved our understanding of the nation of our air brother in the middle east. now i've surfed in and out of the middle east region for much of my career, but how my life changed dramatically after my service in iraq's anbar region

for all of 2006 and 2007 and part of 2008. as you may recall, this period was during the darkest days in the violence in iraq. and while we were in anbar, we thought to empower the arab population there, to resist the ravages of al qaeda's onslaught. during this time, i was personally in motion, traveling along together, and along the sheiks with political and business leaders in doing so not only in our ahmadi and falluja and baghdad, but also in amman and doha in dubai. the counterinsurgency battlefield on which we thought to be and not just al anbar, not just iran countries in the region. without exaggeration, i can tell you during my time in al anbar, i grew to deeply respect the

people of the ancient arab tribes, arrayed along the great euphrates river in the western district. specifically i came to admire the resilience, their spirituality in their faith. i came to respect their courage and almost without exception, their uncommon fighting capabilities. in the end i would come away from the experience changed man. changed for the better. for my exposure and for my immersion in the air of culture of al anbar. that admiration continues today in my current duties. i'm completing my 40th year of service in 2011. these will have been the best, the most formative experiences of my career. all this colors my dedication to our relationships in the region. our relationships with the arab states into centcom's area of

responsibility. so this gathering, the area of policy makers confirmation in the u.s.-arab relations has posed the question, arab u.s. relations, going where? so we're all clear centcom is not a policymaking entity. certainly the command participates in policy formulation when were invited by the policy community, but centcom's role is primarily the operationalization of policy and it is here where perhaps on the ground in the arab middle east, where part of the answer can be found to where arab u.s. relations are headed. while there are many and constant challenges, frankly i'm personally optimistic. without hesitation i can tell you that centcom's previous commander, general david petraeus and its current commander, general james mattis

are dedicated to forging a close as possible relations with our arab friends and partners in the region. in many years of service as men have given to the region have led them to the same conclusion. centcom remains committed to the security of our arab partners in the region can do our military to military relations with the two deep in an improved arab u.s. relations with virtually every arab state in the middle east. now this isn't a recent phenomenon. relations have been improving for years under the noted leadership of a succession of centcom commanders. one of them in particular is here with us this morning, general joe hoare, who did so much to facilitate this gradual, substantial improvement, a function of constant in constructive engagement and it has underwritten and it has reinforced a clear u.s. policy goal to enhance u.s. relations with the arab world.

and while there are sometimes truly formidable challenges in our relations on the whole, the military to military relationships reflect commonly shared security goals, aspirations for the region and also reflect a growing concern over the rhetoric and actions of iran, particularly over its nuclear program. arab u.s. relations have evolved dramatically since the period of operation desert storm, following september 11, 2001 and including regional support to operation during iraq a freedom. against this backdrop and in the aftermath of oif, now operation new done in iraq, we are in active conversations with our friends and partners about what the u.s. regional posture should look like in the golf and in the middle east over the long term.

simply put, the u.s. will not depart the region. indeed we are committed to long-term political and economic stability. we're committed to the sovereignty of our friends. we're committed to the free flow of commerce and energy resources, not just in the region, not just for the region, but for the global economy. our presence over the long-term will be be an unambiguous emblem of u.s. commitment to the stability of the region. as we discuss america's long-term posture in the middle east, all of these factors, particularly the sovereignty of our friend and their political and economic stability and viability will figure prominently. not to give purpose to these close relations and provide for increased capacity and interoperability with our partners, we have undertaken the development of a regional

security architecture, designed to serve as a construct within which our partners will strength and national and regional defense capabilities. this is done by building networks of systems and activities that enhance regional security and stability. over the past two years, we worked closely with the countries of the arabian peninsula as well as others of our regional partners to develop this constant -- this construct for addressing common security challenges. it is important to note at the outset that participation in the regional security architecture is a sarver decision of each participant. there are no treaties. there are no binding formal agreements. it is simply common sense security apparatus put into action and here's how it works. theoretically the architecture's core focus involves protect teens in improving our mutual defense capabilities,

strengthening our bilateral cooperation, developing interoperability and even achieving regional and multilateral capabilities. practically, the regional security architecture is made up of an array of major activities, the centerpiece of which is the shared early warning system in the growing and increasingly potent integrated air and missile defense network and development with our goals and regional partners. our nation suffers have developed for several intense and nations is plural with an apostrophe, to resist coercion and deter aggression, to counter pull operation of weapons of mass destruction and related technology, to combat violent extremism and terrorism, to counter piracy and to the said

trafficking, including the tragedy of human trafficking. to defend lines of communication including economic trade, to secure borders and infrastructure, to provide humanitarian assistance and disaster relief and to conduct both the preparation for and if necessary the execution of consequence management. a lot of activity. in support of this growing security architecture, many countries in the region actively participate in an extensive array of ground, maritime, aviation and special operations exercises, each designed to respond to different types of no and emerging threat. these major bilateral and multilateral exercises, as i said before, about 40 year, known as bright star, eagle resolve, iron falcon, cheval and are in a regional exercise,

eager line help strengthen each participating country's ability to maintain security inside its own borders, protect critical infrastructure and create or enhance interoperability with united states forces in regional militaries is a joint undertaking, particularly in deterring regional aggression. the partnerships that have evolved from these activities have contributed directly to improving our overall effectiveness in ongoing multilateral operation and security initiatives. ultimately, the net outcome of these efforts has been the establishment and the refinement of mechanized rooms and capabilities, which while valuable in coordinating activities in one area, such as encountering piracy and smuggling, frequently provide enhanced capability and flexibility to address crises in other areas, often for example the progress made in generating

cooperation for one set of issues will have symbiotic effects elsewhere, such as disaster relief capabilities improve the nation's abilities and consequence management, thereby promoting greater individual and collective capability. now in conjunction with the efforts already mentioned, centcom through the department of defense has also worked hard to increase significantly the numbers of personnel from the region attending programs such as the international military education and training programs. you know it as i met. this program in case you're not familiar facilitates the attendance of foreign military, usually officers at u.s. military schools. the benefits of the trainee program, which is ultimately a strategic investment in ideas and people is that it allows us to better understand each other. it increases our friendship. and in crisis, enhances

coordination and interoperability. i own view is that this increase of our own exposure to our arab friends at u.s. schools has been nothing but good for the u.s. military. and i believe because of that, for the region. we will continue to endeavor to increase the quotas wherever and however we can. another aspect of the regional security architecture, one that is boosting significantly the individual and collectible capabilities of regional arab militaries is the development and the proliferation of centers of excellence, which focus u.s. and regional expertise in key capability areas. for example, special operations and air warfare, and integrated air and missile defense, command and control in maritime security and others.

located on distributed across the region, the centers of excellence, sunbelt and some to be built are increasingly upping the game of the qs with our partners. with interoperability, oracle centers are and will be increasingly to permit state to come together at an individual or collective level for combined training that is simultaneously of high-quality, cutting-edge and economical. while there are other powerful aspects of the regional security architecture, aspects i could discuss this morning. i'm afraid time will permit. this morning i spoken about relationships and cooperation and how we the u.s. central command are forging partnerships, both bilaterally and multilaterally as a means of responding to common security challenges, concerns about.

as he built the regional security architecture, we've done so mindful of the ancient history, the sovereign and celebrated pride the arab people and their governments. one lesson we may draw from the tapestry of the sweep of greek history of our arab peoples is that when various elements of the region have interacted and work together, some have evolved to be far greater than the parts. this is in fact a bit like the effect of a spread of one of histories great mathematical discoveries, the arab invention of such a, the notion of zero. it was an invention in which all of we shared. i hope the kinds of today and the military to military cooperation will create further opportunities to enhance not just the region, the remaining

portions of the world. at gatherings such as this there must be inevitable debates over policy. this region is beset with crazies. it is a known little piece during the last century and precious evelyn this kind of one. it will be not contacts for policy both ancient and contemporary to be blamed for the situations we all are facing in this region today. but if we are looking for bright lights, and for seeking examples of who operation, where policy has in fact given birth to encouraging trends, i suggest that the security architecture and its component parts is evidence of the direction of arab u.s. relations today and over the long term. with this in mind, we like to emphasize that the security efforts have been pursued by our

arab partners are facilitating not just a regional, but a global security environment that enhances, increases confidence among nature, approves deterrents in nature defense in enhances security and stability. these are global or returns on investments of our friends. u.s. central command is honored to work closely with our arab partners as we address common security challenges. and we have done -- as we've done frequently as of late, we encourage our arab friends, the arab states of the region to embrace and to help shape the increasingly capable iraqi security forces. much can be done within the context of the rsa in conjunction with our partners to bring iraq into the strong security relationship. we can all acknowledge that much remains to be done in the formation of the government in iraq. however, knowing the iraqi people as i do, i'm optimistic

over the long-term how this will turn out. we would encourage our arab friends now to embrace and as they can come enhance iraq's security capability. such a step would undoubtedly hope the region as we continue to draw down american formations under operation new don. when i started my comments, i told you we were the smallest of the u.s. combatant commands, but with the greatest number of challenges. and that is certainly true. i've never seen the bottom of my inbox. however, we've experienced throughout our area many success stories, reflecting close, long-standing relationships, dedicated regional partners who were intimately involved in are many efforts to set the strategic stage to support our common cause. so on behalf of of the 200,000 u.s. servicemembers and the tens

of thousands of american civilians serving in centcom, i want to thank you for your participation in this important conference. again, thank you for the opportunity to visit with you this morning. can't [applause] >> thank you very much. well presented, well thought out, well organized, well articulated presentation. this is one of the finest we've had of the serving military officers in the history of the conferences. the general has agreed to take a question and it has to do with the horn of africa area and the distinction between the newer command of africa command. and particularly with regard to somalia and piracy as well as

gehman and these weekly and sometimes daily in the news, if you would elaborate on this. and from the gehman side of it, but there are many proposals to enhance the security side of the relationship, some even more than a billion dollars that people are talking about. but from a disk, the more fundamental massive and pervasive human needs that impact the security and stability have to do with the countries in the population's economic and social needs, which may be beyond central command, but would invite your comments nonetheless. secondly, with regard to the piracy issue, it costs according to one source, $50,000 for each transiting of that area in insurance costs. and this is an enormous effect to those omissions, which people

would protect the economic interests, not just the political and the social stability interest there. $50,000 in insurance, which goes to the bottom line of the shipping companies and the international oil companies they are. and tacked into that is what if there is a fiscal budgetary congressional cut and the overall defense allegations appropriations -- how will that affect your mission, including afrikaans and this horn of africa area of yemen, djibouti, somalia, sudan? they are all wrapped into that one question of the horn of africa area. general? >> that was masterful. had to tell you in that one question i have six requirements. very well done.

the punctuation as the belt that. [laughter] first, let me talk a bit about afrikaans. it is the newest of the combatant commands led by general kip ward we shared for some period of time a number of state and in october of 08, the states and the horn of africa moved from centcom's region to the africom region for the military planning and engagement and so on. when we are at our best, and are relations between combatant commands, the boundary that people draw on maps actually blur. and we talked to africom every day about not just the security challenges, but frankly the security opportunities.

and we never miss an opportunity to partner with africom in developing the capacity of the states in the africa command. but on those occasions where there are shared security concerns, we also may partner with africom and the shifting of forces across the region. primarily naval forces and often assist either the piracy. piracy is a major concern and nausea to discussing the horn of africa and particularly somalia. somalia of course has in many respects lost the capacity to extend a writ of government virtually anywhere in that country. as a result of that, there are larger people would call ungoverned areas. and in many of those areas there are predatory on better conduct piracy, both in the gulf of

somalia, the gulf of aden and in the indian ocean some of the abilities to get deep into the indian ocean has been quite startling actually. the good news is that the international community is embracing the issue of encountering piracy. and from the lanes that have been established for the secured transit come out of the bott altman to, passing through the strait of the gulf of aden and into the larger and the notion, there are often maybes from as many as 10 teen countries operating in close cooperation with each other, close cooperation with each other to provide passage. however, there will be occasions, depending on the conditions of this he stayed in the time of the year and the direction of the month, et cetera, when the pirates will have success in closing i am

confronting a particular shape. and in that regard, the fifth fleet, the united states navy has dedicated not a small amount of time with the maritime industry talking about certain best practices that could be embraced by the maritime industry and particular to provide for their security, such things as barbed wire along the gunwales. the moment you see an unidentified mall boat approaching, going to maximum speed, varying your course and if necessary, hiring armed security crews. where we have seen best part is this exercise, we have seen that the rate of piracy to be very low. meanwhile, the ships of our friends from europe and asia and from the region and the united states have done a pretty significant job, we think. it's not always successful, but it has made a difference in

reducing both the rate of piracy and the success of piracy. and so we take that to be a very serious mission, even though we are facing probably more austere times with regard to our budget. we don't anticipate any reduction in the attention that of centcom and africom will pay to this particular issue. it is about the global economy. it is providing for freedom of navigation, which is our great navy and we will continue to embrace that. with regard to the horn of africa in general and yemen, we be yemen as a friendly state. we have close relations with the government there, president saleh. we have worked very diligently at central command to do what we can, with yemen to assist yemen

and its efforts in counterterrorism. al qaeda in the arabian peninsula has emerged as a threat organization of violent extremist organization with significant reach and we know that yemen seeks to deal with that terrorist threat. we are working closely with yemen, not just in the area of counterterrorism, but seeking to help yemen to create greater capacity and capability within its conventional forces to provide a security environment in which we can do the next important point that you mentioned a few moments ago, doc dürer, and that is provided for real developments in that country. the state department led by ambassador first-team, who was recently arrived in some has a long-term development program, which is intended to provide yemen and the assistance that it needs in conjunction with other

states in the region who are all actively engaged in supporting yemen, to provide for development, to provide for improvements in agriculture and water management. and in doing so -- and he won't be able to do so until the ri