you can see the supreme court page. joining me now at the table is robert nichols, president and coo of the financial-services forum. i want to begin with the whole tax-cut bill because that will be on the senate floor this week and maybe in the house. i just want to show viewers a "the wall street journal" on friday. the headlines -- companies calling to cash. coffers swelled to 51-year high

as cautious firms put off investing in growth. there is a piece in "the new york times" about the deal. while it will cost a lot, it is likely to get very little bang for the buck. tax cuts for the wealthy will barely be spent at all and even middle-class tax cut won't add much to spending. guest: well, i don't agree with him on all the elements but i've will provide maybe some big top line observations. but albert had a poll last week that talk about bipartisanship -- bloomberg had a poll last week about bipartisanship and i think this is a good first in that direction. my view is a higher tax on capital would discourage investment, and this deal would make sure there is not a higher tax on capital.

if there is a higher tax on dividends than might be -- companies might provide less dividends that could hurt investors across all income streams. seniors, of course, gaining the lion's share of dividends so this will protect them in that area. there are a lot of folks that have a philosophical disagreement with raising taxes during a recession. another observation, small businesses, of course, are huge job creators and many small businesses file as individuals so this would keep taxes on small business is down. there are a lot of differing views on that agreement but i actually think it is an important first step in bipartisanship. also, "the wall street journal" today had a survey that i did not know if you -- if the obscene, they interviewed a group of economists all across the ideological spectrum and asked what your views on the economies are now. they asked them to after this

tax bill was announced. the majority of these economists have a more rosy scenario, they actually think gdp growth will be actually greater next year and a chance of a double-dip recession are less. in terms of taking a bipartisan step toward helping the economy move forward i actually think this is probably a good first step in that direction. host: "the wall street journal" headline this morning. president obama will convene a one-day summit of corporate chief executives wednesday as part of a renewed white house effort. the second paragraph of the story -- nine why are companies holding on to the money? guest: they were on the summit. first of all, we think it is actually a very important thing. we would like to see that the week -- and the relationship between the business community

and the administration strengthened. we would like to start in the new. obviously there have been frictions between some industry sectors and the administration over the last couple of years. we would like to see as a fresh start. we do see it as a common goal, getting the economy moving again, getting people back to work. that is a critically important policy priority that the private sector and the public sector shares. to get that, to make that happen, for capital to be deployed, part of what we are looking at at the business community and financial certainty -- sector is certain date. anything from capital requirements, implementation of that frank -- dodd-frank. all sorts of built -- building blocks the business committee is looking for to help deploy capital. part of it is the man. demand is not where we would like to be pared from a financial sector standpoint there is a lot of debate over lending. why aren't you lending. we have the regulators saying we

have the financial institutions to lend prudently. and at the same time you have some folks -- other policymakers say, lend more, lend more quickly. it is a balancing act that the financial sector is trying to straddle. host: if companies need certainty and this tax cut bill is only two years, does it mean companies are still going to hold onto their cash and will not be investing it? guest: companies are looking to invest. banks make money through lending. companies will make money through risk capital. so there is the desire to invest. it just want to make sure there are the right set of economic circumstances and that isn't in the public and private sector should look to together. host: does the tax cut bill lay the foundation question of guest: it certainly moves us in the right direction.

obama they need in order to reinvest some of the capital? guest: i think a couple of the key things to move the economy forward, one is there needs to be a long-term approach to the debt and deficit outlook. a sunday talk quite a bit about in the program. it is a critically important issue. the path we are on is not sustainable. secondly and some and we have not talked about much in the last couple of years is the idea of global engagement agenda or new trade agenda. we are about 5% of the world's consumers. we need to open up export markets. the president had a very noble goal, to double our exports or so in the next five years. it is critically important. cannot agree more. we would like to get -- there is colombia, panama, south korean trade agreement that the president successfully negotiated. he deserves praise for doing

that. the next step is for congress to act. but i think the trade agenda is one thing critically important so that for the manufacturing heartland, to double our exports, for our service providers, that is something that is a critically important step in terms of the building blocks i referenced earlier. host: of the tax-cut deal is a positive, the trade deal is a positive. does this mean frictions are easing between the white house and ceo's? guest: time will tell. i would like to see this be sustainable, something that happens with a lot of frequency, to have a two-way dialogue. it is not just having a meeting and then you go your separate ways, it is sustained dialogue, it continues, the ability to live a thoughtful voice as public policy is being created on both sides of pennsylvania avenue. i think it is a great thing the president is doing. i just hope it is sustained. and it really evolves into a two-way dialogue. host: talking about the obama administration and his outreach to the business community. he meets with ceo's on a summit.

california. allen, democratic line. caller: good morning. i just wanted to say thank you for giving me the information -- did not know about all of that. one question that still keeps coming up. everyone keeps want to talk about creating new jobs and taxes to help the economy stimulate itself. but no one is talking about the minimum wage in which people are getting jobs and it is not enough to sustain us for the jobs would be better handled. the minimalusly, wage is not an element of this deal. of course, an extension of unemployment insurance is for those who are hurting and still struggling to find work. host: is this something your group agrees with, extension of unemployment benefits? guest: one thing that we have actually done, our group a couple of years ago put out a policy paper talking about ways to help those that are transitioning, those that are out of work, looking for new

jobs and trying to modernize some of these rather antiquated ways that the government, the federal government, uses to conceptually, we care for everyone who is to lead to find a job. with unemployment so high, that is a heck of a lot of people. we actually think this tax deal that the president and congressional leaders, conceptually, it is very thoughtful. host: what is the financial- services forum? guest: we are a nonprofit financial organization comprised of the chief executives officers of the world's largest financial institutions. host: was sort of companies? tesco baker of new york melon, a citibank, j.p. morgan, goldman sachs, among many.

host: yukon, oklahoma. bill, go ahead. caller: i want to know when these tax breaks, who will be a benefit to the country, when they have been in effect for 10 years already, will actually help people? guest: one thing that this has done is make sure that there will not be a tax increase on americans starting in january. i think that is an important element of the deal. as "the wall street journal" noted, as a result of that, they think there is a likelihood for stronger gdp output next year. part of this is inoculating ourselves perhaps against an economic blow. host: democrats critical of the

bush tax cuts say that more jobs were lost during that time, and they do not see the tax cut bill helping the economy. guest: obviously, we have come through a very sharp economic circumstance, in terms of the subprime housing crisis. we have gone through the sort of blow that our economy has not seen in decades. unfortunately, it will take some time to work through that. action that the fed took years ago to what they are still doing, as well as the dramatic steps that president bush and president obama has taken, altogether, have lessened what could have been a were set of economic circumstances. i take your point about the pain

and frustration of getting onto a stronger growth path. host: a new congressman in charge of this watchdog over the fed. he said that there is a currency crisis looming. is that something that you agree with? well that topic come up? guest: i do not have the agenda, but i will say one thing about ron paul. i think the fact that he will have these oversight hearings are sensible, justified, and important. one thing that i would hope for is that the fed stays independent and that we allow them to be independent. we see in other parts of the world there is political interference on the central

bank. that is not a direction we want to go. i respect mr. paul, these hearings over the their quantitative easing, actions they are taking to put us on a growth path, but we are not in a currency crisis. obviously, the dramatic steps that the fed has taken over the past several years is a hot topic in washington, and for good reason, but i do not think we are in a currency crisis. host: who is going to have a seat at this conference? guest: the financial sector, there will just be one or two. it should be a diverse group of industry sectors, and i look forward to seeing the full list the white house will release tomorrow.

host: we have a list here of those that received an invitation. next phone call. erie, pennsylvania. tom, you are next. caller: i have a plethora of comments and solutions to the problems the nation faces. these outrages the cdo packages -- if these are such geniuses, they could take their money and start their own company, and, you know, create competition in the marketplace. it would also create jobs. the u.s. negotiates trade policies to the benefit of the

people in the upper economic spectrum and it is all the gobbledygook. everybody wants to do business with the u.s. why do we have to do these policies, tax plans that are one-sided? guest: first on trade, i would have a slightly different view. i think it benefits all americans, not just certain income brackets. our nation has benefited dramatically from opening up the global marketplace. in terms of compensation, there have been dramatic changes. the higher you are, the more compensation you are getting in

stock, aligning their pay with the long-term performance of the company. so there have been some changes there. i also

imposing a tariff on chinese goods it would like to see that not happen. that's something i think could spark protection tendencies on both sides of the economic relationship and potentially put us into a state of more pronouncepronounced economic friction. acknowledging all of the complexities with china i think engagement with china, high level economic engagement is the right path to move that relationship forward. and for one reason i want to go directly to tom's question. in china they have huge savings, what's called precautionary savings and that's because they don't have the financial marketplace, they'll have an insurance marketplace. they don't have the ability to have access to your average

chinese individual come access to a mortgage or access to car insurance or life insurance company things of that nature. so as a result they save. we would like to unlock that savings, we would like to unleash it, and expanding and modernizing the capital services. the financial services marketplace and the cardinal market in china. and when they do that when these are moving from a savings to a consumption-based economy, they will start consuming more from within their own borders in the euro zone here in united states. and not overnight but over time we could vastly increase our exports to china which i think is a critically important public policy priority. that would like to see happen and the starting point of that would be not to have sort of a currency they will have. >> host: back to the tax cuts issue, if tax cut for the wealthy were targeted to promote manufacturing and technology in the u.s., they would be effective but they aren't. >> guest: they're providing tax relief for all americans.

part of the reason they're doing that, of course, is they are a small business, women and men who file as individuals, that provides them, since we will not raise taxes on small businesses, women and men do have more women to invest to go back into business and ultimately to help hire people. >> host: do you agree with a tweak here then, if the tax cuts were targeted or stored promoting manufacturing technology that would have more bang for the buck and lowering -- >> guest: i would want to put aside all these other parts of our economy. it also could be job creators. congress has in the past as you well know the new with targeted tax cuts and as part of what our tax code is very large with ae, lot of different elements to it. but i think, i would not want to put aside other industry sectors, other cottage agency that might be able.

>> host: with president obama we will be able to talk about reforming the tax code your whah does the business committee want ifpresident obama pushes as he has indicated that people want congress to overhaul the tax t code can what does the business committee want? >> guest: numerous presidents have tried to do this. this this is a top priority. it is t a very complex tax code as a former colleague of mine said, it is held together by bubble, and rubber bands. what generally the business community and average american, is looking for is simplicity. there is a drag on the economy in that sense. a more simplistic code probably makes sense. host: what is complicated for businesses that needs to be simplified? guest: we would like to bring

money back to the u.s. we think that is a positive piece. the burden on small businesses is rather robust. there are some things that you can do, things that your average business person would trade off for simplicity. so yes, there is a lot congress has, a lot of targeted things. what the policy makers in both parties will be looking at over the next few years is trying to get rates down as we try to exchange these provisions that impact every element of our economy. host: robert nichols is our guest, president and ceo of the financial-services forum.

miami, florida. lucy. democratic line. caller: good morning. i would like to know how it is that people are being able to lose their home. a few weeks ago i saw the president on "oprah." they were asking him about how he was going to help these people. i am not talking about myself but there are many people. host: what is your question on the housing industry?

caller: i lost my home through foreclosure. i have nowhere to go. i am in bad shape. host: your view on the housing industry? guest: obviously, many sectors of our economy are still in recovery. different parts of the country are doing better than others, as you well know. some of the sandy states, the recovery is happening much slower. i think she referred to an interview with "oprah" -- i did not see that, so i cannot

comment on that. florida is one of the areas where the housing sector is struggling. some of the western states as well. unfortunately, that will take some time, which is hard for people like lucy to hear, but part of our work with congressional leaders, they are trying to give some assistance to americans who need help. host: next phone call. tennessee. caller: good morning. a couple of things. i heard on one of the political shows that one when they are looking to pay for this is to take from the social security trust fund. that is one of the reasons why this deal should be killed.

secondly, i heard you rattle off the names of the people in your forearm. -- forum. i do believe that a couple of them took bailout money. quite frankly, i do not think people who took bailout money should have a seat at the table. host: your response? guest: let's talk about that, t.a.r.p. it was very unpopular. the american taxpayer has earned $35 billion in income as a result of that program. i will acknowledge it was tremendously unpopular, even though it was the right thing to do. credit should go to chairman

bernanke and secretary paulson for coming up with a plan that kept us out of a very bad economic situation. t.a.r.p., acknowledging it was very unpopular, it was one of the most successful and popular programs in decades. to your question on security, there was the deficit commission. they talked about the need of putting social security on sounder footing. president bush in 2005 also attempted to tackle this. to your point on social security -- this is critically important in terms of unfunded liabilities. we need to get back on a path of sustainability. as we begin to tackle our long term debt -- host: but it is ok to take from

social security in the short term? guest: i do not know if that is the case. i do not know that this is coming out of social security, but we need to put that on a path of sustainability. what the president and congressional leaders have made a judgment on is, doing this deal, for long-term economic prospects, it is much better to do it than not. host: another tweet from a viewer -- perry from arizona. you are next. caller: good morning. what i wanted to say was, if anybody wants to come here with

money, come to america. we will lower your taxes. we want to create jobs. the other thing i want to say is we already have socialism in america. we should think about what we have. the government should be cut back dramatically. in order to create jobs, we need to get the government back to where it should be, protecting us from internal and external aggression, the way the founding fathers set it up. the reason why the economy is going down, why we will become a third growth country, if we continue down this path, is simple. we are losing our liberty. the government is way too big. obama is putting in more irs

agents into the health care plan. host: i think we have your point. guest: i actually agree that the government is too large. it has grown in the past couple of years. i understand why the government has grown, because of these capital concerns, but we need to get on a path where the government can shrink. earlier in your point, you made a point about tax rates, where we should be compared to other nations. that is an important point. if our corporate tax rates go up too high, over time, that can impact corporate behavior on

where you deploy assets, facilities, resources, and your industrial plant. host: when republicans take control of the house, spencer bachus has said that one of the first agenda items is to roll back the dog franc financial regulations bill. -- dodd-frank financial regulations bill. guest: spencer bachus has a huge portfolio that he will be inheriting. let's talk

>> the dodd-frank act is influencing everyone's agenda in the financial community and certainly influenced ours as you will see from the statements today. one of the act's many homework assignments for the regulatory community is to develop procedures for recognizing and allocating losses in the insolvency of systemicly important financial institutions. these are called in the shorthand of washington, d.c., sfies.

the dodd-frank act to its great credit recognizes investor understanding endgame how a insolvency will be resolved influence as firm's appetite for risk. and if the authorities don't change the understanding of existing rules which means changing the rules to begin with, higher capital requirements, which is the solution everyone is trumpeting around the world really can't by themselves end credit or perceptions that in most circumstances systemicly important financial institutions are just going to be economically, politically and administrative, to difficult to fail and unwind. that is what occurred in this crisis and what is occurring to a large extent in europe now. the current financial crisis really underscored the particular dangers of the business plan these existing wind up rules have made very prevalent in the world and

that is to follow a, have a highly leveraged institutions that funds assets that have relatively long maturity with funds that are much shorter in their duration. so this business conditional on the widespread understanding but if we don't have plans existing and practiced, for winding up complex institutions, then they probably won't wind them up and instead they will just bail out these firms when they develop significant financial losses. so our statement tries to set forth three principles that we believe as a committee ought to govern insolvency resolution procedures if authorities are going to succeed in rendering this understanding of the bailout reflex if you

like, inoperative. our first and overriding principle, resolution procedures must have a number of probsts. one they must be credible. two, they must be rehearsed and practiced so you discover what might go wrong. they need to be predictable outside the regulatory community which means they have to be widely publicized. credibility requires that authorities acknowledge the beginning which the act does not really acknowledge, that insolvencies will occur from time to time in sifies and the cost of resolving these insolvencies are seldom going to be zero. that would be nice if they although quick action can stem the ultimate cost of a bailout the dodd-frank act introduces some for very good reason three-part series of potentially

time-consuming checks and balances. these checks and balances are designed or aimed at strengthening a failing firm's due process rights. our country is always interested in checks and balances and very much a tradition of the united states. but before an institution can be subjected to the act's special resolution procedures, the federal reserve and a specified other federal regulator, fdic for banks, the new bank insurance office, the new federal insurance office for insurance companies and then there is, the sec for securities firms. so, the, this is the first step. and, then, so that the, this team of regulators must jointly recommend that, to the secretary of the treasury, that the firm be put into an fdic-managed receivership. then for the recommendation to go forward, the treasury

secretary, after consulting with the president, must undertake a number of specific determinations about the condition of the institution and the benefits of putting it into this special receivership. if and when there is no time limit on what, when the secretary has to respond, if, the, the secretary decides to support the recommendation of the regulators, the consent of the institution's board must be solicited. and if they refuse, then the treasury's decision and findings undergo a nominal 24-hour judicial review. until we've seen this thing in action it's hard to be sure how long or how long this process might take in difficult cases. it's clear that the last two steps could be traversed quickly but the agency's, in the first step because of different missions and different clienteles might have some difficulty

reaching agreement. it might take a while. of course we understand that while this process was unfolding knowledgeable counterparties may be expected to take action to improve their position in the receivership at the taxpayers expense. it is important to keep this at the same time, the systemicly important parts of the firm operating. that is why we have the problem of putting it into special resolution procedure. the second broad principle is the cost of keeping these systemic, the important parts going should fall as far as possible on the firm's stockholders and creditors. we want to minimize the cost of taxpayer help. this means that the receiver ought to be required at the outset to impose preliminary haircuts on unsecured creditors and stockholders of failing firms. appropriate haircuts should be inflicted on all uninsured claimants regardless of maturity,

appropriately is carefully chosen word but a strategy of favoring short-term debtors in the initial process would end up encouraging short funding strategies that created the trouble in the first place. we want to be very careful about anything that provides that favor. now in resolving the losses at the receivership or bridge institution experiences the priority of creditor claims should be respected. when the treasury is reviewing regulator's recommendation, a scramble for liquidity could occur among the various creditors and counterparties motivated by uncertainty just how deep the insolvency is and this is clearly a legitimate concern and we believe that scram he will abouts can be mitigated by giving the receiver a limited ex post right to reverse transactions that can be demonstrated have occurred as part of the scramble or by capping individual county

party losses in the resolution process at a specified percentage. politics will determine what would be done here. then we also maintain that it's important to recognize that whatever funding or credit support the fed and fdic provide to a receivership, or bridge institution, is a tax expenditure. it commits the government to spending money, spending taxpayer money and the government supports decisions to levy any kind of ex post assessments to fund these reports are forms of fiscal policy so it is misleading to suggest they're only a province of the fed or the regulatory community. now because sfis are likely to be global institutions with positions in many countries, u.s. strategies have to be coordinated specifically with other countries. our third and final

principle specific international coordination of country resolution plans is necessary to limit regulatory arbitrage and cross-country scrambles for the good assets of failing firms. no we see in europe today the absence of cross-country loss-sharing agreements is greatly aggravating the financial stresses that european, that europe is undergoing, thank you. >> thank you, ed. our second peek doctor speaker is talking about federal reserve lending programs through the recent financial crisis. bob?. >> thank you, george. as many of you are aware the federal reserve has just released a week or so ago detailed information on many of its financial rescue programs. this was not a voluntary release of information but actually a release that was mandated by requirements under the new dodd-frank acts.

the information covers trillions of dollars of loans and over 21,000 individual transactions. a very voluminous set of information this is mandated the release of information. the thing about the data it really suggests how wide-ranging and deep the federal reserve's lindhing programs and financial support actually was. it surprised many people about both the breadth and depth of the programs. and in particular who received the funding. it was quite surprising to see the amount of loans and funds that were channeled not only to the foreign subsidiaries of foreign banks but also to foreign governments in some cases

and other entities as well, both foreign and domestic. the fed not only engaged in loan purchase --, in loan programs but also in significant asset purchase programs and loan programs to support asset purchases in an attempt to revive and stimulate the asset-backed commercial paper market and asset-backed markets more generally. while the committee endorses and actually applauds the release of this information, at the same time, if you go through and look at it very careful form it really is not sufficient to allow to assess the full impact and implications of the programs that were put in place. to address these issues and a lot of the questions that have been raised, the committee really urges that

we create a nonpartisan, independent group of financial experts to go in and organize the data and conduct the forensic study similar to what was conducted in the lehman bankruptcy case to see what lessons we could actually learn. there's a lot of questions that have been raised in these data that deserve careful scrutiny. for example, what were the true costs of these lending programs? who got the subsidies and how big were they and how were they distributed across the various parties to the transactions? what was the market quality of the underlying collateral? and finally, is there better ways to have structured the programs such that the both the interest of the fed and the taxpayer would be protected and perhaps to assure that the taxpayer received a portion of the upside gains in associated with some of these programs?

many of the beneficiaries quickly returned to profitability and are now engaged in activities to distribute handsome bonuses to managers, just to mention one issue. the purpose of the study is not to conduct a witch-hunt but rather to determine what kinds of lessonsed learned might better able us to deal with the next financial crisis because most surely there will be one that occurs at some point down the road if history is any guide. and we think that under the circumstances the lessons learned are important and deserve significant amount of attention. and probably the most important thing that should be assessed is what was the true costs of the subsidies, and the amount of the subsidies? that has gotten lost in the discussion of the various

programs with particularly policymaker's emphasis on the fact that the taxpayer didn't lose a dollar. yeah, the taxpayer may not have lost money in connection with the loan programs but there was substantial support given and those, those subsidies, need to be quantified and evaluated. we think that this would be, in society's interests and most importantly we think that the federal reserve should embrace such a study because it will be critical to insuring not only its political independence and but ability to conduct monetary policy in an unconstricted way in the future. thank you. >> thank you, bob. our third statement is statement of testing the federal reserve's role about stress testing the banks and how we'll stress testing the stress store. -- stressor. >> thanks, george. as george pointed out the fed is familiar with stress tests but usually on the

giving end rather than the receiving end of the stress test and you might even say the stress from being tested. stress tests are all about thinking through scenarios that might result in the insolvency of a financial institution. so it's interesting to ask what kind of scenario would result in the insolvency of the federal reserve? and secondly to ask, why would that matter if the fed became insolvent? so this statement tries to address those two questions. the main reason that the fed is at risk of being insolvent on a market-value basis, is that the fed has a large amount of interest rate risk embedded in its portfolio. that is, its holding of long term assets compared to its short-term liabilities. based on rough knowledge which is what is available

of the composition of the fed's balance sheet, prior to the qe2 purchases of medium and longer term instruments, about a 50-basis point parallel increase in interest rates of all maturities would probably result in a market value insolvency of the fed. that is a half percentage point increase. after qe2, with an increase in the maturity of assets on the fed's balance sheet, it might be about half that amount. so you can see the insolvency of the federal reserve on a market value basis is not a low probability event. interest rates just over the last few weeks have gone up many basis points, so that an increase prospectively of 30 or 40 basis points is definitely in the realm of

possibility. now the fed is not required to do its accounting on a market value basis of the its existing portfolio. so the fed doesn't have to, as we understand it, actually call itself insolvent, except if the fed were forced to sell assets, that were below market value in sufficient quantity, and recognize the losses on those assets, then the fed would show itself to be insolvent. and so that illustrates what we think the main risk is. if the fed wanted to sell its assets in large quantity, remember with qe 289 in place they will have a little bit more than two trillion dollars in assets which is much more, precrisis the fed had less than a trillion in assets. the fed want to sell 500 billion or up to a trillion in assets, that could entail

recognizing a huge amount of loss since particularly about a trillion of those assets are mortgage-backed securities which would not be easy to liquidate. so the point of course is, if the economy were to surprise on the upside, if the historically low money multiplier started to grow dramatically making the fed want to contract its balance sheet, and if interest rates were rising as they might very well do in that upside scenario, the fed might demure from selling its assets and contracting the monetary base precisely because doing so might make it insolvent. we think that this is a risk worth thinking about and doing something about. i want to recognize that the fed has already mentioned that if it wanted to contract, that it has many different options.

so let's explore those. the fed of course in separate from contracting its balance sheet and selling treasury securities, the fed could engage as it has proposed in reverse repurchase agreements, perhaps with money market mutual funds. those however have been brought into doubt by various market participants, especially on the kind of scale that might be necessary. the fed could also raise interest rates on excess reserves to encourage banks to maintain high balances of excess reserves to keep the money multiplier from growing but that would require creating cash flow problems that would exacerbate the potential insolvency of the fed. the fed of course could also just raise reserve requirements. doing so would competitively disadvantage american-based banks and there are significant risks associated with that kind of a discrete

change in reserve requirements. so we think there is a significant risk that if interest rates were to rise substantially and the fed wanted to contract, that it might simply not contract and allow inflation to take hold. that is the inflation tail risk associated with fed potential insolvency. what could be done about it? well the fed should move as quickly as possible to restore its traditional historical maturity structure of shorter term maturity assets. one possibility would be for the fed to swap long-term debt for short-term treasurys with the u.s. treasury possibly. another possibility is to swap its mortgage-backed security portfolio for shorter-term treasurys with fannie mae may or freddie mac. we think this is an important problem and should be dealt with prior to the potential risks of a

positive economic surprise and an inflation risk. thank you. >> thank you, charlie. our next speaker is dick herring. on the case for the appropriate types of convertable contingent capital. >> thanks, george and good afternoon, everyone. in the recent crisis we learned that the basel framework is virtually totally inadequate. it became clear that the quality of high-quality capital, which is basel speak for equity, had declined remarkably and was totally inadequate to absorb losses. we learned that the risk-weighted denominator was not a good indicator of risk and we learned that the minimums, whether you looked at them in terms of tear one or tier one plus tier two were entirely inadequate to safeguard the financial system. indeed in the case of every major failure you had the

unhe had filing speckel of the spectacle, primary superivsor are were truly puzzled how it could have happened because in the last reporting period the firm in question had far above the average capital and far, far above the minimal requirement. the result was in the end the market simply ignored regulatory capital and focused on tangible equity. basel iii is all about trying to restore confidence in the system and a lot of it unfortunately is going down the same well-trodden road to nowhere. they're trying to fix the, some of the more egregious errors in the risk weights but most of basel iii so far is focusing on having more and higher quality capital. and they're going to do it in several different ways. the capital which had once been 4% equity under basel i

drasted down to 2% after serious bank lobbying over the years. they're going to raise the minimum what has now become 2% to 4.5%. in addition to that they're going to add a countercyclical, i'm sorry, they're going to add a capital conservation buffer that will be about 2 1/2%. and then there will be a discretionary counter-cyclical buffer, and this one is very unclear but it could range from zero to 2 1/2% and there is still the possibility of although not for certainty of an add-on for systematically important banks. incidentally dodd-frank requires that in the united states but it is not yet accepted in the world of basel. so in the end we might look forward to a ink withing system -- banking system that has possibly 10 to 12% equity capital to risk-weighted assets for the large systemicly important

banks. that of course doesn't materially address the inherent flaws but at least it will abetter capitalized system. the dodd-frank act mandated a study for a new kind of capital, a contingent capital requirement, which is commonly known as a coco. this would not be a substitute for equity but a possible addition to the regulatory tool kit. the committee believes this would be a very important addition to the regulatory tool kit and could have an important impact on the incentives for risk-taking and could actually motivate managers and shareholders to correct whatever problems a firm is having long before it becomes a disaster and there is little to do but intervene or close it. the idea of cocoes is not a new one. it has been around for at

least 10 or 15 years. the ideas for cocoes can be four key parameters. what is unusual the choices we made among those parameters. and we think they're all important. the key parameters are the amount of cocoes a bank should be required to issue. second the trigger under which the cocoes would be converted into equity. the third the amount of that would be converted when the trigger is reached, is breached. and then finally the price at which cocoes are converted into equities. now of course these parameters should be specified by the regulators and the aim of giving the bank a very, very strong incentives to take whatever corrective action it needs, whether it is raising additional capital or changing its business plan or restructuring before they hit the trigger.

and that's, i guess the theme that is really quite different about our vary ant of the proposal. so we have the following recommendations regarding these four parameters. first with regard to the first parameter. the amount of cocoes should be sufficient to cause very significant dilution to shareholders if the conversion is triggered. and we think that 10% of the quasi-market value of the bank's assets would be about the right amount. now the quasi-market value is an important departure from the traditional practice. the problem in valuing a bank as you all know is that we can't market to market. we don't really know. it's an odd mix of mark-to-market, fair value and book value accounting and so the best you can do really is to infer what the market value of the bank's

assets are from stock market estimates which represent the equity value, and contain a measure ofistic -- of risk, incidentally and add to it the face value of liability. we call this our quasi-market value of assets. and what we want to focus on as a trigger is the ratio of the, the amount of equity relative to the quasi-market value of assets. now we realize that stock market prices are very noisy and that if you simply left it at the closing price on an particular day, you would create all sorts of problems and leave institutions vulnerable to raids by creditor hedge funds. what we'd like to do is to suggest that the quasi-market value of assets and indeed the quasi-market

value of equity be subject to a 90-day moving average. so that it would have to be a very stained -- sustained decline something like the flash crash which would disappear. this would be something more likely to reflect true asset values. moreover, we think the trigger should be set high enough so it is really capturing the market's view of the future earnings value of the assets rather than some gamble on a bailout. this differs markedly from all of the other proposals we're aware of because they're all based in one way or another on the book value of assets and this clearly does not. we believe in, second, that the trigger for conversion should be breaching a fairly high level of, of, market value of equity to the quasi-market value of assets. and we think 10% is just

about the right amount because it is roughly equal to the amount of equity that is likely under the new scheme. this trigger has the advantage of giving you a fairly clean equity price but most importantly it comes early enough that the institution has plenty of options for either recapitalizing, selling assets, or restructuring in some other way, even changing the business plan. and so it should motivate the managers who will fear dilution and shareholders most of all will fear dilution, to take measures before they reach a point at which it is difficult to take corrective measures. then finally, third, although not finally but third, the, the amount converted should be the full amount of the issue.

some, proposals say that you should only bring up to the amount. we have a very different idea in mind. we wanted to be so large an event that the dilution itself will be a strong incentive. and, that means that we would like the full amount to be converted if you hit the conversion point. our hope is of course, that the fear of hitting the conversion point will keep you from ever getting there but if you do you will hit the conversion point and that will mean that you're going to have a lot of disgruntled shareholders who can badly diluted and you will have additional new shareholders. it is almost certain that management will change and you will have, we may even restore market control in an area where it is virtually dormant these days. finally the conversion rate. and our view is the that the

conversion rate should be favorable to the bondholders. that it should be at least the face value plus a premium of 5%. the idea it will be easier to sell the bonds and it will increase the dilution effect. it, it is very different than the two issues of cocoes outstanding . .

>> first, you actually would increase liquidity within a bank that is declining. it's a rather subtle increase. but it's equivalent to the injection of liquidity that's equal to the interest and principal payments that no longer have to be paid to the holders who are now shareholders. and the other feature that is potentially quite useful is that it deals with something that neither the basel committee or dodd-frank was able to engage. that is the fact that the more risk sensitive you make capital requirements, the more likely you are to make them prosiply call. they are going to make the booms boomier, and the busts bustier. the idea of having the percentage that's base the on

quasi-market value vast, means it will go up in a boom, which will retart lending. and on the way down, the amount that you have to hold will fall which will to some extent offset the encouragement to new lending on the risk-based capital requirement. the bottom line is how might things have been different in recent crisis if we had a cocoa requirements in place years before. i think the answer is -- well, it's speculative. i think it's fairly convincing. we've done some data of all of the systemically important u.s. banks. and it turned out that the six banks that required large interventions or shotgun marriages crossed the 10% threshold long before they got into deep problems, months and some case years before.

so there was plenty of warning of something to do. and it -- these all happened at a time when they could have been raised new capital. capital markets were not at all closed to them at that time. but, of course, these data don't take account of the incentive effects of having cocoas in place. our guess is that a company like lehman brothers where the employees and managers really owned most of the capital or both bear stearns and lehman brothers were owned by the managers and stockholders, that in that case, the fear of delusion is very great. and the fear of delusion was such that they didn't raise new capital. but if they are forced -- if they are faced with a cocoa trigger that would dilute them significantly, you can imagine they would have been believed very, very differently at a time when they could have saved the

firms. they would basically have -- if they had breached the threshold, they would have basically lost control of the firms, they would have double their capital in equity terms roughly, and that might have bought them time to restructure. on the over hand, if they were boomed to failure, it would have given us a much longer time to identify their plight. a matter of months rather than hours. it should have put an end to the scammable over the sleepless weekend to arrange the ad hoc bailout for bankruptcy. >> thank you, dick. our final statement 304 is beyond dodd-frank whatever tag team on this. and charlie will start off. >> thanks, george. [laughter] >> well, almost everyone in this

room probably got a lot of homework to do from dodd-frank. there were over 100 reports mandated as a result of the act. hundreds of new rules that have to be written, very tight deadlines too on a variety of matters. but we thought the turn about fair play. we came up with some homework for the new congress. it might seem strange given that we just had this ill luminous education. some of it had to do with fixing things that weren't fixed, and some had to do with modifying things of dodd-frank that would be easy to modify and beneficial to do so. we're doing to work as a tag team. i'm going to go through the first three of those, and then turn it over to chester kemp.

maybe even one of the most important financial business of the congress is to try to figure out the mortgage market. the key mistake that drove many of the other mistakes was the government subsidization of ever rising and unbelievably high leveraging in the mortgage market. for example, no-docks subprime lending really wouldn't have been a problem if there would have been a 20% down payment requirements. think about that. it's precisely the fact that people didn't have to put much money up on the mortgage that attracted very bad credit risk to take advantage of the lending. of course, it used to be back in the 1980s that a 20% or more down payment was standard. and, of course, in many, many

countries that's the case. we need to get back there. the way to do it is to phase it in. we are starting with 3% down payment requirement. we need to increase it 2% a year until we get back to 20% would be a reasonable way to phase in and get us back to a sane mortgage market. we think that's absolutely necessary for restoring any kind of sanity to the market. second issue is we have a new consumer financial protection bureau. of course, we don't really have a head of that pew -- bureau. it's kind of running outside of the normal due process. and it's being run effectively out of the white house. we think that's not appropriate due process. we need to have the right kind of due process with discussion openly through normal channels with opportunities for public debate that only are going to be

had through a normal sort of regulatory process. we encourage the new congress to think about having hearings, wide ranging hearings to try to figure out how to improve that process. third area is rating agencies. now as you know, dodd-frank basically created a mandate for getting rid of the regulatory use of ratings. this committee supports that as the long-run objective, of course. the use of ratings in regulation tends to encourage the debasement of ratings. the problem, of course, is so much existing regulation depends on the use of ratings. so at least as an interim step, it seems to make sense to try to improve the usefulness of ratings and maybe extent the deadline a little bit for eliminating them. but the way, barbara boxer, senator to california,

introduced something similar to dodd-frank that was defeated. which is to quantify ratings, to turn them from letter grades into numerical estimates and hold rating agency accountable for those estimates. i will now turn the floor over to chester spat, and then jim scott. >> thank you, charlie. one the significant portions of the dodd-frank bill was the treatment of derivatives of clearing and the emphasis of the clearing of derivatives. one can think of that in terms of a number of objectives, including ensuring the adequacy of collateral, to make sure that the central counterparty is bullet proof. to try to limit the generation

of systemic risk, and to try to enhance price transparency. while at the same time, not retarding innovation in the markets. but i think we also think that in some respects, there maybe less than meets the eye with respect to some aspects of the implementation. of course, keep in mind that at least some of the goals -- maybe many of the goals, reflect the derivatives fiasco that occurred at aig. many of the exotic instruments that aig used, of course, would not be likely candidates for clearing on an exchange. furthermore, the degree to which changes in clearing practices are going to be achievable by the statutory implementation deadline on september 15th 2001, this is an open question due to quite a number of different concerns. in effect, a new set of rules

needs to be developed, a whole new legal and regulatory framework, and the market structure needs to be developed. i think an important example along these lines is going to be -- is going to arise with respect to the nature of price transparency, and the reporting requirements of that. and certainly as a group, we're very sympathetic to price transparency in these markets. we're also sensitive to the high ly sensitized nature, it's also the importance of introducing significant reporting delays for launched position so as to not under cut the liquidity of the markets for those large position. sort of more broadly, we are concerned that the tight statutory deadline creates the potential for possibly a forecastable train wreck on september -- on next september 15th. a more specific issue that we

think wasn't contemplated by dodd-frank is going to be the development of suitable margin requirements with respect to credit default swaps. credit default swaps, of course, provide insurance in effect in the event of the default on the underlying bond instrument. these reflect the potential for basically significant downward jumps due to the nature of an effective fault insurance. keep in mind, however, that across a whole range of credit default swaps, and across a whole range of bond contracts, defaults are likely to be very correlated. we saw dramatic evidence, of course, during the financial crisis. this in turn makes it difficult to set margins or clot real requirements that are going to be protective enough of the ensurer based upon the number of

defaults. of course, keep in mind, this is a difficulty that's not specific to the presence of a central counterparty. it's a difficulty that arises, in fact, ot -- over-the-counter trading as well. indeed, while the collateral of aig is widely recognized. that reflected examplely the fundmental problem. this was one aspect that underlied the collateral by aig. i think broadly what this issues suggest to us that it would be desirable for congress to be in the front of the problems and permit reasonable delays in implementing reforms to try to force stall the potential for serious disruptions in the marketplace that we could anticipate come next december 15th. i'm going to turn things over next to ken scott.

>> thank you, chester. in the process of getting a majority for dodd-frank, it became sort of a 2300 page collection of the favorite sayings of congress to improve financial regulation and achieve financial reform. it's almost an endless set of possibilities for comment. picking on only one here, something of an anomaly. that is that dodd-frank could offer incentives for whistleblowers. awarding 10 to 30% of all financial recoveries, fines, penalties that are achieved in a

successful pursuit of a security violation. so the first person to report that independent knowledge of let's say, you know, accounting fraud or wrongdoing of some variety to the fcc is in line for a very substantial pay off. what's anomalous about this, if you think back to sarbane in 2002, that was concerned with accounting fraud, manipulation, world com, for example, represented a case where earnings were bolsters by capitalizing expenses rather than having to recognize and charge them off to the improvement of world com's financial statement. that was disclosed by an employee in the world com

accounting department. and therefore one the things that sarbane tried to do was to improve internal capacity to deal with these kinds of activities within large corporations. so the effort was to improve internal controls over corporate financial records and reporting as part of that. sarbane oxley encouraged employees to inform legal and compliance officers of suspected fraud or wrongdoing in a variety of ways. one, for example, was to require companies to establish confidential hotline numbers to protect sources, retaliation against whistleblowers is

prohibited. it's the internal control of the governance that's the first line of defense against the activity. there are 10,000 companies to which it applied. and now what we find in dodd-frank is the creation of incentives to bypass, to ignore really these internal mechanisms and go to the fcc which over looking the universe that large may not be able to adequately follow up or have the capacity to determine the merits of what all of the tips that it gets. so it does this by creating incentives to go to the fcc if you are the first person to report, you maybe in the line for a very substantial bounty. the retaliation provisions were strengthened if there is retaliation, you can now get two

times your back pay and so on. so in the request for comments in the rule proposal that the fcc issued last month on these whistleblower issues, it requested comments as to whether a whistleblower should be required to make reasonable use of internal compliance procedures before getting in line for a tip in the pay off from the fcc and for very practical reasons the committee believes that the answer to that request should be in the affirmative. >> we have time for questions from the audience. some microphones that will be circulated. if you state your name and identification and direct your question to a particular person, that ought to speed things up. yes, sir, right over here. >> thank you. i think 20% down payment is a

terrific idea. could the commission do this for the consumer protection agency or whatever board, whatever you want to call it? they can't declare anything usive. why not say progressively anything that any loan, any mortgage that requires less than 5, 7, 9% is ipso facto abusive? >> that is part a legal and political question, isn't it? i think the orientation of elizabeth warren and the board will regard that as predatory lending than to go after it from the stand point that the borrowers have skin in the game is a larger -- large element in

the disastrous outcomes that we've had the last couple of years. in terms of issuing a rule, defining abusive as anything -- any loan made with less than a prescribed down payment, i think it would be -- well, the world abusive came into the law without any background in terms of legal usage or interpretation. there are words like unfair, competitive practices and so on that do have a legal history and definition in a variety of context. the word abusive is up for grabs. what's abusive? so technically, would they have the power to say anything less than 20 is abusive? maybe. but politically, do i think it's likely? i don't.

over here. >> will, to follow up on the issue of 20% down payment, i've seen accounts years ago which unfortunately i can't report in the general brass that da mortgages required a lower down payment and yet do not have higher default rates? is this true and how do you explain it? >> high leverage is not a sufficient condition for high default. if you control credit quality, and you have a rising housing market, that is if the people you are lending too have to have evidence of employment and income that can meet their mortgage payments, va and fha historically have managed to run above market leverage without

huge default experience. but what we are saying is high leverage is generally a necessary quality for the kind of housing crisis that we had. that is, where you permit the possibility that relax underwriting standards could lead to large defaults with significant consequences for the financial system. and so we think that when you look at the route of where the idea that leverage was necessary came from, it came from the idea that by supporting the subsidization of mortgages and driving up leverage, you could make housing more affordable. we think that's a bad idea. you can make housing affordable if you want to with on budget expenditures, down payment assistance, the australians do it that way. a lot of countries have figured out that leverage isn't the best way to run an affordable housing program. if we want to have an affordable housing program, let's have one that doesn't destabilize the

financial system. let's have one that's on budget, transparent, and openly debated. that hasn't been what we had. we are not saying that necessarily high leverage defaults in failure. we are saying it creates the risk and is unnecessary for achieving bona fide objectives in affordable housing. >> thank you. hi, i'm andrea, a bank analyst in new york. i worked with a company that did a great deal of work for fannie and freddie. partly related to the quality of fannie and freddie's underwriting standards. they were considered one could say very high and you needed private mortgage insurance or something like that. actually i was involved with bringing a product to freddie which was a higher loan to value

mortgage product. but the -- let's get into the definitions of the erosion of the definition quality where in a collapsing economy with a lot of free trade agreements proliferated during the bush ii administration and on the heels of nafta, on the heels of u.s. compliance with g-20, aside from the erosion of fannie and freddie's criteria in what had been considered a paper underwriting quality. what perhaps at one point was a paper is now b paper or something like that. they called it a. in order to compete with private label, they eroded the quality. and in cases where they had originated a paper, i had some acquaintance with the independent bank in the new york area which had a lot of no doc

loans. but the erosion of the economy had a lot to do with whether or not those borrowers could pay back their loans. this touches on my concern. perhaps you can answer this. the fed has been a conflicted party and has been aligned with international interest. some of which have wanted to see the u.s. economy in concert with the slow growth of the european economies. so where fannie and freddie had provided quality products, but this whole notion of how we -- i don't mean to be confused. but let's just perhaps touch on something like allowing the fed to do the resolution authority. it's not proven itself to be a nonconflicted party. and i don't think -- and maybe you can speak to the point that fannie and freddie at an earlier point under wrote the responsible mortgages and mortgage securities that those

organizations underwrote were performing. you know, the investors receive their cash flows and things like this. let's address these two issues. the deterioration of where fannie and freddie have gotten and how the fed is a conflicted party with being able to handle it's responsibility. >> i would just add -- ed wants to say something. we have given a lot of statements in -- over the last few years over the slipping standards of fannie and freddie and the problems in their own risk management and i think there's been a lot of literature on it. i don't want to rehash that whole story. the point that we are making today is in addition to winding down fannie and freddie, we need to rethink the whole approach of the government toward affordable housing. we need to think, rethink that

approach away from this continuing and rising subjectdyization of high leverage and push in another direction. just to point out at the peak of the crisis, 35% of fannie and freddie's mortgage portfolio had loan to value ratios in excess of 45%. if you just go back to the early 1990s, that's almost unthinkable. so the way that this happened has a very long story that we could talk about. but that a big part of fannie and freddie's erosion of business wasn't just the decision in 2004 to enter no docs and low docs. it was a push that you could see through the whole period primarily and i would say maybe even most importantedly in the form of increasing leverage. we think that's a crucial safeguard to the mortgage system that we should under take. ed? >> the issue of fed being

conflicted is something that we are addressing in the statement about resolution. it's going to be difficult for the fed and any other agency to get together and decide to under take this step of recommending the special resolution authority being invoked. every agency has it's own self-interest, every leader of an agency has a self-interest. and we saw many during this crisis, many differences across the -- stick with the fdic at some point was very much in disagreement with the treasury and the federal reserve and prior to the crisis only the fdic seemed to recommend the leverage ratio as one of the important measures of the capital condition. the fed was locked in on risk-based capital into the basel system, which was based on risk measures as was said in our

discussions by bob that we are really inadequate. >> over here. >> mark, i run a small hedge fund here in washington. three questions. first speculation on whether the deficit commission is, in fact, going to make any headway in eliminating the mortgage deduction. secondly, how would it interface with people like you who want to raise the down payment. i think that's a great idea. that's a double whammy on house prices. and thirdly, i hear this word prosip -- prosip recall so much. they tacked up the requirements on silver and put out the fire.

why wouldn't we be doing that with mortgages? >> can i start? the first point is the deficit commission and what is it's function? and i think the recommendation of the mortgage interest deduction being changed is something that can be undertaken, but was certainly undertaken very small steps. for instance, issues of second home, interest of deductibility, capping interest deductibility in some amount or some income level, letting it slide a bit. i think total abandonful of it isn't what was ever emerged from a political process at this time. now how about this interact with the down payment? we keep trying to hit the theme which charlie has underscored. the system that we have used distorted promoting home ownership has distorted the

financial system. there's no reason to have the goals that look at the financial system. like canada, who did maintain 20%. if you want to lend as an institution, at higher loan to value ratios, you have to get mortgage insurance. and you've got to report to our prudential regulatory authority on the quality of why this high loan to value is sensible. >> i want to respond with one sentence to the first two questions each. with respect to mortgage interest deduction, a question in economics is it a distortion to allow deductibility, or distortion not to allow deductibility. from the stand point of the renter buyer distinction. owner that rent their house out

deduct. deducting for homeowners is tax neutral in terms of incentives. there are opposing arguments though for expensive homes, there's not a margin between renting and buying. you don't have to worry about net neutrality. you could make a responsible argument that distortions depend on the size of the mortgage deduction. second point, do we worry about house price affects from the increase in the minimum down payment. first, remember we are facing this in. i think it would at least potentially have a small effect in preventing runups in home prices. i'd like to point out that's a good thing. that in economics, houses are particular kind of investments. they are an investment that you are also consuming. and so we actually have and will -- pointed out in a recent

theory article, we have a neutrality opposition. when house prices go up, you are not better off. there are some exceptions to that, small important issues. i want to emphasize as a long run social object i, social is not made better off by making home prices rise. >> i'd like to make the point that the ultimate distortion is the services of the house are not taxed. if you don't tax the service sef the house for allowing the interest to be deducted. >> well, we should thank you all for coming out. i wish you all a happy holiday season. we'll see you in 2011. [applause] [applause] [inaudible conversations] [inaudible conversations]

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>> tonight john leibowitz on how to handle online technology and do not track technology. "the communicators" on c-span2. update now on congress. the house was in a brief session earlier today.

>> we have a job to do. the job is -- i know some people don't believe it. rather radical concept, our job is to represent the working families in the middle class, and not the wealthiest people in the country. i have four kids, six grandchildren, i look forward to spending the holidays with them. you know what, we have a job to do. and if it means staying here through christmas eve, through new year's, that is our job. let's pass a proposal that works well for ordinary families and not just for the wealthiest people in this country. i wanted to thank senator sherrod brown for coming down. when you look at the agreement,

we talk about the absurdity in the middle of that time when we have a $13.7 trillion national debt giving tax breaks to people who don't need it, senator brown and i have talked about the dangers in the payroll tax holiday and what it might mean for the future of the social social security. but i also wanted to make another pointed. and that is that there are many, many billions of dollars in this proposal doing to a variety of business tax cuts. so of them, in fact, might work. some of them, in fact, might not work. but what is very, very clear is that if your goal is to create as many jobs as possible, for every dollar of investment, this particular approach is not very effective. when we talk about tax breaks,

for corporations and companies what we should be aware of is that corporate america today, today is sitting on close to $2 trillion in cash, they have that cash on hand. and the problem is not they don't have the money. the problem is that working people -- working people don't have the money to buy the products that these guys are producing. and i believe and not just me, but i think a variety of other economist from across the board believe that it makes a lot more sense if we are serious about creating jobs to invest in our infrastructure. and i say that for a number of reasons. when you put money into roads and bridges and public transportation, you are creating for every dollar that you spend far more jobs than giving a variety of tax breaks. that's just what is an economic

fact. second of all, when you are investing in our infrastructure, not only are you creating jobs short term, you are leaving the country with a long term improvement that increases our competitiveness in a very tough global economy. i mentioned a moment ago, we'll get back to it later, china is investing huge amounts of money into high-speed rail, into their roads, into their bridges, and yet if you drive around certain parts of america, you think we are a third world nation. you have roads with potholes, and i'm going to get it to later. it took less take to get to parts of the country because the rails shape, today they are in

bad shape. it creates job, adds long-term value to the country. unfortunately, in this agreement, and add to provisions and invest in our infrastructure and create jobs. another thing that should be made when we look at the so-called compromise agreement established by the president and the republican leadership is that in the agreement there is an extension of unemployed benefits for 13 months. now there's zero question in my mind that this is something that absolutely has to be done. right now, senator brown made this point. we have millions of americans who have to no fault of their own lost their jobs. maybe their plants went to china, maybe their companies

couldn't get the loans they needed to stay in business. small businesses going under. big businesses shutting down plants. no question that we have got to extent unemployment benefits. but what bothers me is that this provision in this agreement which is a good provision suggests that this is a hard one compromise. that the republican really conceded something and they agreed to a 13-month extension of unemployment benefits. but here's the fact, the fact is that for the last 40 years, when unemployment rates have gone above 7.2%, republicans and democrats in a nonpartisan way have come together to say, of course, we're going to extent unemployment benefits. this is america. we're not going to let working families who are suffering hard times because no fault of their own, they have lost their jobs. we're not going to let them lose

their homes or not enable them to feed their families. this is america. we're not going to do that. republicans have said that 40 years. democrats have said that 40 years. democratic republican presidents, leaders here in the house and senate have said that. to say oh my goodness, the republicans made a major concession, they are going to allow 13 months. that's not a concession. that has bipartisan policy for the last 40 years. now, mr. president, i've been expressing to you and to the american people why i think this is not a good agreement. why i think this agreement should be defeated, and why i think we can put together a much better agreement. but i do want to be very clear that there are positive aspects to this agreement which should be maintained in a -- and improved in a proposal.

let me just mention some of them. this proposal, of course, in addition to extending unemployment benefits for 13 months, extends the middle class tax cuts. and that is obvious, obviously, obviously something that we have to do. the reality is the middle class in this country is collapsing during the bush years. we saw a $2200 decline per year in median family income. and working families are hurting. no question about it. and to not extent that tax cut, when 98% of america would be a travesty. so we have got to maintain those tax cuts. that's a positive thing in that agreement. obviously, any future agreement must maintain. also in the agreement is the earned income tax credits for working americans and very important provision and the child and college tax credits

also in this agreement. and these proposals will keep millions of americans from slipping out of the middle class and into poverty and they will allow millions of americans to send their kids to college. so i'm not here to say to the president or the vice president that there aren't any good proposals and parts of this agreement. there are. but we can do much, much better. now with the president says, and he makes a valid point. okay. show me the votes. show me the votes. he's good at counting. we try the proposal here. mr. president, as you well know, is it last week we only got 53 votes which said that we are going to send the tax breaks to the middle class and not the very, very rich. and the president knows, as everybody else knows that around here republicans filibuster everything, you need 60 votes. show me the votes. well, this is what i would say.

what our job right now is about is reaching out to the american people from one end of the this country to the other. from california to vermont, including a lot of our very conservative states. because frankly, it is not a conservative approach to substantially increase the national debt. by giving tax breaks to billionaires. how many times have you been on the floor giving the republican colleagues give long, long speak about the danger and sustainability about the $13.7 trillion national debt and $1.4 trillion national deficit. you heard it day after day. that's their monotrack. if they believe that, why are they voting for a proposal that increases the national debt for

the very unproductive reason for giving tax breaks to the richest people in this country who don't need it. and i would hope, and the reason why we have to defeat the proposal and fight for a much better one, i would hope that people throughout the country and vermont and colorado and many of our conservative states, they come forward and say wait a second. i do not want to see my kids and grandchildren pay more in taxes because we borrowed money from china to increase the national debt in order to give tax breaks to millionaires and billionaires who have done extraordinarily well in recent years and by the way, have seen a significant decline in the tax rate. mr. president, i know you have heard, people like warren buffett, one of the richest guys in america, he's made the point over and over again, his effective, what he really pays in taxes, his effective tax rate

is lower than his secretaries. and all over this country, you have examples where very, very rich people were able to stash their money in the cayman islands, take advantage of loopholes, and are paying rather low, effective tax rates. in many cases, lower than police officers or fireman or teachers or nurses. so i think this is in fact opposition to this agreement. it should be tripartisan, you could have conservative republican, liberal democrats, i'm an independent progressive. i can tell you, mr. president, that in the last three days, my office has received probably close to 3,000 phone calls, 98% of them against this agreement, probably higher than 99%. and just a huge number of e-mails also overwhelmingly against this agreement. i suspect, i don't know this for

a facts, this is the kind of message that people are sending us all over america. they got to continue to do that. they have got to make it clear so that we can win over at least a handful of republicans and some waiverring democrats and say wait a second we are not going to hold hostage extending middle class tax breaks in order to give tax breaks to billionaires. we're not going to hold hostage extending unemployment for workers who have lost their jobs by giving tax breaks to people who don't need it. and i think -- mr. president, the american people give voice to what they are feeling. which this is not a good agreement. that we can do a lot better. i think, mr. president, we can defeat the proposal and come back with a much, much better proposal which protects the unemployed, extends the benefits, extends the bush tax

cuts for 98% of the population, and protects a lot of important programs, making college more affordable, making child care more affordable, and helping us transform the energy system. there's a lot that we can do. if we defeat the proposal. we are not going to do it inside the beltway. that i'm sure of. republicans are united. we have to win at least a handful of them. a handful of them, and some waivers democrats to say, mr. president, republican leadership, you guys have got to involve congress in this discussion. i was very pleased yesterday that the democratic caucus said sorry. we're not bringing that proposal on to the floor. i applaud speaker pelosi and the democratic caucus for saying that. congressman from the state of vermont, peter welsh, i applause

him, and peter defazio. we can do better. we can do better than we are doing. let me be frank, we are not going to do better unless the american people stand up and help us. we are going to need a lot of phone calls, e-mails, and messages, so that all of our colleagues in the house and senate understand the american people do not want to see their kids having to pay off the debt occurred by giving tax breaks to billionaires. mr. president, this agreement, you know, doesn't come out of the blue. it comes within a context that i think frightens many people in the country. i think many americans have a sinking feeling that there is something very, very wrong in our country today. i know that my father game to this country at the age of 17

without a penny in his pocket. and became the proudest american that you can ever see. didn't have much of an education. but he knew that this country gave him a great opportunity. and that is the american story. that's what it's all about. millions and millions of families whether they came from other countries, whether they, you know, just made it on their own. i know we have heard a majority leader, senator harry reid talking about his experience growing up in a desperately poor family. that's what america is about. there are a lot of folks out there who believe and the facts back them up. there'sing? wrong. what's going on in the country is the middle class is collapsing, poverty is increasing and what people worry about, i have four kids and six grandchildren. i'm not worried about me.

i'm worried about them. we worry about the paiges future as well. we don't want to see our children and grandchildren be the first generation to have a lower standard of living than their parents. we don't want to see the country, the economy of this country move in the wrong way. we don't want to race to the bottom. we want to see our kids live healthier and better lives than we do. not have to work longer hours, not getting a lower quality of education or less education. that is not the history of this great country. and i want to spend a minute now in talking about one aspect of what's going on in the country that does not get the kind of attention that it deserves. and there are obvious reasons why, having to do with who owns the media, corporate control, having to do with who pays and provides the campaign contribution, and having to do with all of the lobbyist that surround this institution, that,

you know, wall street and the oil company has spent hundreds and hundreds of millions of dollars. we all talk about the issue. and the very simple issue that i want to talk about for a moment is who is winning and who's losing in the economy? i talked to new england. everybody follows the red sox, patriots. everybody said who won the game. who's winning, who's losing? and, in fact, in america, it's pretty clear in the economy who's winning and losing. that majority of people working people, middle class people, low income people, are losing. that's who's losing. and it is very clear who is winning. the wealthiest people in this country are doing phenomenally well. they are winning the economic struggle. in america today, mr. president, and again we don't talk about this too much.

we don't talk about it too much, but it's time that we did. in america today we have the most unequal distribution of wealth and income in the industrialized world. now i haven't heard so many people, mr. president, talk about that issue. why not? republicans want -- the republican colleagues want huge tax breaks for the richest people in this country but the reality is that the top 1% already today owns more wealth than the bottom 90%. how much more do they want? when is enough enough? you want it all? we already have millions of families today that have zero wealth. they own less, they owe more than they have. millions of families have below zero wealth. we are living in a situation where the top 1% owns more

wealth than the bottom 90%. top 1% owns more wealth than the bottom 90%. and mr. president, that is simply unacceptable. today in our country and this is something we must be absolutely ashamed about and have got to address that instead of giving tax breaks to billionaires, maybe we should appreciate the fact that about 25% of our children are dependent on food stamps. we should understand that in the industrialized world the united states of america has as the chart shows the highest rate of childhood poverty in the industrialized world. is this america? is this america? united states today has over 20%

of it's kids living in poverty. in finland, the number is about two or three percent. norway, maybe four percent. sweden maybe four and a half percent. switzerland, six percent. whatever it maybe. here we are, if you are watching on television, what you are seeing is the red line is the united states. well over 20%. here's the netherlands in second place, looks like seven percent. this is the future of america. so we are sitting here talking about an agreement which says let's give huge tax breaks to billionaires. here's the reality we have a rate of childhood poverty far, far surpassing any other country on earth. let me tell you something else, i don't know that we have a chart for this. but it's the other half of the equation. what do you think happens when you have millions and millions of kids living in poverty? what do you think happens when

you have kids who are dropping out of school when they are 13 or 14? i will tell you what happens. because i talked to a fellow in vermont who runs one of our jails. and he said that about half of the kids who drop out of school end up in the penal system. >> vermont independent bernie sanders. his filibuster last week is available online at the c-span video library. we take you now to the u.s. senate gaveling in for business today. first up, an hour of debate on the proposed tax cuts and unemployment benefits deal. a vote to move the legislation forward is scheduled for 3 p.m. eastern. you are watching live coverage here on c-span2.

the presiding officer: the senate will come to order. the chaplain dr. barry black will lead the senate in prayer. the chaplain: let us pray. god of might, you are our defender. without your protection, we are powerless. hear our prayers as we lift our hearts toward your throne. forgive us for our failures and defend us with your mercy. today, bless our lawmakers. guide and lead them as you have

promised. keep them safe from the traps that bring national ruin and shelter them from danger. help them to find the common ground that will bring blessings to our nation and world. frustrate the purposes of all enemies of freedom. we pray in your faithful name. amen. the presiding officer: please join me in reciting the pledge of allegiance to the flag. i pledge allegiance to the flag of the united states of america, and to the republic for which it stands, one nation under god, indivisible, with liberty and justice for all.

the presiding officer: the clerk will read a communication to the senate. the clerk: washington, d.c., december 13, 2010. to the senate: under the provisions of rule 1, paragraph 3, of the standing rules of the senate, i hereby appoint the honorable the honorable mark r. warner, a senator from the commonwealth of virginia, to perform the duties of the chair. signed: daniel k. inouye, president pro tempore. mr. reid: mr. president? following leader remarks, the senate will resume consideration of the house message with respect to 4853, the vehicle for the tax agreement with the time until 3:00 p.m. equally divided and controlled between the two leaders and their designees. at 3:00 p.m., the senate will proceed to a roll call vote on the motion to invoke cloture, the motion to concur to the house amendment to the senate amendment to h.r. 4853, with the reid-mcconnell amendment. the cloture vote will be held open until -- we'll close it as

quickly as we can. there is bad weather around the country. i just got a call from a senator who is stuck in minneapolis, but we'll close it just as quickly as we can. we need to start it earlier than normal because some people had to go places. we will be as deliberate as we can in making sure people have the opportunity to vote. i ask unanimous consent that the filing deadline for second-degree amendments with respect to the motion to concur with the amendment be at 2:30 p.m. today. the presiding officer: without objection. mr. reid: mr. president, to be honest with you, i was hoping that the republican leader wouldn't be here today at this time so i could avoid him because i didn't want to talk about the saturday basketball game that louisville beat unlv. it was an upset, but i guess turnabout is fair play because the last two years, unlv has beaten louisville. but the good news, as far as louisville goes, from my perspective, is a young coach

from unlv was a soccer coach and there was some turmoil in the athletic department, and they didn't support him really very well at all, so he went, took a lark and went to louisville. louisville has never had any quality soccer teams, and this young man took this team and they played in the national finals yesterday. they lost 1-0. mr. mcconnell: they did, lost 1-0, but made it all the way to the finals. mr. reid: i was sure pulling for louisville. mr. mcconnell: but you weren't saturday? mr. reid: i wasn't saturday. mr. mcconnell: the senate was not in session saturday, i was actually there. five minutes into the second half, your rebels were up by nine and it looked pretty bleak, but all's well that ends well, and the louisville cardinals managed to win. mr. reid: as i said, mr. president, i was hoping that i wouldn't have to be here today while he was here, but that's the way it is.

i have nothing further, mr. president. mr. mcconnell: i would say to my friend, since we're talking about weekends, i assume that all of our members should expect that we will press on this weekend and are highly likely to -- mr. reid: we need to stay here until we finish. mr. mcconnell: yeah. mr. president? mr. reid: the republican leader. mr. mcconnell: over the past few years, the american people have been engaged in a great national debate about the proper role of government. this debate is as old as our nation itself, but it has re-emerged with new intensity amidst a prolonged economic downturn that continues to affect millions of americans. on the one side are those who argue that the solution to our present troubles lies in giving more to washington. they say that if only washington had more power, we could have

averted these challenges altogether, and that the only way to get us out of this and to put us on stronger economic footing is to hand over more of our freedoms and more of our paychecks to washington. on the other side of this debate are those who say that in order for individuals to prosper and move up the economic ladder, they must be free to take risks, they must be free to fail. they argue for government limits and restraint and for making as many decisions as possible close to home. now, it's no secret that most americans fall into the second group. whenever asked, most americans say they will take a system of free enterprise and limited government over the alternative any day, but occasionally people find the first group's message appealing, too, especially in times of distress, and that's why two years ago, americans chose what they viewed as the safer route. yet, since then, many have come to regret that decision. we have all seen the deep discontent with washington

spread over the last year and a half as lawmakers here assumed more and more authority and spent more and more taxpayer money on wasteful projects and dubious long-term programs which couldn't possibly deliver what democratic leaders said they would. and early last month, we watched as americans told democratic leaders in washington that they had had enough of their two-year experiment in big government. on election day, our debate about government took yet another turn. and the bipartisan compromise that the white house agreed to last week on taxes is a clear sign that it's had an impact. in some ways, it has shifted the debate entirely. here's how. for two years, democrats in washington have argued that the solution to our nation's economic problems is to give bureaucrats in washington trillions of dollars and then have them spend it for us, but with this bipartisan compromise, we're taking a different approach. we're telling the american people to keep money that's rightfully theirs so they can

spend it and invest it as they please. this is an important shift, and the white house should be applauded for agreeing to it. there are parts of this agreement i don't like, such as the democrats' insistence that we borrow the money we need to pay for a further extension of unemployment insurance. in my view, if both parties agree that the debt is a serious problem, we shouldn't be writing checks that we don't have -- don't have the money to cover. and yet in another way, this bipartisan compromise represents an essential first step in tackling the debt, because in keeping taxes where they are, we are officially cutting off that spigot. taxes are going to stay right where they are for the next two years. and until we did that, democrats in washington are never going to be serious about cutting spending or debt. as long as more revenue is coming in, they would always have an excuse to spend more. with this agreement, members of congress no longer have that excuse. history is very clear on this

point. from world war ii through 2009, every dollar of new tax revenue that the government has collected has been associated with $1.17 in new spending. this means that for decades, lawmakers in both parties have spent every dime of revenue that came in from taxpayers, have borrowed a little more on top of it to set a higher base line for the next year. but the american people have caught onto the game and they have had it. they know the root of our problem lies not in the fact that washington taxes too little but that it spends too much, and they want the wasteful spending to stop. mark my words, if republicans had gone along with the democratic plan on taxes, they would have done the same thing they have always done. they would have spent it all and then some. they had no intention of using any new tax revenue to pay down the debt. the president has already said he has better ways to spend the taxpayers' money than they do. nobody expected the same

democrats who more than tripled the deficit to suddenly get serious about cutting if they expected more tax revenue to come in next year as a result of higher taxes. so it never made sense to take money from job creators in order to hand it over to politicians who would only waste it. nobody ever created a job by punishing a job creator. and we simply had to turn off the spigot. not from some but from everyone to remove the temptation to spend it. for the past two years, democrats in washington worked hand in hand with the white house, spending trillions we didn't have on programs americans didn't want. they wrote future budgets, presuming americans would agree to a tax hike to pay for it all. they cashed the checks before americans had even written them, like an employee who demands a raise on the grounds that he and his wife had already budgeted for a speedboat and a three-car garage. but the american people have rebelled against this waive doing business. now we're going to move in

another direction. some may continue to deny that washington has a spending problem. those are the people who are still out there arguing for a tax hike, but the only argument they appear to be making is that it's only fair for certain people to be punished with higher taxes. i've heard a lot of democrats in recent days say that this group or that group doesn't deserve to have their current tax rates extended, but, of course, that's always been a losing argument in america. you can count me among those who want everybody in this country to succeed, and i suspect most americans agree with that. there may be some in washington who are only satisfied if somebody or some group loses out, which either means they think there is a finite amount of success to be had out there, which is nonsense, or they are looking for an excuse to spend more money on turtle tunnels or researching the drug preferences of monkeys, but either way, americans aren't interested in that point of view. americans aren't interested in

scapegoats. they're interested in regaining our prosperity. they've lost faith in government's ability to get us through more and more government spending, and with this bipartisan compromise, we're finally giving these people a voice in the debate. so, mr. president, today's vote is a step in the right direction, but it's only a first step. unless we use it to pivot to the deficit and the debt, we will have only pushed the larger problem down the road, and no one sent us here to do that. it's time to come together to cut the debt in the same way we have come together to prevent a tax hike. it won't be easy, but we have laid the groundwork. i will vote in favor of this bipartisan compromise, and i urge my colleagues in the senate and in the house to do the same. now, mr. president, on another subject, we are losing through retirement a number of our most

distinguished members and none of them have i been closer to than the senator from utah, senator bennett, and i am pleased that he is also here on the floor today. he made his farewell speech last week. now i'd like to speak about his farewell myself. over the last 18 years, i've come to rely on bob's counsel, and today i would like to thank him publicly and personally for being so generous with his candid advice and unfailing good judgment. i simply would not be where i am today without the benefit of bob's wisdom and friendship, and i'm deeply grateful for it. now, bob's always been a pretty low-key guy, and he's always preferred working quietly in the background. both rarities in politics today. but as with most everything bob does, there's a method behind his style.

as bob once put it, in washington, there are two kinds of senators -- workhorses and show horses. i decided i would be a workhorse. and then he went on to explain the difference. he said most of the show horses, he said, look in the mirror in the morning and see a president looking back at them, but we haven't elected a bald innocent this country since eisenhower, so i look in the mirror and realize i don't have the qualifications. what bob failed to point out, of course, is that he's got one of the longest resumes in the senate, so i'd like to take a moment today to go through just some of the things he's achieved in a very, very eventful life. born in salt lake city, bob was the youngest of francis and wallace f. bennett's five children. bob learned hard work ethic and his faith from both his parents. a product of public education, bob graduated from east high school in salt lake city and then went on to attend the

university of utah, where he majored in political science and served as student body president. after college, he served three years as chaplain in the utah army national guard. by then, bob's father had already been a u.s. senator for a number of years, and after his service, bob joined his dad's senate reelection campaign in 1962. it was a close race, but bob's father was able to win. and bob himself was hooked on politics. after working on the campaign, he wasn't much interested in returning to bennett paint and glass so he packed his bags and moved to washington. after bouncing around a little as a press secretary in congre congress, a corporate researcher working on federal pension law, and chief administrative assistant for his dad, he took a job as a lobbyist for jaycey

penny. they don't make as much money as they too today. but bob enjoyed the friendships he made including to the legendary bryce harlow. he became more than a mentor, a friend. and when nixon won election in 1968, bryce pulled him aside and gave him marching order. he said, if i have to give up my cushy corporate job to serve this administration, he said, so do you. go get measured for a suit and go over to the department of transportation. show up, you're going to be john volpe's head of congressional relations. and that's exactly what bob did. bob will tell you he was proud of his work and the experience he gained at d.o.t. he says no department was more successful and he has all of the presidential pens to prove it. at the end of 1971, bob was ready to leave government and start something new so he bought the public relations firm robert

mullin and company and soon unwittingly found himself right in the middle of the watergate scandal. what bob didn't know when he bought the firm is that it doubled as a c.i.a. front and that one of its employees had organized a break-in at the center of the watergate investigation. the unwanted attention ruined bob's new business and completely changed the course of his career. howard hughes was one of mullin's clients at the time and he asked bob to work for him directly in california. looking for a fresh start, he took the job and left washington for the west coast. after that, bob found success running a company that made dayplanners and organizers. under his leadership, the company went from four employees to 700 employees and $80 million in sales. and then in 1992, with utah republican jake garn returning

from the senate, bob decided to fulfill his lifelong dream and follow in his father's footsteps by running for the u.s. senate. after a tough primary, he beat his democratic opponent and won the election with a 15-point margin. and since entering this chamber, he's also been a central player in some of the most significant legislative efforts the senate has undertaken over the last two decades. a staunch conservative with a track record of finding common ground on some of the toughest issues, bob played a central role in the bailout of the american -- of the mexican government during the peso crisis in the 1990's. for his efforts, president clinton praised him as -- quote -- "a highly intelligent, old-fashioned conservative who quickly grasped the consequences of inaction and would stick with us throughout the crisis." around the same time, he was also instrumental in the passage of legislation related to confident ality of -- confidentiality of medical

records. as someone who's always worked hard to build relationships with democrats, i knew i could always rely on bob to find the pulse of democrats on an issue, and democrats would turn to him too. here's what senator reid once said about bob. "there's no more honorable member of this body than bob bennett." bob and i found common cause over the years. among other things, in our defense of the first amendment. i remember being in the trenches together over the flag burning amendment, which we both opposed. both of us, of course, also stronglstrongly oppose any desen of the flag but we agreed that an amendment to the constitution was not the only way to go. and in the end, we prevailed. we thought it was worth the fight to ensure that congress didn't place any qualifiers on the first amendment. over this time, bob became one of my most trusted colleagues and that's why when i was elected republican leader, i asked him to serve as one of my advisors. he's smart, level-headed, a

proven leader, a successful entrepreneur, and when he spea speaks, everyone listens. in addition, he has a remarkable gift of persuasion. far from the floor is where bob does his best work. it's a trait he learned from his dad. as bob once put it, building a consensus, building relationships where people will trust and do things for you is the hardest work of the senate. and when it comes to fruition, it's also the most rewarding work in the senate. bob decided long ago to do his best to stay out of the nasty political fights that occur from time to time in this town. that's one of the reasons you don't ever see him on sunday shows. bob knows that most of the time the media is just looking for a gotcha moment. he's more interested in spending his time focusing on what is best for his constituents, whether it's in this chamber, in committee, or back home. in addition to bob's role in

leadership, he served as ranking member of the rules and administration committee, as the chairman of the joint economic committee, as the senior member of the senate banking committee, as the ranking member on the subcommittee on energy and water development, and, of course, on the senate appropriations committee. he's been involved in nearly every major issue that's come through this chamber over the past two decades. he's worked hard to fix our economy and health care system, simplify the tax code, reform entitlement programs, and strengthen america's national security at home and abroad. but bob will tell you his most important job is being a husba husband. and, of course, today we also pay tribute to joyce, who has played such an active role in the life of the senate family over the years. we'll miss them both. together, they've raised six children and in nearly 50 years of marriage, they've certainly seen a lot. when asked about his legacy, bob has pointed out that it was

always his hope to live up to his own father's example of integrity and hard work. and, bob, we know that if your dad were here today, he'd be so proud of all you have accomplished, not only in this chamber but for our country. but also as a devoted husband, father, and grandfather. so it's with a sense of gratitude for all that he has meant to the senate and to me personally that i pay tribute to bob bennett. it's been an honor to serve with him and, most important, to call him a friend. and on behalf of the senate entire senate family, i want to thank bob for his service. he will be missed. we wish him all the best in the next chapter of his life. the presiding officer: under the previous order, leadership time is reserved. the senate will resume the house message to accompany h.r. 4853, which the clerk will report. the clerk: motion to concur in the house amendment to the

senate amendment with an amendment to h.r. 4853, an act to amend the internal revenue code of 1986 to extend the funding and expenditure authority of the airport and airway trust fund and so forth and for other purposes. the presiding officer: under the previous order, the time until 3:00 p.m. will be equally divided and controlled between the two leaders or their designees. mr. baucus: mr. president? the presiding officer: the senator from montana. mr. baucus: mr. president, before i proceed to speak on the topic, i would like to say a couple words about bob bennett. we all are deeply impressed with his sense of integrity and his commitment working for, you know, basic sound principles. and one i might say made a big impression on me is he came to my office i think on his own, or could be he was appointed to help find a way to make the senate more relevant, ways to change the senate rules to address some of the frustration

that a lot of senators have. you know, people watching might wonder, gosh, why do senators think they are not very relevant. but i must say, it's because a lot of senators feel they want to get something done quickly and are sometimes frustrated by the actions of other senator who has not quite the same idea. but i was very impressed with bob's attitude. he came and talked to me, what can be done, max, what ideas do you have. it was very, very refreshing. and i remember thinking at the time, this is going to be difficult. i told him it was going to be difficult. but i didn't tell him how difficult i thought it would be. but i was very impressed with his -- his freshness and his desire to help -- help adjust the senate rules. mr. president, i ask consent that the following staff of the finance committee be allowed on the senate floor for the duration of the debate on the tax bill. it's michael grant, cane misario, jack mcgillis, nicole marchman, inichi rodrigo, mary

baker, greg sullivan, andrea fishburn and james baker. the presiding officer: without objection. mr. baucus: mr. president, about two years ago, our economy was on the brink. so one of the first things we did with our new president was to enact the american recovery and investment act and we did so to jump-start our economy and we did so to create jobs. in the two years since, our economy has created and sustained more than 3.5 million jobs. 3.5 million more than would have been available had we not taken that action. 3.5 million. the economy is now starting to move in the right direction but we have a long way to go. the positive momentum in the economy is fragile so we need to work tirelessly to protect it, and our first priority must be to create jobs. more jobs. the lower tax rates enacted in 2001 and 2003, along with a number of other tax provisions,

are set to expire at the end of this year. if we do not act, taxes will go up. in addition, last month, the emergency federal unemployment insurance programs expired. if we don't act there, then by the end of next month, 2 million americans will be without critical assistance that they'll need. that's help put food on the table and to keep a roof over their head. the tax cuts and imunlt insurance -- and unemployment insurance both have the critical effect that we must have, the critical effect on middle-class families, our economy and on jobs. a little more than a week ago, the senate voted on two amendments that would have extended these tax cuts for the middle class and unemployment insurance. our amendments would have focused those extensions on the most effective ways to create jobs. the amendments that we voted on that saturday would have given critical relief to middle-class families. they would have provided

unemployment insurance to millions of americans who lost their jobs through no fault of their own. these two amendments, the baucus amendment and the schumer amendment, would have extended tax cuts that would have benefited all taxpayers. those amendments would have extended critical tax cuts, like the college tuition tax deduction. it would have made the child tax credit permanent. and they would have cut taxes for employers, freeing up cash for them to expand and hire new workers. those amendments focused on providing middle-class families the tax relief that they need. they focused on creating the jobs that our economy needs, and they focused on getting the biggest bang for our buck in creating those jobs. cutting taxes for middle-class families and extending unemployment insurance stimulate our economy. they do so because the families who benefit from those policies are the families most likely to spend that extra money.

spending that money injects it directly into our economy and that helps the economy to grow and to create jobs. the best way to extend these expiring tax provisions is to focus on the middle class, and that's what my amendment did and that remains my strong preference. there are some in this body, however, who want to extend tax breaks for the wealthiest as well. these folks have held tax cuts for the middle class hostage to get these tax breaks for millionaires and for billionaires. tax breaks for millionaires and billionaires are not the best way to create jobs. the nation's wealthiest are more likely to save their money rather than spend it and put it back into the economy. and permanently extending tax cuts for the richest americans would cost our economy $00 billion over -- $700 billion over the next ten years. that's too great a cost for a budget already burdened by deficits and debt. but despite this disagreement,

creating jobs needs to remain our first priority. if we do not extend unemployment insurance, then by the end of the next month, 2 million americans who lost jobs through no fault of their own would lose their unemployment benefits. if we allow those benefits to expire, families who currently receive them would lose much of their income. emergency unemployment insurance has benefited about 40 million people, mr. president. that has included, i might add, 10.5 million children. emergency unemployment benefits particularly help middle-class families. middle-class families received 70% of total e.u. benefits. these are folks with a work history. they lost their jobs through no fault of their own. unemployment benefits are the only lifeline that many workers in montana and across the nation have left in this tough economy. these benefits support americans who have worked, who are looking

for work, and who will work again. if we do not extend unemployment insurance, we take some of the most stimulative dollars out of the economy. that would just hurt the economy's ability to create jobs. the nonpartisan congressional budget office says, the unemployment benefits have one of the largest effects on economic output and unemployment per dollar spent on think policy. for every dollar spent on unemployment insurance, $2 are reinvested in the economy. the council of economic advisors estimates that as of september, emergency unemployment insurance benefits have increased the level of employment by nearly 800,000 jobs. that's just september. unemployment insurance goes to people who will spend it immediately. that increases economic demand. it's critical to extend unemployment insurance to

support our fragile economic recovery and to help create jobs. and if we don't extend the lower tax rates enacted in 2001 and 2350 and the other tax provisions expiring at the end of this year, millions of middle-class families will pay higher taxes next year. middle-class families are the backbone of our economy, and this recession has hit middle-class families hardest. too many middle-class folks who have worked hard all their lives have been knocked off their feet by this recession. too many middle-class families are still struggling. if we don't act, individual taxes will go up. if we don't act, the child tax credit will shrink, and the college tuition tax deduction will end. so will the state and local property tax deduction and the property tax deduction itself and a host of other tax breaks critical to middle-class

families. now is certainly not the time to raise taxes on middle-class families. and if we don't act, taxes will go up on employers. taxes will go up on employers engaged in critical research and development. that's r & dhavment our economy needs to stay comettive in the global -- to stay competitive in the gloacial market. if we don't act, taxes will go up on employers working on new sustainable energy resources like wind power. sustainable energy is the industry that could create hundreds of thousands of jobs. now is not the time to raise taxes on the employers with the potential to create the jobs we need. so we must act because if we fail, that is, if we stal fail o extend these provisions, we place our economy at risk. if we fail to act, we place

middle-class families at risk. so while i strongly prefer acting in a way that focuses more on the middle class, that focuses on creating jobs and that gets us the most bang for our buck, inaction clearly is not an option. for that reason, i will support the bipartisan compromise that the president has proposed. plain and simple, this bipartisan compromise is about creating jobs. extending middle-class tax cuts will help create jobs. not extending them would cost jobs. and we just cannot afford to lose jobs. job creation needs to be our number-one priority. our economy has come a long way in the last two years, but the growth is still fragile. let us keep the focus on creating jobs. let us keep moving our economy forward. let us pass this critical

legislation. mr. grassley: mr. president? the presiding officer: the senator from iowa. mr. grassley: -- the senior senator from arizona. mr. mccain: mr. president? the presiding officer: the senator from arizona. mr. mccain: mr. president, i think it's very clear that the vote today will result in a significant majority vote for the pending legislation, the s so-called tax extenders. i will be one of those who will probably be voting as well. but i must say in the brief time that i have, i must say that there's almost an orwellian experience here on the floor of the united states senate, as compared with the rest of america. here we're about to pass -- here we are about to pass the tax extenders, which are necessary to give some kind of certainty to businesses small and large across america, to give tax breaks to people in these most

difficult times, including my home state of arizona. and so what did we do? rather than just extend the tax breaks, which is what the majority of americans want, we engaged in the continuing practice, which has alienated the majority of the american people, of loading up with unneeded, unnecessary, unwanted sweeteners in order to, i guess, get votes or satisfy special interests. i quote from "the wall street journal" this morning, entitled "the hawkeye handouts." "the tax bill is becoming a favorite festival starting with ethanol." and of course it goes on to talk about the ethanol extension is the bipartisan handiwork of people who -- and trade protectist plus mandates that force consumers to buy ethanol. this is a trifecta of government support and for an industry that

is 30 years old and that even al gore admits serves none of its advertised environmental purposes." and i would like to point out for my colleagues on this side of the aisle what the one-fourth says. "the greater political risk here is for republicans who should worry that the tax bill is turning into a special-interest spectacle. the bill revives a $1-a-gallon biodiesel tax credit and there's $221 million for 'incentives for alter national fuel,' money for maintaining railroad tracks and so on. it is precisely the business-as-usual behavior that republicans told tea party voters they wouldn't engage in." these business subsidies are greased for senate votes in favor of the deal so the only chance to remove them would be the kind of public outcry that

attacked the cornhusker kickback and other obamacare fiascoes. call these ethanol favors 'the hawkeye handouts'." that's what sphwhil all about. i say 10 my clerks i'll vote for t but it's not what the people said they wanted done on november 2. now, i understand that -- unless online gaming, poker playing, gambling legalization comes up, we will probably go toon omnibus bill. that omnibus bill is going to be loaded down with earmark and pork-barrel spending, which is a direct -- a direct betrayal of the majority of the voters on november 2 who said, stop the earmarking, stop the spending, stop the outrageous pork-barrel projects. we need -- this bill comes up loaded down with pork-barrel expanding.

we owe it to the american people to stop t what we owe is the american people is a clean continuing resolution with no additional spending on it that would be good for 45 days so the new congress, in response to the american people, will act in a responsible fashion. mr. president, this bill we're going to pass is -- contributes to the debt and the deficit, contributes to the mortgaging of our children's futures. i say to my colleagues, we should rise up against any omnibus appropriations bill and we should only enact a continuing resolution. and i say that to my colleagues on this side of the aisle that may not have gotten the message of november 2. vote to have a clean continuing resolution. that's what the american people have said they want. that's what they deserve. the american people deserve to be heard. let's reconnect washington and the american people. i thank my colleague from iowa

for the time. mr. president, i yield whatever remaining time i have. a senator: mr. president? the presiding officer: the senator from colorado. mr. udall: mr. president, i rise to speak in opposition to the bill in front of us today. i just -- i want to start out by saying, in addition to all the many challenges facing our nation, a massive budget deficit and a crippling debt may priewfer to be the most difficult challenge that we face as a country. a deep structural defect like the one our government has accumulated because of these debt levels, not only threatens our long-term economic security, it darkens the horizon in a way that discourages innovation and investment that we need to spur american jobs today. and, moreover, our apparent inability to squarely address the problem in a bipartisan way is a signal to the american people, as if they needed more proof, that our democracy is not

working, and that is as dangerous as any attack on our country. it is a time bomb in our midst, the ticking of which we cannot ignore unless we are comfortable knowing that it will inevitably blow up on our chin. just last week a bipartisan group appointed by the president confirmed the seriousness of this with a metaphor. the president's commission called our national debt a cancer that is threatening our country from within. whether a time bomb or a cancer, the threat is real. and the commission confirmed it in the starkest possible terms. the chairman's recommendations for how to respond were sobering but if a way they were also like a strong cup of coffee after a serious drinking bing. americans sat up and listened, and for a few days before the release of the report and the vote by the full report the following friday, it looked like

we might be able to set aside the id logical differences and could actually address this problem. it looked like we might be able to follow the old add ogee, "when you're in a hole, stop digging." however, the next week the president announced a plan that he negotiated with republican leaders to extend the bush tax cuts across the board, a plan that would add $900 billion over the next two years. what's staggering to me, mr. president, it took just four days to switch the conversation from reducing the debt to adding to it, just four days after the most substantive conversation we've had about addressing the debt, we start arguing about the wisdom of extending tax breaks for millionaires and billionaires that alone will cost $700 billion over the next decade. that's $700 billion of additional debt the people of the united states will owe to china and our other creditors around the world. to paraphrase one of my

colleagues, i feel like we're operating in some kind of a parallel universe. despite disagreements, our disagreements here and in the other harks i believe that we owe it to the american people and to one another to be pragmatic and truthful about the fiscal challenges confronting us. so i respect and even applaud the president's efforts to reach a compromise based on political pragmatism. but what i respectfully disagree with is the notion that this compromise is based on anything approaching fiscal reality or truth in accounting. which is the point i believe that the chairman of the president's fiscal commission, erskine bowles, and alan simpson, were make. if i might, mr. president, i'd like to remind my colleagues today of the history of the bush tax cuts for the wealthiest americans. those tax cuts were passed after

we experienced one of the strongest economic environments in our history. those who supported tax cuts for the wealthy believe that because we had begun to reduce our long-term debt we could afford them. they believed those tax cuts would stimulate our economy further and create millions of new jobs. in the words of then-vice president cheney it was a time when -- quote -- "deficits don't matter" -- unquote. i did not support the tax cuts for the wealthy in 2001 or 2003. for much the same reason i don't support them today. i voted against them as a member of the house of representatives. now, i sincerely wish that those tax cuts had effectively spurred sustained job growth. i do. but, unfortunately, the next decade saw a decline in our economy like we haven't seen since the great depression. banks fraild, foreclosures reached a crisis point, we were forced to bail out financial institutions and insurance giant

and the auto companies to keep the economy from crashing further. during that time, real income for average households decreased and the unemployment rate nearly dubilityd as millions of workers were laid off. if tbilities for the wealthy among us were an efficient way to spur innovation and investment, i have to believe that economists would be telling us to continue them. but here's what they're actually saying: economisteconomists of all strie tell us us that extending tax cuts for the wealthy is one of the least effective ways to create jobs and build the economy. even some of america's most successful businessmen, bill gates and warren buffett, who are among those who stand to gain dramatically from the bill before us, have urged us to prioritize seniors, long-term economic stability, and job creation instead. they know what recent history has shown, that tax cuts for millionaires and billionaires don't help our economy. it certainly doesn't help our

national debt. just over one week ago i stood here with all of my colleagues and voted to support a proposal to follow the advice of economists bill gates and warren buffet and extend relief to middle-class families. to a family making $50,000 a year, an $800 tax cut would make the difference in buying a car. as more americans stand in the unemployment line, i find it hard to explain or justify last week's filibuster preventing middle-class tax relief so millionaires and billionaires can get an extra six-figure check from the federal government. we've heard all kinds of arguments for extending tax cuts for the wealthiest americans and we've been told this bill represents the best deal we could get in order to bring further tax relief to middle-class americans. but again, mr. president, those

arguments are based on political pragmatism, not a truthful or objectively measured analysis of the actual impact on our budget deficit. that's why the cochair of the president's deficit commission, erskine bowles, a university president who knows the effect of the budget crisis has had on our states, on education and on families, has spoken out against this irresponsible tax deal for wealthy americans. the presiding officer: the senator's time has expired. mr. udall: mr. president we should be voting on a plan kroeuplsed negotiate -- plan compromised in good faith. i feel the bad choices we made will haunt us in the next decade. for these reasons the legislation before us is a step too far. that is why i oppose it. i yield the floor. the presiding officer: the

senator from iowa. mr. grassley: how much time is on our side? the presiding officer: 12 1/2 minutes. mr. grassley: this bill is about stopping the biggest tax increase in the history of the country that will happen if we don't pass something between now and the end of the year. and that happens because the 2001 tax law, the present tax policy, was only good for ten years, and it sunsets. and so you go back to the big tax policy that we had, the high tax policy we had in the year 2000. we're passing this now because of a simple rule of economics. you should not increase taxes during an economic recession. and with nearly 10% unemployment, we're still obviously in a recession.

some on the other side supported the president's earlier proposal when he wanted to maintain the existing tax policy just for those below a $200,000-a-year income. the senate did not support that proposal, and it's clear that that proposal could not pass. i know that can be a difficult thing. over the years i've seen proposals that i thought were good and just and that i cared passionately about defeated here in the senate. but you just move on. and so that's what our president has done. he has moved on in a pragmatic spirit. he has put forward another proposal to prevent the biggest tax increase in the history of the country from happening. he doesn't view it as ideal, and few on my side of the aisle do as well. for all of us, it's a balancing

act. we want to stay true to our deals. we also want to deliver practical results to our constituents. and i support that this bill -- i submit that this bill doesn't increase taxes. it doesn't cut anybody's taxes. and that that happens to be the right balance for the vast majority of us, but it happens to be what's right for the economy now that we're in a recession. just ten days ago the unemployment rate ticked up to 9.8%. since july it was at 9.5%. so the trend is in the wrong direction. we're in a fragile situation. the economy is clearly telling congress, handle with extreme care. economists -- the majority of the economists surveyed by cnn

money says that preventing the 2011 tax hikes is the number-one thing congress can do right now help the economy, and the survey -- the survey is here on the chart. 61% said preventing tax hikes was the best course of action congress can take at this particular point in time. we have the nonpartisan congressional budget office saying that g.d.p. growth will be far less if we let the biggest tax increase in the history of the country happen without congress intervening. if the tax relief doesn't maintain at the present level, the economy would go .3% less than if we do it the way the

president originally wanted to do it, just for those people under $200,000-a-year income. in other words, the economy will grow at 1.4% if we leave tax policy the last ten years in place as opposed to doing it, taxing people that make over $200,000 a year at a higher level. then the economy would only grow at 1.1%. so given the recession, given the high unemployment rate, given businesses' reluctance to invest and grow, we need to be especially sensitive to g.d.p. growth. if it were just a matter of either the government got the money or the private sector, that would be one thing. as the government does have a deficit problem. but in this case, it's a matter of money simply not being there

because of the hit to the gross domestic product. we're talking about dead weight loss. for those of you that think taxing people more will bring in more revenue, i would put up here a chart that expresses tax policy and the result of it over the last 50 years. you can see the red line here says that an average of about 18.2% of all the wealth -- is our 12 1/2 minutes up? the presiding officer: 7 minutes remaining. mr. grassley: i'm sorry. i thought you were talking to me. you can see the red line shows that for a 50-year average, about 18.2% of the gross domestic product has come to the congress to spend, regardless of what the high marginal tax rates

were, going back to 93 in the eisenhower administration, going down to 70 in the kennedy administration, going down to 50 in the reagan administration, going down to 26 in the reagan administration, back up to 40 -- almost 40% in the bush, h.w. bush's administration, and then down to the 35% where they are now, and they could go back up to the 40% if we don't intervene right now. what this ought to tell everybody here is that marginal tax rates don't make a difference, a big difference on how many money comes into the federal treasury, that the people of this country decided about how much they're going to give to us in congress to spend out of the entire national

income. and it's about 18.2% regardless of where the marginal tax rates are. it tells me that people, if they don't want to work, if they don't want to earn, or if they want to hire people to legally avoid taxes, they're going to do it and we're only going to get so much. here's what the nonpartisan joint committee on taxation says about this. "we anticipate -- -- quote -- "we anticipate that taxpayers would respond to the increased marginal rates by utilizing tax planning and tax avoidance strategies that will decrease the amount of income subject to taxation." and that chart proves exactly what the nonpartisan joint committee on taxation has said. we have known about these looming tax hikes for a decade now. we should have acted many years ago. now we have only 19 days to go

before the tax hikes take effect. we're down to the wire, and we need to being the. we need to -- and we need to act. we need to act because that's what it takes to turn this economy around. the time to dither is over. the national association of independent businesses had this to say recently: because of no action on expiring tax rates, there is a cloud of uncertainty loud and darker in response to consumer sentiment fell and owner optimism remained anchored solidly in recession territory. thus, spending stayed in main street mans -- in maintenance mode, owners won't make spending commitments when sales prospects remain weak and important decisions such as tax rates and labor costs remain high --

remain uncertain." end of quote from small business. uncertainty is the issue we have to deal with here. passing this bill so that the biggest tax hike in the history of the country won't happen is one thing that will bring some certainty and maybe more certainty than anything else to our economy. so i ask my colleagues that the bottom line, as evidenced by this chart, is stop the tax hikes. it's time to leave the tax policy of the last ten years in place, so for at least for the next two years people know that they can hire and expand this economy and expand theirs. i reserve the balance of my time.

the presiding officer: 2 1/2 minutes. mr. grassley: i think, mr. president, i'm going to take 2 1/2 minutes to address the issue of what the senator from arizona said about some of the provisions in this bill. we keep having ethanol be referred to as a subsidy. well, let me tell you about some of the subsidies that are in this bill because you might think that ethanol is the only one of them. think in terms of the research and development tax credit. that's subsidy for big business. it's been around for 30 years. think about the indian employment tax credit, the subsidy for new market tax credits, the subsidy for railroad track maintenance credit, mine rescue train credit, subsidy for employer

wage credit for employees who are on active duty in the uniformed services, the subsidy for 15-year straight line cost recovery for qualified lease holder improvements, the subsidy for the seven-year recovery period for motor sports entertainment complexes. i don't quite understand when there's 72 provisions in this bill that expired on december 31, 2009, and they're just being continued, as some of them have been for 30 years, how somebody today is going to say that that's bad tax policy and they didn't say it over the last 30 years. and particularly when it comes to a time when we know that we need a balanced alternative energy program. balanced for whatever can be

alternative energy because god only made so much fossil fuel. obviously we ought to be using petroleum. but should we import more petroleum from the 10% of the fuel used in motor vehicles coming from ethanol? do you believe that we ought to have a good national security program that's less based upon the requirement of imported oil? i think we ought to look at this balanced program as being one of fossil fuels, one of alternative energy, and one of conservation. and ethanol and biodiesel and wind and solar and all of that is part of the balanced program and they all have tax incentives. i yield the floor. the presiding officer: the clerk

will report the motion to invoke cloture. the clerk: cloture motion: we, the undersigned senators, in accordance with the provisions of rule 22 of the standing rules of the senate, do hereby move to bring to a close debate on the motion to concur in the house amendment to the senate amendment to h.r. 4853, the middle class tax relief act with an amendment numbered 4753 signed by 18 senators. the presiding officer: by unanimous consent the plant triquorum call -- the mandatory quorum call has been waived. the question is, is it the sense of the senate the debate on the motion to concur on the house amendment to the senate amendment to h.r. 5853 with amendment number 4753 shall be brought to a close. the yeas and nays are mandatory under the rule. the clerk will call the roll.

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