quarters you deal with inflation. how do you balance this quarter with more inflation, and this quarter is more on unemployment numbers. how do y'all make that decision? >> we do it based on a variety of models and other things that help us project forward where we think the economy is going to go. this shows unemployment is likely to stay high for some time as i said earlierment inflation, we know about the commodity increases, but not with standing that, underlying inflation looks to be low. based on that, we think accommodative policies are still warranted. ..

>> thank you, mr. chairman. >> mr. ryan. >> thank you, chairman ryan. thank you, dr. bernanke. one of the mandates for the fed is to keep unemployment low. there's some folks in town who think that that should no longer be the role of the fed. how would you have negotiated this crisis and where would we

be today if he did not have that mandate? >> well, our policies would have probably been somewhat similar because from both sides, we had both high unemployment and low inflation so both of those things have moved us to the accommodative. that being said in situations like this where unemployment is very high and inflation is low, i think that monetary policy does have some scope to support recovery, and, therefore, to help on the employment site. so i say that but again, reemphasizing just like other central banks the federal reserve is very committed to price stability and we will make sure that happens as well. >> would we have the unemployment numbers today if you didn't have the ability, or the mandate to look out for unemployment and try to keep it low? >> it's really very hard to tell because, again, inflation is also very low so we might have been -- we would have a very

easy policy because of the need to keep inflation away from the deflation zone, to keep deflation away from zero. that being said, it may have been some less accommodative. >> at the fed doesn't have that authority that we could be any worse scenario to recover and come out of this stuff. one of the things that struck me, one of the gentleman from the other side asked you about ambitiously 4.5% growth. if we had that emphasis growth, it would still take five years. if we had three plus growth percent a year we're still be, take 10 years to get out of here. that's a lot of decades as far as i can tell. we're in the same position japan was in during the '80s. that's unacceptable to me. i'm from ohio. we have cities in my district that are 10, 15% unemployment, crime is going up, all the social problems because people are out of work. what else could we do hear from the legislative side that could

help drive that number down quicker? >> it's very difficult. no easy answer where we are. one suggestion i have come and i've been trying to reiterate this is that even as you're looking at budget cuts and balancing the budget, all which is a very important, it's also important to think about the composition, can you make the tax code more growth friendly? can you improve the way you -- you're spending is allocated? >> infrastructure like you mentioned, you know, $50 billion, $100 billion in the next year or two for infrastructure that needed to get done anyway, in education and job retraining that would put people correctly back to work. is that something that would help drive down this on deployment rate quicker? >> what i'd like to see is that combined -- if you do that i'd like to see a combined with the longer-term perspective that maintains budget discipline over

the next few years. otherwise a risk might be that interest rates would go up and that would undo some of the benefits. >> i think we're all in agreement that long-term demographics of health care costs, and that's what we try to do with with health care reform bill which cbo says we'll save us a trillion dollars in the second decade, and almost 200 billion in the first decade. that's what cbo is saying. and also some disincentives to work that were mentioned earlier. one of the disincentives to work it experience with folks in my district is they are better off being on medicaid because they have health care for their kids. health care reform is now an incentive to go back to work because you will be rewarded with health care. so i think those are two things that need to be addressed. so i think we need additional fiscal stimulus to drive unemployment down. we should be so worried about inflation in places outside of our country. and i think we've got to worry about jobs here at home. one final question on chinese

currency. do you still believe that the chinese are manipulating their currency? and if they are, is that feeling the inflation in china? and how is the manipulation of chinese currency affecting our ability to recover here in the united states? i will just wrapped into one. >> it is undervalued. it would be both in our interest and in chinese interest for them to raise the value of their currency. and it would help with her inflation problem. one of the things is happening which is a little surprising in a way is that they have an inflation problem and the way they are addressing is not violent raising their currency value which would reduce the demand for the exports, they are leaving it where it is and they are instead trying to reduce domestic demand through higher interest rates. and it would seem like a better strategy would be to let

domestic demand be what it is and let people enjoy higher standards of living in china and reduce the exports via a higher exchange rate. so yes, it is a counterproductive policy both for them and us and it is contributing to the still large global imbalances in terms of current accounts that we see around the world. >> mr. chairman, thank you. 's. we got get going. >> mr. mole many. >> thank you, mr. chairman. dr. bernanke, a privileged to bring here. thanks for doing the very quickly i'll try to bring us back to the budget process as we are starting to start that here right away. one of the things that we look at, i know you have look at is the cbo baseline projections. which are made of able to us i think last week. and i am comparing it to what i've seen happen in the bond market. we saw the 10 year treasury go through 3.5% on monday, 3.7 yesterday.

it was still trading above 3.7. when you look at the cbo's projections for what the interest rates will be over the course of this year this in a 3.4% rate for the 10 year treasury for the balance of this year. is it fair to tell you that cbo may have underestimated the environment, the interest rate environment we will see for the bows of 2011? >> -- the balance of 2011? >> i would say we're at 3.7 now, that reflects anticipation of higher growth. of course, as you know, the rates changed pretty radically. i don't happen to know what cbo expects for next year, and i think for the longer-term horizon it's the whole path that matters because the car -- you expect interest rates to go up. >> it is 3.8% for next year and roughly 3.5% over the next several years. my concern is something he referred to earlier which is that we are so exposed on our debt at roughly $14 trillion,

they even admit, the cbo does come if they're off by just 1% on the estimate for interest rates, it translates into an additional $1.3 trillion worth of debt over the next decade. that brings the to the next issue which ever discussed a couple times which is the debt ceiling. you said something that caught my attention which is you were concerned that some of the proposals that may have been offered including senator toomey's communism question about the workability, about trying to prioritize spending among debt repayment and interest repayment and various benefits programs. given our fiscal situation, if we were able to figure out a way to work through those workability problems come if we're able to pick out a way to prioritize, without assuage your concerns as using a debt ceiling as an environment of discussions about changing our fiscal policy? >> well, my concern since i'm sort of mostly involved in the financial side, my concern is

about not defaulted on the debt. i think that jimmy is a very high priority. so that would help on that account very much. used it would be in a position of course where you would be not paying contractors for example. you would not be putting up social security and medicare checks and those things. if you think that's something you're willing to do, that's up to congress to decide. >> fair enough. last question. we've talked about your plans to exit this expansionary policy when you see the need to do so and you've talked about raising rates, talked about regaining some of the securities that you hold. are you satisfied to be able to do that quickly enough to react to inflationary concern? >> yes. we can raise short-term interest rates which is the main tool we have, essentially as quickly as we like because we can raise the interest rate that we pay to banks. so yes, we don't have to sell off all our assets to tighten policy. we can do it via our control

over short-term interest rates. >> had to give serious consideration to not completing the qe2 program? >> we review the program at every meeting. we have another meeting come up in the middle of march and we will as we always do, we will look at the outlook for both employment and inflation. and it is certainly possible. i mean, we take very seriously that this is a program that needs to be looked at at every meeting, and in light of how ever the economic news comes in. >> given the fact qe2 is more of the unusual and extreme, extreme is not the right word, but the tool you're using during this period, would be fair to say that you would consider ending qe2 before raising short-term rates of? >> yes. i think they'll be the most likely outcome, just spent the last question, maybe a point. there is another $1.5 trillion gorilla in the room in the terms of the amount of money that gets dumped into the system, the

policies were talking about which is our fiscal policy. you have no control over our fiscal policy and you can do everything to can't do restriction, to restrict expansion policy. and if we continue to spend a bunch of money we don't have, we will be contributing to inflationary pressures, won't we? >> yes, but i think even more severe you'll be contributing to financial problems, the stress of the financial markets. >> thank you, sir. and say hello to my friends. >> thank you, mr. chairman. dr. bernanke, thank you for laying bare some of the myths for us on both sides of the aisle. about the financial situation that we face today and the financial situation we actually face a few years ago, and hope we will learn. i want to thank both of chairman ryan and ranking member van hollen because of his civil tone that the questions have taken.

i think it struck me, maybe it's normal for all of you. so i will try to continue on that avenue. i will try my best. for the past several months some folks have been promoting the myth of a europe with an overrun health care system, overbearing government, and economic stagnation. but not long ago some of these same people had nothing but praise for the same countries low taxes, low spending economies. so the problem of this theory is that it's incorrect, i think. ireland ranked near the top of the heritage foundation's so-called freedom index while sitting on a property bubble

fueled by banks that had run wild. then the bubble burst and the revenue dropped, and the public debt exploded. we need to remember, my good friend, the mayor of new york who said i didn't have ago when he was running that what we need to do, it will take is for five years before we return to where we were, 2006. the point is we don't want to return to what it was in 2006 because that's the problems that we did not address and we see the systemic and we see the result of not addressing them. so these countries are relying on the same theories of slash and burn budgeting that is being talked about here. not just today. the problem is it doesn't work.

for instance, britain, it's a gross domestic product fell .5% in the last quarter of 2010. widespread losses in construction, widespread losses in transportation, and in services rendered to the public. so i think we're all here to roll up our sleeves, with your direction and advice, address our long-term deficit, but we cannot pull the legs out from underneath the recovery. and i think this is your message, correct me if i'm wrong, by taking a slash and burn approach of government operations, our full faith credit of the country hostage, mr. chairman, doctor, what do you see as the result of the immediate and drastic cuts to

the federal budget? what would be the result in your view of? >> well, i think if that's all that was done, the cost to the recovery would outweigh the benefits in terms of fiscal discipline. i think we really need to take a long-term view. now, maybe a bit of a down payment is needed that we need to show not just -- we need to show that we have a plan that will carry us forward for the next decade at least, that will produce consistent reductions in the deficit over time, and it has the benefit of allowing us to think it through and to take the time needed to change programs, et cetera. so again, my message is, would be i think that the best approach is to take a longer-term perspective. that's my -- >> this is not just a one of you -- one or two years think?

>> nothing we can do now will solve this problem. >> i think folks on both sides of their how to understand it that there has to be cuts to the budget. there's no two ways about it. we cannot continue to have tax cuts that are not paid for where we have no offsets like we did in 2001, 2003. we were warned in 1999 before those things ever happen. and we did not heed them. my last question is is it your opinion that whatever deficit savings we would find in an immediate and drastic slashed approach to the budget would be lost to an economic downturn or stagnation. do you agree with that? >> i don't know quantitatively, but i do think there is a concern about only focusing on short-term cuts. because of the recovery which is still not complete, i think cuts combined with a long-term perspective would be both less painful for the current recovery and also more credible for the

bond market. >> thank you. i appreciate it. thank you chairman spent our time is fleeting and the staff has suggested that minority has agreed that we go to three minutes if there's no objection on the remaining questions. so without objection, will next go to mr. aiken. >> thank you, mr. chairman. over this way. the comment come it seems like when we talk about dealing with the budget deficit, it reminds me a little bit about these all kinds of imaginative weight loss programs, you know? it seems like when you get down to the bottom line, you can either eat less or you can exercise more. you are only given to alternative. it seems like we're in the same way. we can try to sugarcoat it, but the problem is either we're spending too much on we have a to an attack a lot more. a comment was made harder which i thought was an amazing quotation from ms. mccollum,

that budget deficit is not a spending problem. i found that amazing because it seems like and it sure is a big spending problem. we're just on different planets i suppose. but let's just assume if you're going to cut spending that you will try to increase taxes. my understanding is as i take a look at historic data, our tax revenues run somewhere in that 18% range. my understanding is if we were to double the tax rate on everything across the board, we couldn't assume we're going to get double in revenue, federal revenue. in fact, we may do what you're saying, crashed the economy and get even less. i do recall we did dividends, capital gains and death tax in may of '03. and the congressional budget office said now you have less revenue. but, in fact, there was more revenue because the economy kind of got going. so my question is, when i take a look at this overall problem that we are to have the in terms

of, like a weight-loss thing, it's pretty spooky to me because you add all the entitlements, the main ones, medicaid, medicare, social security and the other kinds of entitlement and and debt service to that, and when i look at the numbers looking about 2.3 roughly trillion. to reminisce about about the same thing. you discretionary nondefense and right now just at parity. so i don't understand, i guess my question to you is first of all, don't we have to essentially deal with the entitlements just by definition? or can you make it up by doubling taxes and hope there's going to be a ton more revenue and? >> well, i think that as you point out, i mean, in the long run the way we are going, entitlements plus entries with basically the entire government budget. so unless you raise taxes considerably. now, it's up to congress to find

the right balance between taxes and cuts and so on, of course. but i just think you need to look seriously particularly of the health care costs, which is of course part of what's been going on the last couple of years in congress. but i think focus on the cost side is important, and it would be difficult i think -- well, i am very loath to prescribe exactly out to address these issues i do think it would be very difficult to leave health care programs untouched and still achieve budgetary balance in the next 15 years. >> i think what i heard you sing is you really have to deal with that rate of spending, and particularly any entitlement, the health care pieces that is a big part of that, that has to be dealt with. and that raising taxes, just to finish the question, can you raise -- >> we are out of time. >> thank you, mr. chairman. >> thank you, and thank you, chairman bernanke, for your good

work over the last few years in helping the economy began to grow and do your part you're not easy decisions on any of our part, so appreciate what you have done. and some of your comments at this point were really very important to us as we see this beginning of a recovery. and some of your comments about your optimism may be too strong. your sense that we are going and going out of it. you've also made some comments i want to follow up on which is really about the debt ceiling. and the recklessness, they are being politics played with raising the debt ceiling. none of us want to raise the debt ceiling. we would much rather not have to be in this situation. but the two consequences of not raising the debt ceiling as you pointed out is to really help i want to confirm, the harm it would do to the united states and our ability to borrow in the future, interest rates. and really defaulting on our not

paying is just a huge consequence to our economy. so you want to talk about that again if you would exactly as i think has been pointed out, and senator from pennsylvania, our new senator, senator toomey, have proposed legislation that would make debt payment to our creditors, our foreign creditors that priority overpaying, instead of paying our social security beneficiaries, possibly not getting checks. our veterans not getting payments. u.s. contractors not getting payments. so we put the u.s. in a different position of no longer having space with american seniors, american veterans. and, of course, u.s. companies are creditors. so he could you comment on both of those? i think your comment very much on the first piece about how

reckless it would be. the second one would put us in a position of losing faith with the american people who have counted on us to do that and leaving that prioritization, making statements very clearly that we would rather pay our foreign creditors than to actually pay the american people. >> on the first, defaulting on the debt which we probably an immediate financial crisis. a very severe one. and would have very deep consequences for our economy. and even assuming we were able to get to that we would probably lead to much higher interest rates for the united states for many years to come here this was pointed out by a couple of folks that applying a higher interest rates are existing debt, that would be a very big step backwards in terms of trying to balance our budget. on the prioritization, that might help -- that might help address the default problem, which is very important. it's up to congress i suppose what do you it's worth doing what you say, which is stopping

social security checks and those sorts of things. i just wanted to make the very narrow point but still important point that there are operational problems as well. even if we are instructed, the federal reserve is the agent of the treasure. we make a lot of the payments on the half of the treasure and we would have to figure out how to tell that this check to mr. jones is a payment on his interest and this check is a social security check. there would be some practical operation problems that would like to bring up if we move in this direction. >> it's reckless and it is -- thank you very much. i appreciate your comments. >> mr. wood all is next. >> mr. chairman, i appreciate your willingness to spend his two and half hours with us as a junior member and as a party member. i'm grateful. i appreciate your comments about the economic impacts of simplifying the tax code, lowering rates, and limiting those distortions that are there. i want to talk specifically about those dollars better

overseas and i think back to the wall street editorial, a trillion dollars overseas that want to come back home for whatever odd reason. i'm new to this body. we will tax you if you try to invest in america but we will let you invested overseas for free. what do you think the economic impact would be of having that tax holiday to allow those american companies who want to bring and invest those dollars in america, to bring those back? >> we have done that before a few years ago and a lot of money did come back. some of it went to dividends and that sort of thing. some of it probably went to investment. it's hard to tell how much would go in each direction. i think if you're going to do that you might want to consider the more permanent alternative which is do what other countries do, most other countries, and put attacks on kerry told basis in the first place. you would get a lot of repatriation if you get a holiday, no question.

>> you've talked a lot about low long-term bond rates. i think when we did it back in 2003, the rate was five and a quarter. what we see a substantial difference is that rate was zero and without the limitations that we place on that repatriation back in 2003? i would've a substantial -- >> beta one is probably -- beta one is probably a good bit less than the current rate. i don't really have more to add on that spent there was a lot of discussion back at that time about how many of those dollars went to dividends. you've also talked a lot about the importance of consumer spending in terms of giving us out of our current situation. having those dollars go to dividends, is that a bad thing or is that just different from investment but it's still going to contribute? >> yes, dividends could be spent by consumers, that's right. >> you also talk about the

importance of asking a question of how smart is this vinegar is there any spinning out there that you would say is sacrosanct and should not be examined or should we be looking at everything? >> i hope you look at everything. >> thank you very much. >> ms. wasserman schultz is ne next. >> i got it to work on the first time. thank you chairman bernanke. it's good to be with you. testifying, when he testified before the senate budget committee last month, you observe that the recovery act fund will run out in 2011 and you acknowledged at the time that the exploration of those funds would worsen. and your words prevent ahead when for the overall economy. in addition with the announcement of chairman ryan spending cap for fiscal year 2011, our colleagues on the other side of the aisle are intending further cuts of discretion spending with such a critical component in the recovery act, and so essentially that's like an anti-recovery

act. given this headwind, what would you say the impact would be coupled with the inevitable cut in state and local spending -- state and local budgets because of the deficits that are not going to face because of the recovery act all? if combined with the draconian spending cuts proposed by our republican colleagues, is there any way that solely cutting discretionary funding, spending in 2011 which is mr. ryan's plan is going to create jobs on its own? what impact will that have? >> well, for state and local governments specifically, their tax revenues have improved somewhat as the economy has gotten better, which is a help. but they still are under considerable strain and that, reduction in employment and spending at that level is going to be a negative, it's going to be a negative for growth. i can only come back to the point i made a couple of times, which is that i think it's

important to address the deficit. but i hope the rather than doing a one off kind of thing, that you look at a longer-term window, a longer-term horizon, and in thinking about, keep in mind that we are still coming out of a very deep recession right now. but that doesn't in any way reduce the need to address the long-term structural budget problems and i hope that you will do that in a very serious way. >> acknowledging that we do need to address the deficit, but taking by themselves which is what is proposed draconian cuts from the chairman of the budget committee, combined with the impact of the recovery act fund being phased out and no longer being available, what is that likely to do to the jobs, our potential for creating jobs and the continued pace of the recovery? >> that would depend on the details but again, i would like

to reiterate that you need -- it's better i think you think about this in the context of a longer-term plan, longer-term trajectory for fiscal spending. >> and just on health care, the affordable care act included numerous provisions to contain costs by moving from a system that rewards quality and value and consistency. would you agree by giving providers incentives to coordinate care and reduce wasteful spending that we have potential to generate real savings? >> i'm not really able to make estimates. i know there are some measures in health care plan that are intended to reduce costs. i don't know how effective they are going to be. i think that's something that congress ought to monitor very closely and look for any additional ways to confront, to control wasteful spending which, of course, there is a great deal i think in the health care industry. so, since we're discussing under the health care spending is going to be an enormous part of the federal budget in coming

decades, anything you can do to reduce unnecessary spending will be very, very helpful. >> thank you. i love washington, d.c., cutting budget deficit is different i so appreciate your thoughts about long-term reform, because just the beginning. i can't wait to get to some long-term reforms. when you see will be vigilant about watching for inflation, can you name one time in your agency's history where you got it right next we've got on the brakes in time to correct runaway inflation? you have any track record at all? >> absolutely. ever since paul volcker conquered inflation in the early '80s, inflation has come down very steadily. and over the last -- >> i fear that you mention paul volcker. i don't think he got to it in time.

>> after. he came -- >> 2% or less. by time chairman volcker left office can he came with a 13% inflation rate. he left office with 4% inflation rate. >> after it went to -- >> 13% was the highest. then it came down over about eight years under his stewardship to about 4%. then from there under chairman greenspan and to the late '90s it came down gradually to about 2% and it's been there ever since. >> i do think the agency got to inflation on time. as you are proposing. >> it has come it has except in the '70s which, of course, can learn from. >> maybe we will beg to differ there. that banks, there's a lot of government products on the street to support this borrowing that we are doing. doesn't make sense, alisa destiny, that when banks have one of your products to invest in on their balance sheets versus a small business down the

straight, they're going to go to your product. and so could you argue to mr. langford's point that my lord, if we just stop these products are being offered and let banks invest in the private sector where you get a better return on your money, that could be a solution ?-que?-quex at least mr. langford's question. >> no, i don't think so. we pay 25 basis points, one-fourth of 1%. so if there's any attractive and opportunity out there, banks will prefer to do that and put money with us. secondly, the existence of those reserves is the counterpart to the purchases of securities that we're doing which in turn is lower the rates and making it easier for borrowers to get credit. so you can't look at one side and not look at the other side. so i think that's not cricket i think it does help credit extension spent okay. thank you. one last thing. over the last three years you indicate over 1 trillion in government spending. considering when government gets a dollar, we make 60 cents.

i think the private sector record is for every dollar the private sector did they make one 20th or one 30th. casualties argue that taxing and borrowing and bigger government is not the most effective way to grow the economy? >> it is certainly true that taxation in particular has what's called a dead weight loss. so the loss to the private sector is greater than the taxes actually paid because of the distortions that are caused. and as i said i think anything that can be done to make the tax code more efficient and fair, low rates and so on would be good for the economy. >> i agree with you there. thank you. >> thank you, mr. chairman. chairman bernanke, thank you very much for your test would i want to return to this issue of the possibly of not extending are raising the debt ceiling. and focus on the economic consequences. i think the american people i think would be repulsed by the idea that what we default on her debt to set the concept of you

have called catastrophic. we call it reckless. on all not not a good idea. but the idea of privatizing payments is frightening to me because what this essentially have the effect that we would be paying china before we would be paying our troops in afghanistan and? >> yes. >> it's a pretty scary concept. talking about against the impact on the economy, if we were to not raise the debt ceiling and we didn't do it for six months, in that period of time, absent that we would be spending about a trillion eight, a trillion nine, something like that during that six-month commitment that be about right? we would be spending close to $2 trillion. and we are now borrowing 40 to 50 cents of every dollar we spend. so essentially wouldn't we be taking somewhere close to a trillion dollars out of the economy during that six-month period? which essentially is more than the entire recovery and reinvestment act.

>> i think personal i should point out some of that money will be going overseas and so on. but i think that affect would be just dwarfed by the financial crisis that you would be engendered. >> all in all pretty draconian is the word has been thrown around, pretty draconian and negative impacts on them. i wanted to clarify one thing that mr. akin raised about my colleague ms. mccollum stated. i don't think she said that it was not a spending problem. she said it is not solely a spending problem. and since we just recently, there's a report out that we are at the lowest tax rate this country in 60 years. could you square the concept that we don't have at least somewhat of a revenue problem in terms of the budget deficit? >> we have a revenue problem right now in part because we haven't recovered, and so the

share of gdp that we're getting revenues is way below the historical average. so that's a temporary situation, we hope. we hope it will go back more towards a 19% of gdp that's the normal. but in the longer term basically economists would just have to decide where its values are, whether it wants to raise taxes, whether wants it has been on it wants to make accommodation. i hope you look at the whole set of options and try to think about what is best for the economy. >> one comment because you referenced taxes that are growth for the. my brother is in the barbecue business. he's done extremely well. paid a lot of taxes, and he said when we're talking about whether to extend the tax rate for the people making over a quarter of a million dollars with certain inclusion, he said i don't care what my tax rate is, i care that people can afford barbecue because if they can't afford barbecued it doesn't matter what my tax rate is. thank you very much.

>> thank you, mr. chairman, and thank you dr. bernanke for being here. i want to see it a little on the subject matter of debt ceiling and then i want to move into state pension reform in state debt and deficit and how that may impact decisions congress has to make. earlier during the hearing someone had referred to a debt ceiling vote as quote routine. i happened to be one of people who believe that's part of the promise that we having. this notion that we're going to continue as the federal government to borrow beyond our means i think as a direct impact to the global markets, to our marketeer and to consumers and employers and small business owners that are trying to have predictability are the ones are going to really help us emerge stronger as a nation and as an economy. i also is concerned about some of the comments you have made our phrases you have used.

some i appreciated and agree with, and some of that concern me. one was unwind some of the semester i agree with it. i think what you're saying is that we should be stopping the use of stimulus and returning to some of those dollars. he also said future spending must be quote smart spending. when you say future spending should be smart spending how would you categorize the spending up to this point in the last two years? >> i was only making a point. what i'm afraid of is that congress will look only at the total spending, the total revenue numbers and in tribe doing about how to make those people which is important. but it's also important to look at the programs, look at the tax code and make sure it is as effective as possible. i wasn't claiming i could identify waste, fraud, and abuse but clearly whatever it -- >> we have to reduce or spending. we've got to simplify the tax code which i think i heard you said earlier, and we've got to sort of, or i would argue reduce

some of the radio toward environment that is going to get some of the private sector money that is on the sidelines back into the economy which i think would replace the federal spending that is being suggested as required for this economy to move forward, that the second question i have a concern i have is according to census bureau data, this is fy08, we have 4% of interest on debt, a sheriff state and local expenditures and with fy08 that outstanding as a share of 18-point to present their can you come in briefly on those levels if they are appropriate, if they hire or no and compare it to our levels as low? >> they are clear lower than the federal. that's 18% versus 69%, and most of that debt is associate with

capital projects as well. so in their respective states are not as bad off in some terms of the federal government on the other hand, they're very difficult short-term situation doesn't give a balanced budget amendment and with a falling tax represent difficult cuts on spending and employment. it i would say also that 18% number doesn't take into account long-term issues. i think you referred to already, the pensions and health care unfunded liabilities which are potentially much more significant. >> thank you, sir. >> thank you, mr. chairman. and thank you, chairman bernanke, for your long-suffering today. i apologize i had to leave for another hearing. i have three simple questions that are probably just one word answers, and then a little bit longer would have you ever seen a recovery in modern history that has not been led forward by housing and construction?

>> it's normal for housing and construction to be an important part of the recovery. >> thank you very much. its absence is deeply troubling to this member. number two, with the instability in the middle east and rising gas prices, could i ask you at what level of gas prices in our nation would we trigger a deep recession began? i put the number of that $4 a gallon. where would you put it? >> i don't think there's a single number but it's true that as we move up above $4, that you're beginning to take a significant amount of disposable income away from people and that acts like a tax essentially and makes it more difficult for the economy to grow. >> thank you. i don't know if you have any ideas about helping to put to work the unemployed. useful applet identified in your opening statement those who have been out of work for more than six months, thank you for recognizing that, that lost productivity is up deep concern.

what we be the most effective means to reemploy in the short term and to gain productivity in this economy? >> i don't have any good answers. as you know the fed is trying to do our best to help improve the employment situation. i guess one day to look at would be the unemployment insurance system that maybe there might be ways to use some of the money to give training for example, rather than just simple income support. >> thank you very much for the. longus question, last december congress and the courts force the federal reserve to release its report on what to get done during the financial crisis, which financial institutions receive money through the federal reserve. you have opposed compiling and releasing that report, claiming that making federal reserve activitieactivities public would disturb the financial markets. what we have learned is the federal reserve really wanted to keep secret that it had bought back from german and swiss banks

more than a half a trillion dollars of bad mortgage-backed securities that wall street megabanks have pulled off to those banks. clearly this is something the fed apparently didn't want the congress and the public to know. we now also know that private gains provided to wall street and foreign banks were at the expense of massive social costs force on our public in the form of growing debt from historic levels of unemployment. why should congress and the public know what the fed is doing, especially when it puts on to the u.s. financial system and public system such burdens as buying back bad bonds from foreign banks? and my questions are, did you defend secrecy for the sake of secrecy, or did you defend secrecy to protect the fed from the public's view of mistakes made by the fed and its member institutions? >> there is a longer any secrecy. a discount when the there is

some case to have secrecy during the period of the crisis, all the information is never good with a two year lag under the dodd-frank act so there is no aspect of the fed's now which is permanently secret. i had no idea what you're talking about with this was -- would not purchase mortgage bonds from anybody other than fannie and freddie. and we sent money only banks that have through their u.s. operations which is required by law that we could automatically operating banks the same time and we lent against collateral. we were repaid in every single case. >> mr. kempe could i ask -- >> is never going to get a chance. >> i ask that all members questions be submitted in writing and the chairman respond. >> thank you for visiting with us. it's my privilege to be with you on the you on the half of my southern indiana constituents. as you know japan recent had its credit rating downgraded in light of its fiscal situation.

part of the justification for standard and poor's downgrade was the fact that japan has no coherent plan to deal with is unsustainable fiscal situation. here in this country like japan we have very low interest rates, as compared to recent history. our own deficits are adding to our national debt at a remarkable rate. and we, too, have no coherent plan to deal with this. at least in the long term. you have indicated there is no magic number. i think that's fair. i think history proves it out. there is no magic debt to gdp never. that said, you know doubt have some sense of when we're getting close to unsustainable debt dynamics. when are we getting close to ask and what are the main indicators that we need to monitor? we as members of congress, you as a federal reserve to avoid a crisis. >> we already have considerable increase in a debt-to-gdp ratio

and we are heading towards 90% by, i think it was 2020 i believe, i'm not sure. so as we move out beyond 90, 200 we are approaching the level to where some of the countries in europe are what you have a very serious problems. again, i don't know, there's not a magic number and the problem is that you can't tell in advance when the bond markets might begin to become worried. i think the bond markets are looking not only anyway at the debt to gdp never come they're looking at the plan. does the country have a plan? does have the political will and so on? i think if we demonstrate we have the political will i think the markets will be quite forgiving spirit i suspected you would say that. so the very fact that this congress doesn't have come has not implement a bipartisan coherent plan to deal with that situation, to the and one of the things is no doubt drive our debt to gdp is our federal spending. things like medicare, and i was

encouraged to hear my friend on the other side of the aisle indicate earlier she wants to put everything on the table as we deal with this. medicare, why do we take the and put that on the table as one example because you have indicated we have a choice, international press club, she said we'd even make adjustments are careful and deliberative process, when this crisis hits we are going to have to do things very quickly in a hasty way that maybe most of our country is uncomfortable with. do you agree that medicare is in on a sustainable path and that it must be quickly? >> it's going to be a very, very big share of medicare, medicaid all health has been programs will be a very big share of government spending and a gdp over the next 10, 15, 20 years. and i think long-term budgetary stability and economic health and the united states in general requires us to look very, very hard in ways to save costs on health care spent thank you so much. >> ms. matz.

>> thank you, mr. chairman. i'd like to ask you questions about the consequences of not thinking of that scene. and i really wanted to know if you could paint a picture of the consequences? coming from the state of california and in the state legislature we are having to manage our budget crisis when i was first there a couple of years ago. our budget was $110 million. we cut it to 83 billion. and now my colleagues who aren't still there are left with a $23 billion deficit. and so if we didn't let the debt ceiling what would that do to the state's? with they be able to refinance their debt? >> i see what you're saying. well, i think it's important to know that california always pays its interest. it uses a script and so on for some employees. up for some payments but it has paid interest. even so i think it was green on

california debt when up for a while or at least following that. it's clear that the value to pay interest on a u.s. the debt would have and would create enormous crisis of confidence in financial markets and into the bond market. it would as a practical matter cascaded through system because banks and other institutions are counting on receiving interest in or to make their payments would not be able to make their payments. so you would have a seizing up of the financial system that could be quite detrimental to our economy. even if that was worked through some out and say, for example, the debt was raised within a few hours, the long-term consequences in terms of the interest rate that united states government would have to pay could be quite serious, which in turn would make our debt payments, interest payments much higher, to make the deficit all that much worse.

on the states, i think it would be some indirect effects because after all, the federal government does provide a bit of income to the revenue-sharing to the states, make the situation worse as well. >> would have access to alternative funding sources if it wasn't raised? >> no doubt the bond markets would be very disruptive. if they're able to borrow, very possible it would be much higher rates than their borrowing today. but whether they would have access i don't know. >> what about intergovernmental transfers from the federal to the state government? you might have -- you are addreg that if you seconds ago but can you elaborate? >> it depends on the prioritization. if all payments are shut down, other than payments on the debt which again, i think has some serious technical concerns associated with it, but then that would mean presumably that payments to social security,

medicare recipients, contractors and to the states would all be interrupted until such time as the limit was raised. >> thank you. in the interest of the chairman start and we we have two more. >> thank you, mr. bernanke for being here. i have enjoyed the discussion and the dialogue today and the small business owner from back in northern in indiana, for the last 15 years i've seen a lot of fluctuations in several different sectors we've been involved in. and i guess what to touch him with a real quick because as a business owner going back to what ms. bass was talk about what the debt, currently we do not prioritize the debt come is that correct? why can't we change that? why can't we focus on making sure that our current debt, our primary obligations be taken care of and then start basically

by process of elimination moving down that ladder and say we're going to make sure that we don't default? i don't believe we should default to do. even though i'm a freshman congressman, i think that we do have an obligation to doing th that. >> the only point i would make there is that there are some technical difficulties. i mean, the federal reserve as the agent, the federal government makes many of these payments including interesting than other kinds of payments as well. we would have to find ways to make sure that we're making interest payments and not other kinds of payments. so i think it would be be some serious operational concerns. i'm -- particularly if this came with very short notice why do raise that point for your attention. beyond that, congress again has to make that determination whether you are willing to stop social security payment and the like as a temporary measure. >> i think if we make that one of our priorities because people have paid into that for years, making sure that the prodi,

making sure our military is a priority, making sure interest as a priority, can't we then say to our, those who carry our debt that we will make sure that they're taking care of, and moving down the ladder and making sure our priorities are first and foremost at the top of the list so that let way we don't have to worry about -- it just seemed like coming to washington so far, issues a for conclusion that we have to raise the debt ceiling. are we taking measured steps to save the long-term, not just with a short-term notification that you all would have to change operational infrastructure and things, but long-term would we be better off having some flexibility like that? >> well, the amount of bars the government has to do is already determined when you agreed how much we spend and how much you will tax. so it's like this debt was incurred are eager to question are we going to make the payment we all are not. that's what this is about. on terms of the prioritization,

given enough time i'm sure that could be worked out but i do want to make sure people understand if this is a short-term thing that there could be -- it might not be technically possible to carry it out. >> but long-term you think it will be a good thing? >> i would just be for instead that again, i'm sorry, i think this whole issue is very, very import but i think the best way to do it is to just sit down and look at the long-term situation, look at each part of the budget i tried to come to decisions about how you're going to address these imbalances. >> ms. black. >> not working. there we go. thank you. mr. bernanke, i apologize for not being here during the entire hearing but i had another meeting. so it seems to me that i continue to hear over and over since i've come in that you do agree that it needs to be a long-term plan. and certainly looking at more than half of our budget is not subject to the annual approval by congress, and it's on

automatic pilot. as you talk about the needs to be an overall plan, do you have an idea about how we might reform the budget process to help us to consider all of the expenses in a yearly basis of? >> well, i think it's sensible, particularly of a long-term plan to drop the somewhat artificial distinctions between discretionary and mandatory spending. you want to look at everything on the budget over a longer term. in a speech i gave a few months ago i talked about fiscal rules, and a lot of countries around the world have set up fiscal rules which described -- this goes back to mr. stutzman's question a bit, that these rules, some of them, for example, within down or sequester part of the government spending is the deficit exceeds a certain level, for example.

so there are ways to set up rules that would enforce congress essentially to meet certain targets. something similar to that was with an approach that was used sometime ago. so i don't have real specific suggestions here, but i do think that thinking hard about your framework and recognizing the current approach when you try to find an offset, that's basically say we're satisfied with the deficit where it is. you need to have something that is better than offset the qt does something that will allow the deficit to shrink over time relative to where the current projections are. so it's very challenging to do that, i understand. but again, creating some kind of long-term overall plan and within the context of that plan getting in various programs. that's essentially what has to be done in order to get us back on a stable path. >> i know there have been a lot of talk about us having a

balanced budget and then it. of course, that takes a very long time to get there. what would you think in the meantime about having a spending cap that we could only stand to a certain level of? >> well, that's up to congress to do that if you want. i assume that would be just a legislative action as opposed to a constitutional action. you could do that but then you have to have a mechanism -- this is similar to a fiscal rule. basically it says you have to not be allowed to appropriate more than a certain level. if more was spent because, say, medicare payments were higher than anticipated he would have to find a way to deal with that. but that is a former -- a form of rule that you could apply and along with consideration of how revenues are going to be involved that could help you structure the plan for reducing deficit over time. >> thank you. thank you, mr. chairman. i yield back mike dodd. >> chairman, you've been very generous to quit gone over your time. we appreciate your indulgence.

this hearing is adjourned. >> thank you, mr. chairman. [inaudible conversations] [inaudible conversations] ..

>> he expressed ambivalence about the prospect of another run and never planned a life in politics. senator jim webb not seeks reelection in 2012. you can read a statement online in the "washington post" today. today's white house briefing is set for 1:45 with robert gibbs answering reporter's questions. that's 45 minutes from now, and we'll have live coverage as that gets underway. donald rumsfeld is talking about his memoir, known and unknown. he is interviewed by historian michael beschloss. booktv will be streaming this event live from the constitution center.

go to booktv.org, and it's starting at 6:30 eastern.

>> a quirk reminder today's white house briefing is set for 1:45. we'll have that for you live. until then, legislative battles over the pe arks' -- epa's carbon rule and spending. >> host: this piece in the "washington examiner" today. turn off the gas in cap and trade. this puts the brakes on job creshes if regulations are contrary to the will of the american people. your bill was part of and got a

reaction from the "new york times" editor your pages and says the legislation would stop modest regulation the agency already proposed plus stronger ones they will issue later this year, and that should lead to the retirement of the many of the nation's older, dirtier coal fired power plants and a dramatic reduction in carbon emissions. what's your reaction to that? >> guest: we need to make all energy as clean as we can as fast as we can without raising costs on american families. i'm the only senator in the committee as well as the public works committee. we fled to deal with energy security as well as environmental stewardship and economic growth. we need the energy, and we need to work in ways to make it cleaner. look at what's happening around the world. china's doing an incredible job

with coal. we need to protect our air, but those ought to be decisions made by congress, not the environmental protection agency using antiquated laws from years and years ago never intended to deal with global warming. my specific bill focuses on using rules and regulations to try to address climate change when that wasn't the intention of the clean air act or the clean water act or the national environment policy act. >> host: do you think these are modest rules for this? >> guest: no, i think the environmental protection agency is way off base with what they are trying to do. you know, it's interesting, the president had an editorial and has been talking about his executive order to get rid of unnecessary rules and regulations to look at costs as well as benefits and jobs. the rules coming from epa have been crushing jobs, energy resulted jobs in the red, white, and blue energy sector that i

think of as the oil, gas, coal, eurorain -- uranium for nuclear power. he has to be talking about the environmental protection agency because they have gone way too far. in fact, the head of the environmental protection agency, lee -- lisa jackson, said oh, no, we don't need to stop anything. that was a response to talk about the arrogance of the agency to say we're going with the back door cap-and-trade approach. nancy pelosi was speaker of the house, democrats controlled the house, 59 democrats in the senate, they still couldn't get it passed because they were hearing from folks back home saying don't do this. the president talks about making green energy the most affordable energy, but he doesn't do it by

lowering the cost of renewable energy. he does it by raising the cost of other forms of energy which is an energy tax which is why i don't call it cap-and-trade. i call it cap-and-tax. i think congress is trying to do what the president was unable to do, and now realizing the numbers are further against him, they are trying to use the environmental protection agency to force this on the american people. >> host: the republican conference, you must be privy to where the votes stand on this sort of thing. what do you think about the likelihood of your legislation or the senator inhoff has that as well. what is the likelihood of passing it? >> guest: it talks about my broad sweeping legislation and senator inhoff talked about the

clean air act. there's articles in washington and in the press about a dozen democrats who are saying we got to do something because we know with the impact if these regulations continue, it's going to continue to hurt jobs and the economy, and people are worried about energy costs going up. if you're a small business, you want to hire people, you want certainty, and when you're not certain what's happening with your energy costs because the rules and regulations are regular lated, you're lessly to hire. >> host: when the senate is likely to get something done, are you saying as you point out there's some central democrats saying epa rules is something to get behind and is that what's going to pass in the senate? >> i think it's hard to predict. you know, the democrats are at a retreat to debate and discuss where they want to go. i know where i would like to go

which is defending american's affordable energy and jobs act. i introduced that. it's senate bill 228. i think it really addresses this in the broadest way saying we need to make energy clean as we can as fast as we can without raising prices on american families. >> host: you won't say whether or not you're gong -- going to vote. >> guest: you take a look at the four laws, and none of them were passed at a time in this country when anybody was talking about global warming. it was passed when i was in college when ""newsweek" said it was the coming ice age. those laws were not intended to relate to climate change, and congress needs to be the sole authority, and not a rule making agency. i'm going to fight cap-and-trade

all the way, do anything i can to defeat it. if congress passes that, that should come out of congress, not some administrative office. >> host: switching gears to talk about the health care law. you introduced legislation to revise the health care law allowing states to opt out of major provisions that the expanding medicaid, individual mandate and employer mandate, ect.. what's left? >> guest: it allows states to make decisions. in wyoming, we know one size doesn't fit all. i was in the state senate in wyoming for five years, and we know in wyoming that what may work in new york city isn't going to work in wyoming. you have 26 governors now suing washington through the court system to say this law is unconstitutional specifically the individual mandate where the law says # you must buy this

product. this is what governors decide, and let them opt out if they would like to do that. the 33 governors have written to the president saying we need flexibility on medicaid. medicaid is going to cause us to go broke. story in the "new york times" the other day. the two governors that were highlighted as concerns about the cost of medicaid, the program for low-income individual, the two big pictures? jerry brown of california, democrat governors saying we cannot afford these mandates. you have the democratic governor of tennessee, resen, who called this the mother of all unfunded mandates. this is bipartisan concern around the country, and it seems this state health care choice act says, you know, let the states decide. if they want to be a part of this, good. if they don't and know better what works for their state, that's the way i think they should go.

i think the health care law has people forcing to buy insurance that they may not need or want or can't afford. the businesses that are trying to hire people, the small businesses creating jobs, the individual mandate on them to have to buy insurance, very expensive, the medicaid mandates are hard on the staids. if they follow these huge mandates with the expenditure from washington, that doesn't leave money for teach everies, schools, public safety, police officers, firefighters, so those are decisions that ought to be made at home, not here in washington. >> host: senator barasso was a surgeon for 24 years. the constitutionality of it, congressman said this question can be answered very quickly if you just pass legislation that allows individuals to carry

insurance as long as they take full responsibility for their health. why not resolve it that way? >> guest: there's a lot to be said to eliminate the individual mandate. we've had a number of democrats and the interesting thing that the "washington examiner," and if you have it, the one side has my editorial, and the other side has a picture of a number of democrats who don't like the individual mandate. you'll get to it -- right there, there's a picture of joe mansion, claire mccas youkill. we have to find a way to get around it. that's one option, but i heard the president's press secretary this morning on television say, oh, no, we're staking our future on the mandate that we know better. every american must buy this product whether they like it or not. the administration seems dug in even though there's a number of

democrats in the senate who i think see it my way. >> host: you're agreeable to others? >> guest: i'm agreeable to eliminating the individual mandate. i think the way to do it is let state make those decisions. if a state wants to remove one mandate or all four, states can decide what they want to opt out on and what works best for their state, and that relates to medicaid and the level of insurance. we have to get washington approved insurance at high levels. that kind of destroys the whole health savings accounts that work for people. we had the round table discussion at the white house last year that i visited with the president on, and i say -- and it's interesting because the president has said, you know, nobody should go bankrupt because of health care. i agree with him completely which is why i supported and talked to him specifically about a catastrophic coverage for

everybody. that works, and then have health savings accounts. let people be consumers in terms of thinking about how they spend their own money. you said earlier i practiced orthopedic surgery in wyoming for 24 years. the busiest week was between christmas and new years when people came in saying i met my deductible for the year. my shoulder hurts or my knee, and now i can get a free operation. there was one new year's eve i did eight operation for people who put it off until they met their deductible for the year. they didn't want to wait until after january 1 when they would have had to start all over again. i think people are very smart. they are very smart consumers with their own money when they pay from their own wallet. that's the best way to make decisions. we have a health care system where very little comes out of

their wallet that they see. they spend government money or their insurance company money a lot differently than when they they about their own. >> host: on the flip side of that given you're an orthopedic surgeon, an expensive surgery, people said if you offer just catastrophic coverage that covers up to $2,000-$3,000 and half that, people have to pay out of pocket and there's surgeries that cost thousands and thousands of dollars. how is that adequate health insurance? >> guest: i say that some coverage with copays and things, but if something catastrophic happens, terrible car wrerk or something that would be very, very expensive or health care bills that can bankrupt somebody, those folks are protected because they would be covered above that level. they would never lose their home. we really need to make sure that -- look at this whole debate on health care, what do i

want out of it? i want people to get the care that they need from the doctors that they want at a cost they can afford. when the president talks about things and i was with him at first when i knew what his goals were, but this health care law that was passed in the middle of the night and crammed down the throats of american people with unseemly deals cut with the corn husker kick back and louisiana purchase and owl those sorts of things where, you know, the president promised, you know, people could see it written on c-span, and i was having my tv on c-span. i never saw it. i saw a closed door to harry reid's office where the law was written. he put it together. said here, i'm smarter than the rest of the world. take this and live by it. the people revolted. this was a year sin it's been signed into law.

people want this law repeal. it's unpopular, and in polls this past week, a majority of americans support what i want to do is allow states to opt out. >> host: lose, republican in new jersey. you're on the air. go ahead. c-span: -- >> caller: good morning, senator. china, spending on solar and wind is dropped in a bucket. it's nothing, and trust me, there's no concerns of implementing tax and applying -- buying up oil fields around the world. infrastructure, where are you going to put these plants at? these solar fields and the -- where are you going to put it? i got the philadelphia coal plant right across the river from me. it sits on a half an acre.

where are you going to put it? >> host: senator? >> guest: a couple things, louis. with regard to china and renewable energy, and china talks a good game saying we're investing additional money on renewable energy, but even the most optimistic projections for china, 29 years from -- 39 years from now, 2050, at most, the most optimistic projections, the energy from china is renewables. use of coal is going up 10% from now for the next 40 years. i want to see technology make energy clean as we can worldwide. china is going to continue to use coal, oil, gas, uranium. they are importing from wyoming and canada and goes to ship by

china. china is building their coal-fired plants not on the shores because where folks are living, and they are finding it easier to move coal from wyoming and australia than their own coal because of their transportation system. lose mentioned infrastructure -- louis mentioned infrastructure. i said the word lines, power lines, transmission lines. that's a big issue. a lot of times with wind power, and we have a lot of wind in wyoming, there are places that need the electricity which is not necessarily where it's being generated. it's the lines and whose lant do you take? you know, we had heated debates in the senate about does it go across public land or private land? i think it ought to go across public land. others say no, use a rancher's land. you know, that's fighting words in the rocky mountain west.

ultimately, we need all the energy, the red, white, and blue energy, renewable energy, we have to be efficient on how we use our energy. we need it all. >> host: bill, a democrat. go ahead, bill. >> caller: thank you, i want to make two appointments. >> host: make it quick, bill. >> caller: i will. i feel the republicans are just so obstinate and battling this power against the democrats and president obama that they'll do anything to kill solar, wind, battery power a that you're argument is everything creates certainty and as far as the health care, you're going to give the industry to china that i just mentioned, and it's going to be on the republican's heads. 85% of americans with health care that pay for it don't use

it, but we still pay. 20% of americans with health care use it, so you're talking about approximately 160 million americans that pay for health care that put money in the system that don't use it. i spend about $500-$6,000 on my own health care and don't use it. i believe there should be a medicaid buy in program where people like me put the money into medicaid and not use it, and i'm happy to do so. if you have 160 million people like me, you do the math. it will more than pay for the 20% of americans, about 40 million people, 50 million people actively using the private health care system. >> host: senator? >> guest: a couple things, bill, thank you. in terms of the solar, wind, battery power, we need it all, but the most optimistic

projections around the world are that globally that's still only going to be 10, and at absolutely most, 15% of the energy that is being demanded over 40 years from now. it just doesn't -- you're not going to be able to keep the lights on in you're so focused on that because the technology suspect there, and it's much more expensive. it is much more expensive those forms of energy. now we need it all which is why i want to see investments made in coming up with clean coal technology. coal remaps the most available -- remains the most reliable and secure source of energy in the utes and that they have in china. there was an interesting article in the "atlantic monthly". he's heading back to china next month about the need to come to grips that we are going to continue to rely on coal and

solar and wind aren't going to get us there. with regard to the health care and medicaid. medicaid is a broken system. it is the most expensive way to provide care, and it's why the health care law under president obama is such a failure. medicaid is one that over half the doctors in the country don't want to see patients on medicaid because the reimbursement is so low, so it's like giving somebody medicaid card is like giving them a bus ticket when the bus isn't coming. the president uses the words coverage and care. just because you have coverage doesn't mean care. in canada, everybody's covered, but # 3,000 canadians came to the united states last year for because because they couldn't get care even though they had coverage in canada. i think medicaid is the wrong way to go, and to cram 16 million more americans into

medicaid which is what the president's health care law does i think is absolutely going to make it much, much harder and more intensive for the states which is why republican and democrat governors alike are saying please stop. we need flexibility, freedom, choice. we can't deal with the mandates coming from washington. >> host: an e-mail from a viewer who writes isn't is true the insurance companies pushed the public option to pay themselves for agreeing to the industry reforms of coverage for preexisting conditions removing lifetime caps and being scrutinized for canceling policies on customers who got ill? what will the insurance companies going to do when they don't have extra customers to foot the expenses for the improvements? they are going to raise the rates on us who played by the rules since the beginning.

>> guest: that's the concern of anybody who followed the debate. the president went to the white house behind closed doors, not on c-span, cut deals with the insurance companies, the drug industry about the donut hole and what drugs people have to live under on medicare. all of these deals were cut behind closed doors in the white house instead of on c-span as promised or actually debated. you know, as a doctor, i've fought government regulators, insurance company bureaucrats, an i don't think anybody should stand in between the patient and the doctor. i think that person that wrote that has a good understanding of what deals were cut in the white house. >> host: the e-mailer is saying to get rid of the individual mandate, rates go up on us, do you agree? >> guest: i think the individual mandate is unconstitutional. the deal the president cut said

to insurance companies is we will make everybody buy insurance, and therefore you'll have more customers. i think there's a lot of things we can do to improve this system. 75% of what we have in the country's health care system prior to this health care law was good, and i think about 75% of the things coming out in this health care law are bad. if this health care law were a car, it would be a lemon. you'd take it back to the dealer and turn it in and go to a different dealer and buy a different car. >> host: if you're interesting in the coverage of the health care date, go to c-span.org. remember we did cover one meeting between republican and democratic leaders at the white house over the health care legislation. mexico, missouri. james, independent, you're next for the senator. james, you're on the air, sir. >> caller: good morning, thank you for taking my call. i want to speak on three subjects real quickment one is

the health care bill. i work with the rrld and we have medicare and because of the new health care law they raised me and my wife's rate to -- we have a $# -- $300 deductible now which is $600 now. my doctor went it a seminar which they were required to go to. 40 doctors there, he's a man of 73 years old, and after the new deals are going into effect in january of next year, there will be, the doctor will not bill us independently. you go to the doctor, they look you over and tell you what they do have to do and the things they need to do, and they send the bill to medicare and they make a decision whether they're going to pay the doctor for such things and if they get paid.

he told me he was the only doctor of the 40-some doctors that agreed to go along with the medicare system if that went into effect. how are people going to get doctors? >> guest: james is right about everything he talked about. he has medicare. he's a supplemental, and what he's noticing in terms of the deductible, things have changed because, and this is one of the reasons we have so many people in this country opposed to this health care law. seniors have been smart following this. they know that the health care law cuts $500 billion from medicare for the program set up for their seniors, and it cuts of $500 billion, greta, not to save medicare, but to start a whole new government program for other people which is the 16 million who are being jammed on to the medicaid program. you know, the seniors i talk to in wyoming say if you're going to cut medicare, use that money to save medicare and strengthen medicare.

don't use it for somebody else and start a whole new government program, so when you take $500 billion out of medicare, you know, people like james in missouri are going to find out that they're going to have to make it up, and that's exactly what he's dealing with now in his supplemental policy. he talked about all the doctors that went to this conference, and he raised an excellent question on how to are you going to get to see a doctor if his doctor is the only one continuing to see medicare patients? even the congressional budget office and actuaries said there's doctors who can't afford to keep their offices open and hospitals will close if they have to live under more and more patients getting reimbursed with rates. the solution for doctors is to say i'm not going to care for medicare or medicaid patients and deal with people who have regular insurance who are paying because the reimbursement is so

low. it's a cost to take care of medicare or medicaid people. i have a fear it's going to be tough to get doctors. it puts money in to train, hire 15,000 more irs agents to investigate you to make sure you followed the president to buy insurance under this mandate, but it doesn't have money in it to train the nurses, the doctors to take care of the patients. there's going to be a shortage of 91,000 doctors. that's a general estimate of what people believe, and half of those are family doctor, the other half is specialists because the number of people retiring from medicine, the number of those being trained, and those of us living longer lives because the break throughs in modern medicine. >> host: steven on the republican line. >> caller: yes, on the epa the only way to get their attention

is cut off the funding to the epa, the top 10,000 earning employees in the epa. it will not be repaid, but until they revoke the rules, they don't get paid. i think that's the only way congress gettings the man -- gets the mandate back from the agencies they granted power to. i want your comments, please. >> guest: i agree completely. the eps a overfunded. there's more and more money going in there. if you look at budgets of washington with the agencies and rule makers, this legislation has 40 more rules than bill clinton's administration had. regulators are being hired is way up under this administration at a time when people all across the country are looking for jobs, you know, government jobs continue to grow, and it's because of the administration and the rules and regulations, and congress is still 100 members in the senate and 435 in

the house, but the administration with its 16% more federal regulators right now than there were before president obama came to office. he's absolutely right. >> host: a democrat in ohio. what's the name of your town? >> caller: [inaudible] >> host: go ahead. >> caller: okay. how are you today? >> host: good. >> caller: we had a meeting with the republican from ohio on this new billing operation that's going on. if this is located on high school property, and the damage it's done to properties in pennsylvania and ruined the water systems and people have water buffaloes now sitting on their property when they used to be able to go to the tap to get water. that's just one thing. i mean, i can't believe the head of the department of natural resource is to for ruining the

water, and -- >> host: can i ask you something about this meeting? a tea party group holding the meeting, were they opposed? >> caller: totally for it, totally for it. they had nobody there that gave an opposeing view on what would happen. the lady that was the head of the ohio oil and gas energy education program, rhonda rita, she said the people who made the gasland, she said, actually, they make me sick. it's awful because it's on a high school. >> host: leaving it there. senator, what about this issue of extracting natural gas and the techniques. >> guest: this is about natural gas, and there's incredible finds around the united states. in terms of energy security, it's belter to use the resources here than continue to send so much money overseas to the

middle east and with what's happening in egypt now. you worry what's going to happen at the price at the pump. the more we are reliable on energy we have here in the united states, the better. fragging has been used for a long, long time. but i don't know the specifics of this one high school in ohio. i mean, there are a lot of places where there's natural gas available to be had. you know, even sheri browne, senator from ohio, running now in 2012, she's even talking about a moratorium like the rockefeller plan on epa regulations. he's talking about a shorter timeframe, a year. you have people from both sides of the aisle, and pretty far apart all realizing the expense by the environmental protection agency with the impact on energy costs and regulations and on jobs is pretty dramatic. >> host: would you vote for a delay on epa rules, do you think

that passes the senate? >> guest: harry reid decides what to bring up. i'll continue working on my bill that really has to do with american energy availability, affordability, and the jobs related to that. i think that's the best way to go so that none of these laws can be manipulated under the guys global warming, so i think across the board in washington on the hill, people realize how devastating these epa regulations are on jobs. if the president truly believes as he says, and i agree with what he says, and agree with very little of what he actually does. if we're going to focus on jobs in the economy at a time when china is really focused on its economy, and we saw that when the president of china was here a couple of weeks ago, i think we need to not tie our hands behind our back and allow us to get to american energy.

>> host: you're on the air from montana. >> caller: first thing i had was about insurance, you can't get people to buy car insurance now, and that's a mandate by law. how are they going to get people to buy health insurance? it just doesn't make sense to me. and another thing is about this work force. they want us to go out and get reeducated on jobs. our jobs, i was a construction worker, and now i see all the construction work jobs are taken up by people from other countries, and a lot of factories in this country are getting taken up by people from other countries that don't have a -- [inaudible] >> guest: with regard to the health insurance mandate is how will you implement it? that to me is the fact that i don't want them to be able to

implement it. they are asking for $10 billion to hire irs agents. that's how they plan to implement to find people without health insurance. it's going to impact people all across the country, especially young folks who feel bullet proof and don't have to worry about that sort of thing yet. to hire that many irs agents, that's the way they plan to go after these folks. he's right. even in our state senate, i was chair of the transportation committee, and there was a mandate you had to have auto insurance if you want the to -- wanted to own a vehicle and drive, but a number of people still didn't buy the insurance even though they had to. i think it's going to be very difficult to force this. how are they going to do it? hire more irs agents to look into your life and paperwork. >> host: senator, serving second term in the senate, republican from wyoming. charles on the republican line. you're next.

>> caller: i was wondering where we're getting our energy if they shut down the public lands here in utah with the red rock initiatives. the ma majority of our coals natural gas, all that comes from this type of ground. on december 3, they decided they could erase with eight years of work to come back. people don't sit around looking at the map. you see what that takes away from us. the authority eliminated a lot of jobs here and now they are coming after more of this stuff. this is what we rely on to live on. talk about creating jobs? they are killing jobs and hurting the economy. it goes against the sovereignty of this state because understand when we got statehood, we were to be control of the ground, and they now have taken that illegally away from us i feel.

i wonder how we can survive when they take away our ground and what we can do to stop it. >> guest: charles is rye. that's a such situation in utah and the west and wyoming, the land is federal land. the rocky mountain west have been great stewards of the land. multiple use works for grazing, recreation, energy exploration, all of those things, tourism, that's all been, i think, a very significant part of our success, and it's still one of the most beautiful places to go m people want to go to the rocky mountain west. in utah, he made reference to december 23rd, the day after we adjourned for the year of the congress and the department interior did a sneak attack to sneak this through. the secretary of interior came out with his wild lands

initiative which wants to tie up land that in the past have been used for the multi. multiple use approach. it appears to be a taking which is going to cost jobs, livelihood, will make it harder for people to do the things they have been doing for 120 years of statehood for wyoming. i understand exactly what charles is talking about as do the people across the rocky mountain west who live in states where huge amounts of the land is not privately owned, but governmentally owned, and that's the approach. >> host: david, democratic line, good morning. >> caller: good morning, greta. seems like every day there's new republicans up there trying to scare the american people about the health care law, and i think it's a good law, and we haven't

given a chance to work yet to see what will happen. everybody is predicting what they think will happen. everybody should sit back and give the law a chance to work. >> guest: because it will bankrupt the country in the process. the expenses are extraordinary to a point where we have now have $14 trillion in debt. this is going to add to that debt. it's not helping in any way i can see. i think it's harder for patients to see doctors, and i think ultimately the quality of care will go down. 24 is a law, i've read the whole thing, i know we're going to see thousands and thousands of pages of regulations still coming. the president's promises to the american people have been proven to be false when he said, well, if will get the cost down. it hasn't. cost has gone up. he put you can have it if you like it, but the chief actuary

of medicare says not necessarily. as the regulations continue to come out, i'm going to continue to comment on all of them. i think that sitting back and waiting is the wrong situation because i think as time goes on, it's going to make worse for patients, worse for provider, the doctors and nurses who care for them, and worse for the taxpayers. the thing that striebs me, greta, you see all these people with friends in high places, friends in the administrations, and people who lobbied for the bill are getting waivers says don't make it apply to us. health and human services offered another 500 waivers. there's over 2.2 million americans who now have waivers so the health care law doesn't apply to them. a lot of them are union members. 160-some are from unions who supported the law in the first place and lobbied for it, but they don't want to live under the mandates, so, i want to know

why small businesses, and that last caller was from michigan and other states that have small businesses, they don't have access, only the big companies in the union have access. if you have friends in high places, you can get a waiver to get out of the health care law. 40% of all of the waivers have gone to union workers, but union works are only 7% of the work force in this country, so if -- it just doesn't seem right, and so the people can do that, i want to have a waiver for every american which is part of this health care law that i have the state health care choice act. if a state says we want a waiver, we want out of the whole thing, i think they should have the same opportunity that all the friends of the administration are saying, i read the bill, pelosi said you have to read it to know what happens, i don't like it.

i want out. >> caller: hi, greta. >> host: good morning. >> caller: i'd like to say i'm with john barasso on like everything you said. this one guy that asked about how they'll enforce that individual mandate, i have another question just about like that. when i was a young man, got out of the service, i couldn't find a job, so i went on the migrant trail, and i worked ranches. i've been to wyoming. i've been to washington. i've been all over the country doing farming and ranch work. now, i know there's still thousands of men and families out there who are harvesting stuff. i'd like to know how they're going to enforce that individual mandate. are they going to issue some kind of a card that if you don't

have proof, police come? >> guest: thank you for your service to the country, and sounds like you had wonderful opportunityings to see the country. i have those same concerns. i think the internal revenue service will come after people with the individual mandate, fine people, and the fines go up year after year, and i've offered amendments during the health care debate about that. i think we ought to get rid of the individual mandate and in today's, one of the washington papers, your senator, you know, your newly elected senator, is agreeing that we need to do something about the individual mandate because he doesn't like it either. >> host: texas, james, republican line. last call. go ahead. >> caller: top of the morning, greta, senator barasso. >> host: good morning. he's listening, james, go ahead. >> caller: yeah, i think the health care law is a great

thing. it does probably need to be revised, but yeah, it's going to create jobs. we'll get all the for-profits out of business and keeps the for-care in the industry. that's where we'll get innovation from too to deal with the industry problem. i think it will help the infrastructure some sort of ways i'm sure with good hospitals and good care you probably want to do more for your city i suppose. >> host: okay. james likes the bill and asks the question why not think of areas to improve it rather than overhauling it? >> guest: well, like james, i want to make sure people get the care they need from the doctors they want at a price they can afford, and i think that's a wonderful goal for all of us. i think having read this whole law, it doesn't accomplish those things, but drives up the cost of care. it puts government regulators

between the patient and their doctor and people ultimately are not going to be allowed to keep what they like if they have it. there are parts that need to be repealed. i want to repeal the whole thing. even the president's debt commission has looked at this law, talking about it as a class act, one of the components it of. they said it's a ponzi scheme and even madoff would be proud of it. others said you should use it to strengthen medicare and not start a new program. i'm waiting to see what the president says about his own debt commission because they have serious reservations about not the goals, but how the law was written and how to implement it. >> host: senator barasso, thank you so much for talking with our viewers. > the white house briefing is

starting soon. it is starting late, but when it's started, we'll have it live for you here on c-span 2. until then, more washington journal. >> host: john matthis is president and ceo of. let's begin with what they are. >> guest: thanks, greta. the community service block grant is a series of funds that's been around since 1981 and date back to the war on poverty in 1964. what it is is federal money that goes to states, the governor's office, and they grant it out to community agencies in their area to provide services for human needs. basically, they provide economic security for families and individuals who are low income, and when we say low income, we mean below the poverty level, and that's $# 2,000 for a --

$22,000 for a family of four. wee -- we are talking about families who are struggling. >> host: the money goes from the federal government to where? >> guest: state capitol of the governor, and they in turn grant it out to local agencies in the community whether it's commune action partnerships of des moines, pittsburgh, san bernano. we service 90% plus of counties. some of them are non-profit agencies, and others are municipal. they are run by city government there and states like texas and florida are county governments, but the commission is the same. federal money to the states to the communities that the

communities decide how it's to be spent for programs that they'll disadvantage low income people in the community. >> host: how many people do you know estimating have access to communities like thissing? >> guest: i don't have to guess. there's a rigorous reporting system. the most recent figures we have are for the fiscal year 2009, and during that year,20.7 million americans were served by these agencies, and we expect that's before the great recession and before also the recovery act money came in that really boosted community action like other federal departments that will serve substantially more than 27.7 million when we see the 2010 numbers because the need was greater, and there were more resources to invest in the needs. >> host: what's the budget for grant need? >> guest: $700 million a

year. it went up to a billion later with home energy assistance, family support services, economic development, and other things that help poor people. it's now anticipated to return to the $700 million, and that's what we were thinking about until the president informed us differently in the state of the union address. >> host: yeah, we'll talk about that a little more, but i want examples of block grants for education. what's an example? >> guest: exis different. our money comes from the department of health and human services. the kind of educational activities we do is head start for preschool. that comes from hhs to serve 5-year-olds. there's funds for afterschool programs for kids, tutoring programs for kids, and job training and retraining. dislocated workers, unemployed workers, people who graduated,

need jobs, and these provide training for jobs in careers, and that's applied education they can use. >> host: nutrition emergency services. >> guest: well, for example, san benindio, county in california, it's a large county. they have over 900 feeding sites that can be a place where a family sits down and has a meal or it's a food bank where people can get food supplies and take them home. there's feeding programs where people can eat and programs where people get food and other services there too. >> host: what's the role of the federal government in riding these services? >> guest: americans are involved. the census numbers from 2009 were released and we're waiting for the 2010 one, but in 2009,

43.7 million americans were officially poor. over 43.5 americans. one in every seven americans are on food stamps and get assistance. that's good. we want people and seniors to eat well to stay healthy, but it's indicative that hunger is a problem in america. if these were not widespread problems, maybe the government wouldn't have to pay attention to them. we have hunger, poverty, unemployment being high, and in some states, the national figure of 9.4, but states like oregon, florida, and ohio where the rate is 16% and a above. that's a problem. the foreclosure rate in florida, nevada, and arizona are astronomical. when people lose their jobs, lose their homes, and these are the new poor.

it's not the stereotype of poor. these are people who made it for awhile, and the bottom fell out of the economy and now their lives, and the reason the federal government should be involved is what kind of country do we want to have? >> host: president obama who was a community organizer in chicago has agreed to cutting community block grants. here's what jacob luo wrote in the "new york times" on february 6. for the past 30 years, these grants were used allocating a formula that does not consider how good a job the resip yes , ma'ams are doing. the president is proposing to cut these in half and reform the remaining half into competitive grant program to give communities the most effective help. beginning with the formula. their argument does not consider how well the recipients are doing. >> guest: i have great respect for jack, a smart fellow and

does great work and has more brains in his hangnail than i'll ever have. his argument is not sound. the formula that allocates funds is nothing to do with the allocative process and action communities since 1981 had a strong results with oriented management administration. we a data collection system that shows what happens. if mr. lou's comment is community action never undergone study for 10 years as administered by university x or think tank y, we agree. but wait a minute, thousands of kids have full bellies and head start kids get dental care and their teeth are better and start school better and thousands of seniors have meals own wheels

and other programs and millions of low income people had their income taxes done at community action agencies and participate in the year end income tax credit with bipartisan support, we think we have a lot of results that show how effective the programs are. now, the point is somebody with a financial literacy program found that struggling or one who wants to start a business, they'll come to a community action agency and may get money to start their business. that happens all across the country. they may get training to get their house in order. as a result of the training, the people didn't get a seat on the new york stock exchange, guilty, they did. did their lives become better? did they become business people? by virtue of community action, did the people served become taxpayers instead of tax drainers. we think they do.

>> host: everybody needs to tighten their belts to tackle the deficit, so why not the community action programs as well? >> guest: early in the administration there was a five year freeze on domestic spending, and we're ready to play our part in commune action and be good citizens and soldiers on tighten our belts even understanding the need of our agencies are more. the lines at food banks used to eight o'clock in the morning now start at five o'clock in the morning. people who need emergency heat for their homes is up. the goal oning the deficit is to freeze it five years, we'll figure out how to do that. big, big difference of freezing of the levels for five years versus a 50% cut. we were the of the program mentioned in the state of the union address. with the only mention -- we were

the only one mentioned bite chief of staff at bill daley on "face the nation," and as i was watching c-span and drinking my coffee, we were one of the few programs mentioned. i speak for the community action world as much as i can, but the 20 million-plus people we serve and the employees and volunteers and board members across the country -- it was disappointing. it was almost to a degree hurtful. during the recovery act, community action agencies worked six, seven days a week, 12 hours a day, to make sure homes got weatherized. we think we can make a 600,000 by the time we ended 2012. people got hired for jobs with the recovery act money. there are people in california, arizona, washington state, installing a solar panels now that did not have jobs before.

they got training with the direct money and community action agencies and that they are now being supported by the private sector to do that. we are willing to take our share, but we would invite the president and the obama administration to reconsider this decision. host: margaret in chicago, democratic line, you are up first. caller: good morning. i feel very sorry for you and all of us. i've been a registered nurse for over 30 years, and i've worked in different areas, and here in chicago, people are dying. people are hurting. i have breast cancer, and i'm just lucky that i have medicaid. imagine me, an old medicaid patient, after having been a nurse. and i am lucky. i live in fear every day. people are dying, but they are being swept away into nursing homes, disabled kids.

people died. people die from that care and budget cuts. you see people tear up about "forrest gump." why is it that they can walk by someone shoeless in chicago? democrats, you are my last hope, and i am so sad that every politician -- where are the people, the safety net ripped, and there was another person who has nothing. ok, rahm emanuel in chicago, he is going to freeze everything. i was a city news for four years, were -- in mycity -- city nurse for four years, working really hard. i would like to see us out there like egypt, working for a health care, jobs, and for the country to care about its people.

it cannot last. my heart is so broken -- host: i think we got your point. guest: margaret, we hear the pain in your voice, and that is part of the story. there is too much pain in america, and chicago -- i talked to a reporter from chicago yesterday, and when a reporter calls you, you never know what is going to be, whether they are trying to at nail you or say something disparaging to this reporter, who was really wonderful, was almost in tears saying that my office is just blocks from headstart. what is going to happen to these kids if the cuts come through? there is a lot of pain and suffering. if we ignore these problems, they're not going to go away. they are going to cost us in other ways. margaret, you are a nurse. you know what happens if they don't have an adequate -- if they don't have adequate health

care. they are in emergency rooms. there is a whole litany of problems aarau jobs and economic stability and security that affect tens of millions of people. i agree with you that we need to come together as a nation and tackle this problem, because it affects all of us. host: michael is a republican in myrtle beach, south carolina. caller: yes, sir. i was listening to you here, and, you know, you talk about your program and, you know, it all sounds good, but how many programs in the united states to we have for poor people? >> we'll go live to the white house for today's briefing. here's spokesman robert gibbs. >> thanks, robert.

i wanted to ask about the meeting with the republican leadership and something on egypt too. so speaker boehner and majority leader canter both said there was agreement at the lunch on the need to cut spending and on the need to do it together with the president. is that how the president sees it as well? >> yes. i just came from talking to him about the lunch. he thought it was very constructive that they agreed on, let me expand a little bit, on cutting spending and reducing our deficit; that we should have a broad discussion about with the american people the size and the scope of the problem that we face in getting our fiscal house in order; they discussed issues like trade as areas where we could work together. obviously, our trade representatives testified in the

house, on the house side today saying that the administration would soon send up the language around the south korea free trade agreement and intensify our engagement to address both colombia and panama in hopes that those negotiations could be concluded this year and agreements could then be sent to congress thereafter. they agreed that education, an issue that we have worked on in a bipartisan way over the first two years of the administration, continues to be one where democrats and republicans can and should work together. regulations that are outdated and don't work, that was another topic. they also talked some about foreign policy. particularly managing the

transitions in iraq and afghanistan. but i would say, obviously, reducing the deficit and growing the economy were the things that according to the president were most discussed at the lunch. >> in the area of spending and the deficit, did the republican leadership and the president reach any specific agreement on anything? >> no, not that i'm aware of. >> okay. was that something that you, was ever part of the agenda for this meeting? >> this is, look, i think this is going to be a long discussion on the steps that we need to take to reduce our deficit. and -- bless you. i don't think that people looked at this as a negotiating session. >> while that was happening or earlier the house republicans brought out some proposed spending cuts including areas such as high-speed rail and education that the president obviously wants to invest more money in, and in some cases

conservatives want even bigger cuts. what's your reaction to it? >> well, look, i know that not long ago we i saw parts of that list, i know omb is taking a look at that. there's broad agreement that we have to change the way washington works particularly as it relates to spending. we have to do so in a way that protects important investments so that we can win the future. so i think the president looks forward to working with and working with republicans and other democrats to make progress on these these issues. >> one question on egypt, please. the israeli defense minister is coming here later today to meet with secretary clinton and secretary gates. can you say what the significance of that meeting is? is. >> i don't know the latter to that question. i think he's in town for some regularly-scheduled meetings.

i think we'll have a readout on some of those discussions afterwards. >> is it fair to say you think he will be pushing the message about concerns of mubarak stepping down too quickly? >> i'm not going to presume what somebody from another government might say to us. that's not my role. >> okay, one on the republican meeting and egypt. what specific areas of spending cuts did they discuss in this meeting? >> the president didn't give me any details on that. >> and did the president at any point ask the republicans not to use as a political football the threat to not lift the national debt ceiling? >> i didn't get that level of detail from him. i think our position on that's fairly well known. >> okay. and on egypt, the egyptian foreign minister is telling pbs that vice president biden's call for immediate lifting of the emergency rule in egypt was, he

was made by that, and he he felt that the egyptian government could not make such a move until the unrest had been put down and restored. what's the response on that? >> i think as we said in the readout from vice president biden's call to vice president suleiman that an orderly transition must begin now, and it must produce without delay immediate and irreversible progress. and i think it is clear that what the government has thus far put forward has yet to meet a minimum threshold for the people of egypt. that's why many of you all reported the crowds in yesterday's, yesterday's protests bigger than even those on friday. i think we were all and have been struck here at the diversity of those that you saw in the street yesterday. diversity of age, diversity of lifestyle, diversity of ideas,

and i think it is clear that the egyptian government is going to have to take some real, concrete steps in order to meet the threshold that the people of egypt that they represent require from their government. and i think unless or until that process takes hold, i think you're gonna see the continued pictures that all of us are watching out of cairo and of other cities throughout egypt. so i think the best way to do that is for vice president suleiman as the head of this process representing the egyptian government is to expand the size and scope of the discussions and the negotiations with those that are not in power and to take many of the steps that we outlined yesterday, one of which is lifting the

emergency law. one of them is, are constitutional changes so that we get toward free and fair elections. but i think it's obvious that they've yet to meet the threshold that will satisfy most of the people. >> has anybody in the obama administration reached out for consultations, for discussions at all with anybody in the leading opposition group, the muslim brotherhood? >> not that i'm aware of. >> in terms of your readout of the president's meeting with the house republican leaders, he said, you made a reference intensifying your arrangement in the colombia and panama free trade agreements. republicans say those agreements are good to go, send 'em up. what do you mean when you say intensify -- >> well, i think that there are some, and as ambassador kirk

said today, there are some outstanding issues. these free trade agreements have been, haven't gone anywhere in congress because there continue to be some outstanding issues particularly around internationally-recognized labor rights that, that i think many believe must be addressed. i think the model that we used for south korea is one that the ambassador kirk and the president believe can result in an agreement that will capture prod bipartisan support, hopefully as soon as we can get some of this worked out. but i don't -- there shouldn't be once the agreement gets done on south korea, i don't there

would be a lot of delay on that getting done as we had, again, outstanding issues as it related to south korea particularly on autos and beef. we worked that out and stakeholders from both sides of the political spectrum, business and labor are now endorsing that free trade agreement. >> does it need to be renegotiated, colombia and panama? >> we need to address some outstanding issues like we did with south korea. >> wait a minute, with south korea you renegotiated the deal, right? >> we addressed outstanding issues. >> can you explain what that means? >> they are issues that need to be addressed, and that's what we're going to do to -- >> with i don't know what that means. is the trade agreement renegotiated with the south korean government is what you did. >> no, we, we -- there were, there were shortcomings in what needed to be addressed on issues relating to autos and beef. which had prevented an agreement from being voted on. there, as i said in my earlier

answer to you, outstanding issues relating to colombia and panama that also need to be addressed. >> is it safe to say that vice president suleiman's vision for the transition process is not entirely in line with the u.s. position? >> i think that his, the process for his transition does not appear to be in line with the people of egypt. and i think we believe that more has to be done, and i think more importantly, the people of egypt think more has to be done. i think that's why you continue to see the size of those gathered to express their concerns about their lack of recognition in freedom and opportunity, why those ranks continue to grow. i think the vice president was clear with vice president suleiman on some steps that needed to be taken to address the concerns that we see. >> and does the white house feel

confident that he's the right person for the job? i know over the weekend there were a lot of positive comments made by this administration about his sort of support for him and what he was doing. >> no, i, i -- again, vice president suleiman, we've done this about four times, but i'll try one more time. vice president suleiman is, is in charge of a process in representing the egyptian government to negotiate with those not in government in order to get us on a path toward an orderly transition that ends in a free and fair election. it's not for us to determine who's in charge of that process with the egyptian government, it's not for us to determine who sits in a room representing the opposition except for us to understand that when unrest grows and the size of these crowds grow, it's clear that the threshold of meeting a broad-based coalition in civil -- that represents a broad-based coalition of civil society, that that's not been, that's not been reached.

that is what continues to be, what continues to be the problem. >> but if it's not for you to decide, then why, then b, is the vice president -- we saw strong language essentially putting pressure and offering up some demands, some things that need to be changed. so, clearly, you know, there is a position. there's something that you want to be done in egypt, right? >> more importantly, there's something that the people in egypt want. >> right. but the administration does as well. it's what the white house wants to happen there. >> it's what i think everybody in the international community understands has to be done to meet the demands of those that are protesting in cairo. again, it's obvious you're reporting it, what people are looking for. and we've talked about lifting the emergency law for quite some time. we put out a statement last year at its extension that going backwards almost three decades this was not something that we thought was in any way helpful.

that happened, you see, you see people believing that that should be rescinded just like we do. but, again, it is not for us to determine the outcome, and it's not for us to determine all of those participants. the participants on the government side is vice president suleiman. that's why the vice president of our country has talked to him about broadening this process. quickening the pace of this process. because, again, what we see happening on the streets of cairo is not altogether surprising when you understand the lack of steps that the government has taken to address their concerns. i mean, i think that's, that's what we see happening. >> does the white house feel that it has the full understanding of all those participants and what their motives are? >> again, it's not for us to determine, dale.

we're not going to pick which seven people represent egypt. >> i'm not saying picking -- >> no, you are. as a matter of fact, you are. >> no, no, what i said is do you think that you have a full understanding of all of these players and what their motives are? i'm not saying whether or not you supporting them or pecking them. do you think you have a good understanding of them? >> again, this is something for the egyptians to work out. i think, i think, again, i think what you saw yesterday was a very broad coalition, represented a very broad coalition of grievances and concerns by the egyptian people. again, one of them, i think somebody that stirred a lot of passion yesterday was somebody who works for a silicon valley company. i think, again, there is a broad, a broad array of concern saw families -- you saw

families, you saw older people bring their children. there's a broad cross section of egyptian society that seeks the types of freedoms that many have sought for quite some time. and the government is going to have to be responsive to those concerns. and if not, you're going to see -- as i think everyone anticipates -- the size of these protests certainly as we get to friday get bigger and bigger. >> robert, we talked about suleiman, but some of his quotes recently are there will be no ending of yesterday and today. there will be no ending of the regime. we absolutely do not tolerate it, meaning the civil disobedience. we cannot bear the situation for a long time, and we must end this crisis as soon as possible. people on the ground there say they think what he's threating is a violent crackdown. do you agree?

>> i think first and foremost we would reiterate and we have at every discussion that we've had at all levels with the egyptian government that the demands of those protesting cannot be addressed with violence and should not. i think, again, i think, chip, if you layer what the government of egypt is saying, if you put that on one side of the ledger and then on the other side of the ledger you put a growing number of people out seeking redress of those grievances, then you understand what he's saying is not assuaging the concerns of those in protest. and they're going to have to do more, it's clear. >> exactly why some former state department official said it's conceivable we're moving toward a tiananmen square because the tough rhetoric is increasing from suleiman in spite of the vice president's call, and the protesters are increasing the

size of the crowds and having a stronger statement about -- >> well, i don't think anybody, i to not think -- i do not think anybody believes and i don't think anybody wants in this government that believes that -- >> [inaudible] >> well, i'm not a spokesperson for their government, chip. i think our strong belief is that the process, again, i think if process is expanded, if a broader group of those not in government take part in this process, it's clear that the government is going to have to do some changing. some immediate and irreversible change. >> that could mean a crackdown in the eyes of suleiman. >> well, again, chip, i would simply reiterate as we said from the very -- as we have said from the very outset of this that it

is our, we strongly condemn any violence that we've seen. that is not in any way going to meet the concerns of those that you see in the streets. >> your message today is very consistent with yesterday's -- >> i try. >> first vice president had that call and put out the press release yesterday in which he said that he had called on suleiman to end the arrests and be the harassments and beating, immediately rescind the emergency law, broaden dialogue and invite the opposition to participate in discussions. but if anything, from his statements of yesterday and today he's moving in the opposite direction, so isn't it time for the white house to ratchet it up or do something else? >> and the crowds are getting bigger. >> but what about the white house response? if you're saying you need to do x, y and z, and he's moving in the opposite direction, doesn't the white house need to do something else? >> i think the white house can

do only -- we're not in charge of and we can't, we're not going to be able to force them to do anything. but i think if vice president suleiman continues to pepper his statements with -- as he had two days before and cheryl asked me about -- that we're not ready to move toward democracy, we're not going to see anything change, it is clear as the president has said that egypt is not going back to where it was. nobody believes that. and unless or until the government broadens the negotiations with those in the opposition, unless or until that happens, the pressure for them to do so is only going to get greater. i don't -- i think if there's some notion on the government side that you can put the genie back in this bottle, i think

that, i think that's gone a long time ago. quite frankly, we saw, chip, what happened in the middle of last week when violence was entered into this equation. which is why the prime minister came out the next day and talked about what a fatal error that had been. and i don't think that -- nobody here believes that the grievances are going to be met with a violent, that the grievances will be dealt with through a violent response in a way that helps move toward change. >> the administration said to suleiman if there is violence again then we will cut the aid package? >> well, we have been clear from the beginning of this that we will evaluate their responses to , and their level of restraint will be evaluated as we make decisions on our aid.

>> so on aid it's still the same answer as it was two weeks ago? >> >> we are, we are watching quite closely to see what those responses are, and the response of the government will determine what that aid looks like. >> does the white house have a timetable for getting these free trade deals done? >> well, obviously, i think, i think ambassador kirk said today that our hope is to get south korea done in the first half -- through congress in the first half of this year. and it is our hope that we can resolve outstanding issues with colombia and panama year and move language to the hill soon after. >> any thoughts on senator webb's announced retirement and impact it may have on 2012? >> well, i think the president had an opportunity to talk with senator webb earlier in the

morning and thanks him for -- thanked him for, yet again, for the service that he has displayed on behalf of his country. obviously, the impacts that he's had on things like veterans through a post-9/11 g.i. bill represent his mark on this country and the people that have served it. i think virginia is going to be a very competitive state in, as it was last time in, in both presidential and senate elections. >> are you going to run? [laughter] >> i wouldn't serve if i was appointed. [laughter] >> who called who, do you know? >> senator webb -- i think the president called senator webb, but i think that was -- >> [inaudible] because they had given you a heads up? >> are -- yes.

>> are you done? [laughter] >> bipartisanship. [laughter] >> networks. [laughter] >> oh! >> note the groans. >> exactly. [inaudible conversations] >> mix groan with laughter. [laughter] >> not negotiating, i know. if it was not a negotiating session, what was it today? what was lunch about? >> i think, as i said yesterday and as the president said at the end of last year, we needed to do a better job of reaching out. look, i think we saw what happened in the lame duck session of congress, that when we can sit around and table and talk about what we degree on and what common ground is there,

then we can get things done on behalf of the american people. so i think this was an opportunity to listen to each other and to figure out where that common ground is. look, chuck, i don't -- >> common ground that you both agreed you didn't talk? >> i don't know if that came out of the lunch on their side. i know, again, that's what the president said in a room of both representatives of the house and the senate. last year. that he needed to do better and will resolve to do that. >> it was pretty remarkable -- [inaudible] the vice president's call to vice president suleiman. >> uh-huh. >> our policy out there is public, you know, of what we consider acceptable of the government, so even if you're

not going to tell us what the consequences are, did vice president biden make it clear there are consequences with the u.s. relationship if this policy isn't met? >> well, again, chuck i, i think the greatest consequence, the greatest consequences are continued, the continued protests that we see and the increase in the size of those protests. i think as you heard the president say very early on in this, that every government has an obligation to represent, to represent its people. and i think that while some had thought -- and i don't, you know, maybe we can wait this out, maybe we can set up some committees and commissions, and life will return to normal, i think that's largely been answered by a greater number of

people representing a greater cross-section of egyptian society who have come out seeking their grievances to be addressed. and i think those are not likely to dissipate until the government takes some genuine steps, some of which we outlined. but only they can solve this problem. only the government of egypt can enter into a serious process here. and, again, i have no doubt that as we get farther and farther into this week you're going to see more and more of it. >> secretary napolitano testified this morning in front of the -- [inaudible] no uncertain terms that yemen, threat to the united states and bigger threat -- [inaudible] are we pursuing a new policy in yemen, does this alter our

afghanistan policy? this is the number one with threat to the unite is now yemen -- to the united states is now yemen, why are there so many troops in afghanistan? >> well, let's understand that one of the reasons why as you heard the president say in the state of the union, one of the reasons why the breadth and type of attack that we saw september 11th of 2001, why that is harder the take place today is because of the fact that in, in afghanistan and in pakistan the leadership of of al-qaeda is under the greatest from that it has seen since september 11th. that, look, we came in and, to be honest, we as we had said during the campaign, we did not think the central front for

al-qaeda was in iraq, that we believed it was in afghanistan and pakistan, and we shifted our resources accordingly. >> now you guys are saying it's in yemen. does that mean we shift our resources again? >> and i can assure you our cooperation with and our relationship with the government of yemen is incredibly important in, in, in addressing the counterterrorism threat that exists there. i think it's clear that in the past ten years as we come up to the anniversary of september 11th, 2001, that the threat has evolved. as our response, too, has evolved. we put greater pressure on afghanistan and pakistan. al-qaeda leadership in afghanistan and pakistan, and we have increased our cooperation with counterterrorism exercises in, with the government of

yemen. john? >> does the president have confidence in margaret -- [inaudible] >> great, great confidence. >> can you tell us who, if she, is she the lead envoy now, or is there a thought of sending somebody like ambassador witter in back? >> no, i think ambassador wisner was sent to have one conversation that he had. ambassador scoab by was well aware of that, and the ambassador takes part in the daily deputies' committee meetings in the situation room run by the nsc in order to assess the situation on the ground in egypt. >> and is the president aware that the iranian opposition, mow has requested a sympathy protest on february 14th, and does he

have a message for the iranian leaders on that? >> yeah. i think the iranian leaders mentioned something around watching what was happening in egypt, and i think i challenge the islamic republic of iran to, to show its responsiveness to its citizens by allowing such a, such a march to happen. and we'll see if, we'll see if government of iran is confident enough in its meeting the demands of its people to let it people show the demands that they have of their government. and we, we await their response. mark? >> robert, do y know if patriot act extension came up in the lunch meeting? >> i don't know the answer to that. i should have asked that question, and i don't know it. obviously, as i said here yesterday, we're supportive of, we're supportive of that extension. we actually, i think you'll see from our statement of administration policy i think

that went out a couple of days ago, our -- we support an even longer extension to take any of the uncertainty around extending these out past, out into 2013 rather than just the 8th of december of this year. and we hope that that gets figured out soon. >> do you think that's possible -- >> i do. >> more common ground with republicans on that than democrats? >> well, again, i think there's been some concern on the democratic side about, about seeing an extension go -- i know at least in the senate making sure that extension extends longer than just a little more than ten months. but my sense is that that will get done. >> did you get an answer on whether the obamas voted? >> i think the transcript yesterday, it shows that they received their ballots, but they at least as of yesterday about

5:00 in the afternoon had not filled them out. i will check again. >> [inaudible] >> i -- [laughter] i, i will check again and see if they voted. i'm resisting making a joke. >> and before you leave can you tell us what they're really digging up out there? on the north lawn? [laughter] >> i told you, they're moving the monument. they're going to do it at night. everyone's going to wake up and go, where'd that thing go? and they'll look behind them -- >> the answer is no. [laughter] >> okay, i, they've erected this gray wall in front of my office that i've threatened to go spray paint. [laughter] and make it a little bit more aesthetically pleasing than -- >> do you even know? >> i haven't asked. i probably should given the pounding that i hear in my office. maybe it is the monument. mike. >> all of the options the administration is considering on fannie and freddie essentially

mount to cutting government support that would either raise these and/or lower the amount that could be borrowed with government guarantees. is the obama administration going to backtrack on support for working middle class families buying houses? >> let me address your question in a couple different ways, mike. obviously, the financial reform legislation that passed six, a little more than six months ago required a process for reforming the nation's housing, housing finance market. on friday secretaries geithner and donovan will unveil what some of those options are, and i'll wait to, wait for them to do that. >> would you favor anything that made it harder for middle class

families? >> i would favor both secretaries rolling that out on friday and answering all your questions. >> another topic. >> yes. >> one of the elements the republican proposal on the budget is to eliminate -- [inaudible] now, i remember -- eliminate funding for aher corp.. now, i remember in iowa standing there in the audience standing by barack obama saying support for ameicorp figured strongly. would he consider a piece of legislation? >> i think we're a long way from getting a piece of legislation to sign. as i said earlier, we look forward to seeing what republicans have put out. you will see on monday what the president puts out in a budget that over the course of the next five years will freeze spending

levels resulting in cuts of about $400 billion and rolling us back to a spending level as a percentage of our economy that we haven't seen since eisenhower was president. i think we all agreed that spending has to be reduced. and i think we're going to spend a lot of time in the next several months working to see what investments need to be made to address the challenges that we have in the future, and i think that's what some of debate's going to be about. >> eliminating americorp? >> >> i appreciate your multiple opportunities to get into a series of hypotheticals. >> what role has the advice that you've been getting from friendly arab governments played in the sort of recall rations of the add -- recalibrations of the administration's policy in the last couple weeks? >> what recalibrations of the

administration's policy do you speak of? >> i guess the main recalibration might be sort of the meaning of now when we're calling for an early transition. >> well, i haven't spoken to any of those governments, but i interpreted now the same way the president did, and that was both when president mubarak said he was leaving and when the president said that that transition must begin now. i think that was a week ago monday. but it's clear, mike, that the government has not taken the necessary steps that the people of egypt need to see. that's why more and more people come out to register their grievances. but our notion of when the transition needed to have started hasn't changed. what the people of egypt seek in

those grievances hasn't changed. what has to change is the posture of the government in addressing what the people of egypt need to see. >> was there much staff at the lunch? was it just the four principles? >> i believe it was. on our side the president, the vice president and the chief of staff, speaker of the majority leader and the majority whip, total of six. >> so none of their staffsome. >> not that i'm aware of, no. >> the associated press came out with an investigation showing several different cia officials who were involved in the worst abuses of the bush administration and even some instances in this administration have been promoted to leadership positions and not disciplined. is the president comfortable with the system of discipline and accountability? >> the president has great confidence in the men and women that dot very difficult -- do the very difficult jobs at the cia. i would point you over to cia.

>> robert, is friday your last day? >> still is. >> it still is? >> technically, i will be here until sunday. >> i'm just wondering what advice you would give to jay and any reflections you might have. [laughter] >> it's, like -- >> we tried that just yesterday. >> i was having lunch with the first lady yesterday. >> ooh! >> name dropper. [laughter] [inaudible conversations] [laughter] >> got ready to answer ari's question. >> well, since i missed it, you apparently didn't answer it yesterday. >> i did answer ann's, i didn't answer ari's, awkwardly. >> just keep asking. [laughter] >> look, i'm not going to give you everything i've talked to

jay about for a whole host of reasons much as i'm sure you all have talked about what jay's going to bring and are discussing those with myself and jay. look, the advice i have for him is the, i think, advice i got from the people like marlin fitswater and others who have done this job so well and that is, obviously, first and foremost, regardless of what you know and what you're asked, your solemn obligation is to always tell the truth. and while that may seem readily obvious, obviously, in the past it's not always been the case. i think that, as i said yesterday, i think it is remarkable to watch transpiring halfway around the world a fight for a freedom of speech and a way of life that we have and we

participate in each and every day here. i think the universal values that this government espouses, one of those is a healthy freedom of the press and a desire to have an informed public because based on sessions like the one we're having. and i'll say this, while we're on the subject of halfway around the world, these sessions have been broadcast thousands of miles away and interpreted for billions of people. they watch your questions, and they watch this government's answers. i think it reminds us of the seriousness with which we all approach be our jobs each day. and the seriousness with which

the world watches the example of this country as an example for all the world. so that and a lot of other things. >> did you give him a dossier? >> i didn't say that. [laughter] >> ann. >> the president and his relationship with the opposition is something that's watched around the world too. the lunch today you kind of skirted around the edges, very vague about what was talked, didn't get much -- [laughter] >> i don't think that's the case. >> does a lunch like this in the bigger picture of things have much impact? is there a relationship between the president and the speaker that takes root at something like this? >> i, i think that -- i don't think this can only be -- i don't think the president believes this can be a one-time-only affair.

i think, i think that in order to, particularly in a government that is divided in its control, obviously the requirement is, the requirement for something to get here means it has to go through an entity that's controlled by the republican party and an entity that's controlled by the democratic party. so so we know without the type of dialogue and seeking of common ground that something like today's lunch does, we're not going to see any progress on behalf of the american people on the issues that they have concerns about, reducing our deficit, an atmosphere for creating jobs, continued, the continued safety and security of the american people. so i think all of those require that we try on both sides a little harder to understand

where the other side is and, more importantly, to understand where we all agree. and i think the, i think that continue that process -- continues that process. >> is the president for sharpening some of the political rhetoric that he used in 2010? >> look, i think each entity would say that what is said in a campaign is different than -- we have campaigns for a reason, right? we have people make choices, and then after those campaigns we get about to governing the country. i think, i think certainly what this president hopes is that, that we spend the next many months leading up to something that's far, far away in 2012, that we spend the next many months addressing and finding that common ground and addressing the challenges that

we know the american people want us to address. there'll be plenty of time to get back to a political campaign. and i think it's important that we spend time focusing on what's on people's minds. >> can i follow up on that? >> sure. >> tomorrow i believe of the republicans in the house will be unveiling about a half a trillion dollars worth of specific budget cuts they want to enact relatively immediately. did the president, in be effect, get a presue of that -- preview of that? >> not that i'm aware of. again, i, i think they talked broadly about, about the need to cut spending, but i am not aware that they got a preview of, of what they'll unveil tomorrow. >> i wanted to ask about tomorrow, but on the subject of the transition, do you know is jay going to brief on monday, dive right in? >> i believe he will. >> okay. and can you talk a little more about -- [inaudible] [laughter]

>> maybe a couple of nice purple ties would do him well. i'm sorry. >> there's going to be -- can you talk about what the president's going to be saying tomorrow on his trip to michigan? >> yeah, let me wait for that. obviously, the president is, he'll get into some policy specifics on this, but obviously what the president, what the president outlined in the state of the union with an agenda that outinnovates, outeducates and outbuilds the competition, we're focusing tomorrow in marquette, the portion of building the type of infrastructure and wireless networks that the, that are needed to attract the jobs of tomorrow. and to help train students to continue to be the most productive work force in the world. so we will highlight that tomorrow in the trip, and they'll have more details on

that. >> robert, does the president think governor kaine would make a pretty good senator in virginia, and does he think that jim webb might make a pretty good secretary of defense? >> i -- [laughter] i should answer both those questions on monday. [laughter] no, i, look, without getting into who would be a good candidate for either one of those jobs, obviously, i think senator webb has great experience. i mentioned his continued service to this country and, obviously, his service in, in, in the navy has been important. and, obviously, i think, look, particularly somebody like governor kaine is, was the governor of the state or commonwealth that i'm from, and

i think he did a terrific job as governor and is doing a terrific job as the chairman of the dnc. >> and one other quick question. the president, obviously, watches you, i presume he watches you. [laughter] has he ever -- what was the most interesting piece of advice or observation he had after, after observing one of these? >> i can't article necessarily that. -- recall necessarily that. i will say this, look, and i think one of the things that i think will, will continue not just with jay, but press secretaries that come after is the type of important access that each individual has and needs to do the type of job that you do. each of the last several days particularly i've gone and talked to him about, about egypt and to talk to him about what our continued public messaging has to be.

and i, i know that jay will enjoy the same type of access that i've had and that others before me have had in being able to go in and get from the president his thoughts directly. and i think that will be a great benefit to you. >> robert, i asked you a question -- >> [inaudible] >> i know. thank you. [laughter] >> it's april's voice and it's your head. [laughter] >> okay. all right. robert, i've been asking you a question for the last couple days, and i hope you have an answer -- >> oh, is this calls? >> yes. am i going to get this by friday? >> i will get this for you by friday. i, i went into ask him about voting, and i got the answer, and i came back and about 15 minutes later i went and tried to get the second answer, and he had gone to have dinner with the

girls. i did not get an answer. >> thank you. i look forward to getting it before friday. also on the budget cuts, 350 million will be cut for the community service block grant. what do you say to the poor community -- [inaudible] as they also supported this president when he was then-candidate obama as they believed he felt their pain? >> well, he does understand the importance that, the importance of this funding, but as jack lew said in his op-ed and as the president and jack have talked about in the construction of the budget, we have reached a point where we have to do something about what we take in and what we spend and the great divergence in those two numbers. and that this process is not going to be an easy one. it means that on each side we're

going to have to give a little on things that are even, even that are greatly important to us. and if we simply exempted everything that was, was important to everybody in this process, we would simply continue the process of spending much, much more than we have. >> but in that slept -- slept the 10th press conference the president had, he talked about his efforts in the community, someone who was in the community, who worked for the community. and how far -- and he understands, he said he understood, you know, what it meant to be an advocate for grassroots organizations and for poor communities. but how far did the president go to spare the $350 million cut to these programs? >> well, look, obviously we had to make a series of decisions. i, i think when you see the budget come out, you'll see very

little that, that was spared in, in the tough decisions that had to be made to construct a budget that gets us back on a path toward fiscal responsibility. it's, it's not that he doesn't care about the grassroots, it's that all of these decisions are going to be tough and, quite frankly, we, we -- all the easy decisions have been made. those decisions are not gonna just impact the type of discretionary spending, april, that you're talking about. you've seen the secretary of defense is, has made it one of his priorities to get rid of weapons programs that even those in the military don't want. so there are a series of tough decisions that will be laid out both in the budget that the president has and in going forward that, that even make changes to thick that we -- things that we believe are priorities.

>> thank you, robert. i have two questions. we know what you think of chairman kaine. since his conversation with senator webb, has the president had a conversation with chairman kaine? >> not that i know of. when i came out here, he had not spoken with either one of those men. >> and regarding egypt, we all know about the conversations vice president biden had with vice president suleiman. you've spoken with contacts at other levels of government. is the administration in touch well bare die or -- with elbaradei or the former egyptian foreign minister? >> i know that -- let me check and see if embassy has any more guidance. i know that the embassy reached out and talks with mr. elbaradei, i want to say sometime -- a lot of days run together -- i think sometime early last week. let me see if i can get a better

sense of when that date was and whether we've had contact with each of those individuals. >> thanks. >> yep. yes, ma'am. >> on egypt, you've said several times in this briefing that the discussions between the vice president and opposition groups, well, some of these opposition groups -- particularly the young people -- don't want to meet with vice president suleiman until mubarak is gone. what is your message to them? >> well, look, i think as i've talked about before, if one side is unwilling to do anything in terms of change and one side is not willing to meet until that side takes up all the change, you're gone -- you're gonna find yourself in an intractable position. i think it is important for each side to play a constructive role. from the side of the government we have, i think, very clearly laid out the steps both in broadening those that are being talked to and the steps they

should take on a path towards, on an orderly transition path towards free and fair elections. as it -- i think the opposition also has to come up with a whole host of those in the opposition need to come up with a path forward as well. i think that that conversation and those negotiations have got to take place or, or we're going to find ourselves in a largely intractable position. >> thank you, robert. [inaudible conversations] >> go there, and then i'll go to you. >> thank you, robert. on egypt again, we just came back from cairo, and we don't hear as much here, but there are major pro-mubarak demonstrations, and you can hear more and more from the first day to the last day people screaming u.s., stay out of this. and to which point is the administration worried that by support oring too openly the

pro-- supporting too openly the pro-democracy government it will fuel anti-american sentiment? >> this is not for us to decide or determine. and i don't think that, i don't -- i think what we see happening is what we see in terms of the youing number of crowds -- the growing number of crowds, people protesting the demands of which can only be met by the government. they can't be met by us, and we can't, quite frankly, compel any of, any of the government to, well, just take this step. that's not for us to determine, quite frankly, as i've said before, we can't provide the definition of what those freedoms look like for the egyptian people. so our -- i think you've heard us say from the very beginning of this that these are

challenges that can only be solved by the people in egypt on both sides of this. that has been our posture the entire time, and that will continue to be our posture. >> what's the message of this administration to the young people in egypt demonstrating in the street according to a reporter, some of them have bands saying, yes, we can too. we're ready to die for democracy. what do you want to tell them? is. >> well, what i want to tell them is i think as the president said in his remarks after president mubarak stepped down that we hear your call for and respect your call for the universal rights that we've advocated that the government of egypt pursue. and that it is clear to all of those that watch that unless or until progress is made, it's not likely that any of those crowds are going away.

i think that's why it's incumbent that the government of egypt -- without delay -- proceed in a process that provides the sort of immediate, irreversible progress that vice president biden talked about yesterday. .. thereby

>> my response was hard for me to discern what she was saying, so therefore, i didn't have a immediate reaction nor do i upon reflection any greater understanding as to what she said or a reaction to it. >> she seems to question the president's americanness. you don't have a reaction? >> i read that answer probably four time, and i still don't know what she said. thanks, guys. [inaudible conversations] [inaudible conversations] >> secretary was said navy, but obviously a marine, i'm sorry. [inaudible conversations] [inaudible conversations]

[inaudible conversations] [inaudible conversations] >> coming up later today, booktv is streaming an event with former defense secretary donald rumsfeld talking about his new memoir, "known and unknown," the first stop on his book tour. he's interviewed by michael beschloss. that's live today starting at 6:30 p.m. eastern, a web cast only, and it's available at booktv.org. you can hear it also live on c-span radio. coming up at 9 tonight, the annual congressional dinner. we'll have remarks from four freshmen members of congress taking their life on capitol hill. that's right here on capitol hill on c-span2.

>> north carolina republican congressman, pat trick mchenry, chaired a house oversight committee today on the financial debt fiesing state government and the municipal bonds that pay for it. this was one of the series of hearings the subcommittee allowed to hold. >> this comes to order. this is our first meeting of the t.a.r.p. financial services on programs. i will begin by making an opening statement. i certainly appreciate the panel of witnesses being here and taking the opportunity to be here. today's hearing is an opportunity to address growing concerns over the fiscal crisis for states and mew municipalities. we have seen a culture arise

where every institution claimed it was too big to file. an all too compliant congress put taxpayers on the hook for trillions of dollars. the national debt is crippling our economy. now we're facing the consequences of bad government policy in another way. state and municipal governments preparing for short falls totally roughly $125 billion this year are struggling under a trillion dollar burden of underfunded pension liabilities, plummeting tax revenues, and an unforgiving bond market. we have to understand the magnitude of this problem to avoid the reactionary ad hoc decision making that fueled the federal action of the 2008 financial crisis. this is not about one analyst. this is about the looming fiscal crisis in states and municipalities and the lack of

transparency in their pension obligation. let's be clear about this. the perfect storm is brewing, already state and municipal governments coming to washington batting a hand expecting a federal bailout like so many others, but the era of the bailout is over. that does not mean, however, that congress must turn a blind eye or a deaf ear to the crisis unfolding to state and local governments. the beauty lies in the fact that 9 national government does not tell the states how to manage their own affairs, at least ideally. the burden of federalism is that when one state or all 50 states are in a crisis, we must work together to solve them for the good of the country. since 1990, state and local government spending increased roughly 70% faster than inflation. the vast majority of the states find themselves in a straight

jacket by the burden of paying out trail of dollars -- trillion of dollars by union pensions and health care benefits that come at the expense of taxpayers. for the last three years, funding from the stimulus agent has masked the severity of the state's fiscal challenges. in fact, there was $140 billion in transfers from the federal governments to the states included in the stimulus. states now say that the more money would help them through their current rough patch. the reality, however, is the money states receive from the stimulus has in many ways made them worse off. a lot of the funding comes with maintenance of effort requirements that force states from funding programs after federal funding dries up this year. more money from washington would just delay the day of reckoning and only further complicate state fiscal situations.

besides, we don't have anymore money. the fact is the government has outgrown the capacity to pay for it. there will be severe consequences for not changing course. students are ready to give back to their communities. they will are cash strapped. firefighters, police officers and other public servants are having no problems of rising standards of living for their family with benefits. they will opt for a different career path. in the end, people will recognize their government failed them. not only that, they believe that their government has actively hurt them. while we have the opportunity to change that, we're responsible to try. this is why we're here today to come to a better understanding

of the crisis at the state and local government level, assess causes, and consider available solutions. with that in mind, this hearing intends to shed lite on how states arrive at their current predicament, what is the current extent of the fiscal disstress, and what needs to be done in terms of the available solution. my friend and colleague from california, representative david nunez, has a proposal to reflect greater transparency at the point of most urgent concern, the pension problem. i look forward to hearing from both sides on any and all possible solutions, and that's why we have this great panel here today. let there be no mistake though. much is required to get our fiscal house in order not just at the state and local levels, but here in washington, d.c.. reckless spending fueled by

bottomless borrowing and endless bailouts is an unsustainable course. with that, i now recognize the ranking member, mr. quigley of illinois for five minutes. >> thank you for holding this timely and important hearing. congratulations on your new post as chairman. the reg strer reflects you and your staff have been extraordinary accommodating and cordial to my staff and myself. the issues are to tv to divide -- too heavy to divide us. i want to thank our four witnesses for testifying today, and i agree, it does really in a sense it's not about bailouts or bankruptcy because i don't think any one of those options can work or is optimal.

i'm from illinois, and you don't need to tell me about how bad its finances are and how critical the issues are. illinois had decades of bad financial decision making under both democrats and republicans. illinois now has an $8 billion backlog in payments, a gaping $136 billion hole in the pension system leaving its pension less than 50% funded. it should be no surprise the rating agency downgraded bonds several times in the last 1 2 months. they were only less risky than bonds from iraq. this bad rating was costing illinois taxpayers $551 million a year extra in interest payments. total debt service to illinois is expected to increase by 33%

between now and the year 2017. the only way illinois was able to climb out from a bottom rung is to raise state income taxes a whopping 66%, an outcome no one wanted. this tax increase brought the bond rating back up reducing interest costs, but only because it passed that on to illinois taxpayers. they have to reform the tax system and the whole way of doing business which leaves taxpayers on the hook. a lesson for all of us. people forgot the story of joseph in genesis during the seven good years, he saved for several lean years. illinois didn't save for the lean years, and now it has to deal with the consequences. what's going on in illinois is not necessarily what's going on

everywhere else. true, most states have rung up large deficits thanks to a collapse in tax revenues, but the short term fiscal problem will improve as the economy grows again. the problem is an actuary problem that suffer from long term structural imbalances. the culprits are rising health care costs, underpaid pension plans. some of these plans look bad right now because of the collapse in the value of pension assets. even an appreciation in value leaves several state plans underfunded. the municipal bond market has now responded to legitimate concerns about the long term structural imbalances in the states. i believe we would be correct to distinguish the bad app the from the other 40 some states that are well managed and only have

temporary deficits. that's why a one size fits all approach for states could do more harm than good. state and local governments across the country need to continue building roads and bridges, and we deponent want to make -- don't want to make the finances more expensive than it is. our national interest at stake, the almosts must be beyond the state governments to reform themselves and reform sooner than later. a default on payments would make it expensive for all states to borrow. they bear the brunt of the costs through higher taxes or public services or charity. i don't want an illinois problem or a new jersey problem to become a national problem. they have to have common sense reforms to shore up finances. the mission matters and successful reform shows people

get the pensions earned through the years of service. we just need the political will to get it done. i look forward to hearing from the witnesses on this matter and discussions of next possible steps. thank you, and i yield back. >> i thank you, mr. quigley, and you've been wonderful to work with, and we certainly appreciate that. this certainly is not a shirts vs. skins or republican vs. democrat issue. the depths of the problem is for both parties and american people and their right to know. i want to begin, before we introduce the panel, we have the mission statement of the oversight committee, and at the chairman's request, i'd like to read that for all that are here today. we exist to secure two fundamental principals. first, americans have the right to know the money washington takes from them is well spent, and second, americans deserve an efficient, effective government that works for them.

our duty on the oversight and government reform committee is to protect these rights. our solemn speedometer is to hold government responsible taxpayers because taxpayers have a right to know what they get from their government. we'll work tirelessly to deliver the facts to the american people and bring reform to the federal bureaucracy. this is the mission of oversight and government reform committee. with that in mind, i want to introduce today's panel. nicole is the freedom trust fellow at the manhattan institute. she writes an urban economic and business issues, a chartered financial analyst and hold r and member of the new york society of securities analyst. her most recent book, "after the fall, saveing capitalism from

washington and wall street," was published in 2009. david r. stehle is the professor of corporate law at the university of pennsylvania law school. he's the author of books and depths dominion in america published in 2001 as well as numerous articles and other publications. ilene norcross is the lead researcher on the state and local policy project. her work focuses on the questions of how societies sustain prosperity and the role civil society plays in supporting economic resiliency. her areas of research include federalism and institutions, state and local governments, and economic development. iris j. lav is a senior adviser

for budget priorities. prior to joining, she was the associate director of public policy for american federation of state, county, and municipal employees at a consulting firm. thank you all for being here today. members will have seven days to submit opening statements for the record. it is the policy of this committee that all witnesses be sworn in before they testify. will you please rise and raise your right hand. do you solemnly swear that the testimony you're about to give of this committee will be the truth, the whole truth, and nothing but the truth? thank you. thank you. the record will reflect that all answered in the affirmative. thank you, and we'll certainly begin. you'll have five minutes to give your opening statements. at one minute remaining, the yellow lite comes up.

if you can just summarize your statements, and we'll begin with you. >> good morning -- >> bring the microphone closer. >> good morning, chairman mchenry, members of the subcommittee. thank you for inviting me to testify today on this important topic. congress is right to worry about the choice between bailing out states and watching as they risk repudiating the long term obligations to bondholders and other creditors including union members. the good news is that congress can still act to avoid this difficult choice. the bad news is that a state bankruptcy statute is not going to be the answer. sometimes arriving at a solution means eliminating the bad solutions, so i will talk a few moments about why state bankruptcy is not the answer and talk for my remaining moments about what are some of the

answers. proponents of a statute say that special interests have taken over the state budgeting process, that there is no prospect of states getting their long term pension obligation, health care obligations to retirees and debt obligations under control absent an external force outside the state political process. proponents believe this could be the external force. in this scenario, states can threaten bankruptcy to ring succession from their creditors and change health care benefits and the like. those worried about the prospect, force states to do this before they get into a crisis situation. as a practical matter, though, bankruptcy is unlikely to help states solve their fiscal problems and actually would add new problems. one reason is how states have structured their bond obligations. when many people think of money that a state owes, they think of

the bonds, bonds against which the state has pledged its full faith and credit to pay back its debt. states do not issue only obligated bonds though. they issue bonds through hundreds of public authorities. new york state, for example, owes nearly $80 billion in debt, only about $3.5 billion of that is through general obligation debt. the remainder is through hundreds of authorities and public purpose vehicles and so forth. it is not in agency or arms of the state. it has its own board of directors. it's only legal and contract agreements with not only bond holders, but employees and retirees. there's no way to pull all the debt together in one place along with pension and health care obligations handed over to a judge and pair it back, at least

not without violating thousands of preexisting cove innocents, contracts with bondholders, and state laws, and this gets to congressman quigley's point that he made in his opening the statement. changing the rules mitigate not only states who got in trouble with their own decisions like new york, california, illinois, and new jersey, but states that are running long term deficits. this force bondholders of all states to question the legal regime. it would take months to sort out the uncertainty. it is unlikely states have to pay more on their debt. another problem with bankruptcy is that states are not like corporations where one person can be authorized to speak for the state. in a corporate bankruptcy, you have a ceo, an agent of the ceo, and a small board of directers all speaking as one.

hundreds of state lawmakers would not give their power to a governor to speak in one voice. bankruptcy would not eclipse the normal processes of democracy. you would still have hundreds of lawmakers speaking in different voices before a judge, no way for a judge to simply take over this process of democracy and solve the state's obligations from on high. another problem is that states did not owe pension benefits for the most part. states administration pension benefits on behalf of local government, cities, towns, and school districts. bankruptcy for the state would not take care of pension obligations. municipalities can do that through changes in state law, required changes in state law, but municipalities can already declare bankruptcy if that is a way for them to deal with their pension obligations, so this does not add a benefit to municipalities to owe pension and health care benefits. what are other solutions that

congress can look to to help states and municipalities to pair back benefits? one thing is making sure to state that congress understands that states have the tools to deal with this themselveses. states can change their laws. they do not need to look to congress to do this for them. with that, i conclude my remarks. thank you. >> thank you. >> it's a great honor to appear before you, and i'm tempted to say everything that nicole said that, not exactly that, but i'll make one comment at the outset, and that is we have lopts of experience dealing with complicated bankruptcies for the fact that it's a multitude of entities is not news in the bankruptcy context. i'd be happy to address questions about that or either the other issues that we're just

raised if folks are interested. currently, at the state's financial crisis spiraling out of control, we only really have two options. the first is that a state might simply default on some obligations declaring itself unable to pay. the second option is for the federal government to bailout one or more of the states as it bailed out financial institutions like behr sterns and fan any and freddie mae. i believe these are deeply problematic, and congress should enact a bankruptcy law for the states, not as a first resort, but as an absolute last resort in the event that everything else fails. the claim we don't need a bankruptcy law for states strikes me like saying there's no need for a fire department because most homeowners have heifer any had fire --

never had fires in their homes, and if one does start, the owners can stop it before it's out of control. this is true, but we still need fire departments for in the rare case the fire gets out of control. i want to make three simple points. first, bankruptcy provides several enormously important benefits we don't have in the absence of bankruptcy. second, it is institutionally permissible in case y'all are concerned about that. third, the law can be tailored to address any particular concerns you might have about things like it being too easy for a state to file or there be the bankruptcy law being too harsh for particular kinds of constituencies. let me say since i have time a brief word about each. first, the benefit that bankruptcy provides for a troubled state.

one of the main benefits bankruptcy would provide is a way to restructure some kinds of obligations that probably can't be restructured outside of bankruptcy, and i would include pensions in that. there are limits on what can be done with pensions outside of bankruptcy. i would include bonds in that category as well. the other huge benefit of bankruptcy is if it is necessary as an absolute last resort, is it brings everybody to the table. don't just have one or two constituencies that get singled out to make sacrifices. we gee everybody to the -- get everybody to the table and ask how can we distribute sacrifices so it makes sense and we can put or finances on a fiscally sustainable course. my second point is that bankruptcy is fully constitutional even with respect to states. all that needs to be done there,

there are sovereignties, and they need to be honored, but they can be honored as long as the bankruptcy law is entirely voluntary, meaning that a state couldn't be thrown into bankruptcy against its will, and the bankruptcy law would also need to ensure that state governmental decision making functions were not interfered with. these are all things we already do with respect to municipal bankruptcy. my final point is that the law can be tailored to deal with any concerns y'all may have. a lot of the discussion and criticism of state bankruptcy seems to assume there's only one possible state bankruptcy law we can have, and it's going to require us to cut everything down to 0. that's not the case. if you're worried about states being too anxious to file for bankruptcy, that there will be strategic use of bankruptcy, i think that's not a reason to worry, but if you are worried

about it, all you have to do is put entrance requirements on there. we already do this with municipal bankruptcies. if you are worried about the bond market because bonds can be written down to 0, you put restrictions as a prerequisite to doing anything with bonds. the final point is simply that we can tailor the bankruptcy law to address any concerns we may have. my bottom line is bankruptcy is not a perfect solution. it would be necessariy. it is an -- it would be messy and it's an absolute last resort, but it's better than states defaulting on their obligation or a federal bailout. >> thank you, mr. skeel. >> thank you for inviting me to testify today on this important topic. the recent recession posed several long standing problems.

if left unaddressed, there will be budget gaps and pension benefits and rise in costs of health care will be troubled. with reform today, states can mitigate the worst. the recent downturn is only one cause for recent state budget gaps. stat and local spending grows faster than the private economy over the past several decades. the fastest area is medicaid. states avoided sharing deficits due to patrol funds and a reliance on debt finance, and in some cases, deferring their contributions to pension systems, not funding health care benefits, or borrowing to make pension payments. this helps states show a balance and pass the cost on to the future. without changes, gao anticipates state and local governments will

require a sustainable and sustained reduction in spending at 12.3% or a significant increase in revenues between 2009 and 2058, the close of a projected fiscal gap. in addition, state and local governments face a funding gap in the pension systems. governments report the unfunded liability for state and local pensions at $1 trillion, but economists estimates closer to $3.5 trillion. according to accounting standards, the discount rates may be based on what the assets are expected to return when invested. this violates economic theory that says the little of -- choosing a rate requires matching that rate with what's being valued. in this case, a public sector pension which is safe, government guaranteed, and thus should be matched with the rate that reflects that safety such as the yield on treasury bonds

currently at 4%. the circular logic of accounting standards has had several consequences for funding. it led to the undervaluing of pension promises and the amount necessary to be set aside to fund the promise, plans have been encouraged to embrace more investment risk, including the risk exposure to make up the losses. union leaders and negotiations in the 1990s when the market was booming, boosted benefits because plans were undervalued on paper. governments have deferred payments to the systems and issued bonds. when are plans likely to run out of assets? one estimates under the generous assumption the state's own assumption of 8% rate of return, by kids' end, eight states will run out of assets to pay ben --

beneficiaries. a lesser scenario is offered by the retirement of research in boston college, illinois will require 13% of its budget to ensure unsolvency, new jersey requires 12.5 of the budget. this are choices that governments refused making. ultimately, i stress it is incumbent upon state governors to stress test pension systems. i believe the biggest impact the federal government can have in helping the states is in the area of medicaid reform and man date relief. i have two recommendations. first, transparent an accurate accounting. governments must stress test pension systems and model the cash flows to determine what will be needed to set aside to pay promises.

these should include the risk free discount rate. the data should be made available to the public. secondly, stabilize pension systems. what's promised while minimizing the burden, states should freeze or reduce the cost of living adjustment increasing retirement age, increasing contributions from workers, and close the benefit plan and move workers to define contribution plan. the last reform allows workers more flexibility, shift risk away from taxpayers, and end the manipulation of worker benefits that turned into what was supposed to be a state investment into a gamble for employees and taxpayers. active accounting allows the states to know the tradeoffs required today and prevent a big problem. thank you, and i look forward to your questions. >> thank you.

>> mr. chairman, members of the committee, thank you for the invitation to appear before you today. i believe that prediction that state throughout the country will have to bailout localities or that the federal government will have to bailout the states are exaggerated. i think that's a necessary alarm among policymakers at large. i want to untangle these claims today. first issue, states are projecting large operating deficits of $125 billion for the 2012 fiscal year that ends in july in most states. unemployment remains high, revenues are below prerecession levels, and rising demand of public services due to the growing population. figure one, please. moreover, the fiscal relief

provided to the recovery in the investment act in 2009 is ending. that's not mine. that's someone else's. okay. it has been helpful in allowing states to overt the budget cut and tax increases. states use the fiscal relief to cover one-third of the budget short falls to the current fiscal year, but only about 6 billion will be available for next year covering less than 5% of these short falls. as difficult and painful as the choices are, states and localities will balance their upcoming budgets through tax increases and use of reserve fund. that's what they do. it's a problem that will strengthen size as the economy continues to recover and state revenues continue to grow. there's no credible evidence of a bubble or a crisis in state and local bonds.

go to figure throe, please. first, interest payments of state and local bonds absorb 4%-5% of current state local expenditures, no more than they did in the 1970s. the default rates since 1907 through -- 1970 through several recessions is one-third of 1%. timely, no increase in there's no bond increase against which the bonds are issued as was the case with the subprime mortgage bomb. third, pensions, which, of course, is complicated. there are short falls as we said in pension funding for future state and local retirees. states have to address them. figure 4, please. pensions were funded in 2000 before the last two recessions using standard accounting. the recessions reduce the value of assets and some jurisdictions

didn't make the required deposit, so as was mentioned, the center for retirement research at boston college find the states have $700 million in unfunded liability. that implies they have to increase contributions on average over the next 30 years from 3.8% of budgets to 5% of budgets. that's on average, not just illinois. changes could reduce that cost, and that's not a crisis. the major controversy is over whether there accounting standards are appropriate, and that $3 trillion number that comes from economists who measure future costs assuming a rate of return such as treasury bonds of 4%. figure 5, please. they do invest in private securities. the average historical rate of return has been about 8% as you can see in that chart.

it may or may not be a little lower going forward, and it's unlikely to be just 4%. there's $3 trillion number is a construct. it doesn't represent the amount pension fund have to invest to meet obligations. the state's in trouble for those who skipped payments. problems are serious, but will abate as the problem improves. pensions need attention, but in most cases, they are not in crisis. i see no need for federal intervex in the areas. states do not want or need the power to declare bankruptcy nor is there a need for federal legislation to require states and localities to report their pensions on a riskless rate as a condition for issuing tax exempt bonds. i should note there's a process going on in the governmental accounting standards board, a reform going on for two years, to reform the way pensions are

recorded, and put all states recording on the same basis which is a transparency improvement to see what's going on and so have a reasonable method for reporting. the proposal would short circuit that. thank you. >> thank you, ms. lav. i appreciate that, and we'll begin the questions with the vice chair of the subcommittee. >> thank you very much, mr. chairman, and thank you for coming and testifying before us today. i have a couple questions for each of us, so i'll try to be quick. first with ms. lav. you stated there is no impending or looming crisis at the moment. the first question is how do you define a crisis of what we're seeing with the states and their obligation requirements at the level their out. how would you define a crisis? >> i define a crisis as something that states had no way

of digging themselves out of. they have many, many tools in which to do this. if you have to raise pension contributions from 3.8% of expenditures to 5% of expenditures, you can accommodate that within budget particularly after the economy recovers, and certainly there's deficits and states are finding ways to close those deficits. we don't appreciate a lot of the budget cuts they are making which are harming low income people and residents, but that's what they do. they set balanced budget requirements, and that's what they do. they manage their finances. >> i think the concern i and others share as states "manage finances" they are spending a higher amount of money percentage wise of borrowed dollars to get us through these "lean or challenging times". my state of new hampshire has done that to pay expenses and so

has new jersey. that's just not good business standards of practice, so -- and i don't know that you had the chance to touch upon it in your verbal remarks, but in your written remarks you talk about standards. my concern is at some point, there is this potential of states wanting to come to the federal government for a "bailout" because of what they define as an economic challenge that they're having. i would argue something a little different. any responsible governor, elect children, or add min straiter -- administrator should be anticipating challenges, and it doesn't appear that's been done in a responsible way, so i understand your point, but can you speak to those states that are borrowing money to pay for ongoing expenses. i'm not talking stimulus money they received, but just borrowing money.

>> very few state have borrowing systems. illinois borrowed for bonds to make a pension contribution which is very bad practice. by and large, states borrow money for infrastructure. you don't see any substantial runup in borrowing as a percent as gross states. we have a chart there that i provided some information to you in my testimony and some graphics and state by state information on that. you don't see runup in borrowing. it isn't good practice for states to borrow to pay for operating expenses. they should borrow for infrastructure because that makes sense economically. we don't approve for borrowing for operating expenses, and in the paper i refer to in my written testimony we do have the whole last section that suggests states do have as referred to some structural deficit and

mismatches on expenditures and revenues, and part of that, and they do need to take steps to fix those mismatches, there's no question about it, but a lot of that mismatch comes from the rate of growth of health care costs in the economy. they spend a lot of their money on health care and health care costs are growing faster than the economy, all throughout the economy, in the private and public sector, and so states with revenues that grow slower than the economy because of the tax system have a hard time meeting speedometers to provide -- responsibilities to provide health care to the states that need it. >> i agree that states need to better manage the pie in the budgetary challenges they are having, but it sounds like you're making an argument now for bankruptcy when in your comments you suggested it's not necessary at this point because of the looming, you know, fiscal challenges they are having. >> they don't need bankruptcy. >> i do want to ask ms. norcross

if you can comment on the testimony we just heard. >> certainly. i want to explain the discount rate controversy by way of analogy. it's important because it informed decades of policy within the pension systems that i believe we're seeing the results of that today, and l animal sigh is this -- analogy is this. the reason your assets don't return to value of liability, consider you have a mortgage and let's say a mutual fund. your broker says i think you're going to return 10% annually on mutual funds. you can't slice your mortgage in half. the bank doesn't send you a different mortgage statement based on that. what that logic producedded over the years, and certainly, yeah, in the 80s and 1990s, the pence plans look fine. a, they undervalued the size of the promise. they are sort of expecting that rate of return will be taking care of the necessary contributions that they should be making to fund the system,

and number two, when plans are overfunded on paper, it's like some states you grant really generous benefit enhancements without doing the math. in new jersey in 2001, the state granted a 9% benefit increase and didn't even figure out what it would cost them. that's what the governor is trying to address right now. remarkably, it violates another principle that you can secure a guaranteed investment with a high risk screen of investments, and in the short term you realize more volatility in your investment, and yet that promise is due within 15 years, so they are basically trying to secure guaranteed payout with a high risk investment, and that's the logic. joshua uses the 8% rate in his paper, and even if granted that, we're looking at funds running out of assets with 3% revenue growth by the end of the decade.

normings' accounting actuaries released a paper on friday using the 8.25% rate saying we have 12 years. >> i thank you for your testimony. the time expired. ranking member is deferred to the full committee ranking member. >> thank you, and i thank you for working why a bipartisan way to address this problem. ms. lav, it's interesting after listening to the vice chairman of the subcommittee speaking just a moment ago, i find it interesting that the national governor's association that is republican and democratic governors through their chairman and vice chairman said on february 4, 2011. allowing states to declare

bankruptcy an authority any state leader asked for or likely use. states are sovereign entities and trust is granted to elected leaders, this suggests a bankruptcy court is better able to overcome political difference, restore stability, and refinance the state. these assumptions are false and serve to threaten the fabric of state and local finance. do you agree with these governors that the state bankruptcy proposal threatens the fabric and these are there words. >> yes, i do agree. states have all the tools they need to manage their finances. occasionally, one state doesn't, but they have the tools they need. >> what would you recommend as to how those states might improve their fiscal situations? >> i think, you know, there are many ways that states can

improve their fiscal situations. they can move to taking a longer term look. many only look one year ahead or two years ahead. they can improve their revenue systems and make sure revenues match with their expenditures. they can have processes in place where they, you know, there are consequences of skipping a pension contributions which has caused a lot of the problems we're talking about today. there are many things that they can do to make it clearer to them to policymakers and the public about their own situations and allow some oversight. i think that states themselves have the ability to do that, and that this recession has just been so very long and deep that some of the flaws, you know, have become apparent, but it's not going to be forever, and i think they will adjust their revenues and expenditures to manage these problems. >> going, you know, house budget committee chair, paul ryan, and

republicans propose cutting the federal budget, discretionary, nonmilitary spending to $40 billion this year and much more in the future. wouldn't this significantly worsen the state of local government's fiscal problems? this is no gift, is it? it's not a gift to the state. >> no, it's not a gift. it's a penalty for the states basically. it is a third of nonsecurity spending that mr. ryan wants to cut. it's our grants that flow through to state and local governments. depending, we don't have the exact number, but somewhere between $10-$13 billion would be money states have to scramble on top of existing and additional deficits they have to close because of these cuts. >> isn't most underfunding of state pensions due to recent dramatic declines in the stock

market that were put in up vestment portfolios that all americans including hedge funds, working people, and probably most lawmakers atepidding here today given the recent emerging recovery, market upturn and projected future gains, don't you agree with the analysis expecting future long term gains equally over the next 30 years to smooth out the day's current problems. the reason i raise this, and any of you can answer this, is that when the storm is over, i don't want to see situations where our employees, by the way, a lot of them working in this room today, may have lost pensions, and now going to the state pensions that have been diminished. states come out of recovery, and then because some states be able to make their pension payments on time, and you got to keep in mind that the employees, they have to pay; right? >> right.

>> they have to pay. okay, so one of my concerns is when the storm is over, then these folks have been locked out a lot of money they were due. i'll start with you ms. lav, and others can comment on that. >> of course the improvement of the economy and market have a lot to do with improving the outlook of pensions overtime, and for most states that have not provided retroactive benefits without funding them in the past, they will be fine, you know, so the vast majority of states will be fine when that occurs as that occurs. >> i would say that the only reason workers lose benefits that are promised is because the investments are treated as a gamble. they have been misvalued, and therefore, the investment strategies are not appropriate for the plans. i mean, i share the view that, you know, what's been promised

is promised and people worked for this and contributed to it. every state pension system and local systems have something different going on. we know about the worse plans, and i caution that the papers are point. again, i grant you 8% return, but if there's no change in policy, this plan runs out of assets. >> thank you. >> certainly appreciate that, and if i could call up slide number 1. this is a representation of the difference between inflation of the 1950 baseline, the difference, the blue line would be private spending increases since 1950 to now versus state and local government spending increases in the red line. private spending has in connection in connection increased five times, but local

spending increased 10 times. it's not a question of a funding short fall, but a spending problem. would you agree with that? >> that's a big part of it, yes. >> now, in terms of the discussion about public pensions, understanding the magnitude of the problem is one thing we want to understand here today. if it's nullble. what, you mentioned in your testimony a funding short fall. is there a range, an agreement on what the funding short fall is for public pension? >> well, thank you, chairman, there's not an agreement of a rough range being 700 billion to 3 trillion. that's a large range. this involves predicting things that are impossible to predict. you have to predict the porches of not only the u.s. stock market, but a global equity and

bond markets, predict the course of future inflations and also predict how long people and their survivors are going to live. >> do you concur with that ms. norcross, that range? >> yes, under a range of assumptions, yes. >> what's that? >> meaning the 700 billion is under the assumptions of the 8% discount rate and that's why we should stress test the pensions and asking economists to value the plan. >> what is the upward end? >> 3.5 trillion. >> okay. now to this point, is there under current government accounting standards, is it sufficient? do we have enough transpirp sigh and understanding the underfunded liabilities of the state pensions? >> no, it's not sufficient. i would advocate asking the states and large municipal sighs

to report the aliabilities under a range of assumptions, report it under a lower, what used to be called the risk free rate, 3% annual return recorded under the 8% return if they want to do that and allow up vesters to make up their minds. i don't think there's a big -- there's a problem with disclosure, but it's not the biggest problem because investors can do their own calculations on littles, and we've seen them do it on their own, and if investors do not like what's reported, they can simply not up vest in the debt. again, we should have more disclose sure, but the problem is that we don't understand the mag magnitude of the issue. it is getting the political will within states to change state constitutions which govern benefits for future workers, people who have not been hired, change state laws, governing health care, and so forth.

>> would you concur with that? >> i agree. >> well, that's simple enough. [laughter] it's reasonable. are the government accounting standards for pensions similar or dissimilar to what public companies are required to disclose? ms. norcross? >> they are different in private sector plans. they use something close to a risk-free rate. they are valuable, but definitely the prief sector plan. >> do you want to add anything to this? >> no. >> wow, this has gone smoothly. in terms of your testimony, you discuss the state spending grew faster than state's own revenue sources in 47 states from 1977 to 2007, and you know, to this point, can you explain the

danger of states reporting budgetary imbalances when they are actually using federal funds and debts to fund these expenditures? >> i think that just highlights the pie and what's in the pie. you have state's own source revenues, federal funded debt, and others. a deficit, if you're just considering what a state can support on its own, that can be papered over if you then sort of discount they are getting federal funds that stimulate sometimes grater spending or causes a state to raise taxes and also the rising debt. while debt is not a large portion of budgets, there's techniques where states will bond, dump a trust fund, bond to replace it, and use that to balance the budget. not bonding directly for operating expenses, but yet they are. >> to that point, have states changed the nature of what they use bonds for? the nature rather than building a road, are they changing it to plug a pension fund problem?

has that changed? >> we've seen more bonding for stuff like that, and also, you know, the definition of capital can be pretty flexible. >> thank you for your testimony. my time has expired, and now, mr. quigley, the ranking member is recognized for 5 minutes. >> thank you, mr. chairman. so far the problems we've seen with these 10 states that are in particular trouble seem to be self-contained. i want to ask any one of you, if you can, what the potential systemic risks are. i guess the last economic crisis taught us anything that everything is interconnected in terms of the market or what have you, if there is a big hiccup. there are thets with these -- threats with these states defaulting and having other problems. the impact on bond ratings and also the bond market itself, so

while they may be only 8-10 states, that's 25% of the country's population. .. which was subject to a media which draw. states are not having tax

revenues coming out. they are likely to be able to continue borrowing. as i think it's a very different kind of crisis. >> if possible, the panicked markets in the short term. meredith whitney did that in a municipal bond market by claiming -- >> you violated our rules. [laughter] >> but you can -- in the long run, people realize that the fundamentals are and you can see that there's beginning to be some improvement in the market now that it's been kind of put to rest. so i think that there are distinctions among states. you know, the last time a state defaulted within the great depression. even the great depression, only one state, arkansas, defaulted. on the cities or counties have actually defaulted since 1970. we are talking -- i don't tank were going to have a major default crisis.

i think that there will be ways, you know, you're going to have some districts and revenue bonds that were tied to the housing bubble and so forth that are going to have trouble paying the most districts are going to have some problems and states will probably step in as pennsylvania step dan in harrisburg and sort that out in a reasonable way. but i just cannot see a scenario nature defaults in contention. >> if i may have to back, i would say one issue that risks courting a bond market crisis would be changing the statute to allow for federal bankruptcy because if i am a bond holder, for example, take new york metropolitan transformation authority, i'd want money to this entity based on a long list of covenant, including a state department says that for as long as these bonds are a candy, this

entity will not declare bankruptcy. but as with new york lawmakers have determined under the democratic assess. if there's any question you have a federal statute that would somehow supersede this idea that you could take away promises made to these bondholders to give to bondholders or union at another state entity, this risk would take many months to sort out. i would also add maybe not the potential for an acute crisis that we saw in september 2008, but the potential for a risk of losses that banks, where you don't need a default for the market value of the securities to decline. you've got more than $200 billion of municipal debts and banks, similar amount in money markets and insurance funds. he thinks worry that the value of the securities has declined, they may pull back on lending to the rest of the economy. again, not a crisis or a panic, that makes recovery more

difficult. the question is, what are you getting for making it more difficult? are not getting much benefit because states have the tools to fix these problems. >> i have one brief response and that is this is all assuming that the states wouldn't defaults on these bonds. i think the question we have to ask is, what are the possibilities? one possibility is no bankruptcy. they simply default completely. >> let me ask another question to ms. norcross. it talked about the rate of return and advocate for reducing it to a much more realistic figure. the same sort of question, a quick shift perhaps eight and a quarter eighths to four would have some sort of impact, a pretty traumatic on a fiscal point of view. the contributions it have to be increased, but also within the market that looks at this, which

you see this being done through a slower period of time and adjustment. cogency that were? >> i agree with what ms. gelinas said and you have to grant in the rain assumption, but the liability of the liability, simply targeting a rate that makes it look better only masks over the underlying reality of what is owed. and also, if you're going to pay this out over 15 years, my concern is that in cases like illinois where they are going to take on more risk investment strategy to make up for what is last. >> thank you. >> i think the ranking member. >> i think the chairman and making member for organizing this important hearing and all the panelists for their thoughtful testimony. i would like to gain a deeper understanding of the magnitude of the challenge. i'd first like to ask ms. norcross and ms. lav to

qualify and expand on a statement and in ms. lav's testimony where he stated that states and localities devote 3.8% of their operating budgets to pension funding. first i'd like to know where you got this number from and is this an expected number universally? and if that in fact is the correct number, based on this number, how can you suggest that public pension costs are the large cost of this state and local financial problems as we know we are just taking our way out in the great session at its impact did our great country. and there are many costs they are but you could comment first ms. norcross and then ms. lav. >> i believe ms. lav gets that figure from the militiamen out

power and that is what her estimate is, on average. and she estimates that if he is the 8% discount rate come you have to raise that to 5% of budgets on average. >> that is correct. we worked with the boston college people and who are now using expertise on state and local finance to help them, but that figure. >> so how can you suggest this is the cause of the local and state financial problems that the contribution is 3.8%? >> it isn't. it isn't the cost. i mean, pension contributions come from general funds. and the big deficit numbers come a 125 billion that you are hearing about is a general fund number, contribution, neither contributions for interest on bonds are the major component of that. a major component of the dataset is what the deficit states have

medicaid health care and education and so forth. so that is why i said, you know, it is not a crisis to raise from 3.8% to 5%, you know, in the way the state budget -- state and local budgets are put together. you know, you can do that over time. it is not a big crisis. and you know, all of this talk about the riskless rate is one way to look at the mu now papers that you have to go to 9%, which would be a big problem if you use the riskless rate. there is a distinct wage between value and liability and how much you have to deposit to make the pension hole. and i would say that those are two different things. >> well, on the riskless rate at a number of you testified on, i'd like some clarification from it. is it true that this rate is different from what the private sector pension plan is?

>> private sector pension plans admit they have a little more risk because the company can go bankrupt. he is the corporate odd rate to reflect the risk. the corporate bond rate is a 5.5% or 6%. >> why should it be a different rate for public pensions? acus private pensions have to be a little more conservative because a private company can go out of business and then they dump their liabilities for their pensions on the public benefit guarantee corporation. so the federal government doesn't have to bail out the private corporation and pay those pension liabilities, insists that it uses a more conservative rate. but a public entity is not going out of business and the public entity of taxing power and can adjust taxes and expenditures. it's going to be an ongoing entity. paraben at gao reports and other observers.

most people who look at this for you do not need a stringent standards for public entities as you do for private. >> so with the riskless rate increased the perceived pension shortfall? >> yes, substantially. >> how does it increase their? >> well, because 60% of pension assets come from return on assets come from investment income. so if you do you only get 4% on investment income, you are projecting that 30 years since the future, you make up a much larger whole thing you have to fill. but if you say you are going to get 4% and you continue to invest in equity, then you are saying something that isn't true and you are sort of saying you have to overcome the pension in the front and because you are saying it's only going to be 4%. but if you get 4% or 8%, you will have more and it. and that will be even -- i hate

to say it, but you could end up with even more sensation were overfilled pension fund to not have consistent contributions every year. it's much more realistic to say what you're going to gain and consistently contribute the amount you need rather than having. >> my time is expired. anyone else like to comment on it? >> i would like to add if i may, the logic behind the discount rate is the risk of what you are valuing. private-sector plan reflects some of the risk about that a company can go out of business for the government guarantees under% saying you're going to get paid. again a long time i skipped back to the idea that she has 15 years in the majority of obligations come due and you are securing the title at all investments for your listening likelihood he will be available to pay it out. >> and if i could comment on the magnitude of pension liabilities, the reason why they don't show up as much at the state level is because these are

the responsibility often of the local government. they are set a state law but paid by the locality for example in new york city will pay about $8.5 billion in pension obligations this year. that's more than 10% of the entire budget, including federal funding for the city. so much bigger problem at the local level rather than state-level. >> i figures for state and local. >> thank you. mr. quigley, unanimous consent request? i ask unanimous consent to enter the record a statement from the governor of massachusetts. >> without objections ordered. mr. cooper is recognized for five minutes. >> thank you for having this hearing. unlike unanimous consent to american article at jeb bush and newt gingrich and "the los angeles times" entitled that are off bankrupt. >> without objection. >> and finance hearings it's important to keep things simple.

and to my understanding, almost 80% of municipal bond are municipal in some form. is that your understanding? these are more widely held high --! the tax-exempt bonds. >> individual investors, tax exempt bonds. for most investors hate is a nasty surprise, a downside surprise. so in markets that function well, you have transparency, a heads up on that news. people are usually less alarmed. i want to ask a couple questions about the transparent yet these markets. what are we missing today comparing these obligations between state that would enable an investor, an individual investor to better evaluate these investments? it is my understanding that some of these get packaged up in bond funds and want the tax break and that way they diversify their risk, but you don't want the bond fund to be harmed either. so what are we missing in terms of trying.

he between the state? >> you are asking me? with respect to bonds, i don't think there's anything missing. the bond had a great tool of information about the state in the financial analyst follow them very closely. and now, i am not aware of anybody complaining about the. see the bonds among the state. moody's just put out a new kind of analysis. they added together the out candy and on debt and pension obligations you can look at it in one place. i think that's a good thing. with respect to pension obligations, i think there is a problem of not being able to look at state to state pensions on the same basis. >> exactly what are those

problems? >> they use different standards. there are a range of actuarial standards that are pretty arcane as to how you measure future liabilities and so forth. states can choose which ones they want. i mentioned at the beginning of the hearing that the governmental accounting standards board is very close to issuing a standard that no longer will allow that and will require -- >> after he gasb has a new standard we will have an apples to apples comparison between the states? >> i believe so. >> to all panelists agree with that? this is pending in about two have been. >> if i might clarify, is that a rule that is going to require them to use the abo versus the pbo or are you referring to gasb? they are also working on the discount will, but i don't think they've solved that problem. >> i don't know what they are going to call.

in the next two months we will have greater comparability between the state's own investor, an individual investor can evaluate the risks involved in the most complex aspect of this, which is valuing pension. >> of course they haven't put up the final really got, but they are working. >> are all the panelists equally hopeful that someone is going to do this? >> they're looking at it, so i'm hopeful. they have been addressed through in september and they are far down the line. i think it's appropriate because all stakeholders have a chance to comment. not something been imposed in various people object to various parts of the world. but it's going to be a standard rule and better than the one we have. >> does the manhattan institute and university law school agreed? >> i'm not following that closely. >> i will as well. i have no prediction on how they will come out.

>> you mentioned earlier breeding agency analyses the dawn of credibility that perhaps they had prior to the housing crisis. our rating agencies on top of these developments between and among the states and municipalities? >> i think they are. they're rating agencies and then they're a whole host of other financial analysts are a specialized enough to read and agencies that they agreed have lost some credibility, but who looked at this finance specialists who spend all their time looking at state and local finance. i mean, i think they have a pretty good handle on what's going on. into the wind at my site that in my report that they are saying there is no major chance of contagious default. they're a couple of extra defaults that are likely to be in mall things like districts

are not major areas. >> my time has expired him and mr. chairman. >> i thank the gentleman and if it is okay with the panel, we have the opportunity to go for a second round of questions if there are no pressing concerns this morning. and so with that, i write on my cell for five minutes. so the definition of defaults is to fail to fulfill a contact from agreement of the good. so if we look at defaults in the bond market, does the bond market to find that narrowly, which is to make good on your payment to me or can we as policymakers defined more broadly, which is to fulfill an obligation to people you are serving, failure to pension

holders for an end for not being able to pay pension holders or could it be not making good, so you have to sell a city or state assets in order to pay bondholders, which is an interesting piece here. but beyond that, as federal policymakers, remake and at worst or transfer payments to the state? there has been some points of reference and testimony here today that is in fact the case. ms. tran norcross, to the tune of hundreds of billions of dollars a year, there are state -- federal transfers to state. there are also federal mandates on the states that are cross drivers to government. can you touch on this and the implications that have obviously for the bond market and indebtedness and the taxpayers? >> the most well-known and

suffer with currently be with medicaid requirements on the states. there are many other grants-in-aid that are handed out to the state would occasionally come with maintenance effort requirements or may encourage the municipality government to raise taxes and support spending. i don't know if i answered your question. >> you did. there are certain states that are in certain fiscal situations. i know some research has done on this. and so, you know, does that -- the difficulty of policymakers to balance the budget of eight. on their credit rate quite certainly does one would leave. ms. tran six, in terms of viewer sub groupings of the state, obviously the dormitory, authority, does that have a bearing the state revenue sources whether or not they are

sustainable? can you touch on that? >> short, without seeing if they're either right or wrong on the broad issues or narrow credit, the rating agencies do have a good understanding that each bond is different, even at state levels. so california for examples that very clearly, pay debt to service on general obligation bonds. this is one that his top priorities for the state, that even if california has the budget deficit, they pay these bonds first before paying anything else. the rating agencies need the structure of the president and that goes into the analysis. other states may not be as high of a priority, but is a high priority in every state. when you look at things like bonds that are tax secured, with the state has said we pledge the sales tax to pay bonds before we

as a sales tax for anything else, that is actually higher than a general obligation bond. so you've got to look at each of those repayment streams, the care of the state, the willingness to pay the debts and sometimes frankly the willingness of the state to make our decisions. you saw an illinois state raise taxes to give comfort to the bondholders. so trying to get more market discipline in getting the bondholders to care more about the fundamentals, it doesn't necessarily issue good, long-term decisions for the state if the response is to raise taxes. it may make the long-term situation worse, not better. >> i certainly appreciate that. today's "wall street journal" there is a hearing where california borrowers are as billions of dollars each year to cover seasonal shortfalls and its cash flows. illinois is proposing to issue

an $8.7 billion debt restructuring bond to pay past due bills and $3.7 billion bond to make required pension contributions to its pension system. there's a larger discussion here about whether the states will be able to afford higher interest rates on these on, following the end of quantitative easing and the impacts that will have on their pension fund gap. so i can just ask the panel to make comments on that reflate and we'd certainly like to hear the testimony. >> higher interest rates are certainly a risk, not only having to do with the fundamentals of the municipal bond market, but also how do global investors feel about the process of inflation in the u.s. if treasury bond rates go up, it is likely municipal bond rates will go up at the same time. >> i will just add that those effects are likely and artier disparate portion alain borne by

the states that are in trouble. so california's interest rate is much higher than other states interest rate. thus the we would expect and i think the long run that's what we want the markets to be doing. >> i concur with what dr. steele says. >> i would distinguish those different things. california issues revenue in a few other states know what they pay them back within the same year. that is not our wing. it is just changing the timing of the borrowing, where illinois bonds are bound with property expenses, which is a big distinction. of course the census will go up if interest rates go up. if interest rates go up. , the total go up. , the total interest on bonds are depending on the source used to calculate, only 4% or 5% of total state and local expenditures. so again, this is not something that is going to break the bank

if it goes from 4% to 5%. 6% of expenditures have to accommodate, but it's not going to break the bank. >> thank you. mr. quigley is recognized for five minutes. >> again, thank you four panelists and the chairman for participating in this very good first effort by the chairman and committee on the important issue. before you do, i guess my last question is the path for local government -- state and local government is that from my point of view, the mission matters, we often have so much that people don't like government. when it comes to local government, when they call 9-1-1 , and they have an ambulance or police officer to respond and they want to know when they cross the bridge it is safe. so much local government strike so close to home that the wheels hit the street.

and so what we're talking about today is so important because the poor financial management put on those things that risk. so be on the financial management dealing with pensions of goforth, it is really the notion that governments need to look at themselves and reinvent themselves. and i'm not just speaking of the congressmen, but i was a county commissioner for 10 years. all local governments need to reinvent himself, not because they don't matter, but because they matter very, very much. and so there is a lot at stake here. i want to commend the panelists with one exception you kept your bondage you are going to the name shall not be mentioned. but it is still a question with a lot of the public wants to know. to what extent could there be significant default or significant bond default in the

year 2011 or 2012? >> i don't think there will be a city. i think there will be some default in the special district and on revenue bonds. so for example, in florida there were -- there were bonds issued for sewers and a development that never got else because the housing bubble burst. well there's no way -- you can't pay back those bonds. there's those kinds of things around the country that are going to be a bit of a problem and that could be default or restructuring. as the chairman said, the term defaults could be used in a number of different ways. i use it as an you don't make the interest payment on the bond. not that you could find some other way to pry it.

again, there always some projects that go bad in a bad economy. i don't think there will be any major large city or county that defaults. you know, i think that by and large, even for smaller ones, the state to step in. i mean, we've got a control board in new york. and you can see them quite a number of control board and impose control board that are trouble and make them figure out a plan for working their finances out. >> i would just add, i also don't think there will be 100 defaults, but i think it's really important to keep in mind, we don't know. probably 50 states will survive. but if only 48 states survive current crisis, we're in trouble. and i think we really need to plan for that. we need to plan for surprises

that await that in 2008 we had not planned for surprises. >> as the democratic people in the state, we don't have to wait for the bond markets to make common sense decisions today. we know state-by-state emanation of the hole we've got to control our health care costs for public employees as well as other people as well as retirees, pension liabilities. these are all things if we do not get a handle on them on the wheel and not be paying these growing retiree costs. these are things we can fix today but we shouldn't and don't have to wait for bond market to tell us what we should be doing already. >> i would concur with what ms. gelinas said. >> thank you and i yield that. >> mr. cooper is recognized for

five minutes. >> thank you, mr. chairman. i like to thank you you in the ranking member. individual investors. i'm an individual bondholder today for local taxpayer who is thinking about maybe buying some of these on, what is the easiest way for me to find on the web or another source of credit status, credit rating financial soundness of the entity in which i am possessing or living? >> they have a whole lot of information about finances. >> perspective to the legal document comes sometimes hundreds of patients, what is the best way for the can number who may be at the broker's office saying he wanted tax-free bond. tell me what i should buy. how do you find out that information? had to tell whether you're living in a kurd jurisdiction are not? this is the information age. is there website you can go to

and find out with relative ease small-town u.s.a., is it worth it or not? >> i think it's fairly difficult to have to piece together information, but all the brokerage published reports were put out an individual bonds. certainly if you go to a broker, you can get that information. but to assemble it together yourself i think it's a little bit difficult. >> that's why most people do rely on it, i'm financial advisers and some brokers rather than making their decisions or at least information. if japan's on what kind of a bond it is. you know, you may be wanting to know about the possibility of further tolls going to pay back the bond on this highway work may be accredited in which case you need to have some sense about the budget of the entity

and its long-term prospects. >> when ms. gelinas said earlier individual citizens take it upon themselves to get ahead of the bond market and participate in the practices, and is very difficult to do that. you really have to be a student of this to understand what is going on. >> right. i think people just like i go to a lawyer or a doctor. i'm a finance person, but everybody is sad. >> the individual investor should be made relatively easy. some of the brokerage houses may be affiliated who help underwrite the bonds and they have an interest in making bonds look good. >> that they be the case. you know, there is not a lot of ways that an individual can investigate, you know, most towns have budgets on the website. i can find them, but it may not tell you everything you want to know. >> we can compare almost everything am i for easily accessible websites.

these important financial instruments, why can't we get an easy handle on this? >> there are 80,000 jurisdictions in the united states or some people say 90,000 at issue bonds. it's quite a large undertaking and one that maybe somebody would want to undertake. >> perhaps a more relevant question is so many people buy a bond fund, which may have a few bad apples in it. how do you tell what is in your bond fund? is my understanding with the crisis they bundle subprime credit when a few more when under than expected, that tainted the whole package. >> that was a different kind of -- those were kind of what people call splice and dice security where people didn't know what the origin is. >> that's not being done with on spike >> no, never. >> the bond without endorsing or not endorsing them, there is at least something in there,

something like a collateralized debt obligation built on mortgage bonds biltong more mortgage bond. some of these things are rated aaa and they ended up being bitterly nothing. i don't see how that would either case here, even if we did this small-scale municipal product default. it's hard to conceive waking up and having the aaa fund be worth something. however, i think it's important that individuals on the wrong, but they don't own them directly. they owe them through money market, $300 worth of state and local debt. and there is an issue here of financial intermediation and the dealer's responsibility that these are the large investment banks. they run these funds. they have many holding funds on their own books. if we haven't succeeded in

getting financial discipline into these firms do still believe in many cases they are too big to fail, they think congress will bail out them, not the state. >> within a few investor day in a bond fund with higher tax-free interest rate project? funds in nevada and southern california? would you put your life savings are your pension fund and a fun like that, especially because it is quite difficult to find out about the merits of each individual project. >> i would be careful, but i certainly wouldn't steer away from the market. i asked about project because that would be the most likely. >> you have to look at the project. >> apparently that's almost impossible to do unless you are a bond lawyer unwilling to read

more per project. >> if you're going to invest in a project -- >> i would be a fund with lots of projects. to me that we are not giving consumers enough information at least that is easily accessible. my time has expired. i appreciate. >> i appreciate the gentleman plan of questioning. the panel wants to go through it, the question was would you invest in state municipal bond funds come to you yourself? yes or no, maybe, if y'all want to answer, that would be great. >> i think there is a very real problem with people's trust in the financial industry entrusting financial advisors and managers of these bond funds and then issue is not going away anytime soon. >> ms. norcross. >> i would probably ask my financial planner. [laughter] i've never actually invest in

municipal bonds. >> okay, thank you. >> i think the gentleman from tennessee. but that will go to mr. walsh of illinois. >> thank you, mr. chairman and thank you for holding such an important hearing. like the ranking member, i'm from illinois as well. we all know that. no way is the federal government going to bail out my state, my voters who are can do to us won't allow it. i feel like i left the movie right before the good part. i'm sure the case is being made that bankruptcy is infeasible. so no bailout. encrypts he is infeasible. tonnages start out with a real quick round robin question. give me your 22nd solution so i can walk out of here with that take away. we are not going to bail you out. bankruptcy is probably not feasible, so what are the states going to do?

i mean, let's get a quick wonder that. >> go ahead. >> i think many states are doing the right thing. you've got new governors from both parties who are starting to address, what do we do about pensions for future employees? medicaid costs, something congress can help with. >> these are questions for voters in individual states pressuring lawmakers to change state laws in state constitutions, not something the federal government can or should do for them. in some ways the system is working imperfectly. >> i guess my question is there will be no bailout, a status on and off the cliff. let's imagine one is literally going to fall off the cliff. we can change laws that will impact things in the future, for what you do for the state that is on the cliff? >> mr. skeel. >> wage but a bankruptcy scheme

in place to deal with precisely that problem. but the only problem we need encrypts before. all at once rang and that his states are doing the right thing. and i hope the optimism we've heard today is correct, that most of them can muddle their way through. but some measures are a lot tougher. pension reform in the state has a lot of debate in illinois that what can and cannot be done now. many states require a constitutional change and i think that's pretty unrealistic. for some of the options are more feasible than others. >> ms. tran pix, your state is falling off the cliff, what you do? >> figure out how you're going to pay out with an accumulated. >> i think states can use their normal processes for dealing with their taxes and their expenditures to set themselves on the right path. illinois has been writing and

talking about illinois problems for 25 years. emanated chicagoan. but it can -- he needs to do those things that need to do to get out of it and to bring some balance. >> thank you. and my remaining time, let me quickly ask one quick question about market risk. phil grossi mentions pemco, one of the largest mutual funds in the country, he stated that a low or negative interest wrote for an extended period of time is the most devilish of all policy tools. what he is saying is that the feds actually lower interest rate and helps our debtors such as states and municipalities, while harming all those who worked hard. ms. tran five, the fed is enabling vendors to reduce their debt on the back for those that

saved money. is that right? >> i would hesitate to say that right now, but -- >> ms. tran six. >> the states and cities have heard it for a low rates, not just for the pasco years in extreme conditions, but for two years now. if rates go up, including possibly way up, you have to get used to a different environment very quickly. >> could you argue the feds quantitative easing program is in effect a bailout for states municipality is quite >> sure, this is a bailout for anyone who owes money in the states and municipalities may not be the biggest proportionate and if it, but if really helpful. >> ms. norcross, do you concur? >> i concur. mr. chairman, i yield back.

>> thank you. ms. merkel from new york. >> thank you, mr. chairman for hosting the very important meeting coming from new york state. as you can imagine, this is on many of our minds. i apologize for being in and out, but i appreciate your time this morning. the first question i want to ask is regarding stimulus money and not so much is paid to the states. do you think that was the way to states where sort of put the states off, they didn't really have to face these issues head-on, and so it actually delayed for now the states have to reckon the situation. >> i am happy to respond to that. when the money first came out in 2009, we would have seen that cover about a third of the states deficits. in that year we would have seen very sharp cut in education and

health care. we would've seen millions of people losing their health insurance and to cut people and we would've seen many, many more layoffs of teachers and other public employees, which would in fact have potentially delayed recovery because you take that demand out of the economy and the stimulus actually provided the boost to the economy that was very important. and so now, as the stimulus is sending, at least state revenues are beginning to grow again. they are still blue to does make bubbles come at the beginning glow again. states have at least a little more ability to absorb the end of the stimulus. they are proposing very major

cut in budgets this year. but it is probably better that they are doing it now and the economy is least in something of growth path and that is the recession, which would've been very damaging. >> i think now it seems to me obvious that those decisions they are making now should've made a year ago and they got the fiscal houses in order. it appears the stimulus just delayed reckoning with the reality of the situation. mr. skeel. >> i agree. there is some stimulus money going to states, but there is no question in my mind that it has delayed the restart term. >> i would agree with that. there was a missed opportunity in that congress might have considered singing to the state, will give you a dollar today in 2009 if you take steps to cut your future liabilities by $1.10 years from now, fix the pension,

fix the health care and give them the operating beneath now, the use as leverage to work on the long-term problem and that is something that was not done. >> i would add to that some of the stimulus has expanded spending and is bleeding to what is taking today. the states in virginia and new jersey are not making the tough choices. >> i have sometime if i could ask another question. mr. skeel, regarding the possibility of encrypts the unscathed that are so financially strapped, if in fact they did declare bankruptcy, would that affect the borrowing ability of states that keep its fiscal house in order and now they're going to be impacted by somebody else's state? >> i think the impact would be very limited. as i was saying a few minutes ago, the bond markets have the ability to distinguish between

states that are in good fiscal shape and states that are not. it's really not like the big bang of 2008, which were really connected to each other, have the same kinds of assets, same kinds of problems. the states really are independent. and so i think a state that's in good physical health would continue to be able to borrow just fine. >> thank you. ms. tran six, i think in your opening statement you addressed it. would you like to address it? >> i would respectfully disagree. markets can distinguish among states, but they cannot do it instantaneously or even in a few weeks or months. so changing the law in this way is really sleeping awake at the century that would take a problem for markets to adjust to that and states would suffer during the timeframe as well. >> one last remark on knots and is when you look at countries

that have run into trouble, argentina, for instance, which is about as profligate as you can get, it is remarkable how quickly they can go back to the market. i believe markets respond a lot more quickly than people tend to think. >> thank you. i yield back. >> thank you for your line of questioning. i've got three more questions that he wanted to post to the panel if that is all right with you all. you know, if you look at the employees versus privacy or employee unions, and the public sector now accounting for more than yours unions. an interesting crossover we found in the last two years. on average, a publix or worker make $14 more per hour in total compensation, wages and benefits than private-sector counterpart.

ms. gelinas, a different about this i know, but if you can testify today and say if you think so the private-sector employees in public sector employees are living in two economies. what are the ramifications of that? to what is really the root cause of that disparity? >> yes, i should be clear that his givers from state to state, some states, especially northeastern states, offer much greater power to employees to collectively bargain their benefits for commensurately much higher. looking -- generalizing the problem, it would not be so much the wages as it is the benefit because these are open-ended liabilities that state and legalities are taking on. right now they are uncontrolled. so one aspect of getting this under control is to start to switch new civilian employees

into 401(k) style pension plans as the private sector has come to your getting rid of an open-ended liability for the state in the future. same thing with health care benefits. many municipalities can assert that all of them, workers do not pay a share or anywhere near the share that private sector workers pay, asking workers to pay more for their own health care, do much to help states and cities with these liabilities. >> so you mentioned switching from a defined benefit plan to 401(k) style, which most federal employees have. for instance, just the sufferings and that is one policy change that we could -- that states could enact. what are the policy -- what are the prescriptions that the federal government can take

action over to help stem the tides that we see coming. ms. lav talked about loss of revenue than the fact that similar funds sort of relief to states about her of having to lay off workers. but if you look a local school boards right now, with the loss of the stimulus funds come you're having hundreds of people show up to school board meetings and talking about layoffs. so what i believe what i saw and what a lot of people focus on is that the day is coming. the day of reckoning is coming when the stimulus funds run out. and rather than realizing it two years ago making changes, they are having to do it now. what are the things we year in congress, what policy changes can be made to help stem this crisis? and i'll post up for everyone. we'll start with ms. gelinas and

go across. >> one area where baby most straightforward for congress to help states is in medicaid because this is not an issue where congress would be telling state, you have to change your pension plan. you have to change the way you govern yourself. medicaid is currently a program that encourages you to spend more. because when state spends 1 dollar more, sometimes it gets more than 1 dollar back from washington, gradually changing medicaid into a block grant program, where you offer a set amount of money, increases on formula and states are encouraged to innovate and cut costs within that and reward them for cutting costs rather than keeping cause. this would approach not a big chunk of their cost, current and future. >> are skeel. >> i agree that medicaid is the most obvious place to do thing. there are real limits on what you all can do with pensions and

things of that sort, simply forward state sovereignty reasons. places where there is federal funding should be looked at first. >> i concur that medicaid and other areas and where there are mandates that it can increase physical pressure on the states. >> i don't think i'm areas we are talking about today that there is any need for federal intervention. >> other than money? >> well, i'm not asking for the stimulus. it was unfortunate and it was designed so the economy would already be recovered when the stimulus ended. revenues are still below their 2000 trouble. of course the end of the stimulus of the states are not able to get back to where they were. so helping the economy, there's not much you can do to help the economy necessarily. with respect to medicaid, i think you can easily talk about a block grant.

medicaid is actually more efficient per individual match for health conditions. so i think the best thing would be to figure out how to control the rate of growth of health care costs in the economy wide. all the scary gao numbers ms. moorcroft mentioned are in fairly driven by the rate of health care costs. health care costs grow faster than gdp, this table have trouble coping with that. so the federal government as a major driver of the april deficit. >> final question today, and this is something i intend to ask feature panels as well. we'll have hearings about the fiscal crisis at the state level and ramifications of not addressing it. and this is the opening of it and we wanted to hear from informed individuals to start this process. i'd like for you all, if you

could, to ask you in the spot, but in the future as well who should hear from next. credit rating agencies, pension holders, unions, just if you could come until may 1, 2, 3 people or entities that we should your friend and will just go right down the line. >> i was a pretty good list. there are several that have a good hand on this. i can suggest a few. and of course unions have a nature's nakedness and you should hear from them. i think you should also listen to the governors and the mayors. in that thank you. >> i concur that it's a good list to start with. also consider calling those who were involved in education financing financing in policy areas. >> i would just add, i think you all should talk to pension lawyers because the issues are

both economic and legal and i think you need to see the whole picture. >> all of those people and i would also suggest speaking with infrastructure people because the other side of this is states have to grow the private sector to create jobs only if infrastructure is so how can state that congress money in their own money and get the biggest bang for their buck and infrastructure and gross state of liabilities can be better controlled from that end as well. >> thank you. i certainly appreciate your testimony. i appreciate the opportunity to hear from you. thank you for your time in a thank you for spending the morning with us. thanks so much. this meeting is adjourned. [inaudible conversations]

[inaudible conversations] >> former defense secretary, donald rumsfeld will talk about his new memoir, known and unknown later today at the national constitution center in philadelphia.

>> secretary tim geithner says the economy is getting stronger and although unemployment remains high, businesses are starting to hire. he also previewed the presidents budget and event hosted by the atlantic magazine at the museum today. that is what you are seeing now. the form also includes interviews with orrin hatch come sec chairman julius genachowski and governor bob mcdonald. this is a little bit less than two hours. >> welcome to this atlantic town hall, finding words in finding our way. i'm judy woodruff of cbs news hour and there is no issue