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nobel prize-winning economist joseph stiglitz today said banks and other financial institutions do not have enough capital to prevent future default and big banks are still relying on the government to step enduring times of trouble. professor stiglitz testified before the senate banking subcommittee on financial institutions along with three other scholars of the financial industry. this is an hour and 25 minutes. >> thank you for joining us. the subcommittee of financial institutions and consumer direction. the senate banking committee will come to order. thank you for joining us today and those in the audience and staff. i know that when you schedule a hearing you schedule it ahead of time so you don't always know when there is one that happens after people start leaving town. there is no telling what will happen so i am honored four of you showed up in that staff on both sides showed up and have been helpful in the planning of this hearing.

i will do an opening statement and then have each of you do the same. the questions and answers maybe a little more free-flowing than they might at another hearing it i will probably ask you to respond to each other's assertions and statements and observations in all four of you are highly respected in these fields and have thought about of this and reflected a lot about this. it should be an interesting discussion fran hour or so. the recent debate but we just concluded and mercifully concluded, or at least round one is obviously was fixated on the national debt that it was more than just the national debt that we should be worried about. too many people in washington seem to have forgotten about the debt that helped put us in this deep recession and caused our country and almost everyone in it so much and that is the death of the financial sector. cbo estimates the entire cost of rescuing our failing banking system, the bailouts decrease

tax revenues, new spending programs in response to the troubled economy and interest payments will cost our nation some $8.6 trillion meaning $8 trillion. that is more than 57% of our ged. we can allow collective initiative steer the role that the possessive debt played in causing the deepest recession since the great depression and that is really the purpose of this hearing. in the last century entry century and half the u.s. banks capital ratios declined from about 25% and all of you have written and thought about this a lot, declined from 25% to around 5% of total assets. in the last two decades, the 10 largest banks nearly doubled their leverage. that is they have have the app sets if you will that they have available to pay off debt debt. at the time of the financial crisis in 2007 in 2008, four of our five largest investment banks were leveraged 35 and in one case 40-1.

that means when their assets declined by the smallest amount they are unable to cover, to pay their debts. they were essentially insolvent. is over reliance on borrowing for other businesses makes a financial system so interconnected and so interdependent that the failure of one firm can bring down the entire sector is not if not the entire economy. implicit assumption that they government will backstop their losses gives companies an incentive to engage in what economist george acker lofton paul romer have called looting. companies can risk bankruptcy at the expense of the rest of society instead of bearing the laws themselves. corning to kansas city fed president for 20 biggest banks are my highly leveraged in their community bank competitors. i will use the word were competitors in the bank. it is assumed the government will step in to prevent them from failing. as a result the largest banks make bigger profits than those that do not enjoy government subsidies of one form or another.

they are least able to weather an economic downturn because of that significant leverage and not surprisingly the largest banks are bigger than before prior to 2006. the 10 largest banks held 60% of total banking assets. by the end of 2010 they held 77% of total banking assets. simply put were there another economic calamity the banks would impose an even higher cost of the taxpayers. this is not capitalism in any sense of the word. the easiest way to prevent the need for future bailouts a simple requiring banks to hold an increased capital research cap. capital buffers require banks to fund themselves losing -- using their own money instead of other peoples money. the ranking member of the full committee senator shelby said one of the lessons of financial crises should be the importance of maintaining strong capital requirements especially for large global banks. i couldn't agree more. the least we could do is ask the financial sector to have a prudent amount of its own money to cover its own losses.

we require as much of our community banks much less the sifi to our system and the same rule should apply to everyone and that is why we are having this hearing today in testifying on some of the greatest economic minds and mindset have great access into all of this. let me in to do so for the u.n. then we will call on all four of you and work their way across. joseph stiglitz born in gary indiana in 1943 started stanford m.i.t. and was drummond professor -- he is now university press are at columbia and chair of columbia's committee on global thought and co-founder and executive director of initiative for policy dialogue there and was awarded the nobel prize in economics 10 years ago for his analyses of markets with asymmetric information. he was lead author of the 1995 report on the intergovernmental panel on climate change that and shared the 2007 nobel peace prize.

mr. stiglitz was a member of the advisers in the clinton years and served as chair from 1995 to 1997 and became chief economist and senior vice president of the world bank from 97 to 2000. thank you for joining us. edwards edward kane is professor of finance at boston college where he held the edward reese chair of economics at ohio state university and had the bad judgment to lead. currently he consults with the world bank is a senior fellow at at the federal deposit insurance corporation for financial research. he has consulted for the congressional budget office the joint economic committee and and and the office of technology assessment. when we had one u.s. congress. eugene ludwig is founder and chief executive officer of promontory financial group the leading consulting firm for financial companies worldwide. prior to founding primal tory mr. ludwig is vice chair and

senior control officer bankers trust deutsch bank. earlier he served for five years as comptroller of the currency, as comptroller of the office of the control of the currency the federal agency responsible for supervising their preponderance of bank estimates of the u.s.. prior to being controlling it was a partner in the law firm of -- specializing in banking law. and last paul pfleiderer received ph.d. degrees from yale and economics. has been teaching at stanford for some 30 years. his research much of which is jointly pursued with another professor of finance is generally concerned with issues that arise when agents acting in financial markets are differentially informed. his current research concerns corporate governance and in addition to his academic research he is consulted for various companies and banks and has been involved in developing risk models and optimization software for use by portfolio

managers. dr. stiglitz if you would begin. >> thank you for this opportunity to address the question of the financial structure the banking industry, which i believe is central to the future stability and prosperity of american local economy. let me thank you senator brown for holding these hearings. two fundamental analytic insights buttressed by some empirical observations should inform our thinking about the appropriate regulation of banks including capital requirements and risk-taking. the first is that when information is imperfect and risk markets incomplete, that is always, there is no presumption unfettered markets will result in efficient outcomes. the reason is that actions give rise to externalities consequences that are not worn by those undertaking them. there is a systematic misalignment of private and social returns. this result is of central importance to banking and finance because the very rationale of the sector rises out of risk management and

acquisition utilization of information necessary for the efficient allocation of capital. decks turn out -- externalities consequences and risk-taking are manifest. is is not just the cost of the bailout of millions of americans who have lost their homes but the literally trillions of dollars of lost output between the economy's actual and potential output the predictable ball out of the crisis. if the resulting sulfur including 25 million americans who would like a full-time job and can get one is incalculable. the budgetary problem are in no small measure the result of inevitable decline in revenues and increasing expenditures that follow. is well-known recovery from the natural crises is slow and painful. this crisis not only demonstrates the importance of externalities to which balers in financial markets give rise but also the importance of what economists call agency problems, those like bank officials who are supposed to take action on the behalf of others with their fiduciary responsibility often have led them to actions to

benefit themselves at the expense of those they are supposed to serve. the second fundamental insight is that increased leverage in general does not create value but simply shifts risk. as leverage increases increased risk is placed on the equity base. this is the central insight of the term. in the 1960s and 70s they showed the result was far more general than he had thought but that there were limitations to most of which caution against excessive leverage and to a cost of bankruptcy that increased leverage increases the likelihood of these cost. in the financial sector the social cost are of increased leverage or even greater because the societal costs associated with externalities that i described earlier. the misalignment of incentives is more in the case of too big to fail banks, banks that are so large the potential consequences of allowing them to go bankrupt poses an unexpected but risk.

empirical observation is that markets are often not rational and assessing risk. this is often true even in the so-called experts but even more so with those who are financially unsophisticated. alan greenspan testified to this before congressman expresses surprise that the financial markets had not manage risk as well as the unexpected. but while he was correct in the conclusion that the financial financial markets have done a miserable job of managing risk i was surprised at his surprised. after all anyone looking at the incentive structures confronting key decision-makers should have realized that they had incentives for excessive risk-taking and short-sighted behavior. beyond that greenspan made another error. if i mismanage risk if i'm irrational in my risk analysis i and my family suffer but they are unlikely to be of societal consequence. if a bank in especially large bank mismanages risk the macroeconomy can be seriously affected. it is these externalities that

provide the motivation for government programs. it is these externalities that explain why self-regulation simply won't work. it is deeply troubling when the country's major financial regulators do not understand the rationale for regulation. rational markets would realize increasing leverage shifted risk and would demand compensating differentials. as we see banks driving to increase their leverage, there may be uncertainty about what is driving this. is it because in doing so they increase the implicit subsidy from the government? is it because they do not understand the fundamental risk? is it because they understand the fundamentals address but realize the bondholders and shareholders do not so that they can extract more money for themselves. about this there is no uncertainty, excessive leverage has large societal costs. banks especially the big tanks need to be restrained. indeed the analysis suggests that there are few or no societal costs in doing so and consider a benefit. it is not as if leopard somehow

manufactures resources out of thin air. lending is risky. the risk has to be born somehow. it is born by equity holders of lending institutions to the extent is isn't shifted to government fdic or bondholders and depositors. given the high social cost of financial obstruction. recent empirical research provided considerable support for the views expressed here. even if there were some increases in lending costs as a result of increased equity requirements those costs have to be offset against the benefits. there are very large societal costs for bank failures as i said before and these can be substantially reduced by higher equity requirements. some have argued that even if it makes sense in the long run to increase capital requirements doing so in the short run can be costly especially at a time such as this when the economy is fragile in the banking system already is weak.

this is an argument for an paste increasing capital requirements and one which would not let dividends or share buybacks or extravagant bonus pools until the desired capital ratios or reach. at the same time one should beware the larger is especially under the current circumstances of delayed. it is precisely because the economy is fragile banks have inadequate capital and the banking sector in the aftermath of the crisis is more concentrated than before the risk that the risk of a financial catastrophe of the kind we experienced in 2008 is so great today. the downside risk of not doing something are especially grave now. i have focus my remarks this afternoon on increasing banks equity capital. there are a number of other factors affecting the risks to the economy posed by the banking and financial sector. i've noted the risk of too big to fail banks. we should not allow anything to grow to a size that opposes a systemic rest to the economy get in the aftermath of the crisis as you pointed out, the banking

sector is become more concentrated and the risk posed by too big to fail banks has if anything increase. we saw too in the crisis the risk posed by not transparent actions such as the over the counter cbs and off-balance-sheet activities. one of the reasons the financial system prose was everyone knew that there was no way they could no through financial position of most of the banks. while the dodd-frank bill improve matters it went nowhere near far enough. the problems continue and as long they continue our economy is at risk. we may never fully protect the economy against the risk of another crisis such as the one we have been through. but this much should be clear. our economic and financial system is badly distorted. resources are misallocated before the crisis. no government has ever -- outside of war on the scale that has resulted from the failures of america's financial system. we may have begun the work of

making our financial system once again become the servant of a society which it is supposed to serve but there is a long way to go. lending especially to smaller medium businesses are constrained. we cannot remind on the self-regulation of financial markets. we learned that lesson in the aftermath of the great depression and the decades following world war ii with a strong regulatory system we are among the most prosperous this country has experience. the question is, will we relearn that lesson in the aftermath of the great recession in 2008? >> thank you. dr. kane. >> thank you mr. chairman. it is an honor and a privilege. >> is your microphone on? >> shall i start again? distributional effects of making taxpayers back up treasury and federal reserve bailout of

insolvent and a great grateful financial situations. during the housing bubble are representative democracy the interest of foreign and domestic financial institutions was much better served than the interest interests of society as a whole as joe stiglitz has been saying. but why were taxpayer interests poorly represented? it is because of regulatory capture. the financial industry sowed loopholes in the capital requirements and regulatory definitions of risk that then and now are supposed to keep the financial instability and check. the dodd-frank act left many issues open. it did not try to define systemic risk or to confront the ongoing foreclosure mess of the fannie and freddie disasters and implementation of a strategy for dealing with regulation regulation induced innovation and for disciplining elite institutions is left to

regulators. the keating five episode tells us how hard it will be for regulators to write rules that truly crack down crackdown on politically influential firms. sadly the same gaps and issues exist in reform efforts unfolding in fossil in the european union. the issue before us is to put reform on a more promising path. to me this means governments must do three things, redefined the supervisor emissions of regulatory agencies, rework bureaucratic incentives and these agencies and refocus reporting responsibilities for regulators and for protective institutions on the value of taxpayer safety net support. and less these duties are embraced explicitly and enforced in an operational and accountable way it is unreasonable to believe that authorities will adequately measure and contain systemic risk during future booms and busts let alone in this bus. the first that would be to strengthen training and recruitment procedures and top regulators.

as you know, most top regulators lay behind them under current appointment procedures a trail of deaths that service political debts. a fourth thorpe a fourth man would establish the equivalent of an academy for financial regulator and train cadets from around the world. among other things due to be drilled in the duties they owe the citizenry and how to overcome the political pressures elite institutions exert when and as they become undercapitalized. the public recognizes that the fed and treasury rescue programs placed heavy in less than fully college burdens on the citizenry. if evaluating t.a.r.p. rescue programs against unrealistic standard of doing nothing at all high officials tell us their bailout programs were necessary to save us from an economic depression can actually made money for the taxpayer. both claims are false but in different ways. bailing out out firms indiscriminately and that is the point that it is indiscriminate,

hampered rather than promoted economic recovery. it evokes reckless gambles among rescued from and created uncertainty about who would finally there are the extravagant cost of these programs. both effects continue to disrupt the flow of credit and real investment that is necessary to trigger and sustained economic recovery. the claim that the fed entire programs made money for the taxpayer is half true. the chu part of the proposition is that thanks to the vastly subsidized terms of these programs most institutions were eventually able to repay the formal obligations they incurred, but the other half of the story is that these rescue programs force taxpayers to provide undercompensated equity funds to deeply troubled institutions and the largest as you have said and most influential were about to make himself bigger and harder to fail. government transferred losses are protective for his work authorities chose this path without weighing the full range

of out-of-pocket and implicit costs of indiscriminate rescues against the cost of alternative programs such as prepackaged bankruptcy or temporary nationalization and without documenting differences in the way each deal would distribute benefits and costs across the population of this country. going forward how to relay capital requirements to systemic risk. we want to raise them and relate them to systemic risk. acting in concert bark and regulatory discipline forces affirmed to carry a capital position that should be regarded as large enough to support their risk. taxpayers become involved in capitalizing major firms because creditors regard the conjectural value of off-balance-sheet capital that government guarantee supplies as an option. taxpayer put this serves as a partial subsidy for on-balance sheet capital supplied by the firm shareholders. citicorp was not undercapitalized. does is capitalize too much with taxpayer options so the problem

is the supervisor conceptions of capital of systemic risk fail to make government officials and protected firms accountable for the roles they play in generating adverse movements in either variable. policymakers nature support of creative forms of risk-taking among the client firms they supervise in officials for absorbing losses in crisis situations make sure the tough decisions favor industry interests over those of the taxpayer. systemic risk can be likened to a disease that has to sometimes. the dodd-frank act and the basel iii framework used higher capital requirements to treat only the first of these symptoms. the extent to which institutions expose themselves indirectly in readily observable ways to credit risks that might fly across the chain of connecting counterparties but to be effective the medicine of capital requirements must be adapted to take fuller account of the firms funding patterns and to treat a second and more

subtle symptom. the second symptom is the ease with which actual potential living debt institutions can use innovative instruments to high-risk disclosures and akiva like fresh losses until their insolvency become so immense that they can drive regulators into a panic and extort life-support. so in good times and in bad, the existence of this taxpayer poet allows the elite private institutions to issue the equivalent of government debt and makes ordinary citizens on compensated equity investors in such firms. my recommendations for regulatory reform are rooted in the straightforward ethical contention that protective institutions and regulatory officials owe fiduciary duties to taxpayers. the assistance of a safety net makes taxpayer silent equity partners and major financial firms. not only are they silent partners, they are uncompensated or poorly compensated partner so the fact taxpayers deserve to be

informed at regular intervals about the value of their side of the taxpayer put. consistently a securities laws managers have important financial broom should measure report under penalties for deception and negligence the value of taxpayer's stake in their same quarterly frequency that they report to stockholders and government officials should examine, challenge and aggregate them publicize this information. my two-piece conception of systemic risk clarifies it is embodied in a course of option like equity investment i taxpayers in the firms of safety net protects. the value of taxpayer's positions varies with the risk that institutions might sustain losses that exceed its ownership of capital. that is often called tail risk by economist and with the percentage of this tail risk the government is likely to absorb. it is one of these -- tales institution wins and -- and

unfavorably structured claim also provides a metric for tracking systemic risk over time. that is advantage of it. requiring authorities to calculate and disclose folks which is in the aggregate value the taxpayer put would make regulatory authorities are personally accountable for the quality of their supervisory performance in booms and recessions alike. most existing measurement strategy incorporates a pioneering perspective of robert burton. studies using this approach could attract the growing correlation of institutional risk exposures as an early warning system for the current crisis. expanding the format for collecting information to include estimates of the potential variability of their returns over different horizons and to improve the precision of systemic risk estimates and officials accountability for regulatory and supervisory performance. accounting standards with well-recognized emerging losses and make evidence of an institutions insolvency under current rules, dangerously slow

to service. efficient safety efficiency tina matas requires a more sophisticated informational framework than current methods of examination provides. to protect taxpayers and to enhance financial stability examinations and bank accounting reports should focus, not focus narrowly on measures of tangible capital. they should also develop and report explicit estimates of the intangible value of an institutions claim on taxpayer resources. the whole financial institution and regulators accountable for carrying out these tasks on tasks on shoots as they regulators and financiers must accept the system of ethical constraints that make them share this information with public. thankthe public. thank you mr. chairman. >> thank you.ducaine. mr. ludwick welcomed. and thank you for joining us. >> thank you very much for having me here today. i would like to commend you chairman brown, ranking member senator corchran and the other members of the committee for holding this hearing. chairman brown and ranking member corchran and the rest of the members of the committee can

take pride in having worked hard to address the challenges posed by the financial crisis. you brought important congressional focus on the issues of financial stability, safety and soundness in the regulatory framework is a journal matter and importantly here today. he passed landmark legislation in this area and continue to engage in serious oversight. we must never lose sight of the tremendous toll that the financial crisis has taken on our country. millions of americans are reeling from lost jobs, lost homes and lost life savings. as losses hit are low and moderate income citizens the hardest. it is a terrible tragedy for many families across america. as we continue to recover from the financial crisis our challenge now is to successfully implement the very powerful post-crisis reforms and enacted through dodd-frank. the basel committee and the financial stability board.

implemented correctly, these new rules will add markedly to financial stability. however, if they are implemented without a sense of their cumulative impact on financial institutions and the system and without a sense of balance and proportion, these rules will put a drag on the financial system, our economy and on job growth. furthermore, if the implementation of these rules is excessive, we can actually see a decrease in safety and soundness. i would like to take a moment to discuss capital requirements an issue that i know is of great interest to the subcommittee. clearly capital is critical to a safe and sound financial system. dodd-frank act, basel iii and a financial stability board reform recognize the importance of capital that they have have enacted forcefully. through their reforms we now have tough capital requirements

and capital levels significantly exceed previous requirements. under basel iii, banks will have to hold 10.5% total capital and 7% common equity. on top of that u.s. regulators may add an additional counter-cyclical capital buffer of up to 2.5%. furthermore, most of the financial institutions typically carry a buffer above the required minimum. at a minimum, this is over a 300% increase in required common equity with ford -- before additional buffers are factored into the equation. three times 300%, very significant addition. this is an important change because common equity is the highest quality capital. although it is the most expensive for banks to raise. it is also important to note that prior to the crisis, several of our largest non-bank

institutions were subject to a much less rigorous capital regime. post-crisis due in part to major messman banks converting or to being purchased by commercial banks and impart to the ability of the fsoc to designate non-bank financial institutions adds systemically important, number of institutions will see an even more marked increase in their capital requirements so we are seeing a real uptick in the amount of capital in the system. but while capital is an important tool in the supervisory toolkit, it is only one tool. i believe we have achieved important reforms and involving capital and therefore i would not at this time advise any further increases in capital requirements beyond the dodd-frank and tough basel standards. what i would like to stress is that critically important to safety and soundness is balance, balance, balance. so how do you achieve the right

balance and ensure that our regulators and regulations are both serious and meaningful, but not so elaborate that they needlessly way down the economy? unfortunately, there is no quick fix. but i can provide some suggestions. first, constant and powerful congressional oversight. i think this committee as i mentioned should be commended for this hearing. congressional oversight is enormously important for the regulatory mechanisms to function correctly. bringing regulators up here and asking the right questions as you are doing today is just critical. number two, support of the work of the office of financial research and its critical role in monitoring systemic risk and promoting financial stability. the ofr for the creation of dodd-frank is i think one of the greatest apps forward in this piece of legislation, it creates a body of economists to worry about independently the next

financial bubble and it helps financial regulators to target their resources in the right direction. that is just getting started come insuring that it is moving forward. number three, ensure that our regulators continue to be top nationals or balance in their views and devoted to safe and sound banking systems to support burden innovation and economic growth. i certainly agree with professor kane that education and the regulatory field since we don't have enough of is critically important today. you can get a degree in almost everything in america but there simply no degree program in regulation and supervision which i think is terrible. number four, avoid waste and access at all costs. in fact, many of our rules and procedures can be applied very well with much less waste than is currently the case. this is critical, because it is not a matter of not having tough regulation but having effective regulation that is targeted and

a waste actually increases safety and soundness because it messes target resources. number five, periodically review regulatory rules to ensure that they are both effective and cause the least burden possible. regulations had to around financial institutions like articles on a ship and in order to keep the ship sailing forward one simply has to clear the barnacles off. number six impose international capital liquidity rules for global banks on a level playing field basis. global standards must not simply put u.s. financial firms at a disadvantage. i think this is a very big issue. we have tough regulators and we have tough regulations. the new dodd-frank rules are demanding, but we need to impose these globally on a level playing field. number seven, properly regulate the shadow banking system, which currently owns one quarter of

the united states an agile sector. this is a very big deal because if you look at the institutions that failed and triggered a crisis it wasn't the commercial banking sector. the shadow banking sector which is still loosely regulated and i think is in genuine danger. with that said i looked or to answering our questions. mr. chairman thank you are in much for having me here today. >> thank you very much. professor pfleiderer. >> thank you chairman brown for allowing me to be here today but i and what i think is a very important issue being discussed here. i want to start with a very simple proposition that i think is completely uncontroversial and that is the notion that the government should not in any way encourage firms to take action. it has large social costs and produces little or no social benefit. just to make this particularly salient, imagine uranium processing firm that wanted to locate one of its plants in a

crowded residential area. obviously we would have zoning regulations that would prohibit that but what if the government had a tax policy that encouraged the uranium processing plant to locate in a crowded area, and above that, in and above that actually provided health benefits in terms of insurance protection for health claims against the uranium processing plant only if it locates in a crowded residential area. that would be a perverse policy clearly. we porch i don't have a perverse policy for a uranium processing plant that we do have a perverse policy when it comes to our banking sector. the reason for that is our government subsidizes that and makes equity expensive. it does that in two main ways. first of all there's a tax subsidy per codec provides attack shield available to all corporations but particularly available to banks. but the other subsidy is the one

that is absolutely critical here and that is there is a too big to fail subsidy. a number of implicit and explicit guarantees that are given in the government safety net. basically it's subsidizes firms when they issued debt and makes equity expensive. now this creates huge distortion and if it affected only a small banks it would be a problem but it affects our entire financial system especially the too big to fail banks. it makes the system extraordinarily fragile and the evidence of what that can create is just a few years ago in our crisis and we are actually seeing morbid play out in europe as we sit here today. highly leveraged banks with too little equity creates huge externalities that are negative in the sense that they create the possibility of a crisis. so there's a huge social cost of this and the question is, is there any social benefit? the answer is no, there's absolutely no social benefit. a lot of people claim that it

would be is expensive. that is based upon a lot of fallacies and mistaken notions. the first notion is that banks hold equity. banks do not hold equity. banks hold assets. equity has to do with the right-hand side of the balance sheet and in particular the promises banks make to those that are providing their funds. and the promises coming to sorts of forms. one is promises better contractual obligations that are made to debt providers and then equity holders have no contractual promises made by the banks. they just get whatever's left. so the problem of course is if you make too many promises to debt holders, funders of the bank, you get into a situation such as what they had in 2008 where the system is teetering on the brink of insolvency and in fact is insolvent. so, with little equity, we have losses that are essentially

socialized. with more equity we have losses that are privatize. in a capitalistic system we want the latter, not the former. so, one of the important things in this debate is to distinguish private from social cost. let's go back to the uranium processing firm. imagine that the uranium processing term is located close to a highly populated residential area and the government says that it must be moved. now the owners of that plan the plant could claim it is costly. they would say is costly because we will lose tax benefits and we are going to lose the insurance you are providing if we were in a highly populated area. we are going to lose that if we move the uranium processing plant. that is clearly a private cost. you are just simply taking away subsidies. the analogy is perfect with the banks here. if we force the banks to move

toward higher capital to safety, we we are taking away subsidies that were encouraging them to do bad things. that is not costly from a social cost point of view. now they're a number of other fallacies that are brought up in this debate. one of them is that banks require us a specific return on equity in this of this equity return is required is fixed. somehow independent of how the bank's finance. professor stiglitz following up on work done by martin miller show this is a basic fallacy. so that is an argument that is based not on science. it is based pretty much on wishful thinking about how the market might be fooled when you change risk exposures. another thing that we see in the marketplace is that a lot of compensation is based upon roe.

you can simply go through a very simple experiment, just to back of envelope calculation. let's imagine we had two managers. a very good manager and a very bad manager. the good manager has 10% equity. not a lot but 10% and manages the banks assets very well and has a 3% return on assets before interest. to the 2% interest rate paid to its funders, that is a 12% roe. now let's talk about a bad manager. who has a much less safe bank with only 3% equity and manages the assets rather poorly, earning only 2.5% return on assets before interest for code that results in almost a 19% roe. in other words,, if you are a bad manager, you can make yourself look good and actually better than a good manager by just having higher leverage. which may very well be in part

some of the incentives for the high leverage that we see out there. one of the questions that is often asked is where will all this equity come from? that is an easy question to answer. first of all it doesn't require new resources. doesn't require new savings. just requires that the banks change the promises that they have been making. in fact you can come very easily and be built up rather rapidly by just preventing banks from paying dividends or other payouts to shareholders. they won't do that voluntarily because it takes away their subsidy that they should be required to do that in the interest of the social good. there is also a statement that is made that we should have a level playing field. i agree with that up to a point. i certainly don't agree with that if we were leveling are playing field by making our banks risky at taxpayers expense. that is no way to run our financial system. so ultimately my analysis is really quite simple here.

what we need to do is get the government less involved in the financial sector and to get it less involved that means we have to require the private sector put up more equity and bear the risk that the taxpayers are now airing that distorts the system and leads to financial crisis. thank you and i look forward to questions. >> thank you. i want to sort of take perhaps another step with your uranium processing plant metaphor analogy. in an article you wrote fallacies are relevant facts in the discussion of capital revelation my bank equity is not expensive. you point out that nonfinancial companies typically hold more capital than is required of things. corning to research paper by the new york fed you pointed out typical nonfinancial firms have equity that exceeds 50% of its assets of the medium capital ratio of commercial banks is about a .5%. to questions. why do wide array why do we allow financial companies to

hold so much less of their own money, and is that sort of a long-term, or our resort of subsidizing encouraging finance over other sectors perhaps manufacturing an economy. let me parenthetically add before you answer, my state is the third-largest manufacturing state in the country behind only states much larger, texas and california in terms of what we produce. in our country, only 30 years ago we were about 25% of gdp was manufacturing and financial services was 10 or 11. that is more or less split in the last 30 years. is that part of the reason that we allow financial companies to hold so much less of their own money in essence than we do other sectors of the economy? >> i think this comes about through several methods. first of all, neither i nor my co-authors are a think anyone else at this table is arguing that they should have 100%

equity. certainly some of the debt that banks use to fund in particular deposits and most particularly deposits has social value. it is used in the payment system. we are not arguing for 100% that there is a lot of debt of the banks use that is just use basically to get additional funding that exploits the government subsidies that i mentioned. so i think one of the things that happen, especially probably after 1970 or so is this notion of too big to fail has created subsidies to the banks in the sense that there is a backstop that the investing public realizes is there that basically encourages debt. the problem feeds on itself because a lot of companies out there would love to have the government ensure their debt as dad as well because that would allow them to issue more debt and get a big tax advantage because of the tax advantage

today. the only sector that can do that is the financial sector because they do have this implicit subsidy and that is what has caused them to lever out. what i think it is easy to document his that has created incentives for the financial sector to grow far bigger than what probably socially is justified, and the increase in the size has basically been to exploit this subsidy. >> dr. stiglitz implicit subsidy, what are the effects of those distortions and applications for our economy? >> well, they are very severe. first, the point is following up on what paul has said, that because of the implicit subsidy, particularly the too big to fail banks can get access to capital at a lower cost. so, you can see it in their cost of funding. so they kid a. lower cost than

one of your manufacturing firms in ohio. that leads them to expand. the second is that, because the too big to fail banks have lower costs fan community banks, and the too big to fail banks often don't focus on lending to as it may's and the community banks, we get a distorted economy so parts of the financial sector that are involved in small and medium-sized enterprise lending are relatively starved of funds relative to the big banks that are engaged in more speculative activities. the net result of this is that our economy gets distorted in several ways. we have been focusing on the size.

it is also the case of the kinds of activities that they engage in is distorted. so that for instance, if you have the government guarantee, you are more willing to undertake greater risk-taking. so rather than lending on the basis of solid information to small and medium-sized medium-size enterprises, you start going into non-transparent cb at -- cvs's and gauging and speculation knowing that if he gambled big and you win, you walk off with a profit and in a few gambled big and lose the taxpayer picks up the losses. so both before crisis the economy is distorted but then of course once the crisis happens, the economy bears an enormous price. this is what has been said by several people this afternoon. this isn't capitalism. you mentioned i think in your own remarks that when you have

socializing losses while you are privatizing gains you get a distorted market economy. so this is really undermining the functioning of a market economy and that is why economists of both the left in and the right agree that this is a very serious distortion in our economy. >> dr. kane, his comments about in the vanishing are disadvantaging various banks, large banks, small things. you said that we have sown huge loopholes and to capital requirements. talk through if you would how the fact that large banks are more highly leveraged then regional banks or community banks. what other and dr. stiglitz talked about how they can borrow money obviously at less cost than other entities i assume.

talk to me about the advantages that the larger banks enjoy as a result of that, if you would. >> sure. dr. stiglitz emphasized that there was an implicit subsidy to risk-taking and the larger institutions can hire better countenance and better lawyers and better lobbyists to see that the way in which risk is assessed in the capital requirement system favors them, so we have seen a number of institutions throughout the world failed even though they met the basel requirement or risk assets. >> that is because the risk waits for all the wrong and the riskiest assets weren't even being counted in the system and that is no accident. the industry is always here before congress and before the agencies telling them how devastating it would be if certain assets were treated any more transparent way.

most of the loopholes come from grants -- non-transparency and affixed to to a fixed way system and once it is set in place can be gained. almost a little bit like blackjack where you have a fixed strategy on the part of the dealer and a variable strategy on the part of the player and if the player plays optimally it would kill the house. >> can i make one more example of the nature of the difficulty? and going back to the cvs' and one of the issues that was debated before the dodd-frank bill was passed, and that was the issue of whether depository institutions that have a government guaranteed fdic insured institution should be allowed to write cbs's. in other words, the extent to

which they should be allowed to engage in non-transparent over-the-counter gambles. they would call them insurance policies. if they are insurance payout to be regulated by insurance but it is peculiar the government is ensuring people's gambling. but whether they are insurance or gambling, they are not in lending activities. what are they doing inside a government insured depository institution? once you have it inside the depository institution with the government backing them they have an incentive to engage in this kind of trading. and that is why in the months after the crisis is it was so clear. most of the profits they were making were associated with trading, not with lending. b and people were told the reason for the t.a.r.p. they allow was to get lending started but that never happened.

but they use that basis and access to the fed window at zero interest rate, close to zero interest rate, to undertake a high leverage and to undertake very highly risky trading activities, which generate high returns but with a government-backed stopping them. >> can i make a point about those high returns? that one of the questions that comes up about the safety net, if you go back in time was that nobody seemed to lose money on these gambles that they were actually making money. what we have seen now in the crisis that this money was actually extracted from the taxpayer in it dance and wasn't profitable at all. it didn't help anyone. infected herd. >> thank you. mr. ludwick, i want to read a sentence written by a finance

professor at stanford. she said there's no credible way to get rid of bailouts except with capital. do you agree with that? >> i think that capital regulator would look at that as an important tool, but i say a couple of things about capital. first, the high leverage which has been rightly criticized by my fellow panelists, the excess of 40-1 into which you are furred to mr. chairman is largely outside the commercial banking system. i think it is excessive and it shouldn't exist. fortunately you and the rest of congress has put a lot of that to rest in terms of the banking system with very strong capital requirements. the second thing i would say is the capital is only one tool. it is almost impossible to have so much capital that you can prevent failures in financial institutions.

financial institutions typically commercial banks typically failed not because of the lack of capital. they fail because of liquidity inadequacies. it is the nature of the fractional banking system. fortunately there were two, both.franken basel have been book is thing attention over the last year plus on the liquidity ratio that banks maintain. that is yet another tool in the toolbox. there are multiple tools and what they lacked in the last decade was the utilization of those tools with sufficient vigor. again fortunately, because of the new laws as well as the increased energy and the financial regulators, those tools are being used vigorously now. i think our issue pulled going forward is striking a balance so that we have a stable financial system which we must have. we have to have the financial system that can support the economy of the united states and i think right now the dangers we face are losing that balance and

becoming excessive in the way we implement.franken that will actually growth. >> you had said earlier that in your testimony said we now have a very tough capital standard because of.franken because of also three. i want to ask your seatmates to comment on that but first tell me what you think the fed should do with sifis? i assume you are saying the capital requirements are about right now. give me your thoughts on what the fed, what they should impose on the largest banks and financial companies? should they go beyond basel iii and if so give me a range? >> basel iii gives the national regulator the 2.5% capital cushion on the top. >> and you agree with that? >> i think that makes sense. what i would not go is beyond that. why? because the the capital increases it been so

significant. we are in new territory now and they do have an impact on lending and on the ability of these institutions to support the economy. we have multiple other tools, and before i think we take additional steps we want to see what the cumulative impact is of implementation of those tools so that we again have a tough regulatory environment, stable financial system but also one that can support the economy of the united states. >> thank you. the opponent -- the pushback that i hear around in ohio and against higher capital requirements, significantly higher, higher than basel iii, higher than some bankers have said, as high as some of you recommend on the panel, were two things. one is the compared to his advantage, competitive disadvantage with european banks and second, it was cause banks not to lend if we required

higher capital standards, especially higher equity standards. with the other three panelists comment on your thoughts about that pushback that higher capital standards would mean u.s. banks have a competitive disadvantage in would mean the u.s. banks would not lend to the degree that we would like them to optimally? do you want to start? >> so, i want to actually with your permission just address an issue that came up here. liquidity is potentially a problem. it has always been a problem in the banking system but liquidity in our modern system is only a problem when there's a problem with insolvency. so with the bank has liquidity problem but it is very solvent, and edwards has a lot of equity, then there is no problem at all with going to the fed and pledging assets, taking a big haircut on them and getting liquidity. doesn't put the taxpayer at risk. the real issue and the issue that we have in the last crisis

was not just a liquidity issue. it is really an issue that related to insolvency and understanding that potentially a counterparty may be below water. so the issue in terms of first of all competitiveness with european banks and also with cutting back on lending, first of all we don't want to be competitive if it requires that we put our whole economy in jeopardy. if banks require subsidy, and it is not clear that they do but if banks require subsidy of by all means we should give it in a way that doesn't require high leverage. so we could have high capital requirements. it does take away some subsidies the banks are now getting it for some reason we decide that tanks need to be subsidized because they are doing something that is underproduced. we need to give those subsidies in a way that doesn't create a fragile banking system. and, just to tell us where we

are right now with respect to these capital requirements, one thing i mentioned in my opening remarks is that a few weeks ago moody's announced that the support rating that it was giving to bank of america was five notches above what it would give without government support. so this indicates that, looking forward to the extent that rating agencies are factoring things incorrectly, the government support is moving the bank of america debt from what would be minimum investment grade up to very high-quality. ..

and our competitiveness in our behavior? >> it bothers to me to the extent we live in a global economy and cannot insulate ourselves from mistakes made in europe, so we have an integrated economy, and if the europeans from their banks such as the are very fragile there's no doubt problems created there can spillover in our economy. >> shortly more fragile than ours. >> the certainly are. so the goal here is -- the bottom that reaches to the top we need to get the global standards that are much higher. what we should do is sink to the low standards of the europeans so that we put ourselves in jeopardy as long as the europeans, rather we should figure out a way if we need to

to subsidize the bank that doesn't require high leverage and again, that is is a position i don't think has been demonstrated banks need subsidies but if they do we should do with in a way that doesn't create fragility in our own economy. >> comments, dr. kane and then stiglitz. >> the mistakes may have come back to the credibility. if you take the day makes allowed to run up more debt under government guarantees the government could never collect from taxpayers somebody has to absorb those. europe is going to learn that subsidizing that risk-taking by their banks is going to ruin the economy for a while. so, the notion that because they've been subsidizing in the past to take away from this i think is one of the lessons of this crisis is people are going to look through the banks of the

regulation and shoes something they can trust. >> the primary lesson is higher capital requirements? >> the primary lesson as you have to deal with average requirements. we have high average requirements. but we have to be sure that the margin we are not subsidizing foolish risk taking. that has to be done around the world. we can have lots of differences in the system to the countries and cultures, but we want to make sure that the margin we are not encouraging people to find ways to high risk or hide their capital. >> dr. stiglitz? >> first i want to address the second question about what banks not land. i think the first remark a change in the debt equity change in the financial structure banks does not really increase their cost except to the extent there's any subsidy to the bank

bailout so to the extent we can put aside a subsidy the fact is there would not be higher costs and therefore no -- less lending. this is where -- do you agree with that there would be higher cost for the bank and i will get back to you the rest of the answer the issue here is a practical matter mr. geren raising equity capital costly and particularly at this time raised so much to increase their own capital position that a number of the banks would consider instead of raising additional capital simply shrinking the balance sheets for higher capital charges. as you no dividends have been restrained by the federal

regulators. recently they were in fact distributed and there was some thought from simon johnson and others that the banks because of equity issues are saying they couldn't attract enough equity they ought to hold on to their profits for the period of time for equity reasons is that the line of thinking? >> a matter of balance they can issue a reasonable dividend based upon the capitol, and it also seems to me under cuts the confidence the public has in the institutions themselves if they are not in the position for a reasonable dividend, one isn't talking about anything excessive in the public loses confidence in the institutions so it is a matter of balance and proportion >> actually regarding just the opposite if they have more capital there would be more confidence in the public and as i said in my testimony that in fact there's a problem of

transition for how serious it is is hard to ascertain that if there is the problem of transition we should impose this requirement the not pay out dividends or excess of bonus pools and that would allow them to recapitalize the banks and put it on a saver basis so that we would not have taxpayers underwriting them. the important point i want to emphasize is the fact us paul emphasize equity is not costly that actually went you have a higher leverage what you are effectively doing is increasing the risk of the equity so that is the fundamental flaw in those emphasize the high cost of equity that when you go to high leverage and our actually driving up the effective cost of equity just shifting the rest. i want to come to just a couple other points related to the

question you posed. the issue and this is really did in the discussion on the debate on the liquidity risk of verses solvency risk, the point here is when there is a lower equity base and there is a high your probability of a bankruptcy orie problem and therefore higher likelihood that nobody will give money to the bank, that's what causes the liquidity crisis. if everybody knew the banks were solvent there would be no liquidity problem. it's because they get afraid the bank is solvent that there is a liquidity crisis, so these issues are intertwined, and the risk of the liquidity crisis shrinks lending and undermines the economy is really did very much to the inadequate capital. now, on the issue of the competitive disadvantage, i want

to agree with what was said. we have to prevent the race to the bottom and what has been going on. but i guess there are two other points i would also raise. first, the framework for regulation in the side of the united states should be national treatment so that if we have companies, financial and institutions come into the united states we regulate them as national institutions. the ought to be i think incorporated if they become any significance and have a subsidiary. this basic principle means of the united states is a large market, banks will want to operate in the united states, and we can set of regulations that protect the american economy. that's the first responsibility protect the economy and jobs and stability of our society.

the issue about can our banks compete abroad well, first i'm not really that worried about that but if it were the case, in terms of our national economy, how many jobs are created in america by the banks operating in europe or latin america? relatively few. this is not a major industry for the rest of our society. so, in my view, we should be focusing on the united states and protecting the united states and not on creating some jobs in europe in which yes they go into the american banking firms but this is a minor issue for our economy. the final point is to look at

the other extreme, we should not have a set of regulations dictated in the united states dictated by the worst banking regulator in the world. we don't want iceland and ireland to dictate the terms of american banking regulation. so yes, the banks are always going to say there is some country that has been bought by the banks and is going to have low regulation and can do things that we can't do. but we'd we need to do is be focused on what is in their economy. >> i couldn't agree with you more. but three things. number one, we don't meet to fight the war. the fact is the congress, the basel and we have capital standards, point number one. number two, i think i couldn't agree with you more, we don't want to have a race to the bottom. we don't want to change what we have by way of the supervision.

what we want to do is use our cut off to ensure the regulation supervision abroad, particularly with respect to capital standards set internationally are applied fairly. the reason if we have an anomaly abroad that affects the economy so in issue of competitiveness what is going on inside the united states to lead our high standards and the third thing where i would take issue with what a number of panelists have said is that the fact is when panic in sue's come as you know, your respective of the amount of capital people get panicked enough the withdraw funds, and the reason is in part because the genius of banking is twofold. one is the majority transformation ability of banks that is taking a short-term fund people's deposit accounts, the checking accounts, and they lend it for longer periods of time because if you're going to build

a plant 85 years payback and the genius of the banking system is that maturity transformation. that means the bank is always going to be short if everybody runs the window and we have seen this in the 1930's movies and the great depression. you never have enough. it's a matter of confidence. so, the capitol is certainly important, but all the capital in the world will not in and of itself it seems to me stop banking runs. banking and runs it seems to me get stopped by the public having enough confidence that the regulatory mechanism is doing its job, that the institutions are functioning correctly, and it seems to me the framework has been put in place by dodd-frank and the regulatory vigor. >> if some say the capitol requirements will dampen and reduce the amount of lending,

why not come into this is a bit rhetorical, why not have the no capital requirements? what that means more lending? would that mean the economy get back on its feet and people can get capital no, mr. chairman, the art of thinking and the art of financing is a matter of balance and proportion and no capital would have some of the externalities' that dr. stiglitz and others people would say no way to tell that is going way too far, but the practical problem for today is having raised capital so significantly having common equity you get to a point of which if it is a transition period and we are in a very delicate economic period right now at this point i can just say practically bank faced with additional capital requirements are going to start shrinking the balance sheet because after all lending takes up a lot of that balance sheet

and a lot of the capitol and lending is a risky business. so it's easier for the institutions in terms of the commercial loans which get 100% capital to shrink the balance sheet to necessarily raise a lot more money and take more excess risk. we don't have much higher capital requirements now. these are to come in the future a lot of lobbying against the actually being installed. we actually have the capitol banking system today. >> the numbers are the future, not today? >> that's right on paper. but what happens is the market's anticipating those requirements and actually impose pressure on institutions to raise capital on the short term city institutions having in fact been raising the capitol in advance of the requirements and interest by the regulators directly to push the capitol standards of now.

>> being pushed that we but as you know they were trying to pay the dividends you talked about, senator there was pressure coming against the implementation of the dodd-frank reforms i don't think we have to worry about the u.s. banking system being overregulated and the lobbyists will see that it's under regulated at the margin and we have a crisis and capital and the capitol stops. where do we have to run in the last crisis? money-market mutual funds and the off-balance sheet vehicle structured investment he calls and things they would put back on the structure vehicles put back on the bank balance sheets and that is when the banking system begins to look terribly

weak. finally on the majority transformation the snl industry shows us that you have to regulate maturity transformation and makes 30 year loans and become solving quickly in the shrinks. they're going to go up again in this country we have to be very concerned about the institutions that our borrowing say overnight and lending for even four or five months after my five years. going to conclude i want to ask one more question i'm going to conclude and give you a moment to think about with each of you to give me the one or two significant improvements to suggest to dodd-frank so give me one or two thoughts of an approaching dodd-frank. the former attorney general of ohio came to see me this week i've known him for many ways of

god save the new director of the financial protection bureau because the confirmation in some doubt you recently wrote an article for the american banker about competitive disadvantages in the shadow banking system, the shadow banking sector system if you will use it, quote come if the of consumer financial protection bureau doesn't have a senate approved leader by the first anniversary of dodd-frank last week july 21st the consequence kicks in this efp will be free to examine to take action against banks with more than $10 billion of assets but not against the non-bank competitors and the end quote are you saying that traditional banks are hurt by the effort to block the appointment of the director? >> yes they are actually. as you know, mr. chairman, i am a huge supporter of the consumer loan issues. i think it's important that we have a functioning agency in that regard the anomaly is not

confirmed is that there will be in position on the banking sector on the consumer rules, not to bad thing, but there won't be an imposition of those rules on the non-bank financial sector, the shadow banking system not a good thing so we got to get about moving forward here. >> in conclusion dr. stiglitz since you began, what one or two improvements would you make to dodd-frank? >> i have to go beyond that. >> the interviews can submit in writing you have seven days afterwards including dr. stiglitz 28 recommendations for dodd-frank. >> the but the point most of us raise is consumed by the too big to fail banks. that's something that should have been done about that. something on the kaufman amendment should have been

included. >> the second one is much higher capital requirements along the lines that most of us have been talking about and i don't think that basel iii goes anywhere far enough. and third is as exemplified in the continuing excessive risk-taking the point i made before that they continue to be engaged by fdic insured institutions makes absolutely no sense and the fact the large fraction continue to be over-the-counter and on transparent and the increasing concern that the exchanges themselves that were not adequate capital requirements imposed by the exchanges so there's a risk the exchange was out again we have systemic risk there should be joint liability

of all of those trading in the exchange for the losses of the tax payer and the imf has put forward some recommendations on those lines. the final point is the anti-competitive practices of the banking sector in control of the payment credit cards, the devotees are outraged and major source of revenue which distorts the economy and hurts ordinary retail merchants throughout the country. small businesses, again. but grocery stores in some cases where 50% of the profits go on the sales are given to the banks when they are paid for the credit card and it is disproportionate to the services

provided. >> dr. king? >> i can reduce nine to two things. many of the points -- of the research is one of the great innovations potentially of dodd-frank. missing today is the director of the office of the research, and of course it's been placed under a very complicated 17 member committee. so i think we really have to address the need to measure and publicize the costs taxpayers incur in supporting a national and international safety nets. this would be the job of the office of the national finance research but it needs to be assigned to them in this way, and i think the help of the authorities to do this skillfully and conscientiously in the long run governments need to change the way they are trained, recruited and incentivized so i believe the national academy for the financial regulators could help on these tasks.

>> thank you. mr. ludwig? >> i lament the fact we don't have a single provincial supervisor. dr. stiglitz and i advocated for the early on in the clinton administration and have not yet been -- the countries that have done better, australia, canada and japan during the crisis had a single focus and the provincial supervisor i think that would advance the cause of financial stability in this country remarkably. i agree with dr. kane that education for the financial supervisor is critical and we don't have an adequate in this country to cause university and third is not a new change to the law, but i think it is absolutely essentials that we implement dodd-frank with prudence and care and share it will not advance the benefits

and safety and soundness. only so many hours in a day, and we want our financial restitution said regulators targeted on those things that matter most not on those that are extraneous. furthermore, excess will put a drag on the economy which we cannot afford at this time. >> doctor? >> i'm afraid since i'm going class i probably don't don't have much to add, so just in some ways to reinforce what has been said here, have made the analogy of may not be the best analogy that we are basically trying to regulate cars speeding down the road at 100 miles an hour that are only 5 feet apart, and of course that inquires very careful regulation to make sure the cars don't hit each other. when the obvious solution is to have the cars have a greater buffer between them and follow each other and greater lengths and that's capital. i don't think we have enough, i think that basel iii is not

enough and capital doesn't solve everything clearly but it solves a lot by putting in a much more privatization of losses rather than the socialization that we have now. so i want to reinforce the idea that we need more capital haven't fought very much about having a single regulator but having heard of this idea it makes a lot of sense to me, and i think that that probably moves in the direction of taking care of a lot of the fragmentation that we have now. and i think that getting the financial research up the problem is the next crisis may not happen in the we certainly won't happen in the way the last one did and we need to constantly be vigilant and being head of the ball rather than behind it is going to be useful and i think they can help us that place to have that up and running is an important.

>> thank you all for the spirited discussion in your public service. that was very helpful today. thanks especially to the majority committee and minority committee staff and jeremy and my office, i appreciate all this. thank you. [inaudible conversations]

utah republican senator mike lee renewed his call for the balanced budget amendment wednesday at an event in washington, d.c.. senator we also talked about

medicare, the growth of government and why he believes deficit spending amounts to, quote, taxation without representation. senator lee was one of 26 senators that voted against the bipartisan deal -- [inaudible conversations] >> some of you may be asking yourselves why jell-o? they're probably aren't many in the room that have the reason to know that. i'm not sure why. but in utah we consume more jell-o per capita than any state in the union. [laughter] consequential the it's been recognized by the legislature as our officials state desert snack. i really don't understand why. i think it has something to do with the fact it is an expensive in utah we have a lot of large families and it's an easy desert to make.

my senate office we wanted to see a little bit like an embassy when you step into an embassy, an embassy when you are abroad you are stepping into the united states. we want our office to feel a little bit like utah when someone comes here stop by my office anytime especially jell-o wednesday and you can enter the zone. it's a pleasure and honor i'm a big fan of this organization find a huge fan of ronald reagan and have been almost my entire life my life changed when i was about 10-years-old and my dad was hired by ronald reagan to be his solicitor general. the solicitor general was the government officials within the department of justice who represents the u.s. government before the supreme court of the united states. i became a huge ronald reagan

fan before he hired my dad and that is when i asked discovered my republican s and when i was able to develop a strong love for the country and of interest as continued my entire life and i suspect the similar interest that's drawn many of you to this foundation which i expected receipt for all it does to instill principles of patriotism and love for our country and hope for a brighter and better tomorrow. it's also for that same reason i ended up seeking the office that i now hold. i decided to run to become a united states senator because i can to the conclusion that the federal government had become too big and expensive. that was a great concern to me as a look to my three young children and i thought about the fact this government, the

government that sits now is making decisions for them that will affect them for their entire lives and its accumulated an enormous amount of debt. nearly $15 trillion worth of debt its hard to put that number into perspective sometimes surly to break it down different ways to help people unded how large it is. $15 trillion in debt is roughly equivalent to $50,000. for every man, woman and child in america. now, that includes everyone, that includes an offense, it includes people who are retired and includes people who are in college and high school or junior high or a great school and it includes people who were in the middle of their careers it includes everyone when you break it down by taxpayer it is more like $150,000 ahead. that is a lot of money.

so recently, i had a friend whose wife gave birth to a child so someone jokingly asked that friend have you told your new baby about your serve the national debt that he now holds and the assured me they hadn't yet the job couldn't process. i have another friend who on halloween sent out a tweet saying i'm schering a trick or treaters tonight by telling them what their share of the national debt is. [laughter] really is a frightening prospect only as frightening as anything else you could do if you think about and when you stop and think about for people in your age you have to find some difficulty with the fact this debt has been incurred largely before you came of age before you were old enough to understand what would happen

certainly before you were old enough to vote and the debt is still being acquired yesterday congress passed the law that would raise the debt limit by about another $2.5 trillion. that is a long-term indebtedness that we have taken on. for one piece of legislation as record-breaking. we've never taken on that much debt in any one time in the nation's entire history for one piece of legislation. now people will be affected by that who are not yet old enough to vote for it because that will be on our books most likely for decades. some of the people who will be affected by that are not only not yet old enough to vote, some of them have yet to be born this ends up resulting call any really pernicious form of taxation without representation, and it's there for something we ought to be avoiding we have to

avoidable costs because we fought a war met over things like taxation without representation. a couple hundred years ago and we won that war read we ought not saddle future generations with the same burden that our forebears also know to get rid of. that's why it's important we focus on restricting the power of government on the restricting the power of government to borrow because it sets off a chain, a cycle of government expansion. let me explain. whenever government acts it does so at the expense of your individual liberty. when the government expands when become less free to that same corresponding degree. it's not as a model government action is bad and the countervailing interest we have a number of individual liberty sometimes it's for me the

government to act to protect us. for those that would harm us, for those who would steal from us and for those who might impair or threaten our life or liberty and but we have to balance government action against what it does to our liberty and as the government expands it requires money in order to expand, it requires money in order to do the things it needs to do to protect us and our life and liberty and property and so it taxes last as it taxes it requires more power to read and that poverty rhodes the individual liberty and as that requires more power it often says well, we need more money to perform these basic services then it gets more money and exerts more power and it tends to perpetuate itself. incrementally that putt perpetually they are eroding the individual liberty unless there's something that breaks

that cycle. there's a couple of things that often can and should and dillinger of the cycles of the government as a girl out of control so we don't get to the point the government is telling us how to do everything so the government doesn't leave anything to us, anything that is truly ours doesn't belong to the government and isn't a choice to government. one of those things is that we have elections and because we have elections, those people being regulated by the government having their liberty restrained by the government and being taxed in order to fund the operations of government have some opportunity to weigh in and say this isn't right especially when it comes time to raise taxes to pay for the new government programs that is a significant opportunity for the voters to step in and say you are taking it a little bit too far we are already having to work in the case of the federal government sometimes three or four or five months out of every year just to pay or federal

taxes and at the end of the time period this program has the audacity to tell us this isn't enough it's not nearly enough it hasn't been for a long time because you were almost 15 tralee always in debt so our liberty is restrained that way. we can stop the expansion of government whenever we see the tax burden is becoming larger we can vote in a different set of representatives to run the government so the tax cost less. another way we can restrain government is by placing the parameters around but it can regulate. we do this of the federal level through the founding document or the law of walls 224-year-old document that we call the u.s. constitution. the document that has fostered the development of the greatest civilization the world has ever known. this document identifies a few rules and responsibilities for the federal government to make sure it doesn't oversee its

balance. the government will be in charge of basic things like national defense, immigration, we tend measures declaring the war just a few basic things like that it's never intended to be all things to all people. both of those things can and should and have in the past presented the federal government from expanding beyond what's appropriate, beyond what we can tolerate and beyond what we should tolerate in terms of protecting ourselves and our liberty to read over the last 75 years the supreme court has eroded the concept the federal government has eliminated in towers allow that to take place as it has taken fairly consistently differential approach to the laws the congress passes. but there's another problem that has also perhaps even to a greater degree interrupted forces that would otherwise keep in check the growth of

government in that whenever we propose a new government program, we no longer expect or require congress to raise taxes immediately into a corresponding degree to cover the new government program. let's take for example a few years ago when congress a republican controlled congress passed into the lobby and said the to the president and received the president's signature of a law that created a program called medicare part b is a prescription drug benefit for the medicare program. it's estimated by some to carry with it unfunded liabilities in the amount of about $19 trillion meaning it creates benefits for people who are alive today that it will cost about $19 trillion according to those who make the system that. $19 trillion more than our tax system as it exists now of producing if. it was signed into law by a

republican president enacted by the republican congress even though it had this effect it didn't have an immediate effect in fact it didn't result in a tax increase at all. it was passed about the same time congress is actually cutting taxes which generally regard. but the problem is because we as americans didn't feel like there wasn't as much as a reaction to because we believe it through a practice we refer to as deficit spending, spending money that our children and grandchildren might one day earn, spending money. when we do that we, we interrupt the accountability of government of the same government that enacted that law so the same legislators a few years ago that passed medicare part d interlock are not the same legislators who are in office today. some of them are still there but not all of them.

not the same as those the would be their years from now many if not most of them fight for ten years from now will have gone on to other things, some of them will have retired and others will have been defeated in elections still others might have even died. by the time the full economic intact of many of the government programs is actually itself of those responsible for the creation of the programs are no longer present. the center of this the most important part of any representative government which is accountability. this is exactly why i believe we have to do something to restrict congress''s deficit spending power. its power to borrow in the name of the united states. it has that power under clause two under the constitution. there is reason for the funding for office to give that power. we needed it in order to make sure we have enough money to fund the fighting of the war, to make sure we have enough money

to provide for the country's basic needs the congress could do the things that it's assigned to do. but it's been severely abused under a prolonged period of time to time has come, i know the time has come to restrict that power. some of this has been deutsch and gloom. my message is not a doom and gloom messages a charge because there is hope to do this because of people like you. there is hope because of your generation. there is hope because an entire group of american voters that at this point is tens of millions strong is simultaneously awakening to the fact the federal government has grown too big and expensive. we fuelled this expansion through the practice of the perpetual deficit spending. people are different as a result

of that. look at what happened in the 2010 general election. you have a new group of people swept into office in the house of representatives and to an extent in the senate i say to an extent in the senate because remember senators terms serve six year terms and only one-third of them are up for reelection every two years. bye contrast in the house, all 435 are up for reelection every two years. that's why you had a much larger shift as a percentage of the overall body in the house than you did in the senate. i predict that trend is going to continue. what will happen as i predicted in the 2012 election cycle will make what happened in the 2010 election cycle look like a comparison, like a sunday picnic. in other words what happened in 2010 is just a mere prelude for what's going to happen the next time are not because you and people like you, your friends

and neighbors and pennants and aunts and uncles are doing something about it and they are understanding with three out of every four americans believed we need to do. 75% of all americans according to the recent cnn believes we need to do which is pass a balanced budget amendment to the constitution of the united states. i believe so strongly in this that i wrote a book about it that came out about the freedom agenda and it's about i wanted to give a brief and punching explanation of how we got into this mess, how we got to the point we could even have a government that could acquire $15 trillion in debt and regulate every aspect allies and most importantly, explain how we get out of there. and why this connection between deficit spending and of the infringement of our individual liberties gives us the key to the way out of its just as deficit spending promotes this

expansion of the government at the expense of our liberty commesso too as the restriction of the deficit spending power to the balanced budget amendment. hold promise to restore the liberty, to restore what i refer to as constitutionally limited government to get the federal government seeking yet again about the fact that its role is limited. as james madison described the power of the federal government as, quote, fuel and to find and several 45 while destroying the power of the state's as numerous and indefinite that exists today and largely in theory. tomorrow would like system practice because we, the american voters, will make it so. we, the american voters, have the power to dictate the proper course of our own government so as to preserve our own liberty and our own property, and at the end of the day enhance our own

lives. it is my hope and prayer each of us can do this and help spread this message of hope that each of us can tell people that there is a way home that doesn't involve economic destruction. when we look at the fact most of the failed economies, land around the globe over the last 100 years or so has had one thing in common, we should be alarmed the we should be motivated to push for the balanced budget amendment. there are too weak economies who've recently written a book called this time it's different and they studied the economies throughout the world and have said those economies we look at overwhelmingly a sovereign debt to gross domestic product ratio at or above 90%. meaning the amount of money passing through the economy every year was roughly equivalent to the total amount

of debt that the national government of the country had acquired. our sovereign debt to gdp ratio stands about 95%. we are well within that danger zone and according to these economists as long as we remain in the danger zone, our economic growth will suffer significantly by as much as half and they as large as the market mean the loss as many jobs every single year as long as we remain in the danger zone. we have to get out of it, we have to because our ability to provide jobs, our ability to continue to be the world's most robust economy depends upon getting our house in order, but it is not just our financial well-being it is also our individual liberty that will benefit as we take this step as we pass the balanced budget amendment and as we've restored that which is properly hours. if we do this, we can succeed

again, and we will prosper and succeed again. we can and must, and together we will. may god bless america. [applause] >> let's open up the floor to questions and you can ask anything you want to give you can ask me about judge lowe and things can make with jell-o. politics, the constitution, the u.s. senate to which i am also good at relationship advice. [laughter] fashion tips are also within my repertoire. [laughter] >> my name is emily and i attend the university. to focus on the fact the only way to get the country back on track is to elect a whole new set of representatives our

upcoming election cycle. who do you believe is the sound candidate? >> you talking about presidential candidates? [laughter] >> that question has become the being of my existence lately to be the reason is we have got -- there are several candidates that i know and like on different levels for different reasons. i used to work for governor john huntsman who's now a presidential candidate. i know him well from a personal standpoint and i have yet to get him at all as a presidential candidate and i knew him as a governor when i was governor council and i knew it from me for a long time and i know and like ron paul. his son is one of my best friends in the senate and we spend a lot of time and do a lot of work together. i'm a big fan of michele bachman also and i've gotten to know her somewhat while serving in the senate i run into her from time

to time i've always been impressed with her stance. rick perry the governor of texas who may be getting in the race soon wrote a fantastic book called fed up. i know very little about rick. other than his book. if he is a candidate for president or is anything like his book, it will be phenomenal. at this point i know that is in non-answer and intended to be but i have yet to make up my mind as to why might support there's a number of good candidates but i'm looking for the candidate offers the best hope helping to usher in the new era of limited government at the federal level. someone who understands the difference between state power of federal power and is willing to fight to enforce that boundary. >> if president obama does not

lose the election in 2012 and the democratic party still holds the white house -- >> are you trying to make me sad? [laughter] >> just a thought. how likely do you think it is that the party can gain the majority in both houses to even override a veto to him to the balanced budget amendment? >> the question is if republicans lose the presidential election in 2012, could republicans obtained a majority in both houses, regain the majority in the house and ought to in the majority in the senate? it's possible. it is possible just because of the way the states in which we have senate seats open, conventional wisdom would suggest normally you are not going to have that happening at the same time that this president obama gets reelected that we would be less likely to

get the majority in the senate and hold the majority in the house. i think it is possible not necessarily likely. what happens is when a presidential candidate does well you have a lot of people riding in on that presidents coat tails and fins of affecting the composition of converse. that happened in 2008. the secured the majority in both houses in 2006 but solidified those maturities somewhat considerably in 2008 because barack obama was such a popular presidential candidate. i'm not sure but is going to be the case this time are not partly because the substantial gains republicans made in the house and partly because of healthy open seats in the senate are in the doubt for 2012, but it becomes a lot less certain. i think right now it's looking pretty good, pretty likely that republicans could be in control of both houses. it becomes incrementally less likely if we don't elect a

republican president. >> good morning, senator. i'm from the university. i have a quick question for you. it is a sense of irony to me that the tea party was on the movement that a lot of these guys are walking around and they are telling us we are completely ignoring the constitution and yet i keep hearing people like yourself and ticketing for the balanced budget amendment. i realize that different sectors of the state level, even if we pass the balanced budget amendment, do you still -- de think the would be enough to balance the budget that message to leave to magically devotees is its balance the budget now? >> there are two parts of your question. the second part of your question which i will answer first is what actually work. the answer is yes. it's not that it will work magically. it's that once we put something in the constitution, and once we make it clear there are certain things the government can't do

or can do only in certain circumstances, for instance if we tell them you may deficit spend only in times declared of war against the nation states which by the way we haven't had since the 1940's and where the congress approves the overage, the overspending by the super majority, then those things are just not going to occur very often. it is enforceable but more to the point is something that once it is put in the constitution the congress will be expected to comply in terms that are modern and crystal clear and would be difficult to say the least politically for any congress that just skirts that and as long as we get the right language in place and that is another part of the reason i wrote this book is to explain what the critical elements of the balanced budget are because if you get the wrong balanced budget amendment language and place it could be rendered in effect but if you write it correctly you will be in good shape. estimate as the first part of

your question a few of the constitution so much as a tea party person or if you love the constitution was amended it? we amended the constitution 27 times. sometimes it is necessary to amend the constitution to protect it in order to protect and enhance and preserve the system set in place. there was certainly true with the bill of rights and the 13th and 14th and 15th amendments which were necessary to eliminate slavery and the badges of slavery and guarantee equal protection under the law to make sure that everyone understands the government can't treat us differently based on our skin color to read it was necessary when we protected the right of women to vote, and it's been necessary on a number of occasions to improve and enhance

the system we have and protect it from those who would do it harm it's necessary again today. i advocate on behalf of amending the constitution in this respect not in spite of my love for the constitution that because of it. >> from the university of st. thomas i want to start by thanking you for your immediate endorsement after the candidacy she's a good man. >> i was wondering what is your opinion on targeting not as conservative republicans in the primary when we have such a vulnerable seats when there's such a vulnerable seats in virginia, florida, ohio, colorado, mexico. do you think that is why is to kind of trip to purge of verdone drinks when they are open to give pretty good majority in the house and the senate? >> targeting republicans in supporting the challengers to the republicans in an office in the house or the senate.

well, look, as one who challenged an incumbent republican in my home state, i would be a hypocrite if i said that it's never appropriate to support someone who wants to get to the united states senate or congress the way that i did and so i'm not going to say that there's never an appropriate circumstances to support a challenger to an incumbent republican just as sometimes it is because of our loyalty of the constitution we amend it sometimes it is because of our loyalty to the republican party and the principles for which it was established that people vote for or otherwise support a challenger to incumbent. that said commodity agree with your overall sentiment that we need a majority. i don't have any plan to go around just as i am not ruling

anything out i haven't ruled anything in either. we have a very small handful of incumbent republicans up for reelection in the senate in 2012 and i have no plans at this point to do anything of it and be supportive of him. >> senator, thank you. my name is michael to read the weekly standard stephen hays we had the privilege to hear from yesterday indicated yesterday morning that according to leader mitch mcconnell, the republicans who voted against the bill yesterday would not be eligible for the seat on the debt commission to read to you still plan to seek a seat on the commission and do you know anything about this policy defacto or not? >> i don't know anything give up that policy. that doesn't mean to suggest the statement wasn't made. that is just the first i have heard of it. it's interesting when you serve in the senate sometimes lots of

other people around you become aware of news before you do and that has sometimes been the case with me. you asked the question do i still plan to seek a seat on the 12th member joint committee with an converse that implies i was at one point planning to seek such a seat on was not and cannot. i don't intend to seek a position on that committee in part because i disagree with it. i disagree with the commission. i don't on that committee to exist. that is one of the reasons i voted against this legislation, and i would have i think and inhibiting a conflict of interest even assuming as it sounds like i probably wouldn't be able to be chosen for that committee any way, but even if i were held of the opinion there was a chance i could get on there i wouldn't seek that because i have a conflict of

interest inherent in the fact i don't think that it should exist .. >> too bad. you are a binary choice of yes or no. the proposal that will be put

forward by the joint bipartisan committee will propose spending cuts that will be given just an up or down yes or no vote. it will not be subject to any amendment process. i don't think that's right. we already have a joint bipartisan committee. two, in fact, one has 100 members. it's called the senate. the other has 435, and it's called the house of representatives. we ought to be debating the cuts there. not behind closed doors. [applause] >> hi, good morning, senator. i'm rachel wilson, i'm from the university of alabama. yes, roll tide. >> roll tide. >> thank you. my question, last night senator mentioned in his speech that we need to reform medicare or it will cease to exist. my question for you is who do

you think are the steps to reforming medicare? >> great. senator pat toomey from pennsylvania, who is a friend of my in the freshman republicans in the senate, has talked a fair amount about this and has paul ryan. we have different republicans that have come up with corresponding proposals to deal with this. at the end of the day, hay share -- they share one thing in common. which is converting medicare into a premium support system. where we help people obtain health insurance. it's a partially funded health insurance plan. so that it's more manageable and more sustainable. one the points that marko rubio makes persuasively, he can see on a current course of the treatee of the medicare program

themselves have acknowledged it's a crash course with insolvency. some say the date of insolvency is maybe ten or 15 years away. others say it's going to occur sooner. six or seven years from now. and his point is that because it's on an unsustainable course, we are doing the american people a disservice by pretending that it isn't. and we need to start converting it to a premium support system rather than the defined benefit system that it has become. >> thank you, senator. >> you bet. >> good morning, senator. >> good morning. there's my name is chase salazar from the university of oregon. my question to you is it seems like if you put a man's livelihood on the line and he'll do anything to keep. praise the constitution, but congressman have to be voted in. how do we deal with the program

when congressman don't want to lose constituents? >> yeah, this is an age-old question. i believe it's not one that we need to worry about. what we need to worry about is making sure they continue to worry about their jobs. meaning, if constituents remain informed of the facts, they are going to make the right decision. it's unusual, i believe, it's very rare, in fact, when a majority of the people in this country in particular are going to make the wrong decision. when people vote in the wrong person, it is sometimes because they don't have a complete set of information. so what we ought to be concerned about is not members of congress being afraid they might lose their job. what we ought to be more concerned about is the situation in which the members of congress could be out there passing jobs without the fear they might lose their jobs. that's why it's important to maintain a national dialogue, that's why social media is such

an important tool. because it has never been so easy or inexpensive for so many people with so little money to communicate to so large of an audience. and that's what social media has done for us. it's made the information package available to the average american voter much, much larger. when the american voter has access to all of the necessary information, the american voter will make the right decision. >> good morning. i'm from buffalo, new york. do you feel like given recent events, your colleagues are prepared to make the tough decisions of making cuts, in order to prepare ourself, or do you feel like we should look towards other leaders, republicans or democrat in order to push more fiscally conservative values. >> okay. the so question is -- does the congress as currently

constituted -- is the congress as currently constituted prepared to make the decisions and necessary cuts? no. no. for two reasons. one some of them are fundamentally, constitutionally incapable of doing that. it's just not in their dna. they need to be replaced. [laughter] >> two, as long as congress continues to have the discretion to deficit spend, it will. i devote an entire chapter in my book, "the freedom agenda" to explaining the dynamics and immense pressure that the congress feels to spend. just to summarize, members are congress are rewarded when they spend, and whey are punished when they cut. and so long as they have the opportunity to engage in deficit

spend, they will do it. benjamin franklin will cheat without screw poll who can without fear. we need to set the limits, but the regional, but the mathematical economic limits of the borrowing capacity. we'll reach a point when lenders will stop lending. those who will will demand a much higher yield. yousuch that we could go from paying $250 billion in interest to money right down the tubes to more like $1 trillion a year in interest. right down the tubes. the difference should be just a few years of interest rating returning to normal historical average rates. that by itself could put us on that course in just a few years. the white house acknowledges

that we're maybe ten years away from that. i think it's going to occur much sooner than that. because i think the white house has assumed -- has made assumptions based on interest rates undually optimistic. >> i'm from the lone star college system of houston texas. i would like to know, where would you like to see government spending cuts begin, and what do you hope to be kind of protected from cuts from our spending? >> great question. first of all, cuts are going to have to be considered and made to some extent across the board in every category. i've been working on a proposed budget package that makes that clearer, i've been holding it back for the time being while i've been focused on the debt limit debate and balanced budget. sometimes in the next few months, i'll be releasing that. in general, i'll say this,

although we've got to look at cuts to every program in everything that we do, nothing can be exempt from review. we do have to pay attention to those things that only the federal government can do. there are certain things that can't be regulated to state and local governments, to civil society, to individuals, families, nonprofit foundations and so forth. national defense is among them. that has not to say we cant look for areas in which we could economize in the airs -- areas of national defense. we have to make sure it doesn't come at expense of national security. there's no way to provide. we can't recreate the minutemen, suddenly, this is something that does have to be provided at the national level. but there can't be any sacred cows. we've had too many that we've said this is off limits. that just can't continue to be the case. because we are boring 40 cents

out of every dollar that we spend. >> good morning, senator. >> good morning. >> thank you for coming. >> are you afraid of the microphone? >> well, i -- yeah, a little bit. it's a little intimidating. my question is in recent memory of everyone in this room, i think it's safe to say that members of both political parties have been known to manipulate and sometimes outright ignore the constitute. i was hoping you could expound -- explain more what safeguards that you would propose in a balanced budget amendment that would ensure that future congress and future presidents can't find ways to get around it and ignore what it says. >> right. great yes. there are a few components of a balanced budget amendment that i think could help it be successful, to help make sure it gets the boundary in which congress needs to operate and within which congress needs to spend. >> first and most fundamentally,

the requirement that congress not spend more than it tacks in. this is the way that most american individuals, households, families, businesses, state and local governments operate. and it's how the federal government ought to operate. there are cases when any family, business, or local state government needs to borrow to cover unusual expenses that need to be spread out over time. it ought not to be the norm as it has become to borrow 40 cents out of every dollar to cover basic day to day operating expenses which is what we are doing now. that's the first element. the second needs to be the restriction on the total amount of money that congress can spend. as a percentage of our economy. in other words, a percentage of gdp limitation. and an interesting fact between the 1790s and the early 1930s, congress generally

spent no more than about one and a half -- between one and a half and 4% of gdp. there were two exceptions. once during the civil war and a second time during and in the wake of world war one. other than that, we stayed in the 1.5 to 4% of gdp range. since the early 1930s, we've been steadily climbing. over the last 25 years or so, we've generally hovered between the very low 20s and the mid to high teens. right now we're spending at a rate of about 25% of gdp. and on the course that we're taking, unless we do something to change that, that number will continue to grow significantly. so that means that a quarter out of every dollar that goes through the american economy is sucked into washington, d.c. where it goes to die, basically.

that's not to say the money is all wasted. but money doesn't stimulate economic growth when it's taken into the government in the same way that it does when it moves through the private sector. where it can be invested, placed at risk, used to create new jobs, which in turn will create new wealth. we need to limit as a percentage of gdp the amount of money that congress may spend. next there need to be provisions in place so that congress may borrow in times of extraordinary need. i think it's fair to say that congress ought to be able to borrow in the instance of a declared war to the extent necessary to fight the war. the money, required to right the war ought not be suggest to either the percentage of gdp limitation or to revenue outlays requirement. and that other than in cases of

the declared war, there ought to be super majority. want to make it difficult, but not unusual, but not impossible for congress to be able to engage. if you had each of the elements, especially if you add to it some restriction on tax increases to make sure that congress doesn't try to balance it's budget by raising taxes which will, i believe, in the long term impair economic growth. you have an, i believe, ironclad tool that help restore individual liberties. thank you. thank you very much. it's been a pleasure to meet with you. i appreciate you being part of that organization and encourage you to continue to stay involved in it. thank you very much. [applause] [applause]

>> a couple of live opens thursday on the companion network c-span. a look at ethnic cleansing and the humanitarian crisis in south sudan. witnesses will testify at the house foreign affairs subcommittee hearing. days after a rebel group declared a cease fire with the newly independent government. that's at 10 a.m. eastern. then later a forum on border security and immigration with u.s. customs and border protection commissioner, alan bersin. he will discuss how efforts have worked to slow illegal immigration on the southern border. it starts at 12 eastern on c-span. >> six, eight, nine. nine. >> 10, 9, 8, 7, 6, 5, 4, 3, 2,

1. >> these are the stakes. to make a world in which all of god's children can live. are to go into the park. we must either love each other, or we must die. >> vote for president johnson on november 3rd. >> this weekend we'll look at the history of political campaign ads with lsu professor, robertman. also former homicide detective, james labelle, on the day that lee harry oswalt killed abraham lincoln. get the complete weekend schedule at c-span.org/history. >> you are watching c-span2 with politics and pub luck -- public

affairs. you can see past programs and get our schedules at our web site. and you can join in the conversation on social media sites. >> next, a discussion with mike glover of "the associateed press" on how the 2012 presidential candidates have reacted to the recent compromise. from today's "washington journal," this is about 40 minutes. >> we're back. our topic here for the next 45 minutes. 2012 politics. how the debt deal will play out. joining us, mike glover who the senior political reporter with "the associated press" and james pindell with manchester.

mike, let me start with you, the candidates in 2012, most of them came against it, how is it playing in iowa? >> most of them, you are right, have come out against them. and it plays depending on where you look. you have to remember, these people are not running at an electorate. they are running in the very, very activist wing of the republican party. and the very, very activist bing in the republican party does like the debt deal. they are conservative. they don't like the agreement. i think all of the republican candidates are running against the debt deal. that sells pretty well to the wing of the republican party that will show up next winter. >> and it sells to iowa conservatives. >> yeah, it's iowa conservatives. the iowa republican party is more conservative than republicans nationwide, and republican caucus scores are more conservative that's republican party as it's currently constituting.

>> host: james pindell in new hampshire? >> i'm coming to you from a state that doesn't have income tax, the base of the party doesn't like it. obviously, independent voters can vote in the primary. they are probably going to make up half of the new hampshire primary. people aren't engaged where the presidential candidates are, expect for newt gingrich imported the final plan, and john huntsman has supported the plan. when they are not supporting it, they say we needed a deal. we need a different, more conservative deal. that's something that's right down the center of where the political mainstream is inside the republican party base. >> reporter: huntsman is one

the top tier candidates, you might call him. i think the debt deal is a good one. does that hurt him in new hampshire? >> look, he has to find a way to stand out. for the most part, candidates above him, tim pawlenty, michele bachmann, mitt romney, a number of the candidates were against the deal. he's finding ways to stand out to say he was for it. one the phrases he said in new hampshire, reasonable. be interesting to watch how it plays out. it'll be interesting, had a couple of letters to the editor. reasonable versus ideological. how the debate plays out will be fascinating, particularly in new hampshire. >> host: how do you feel what he said in iowa? >> he said it is a reasonable deal, get people together and do whatever we can to get people to accomplish what we need.

the problem that he faces, the base of the republican party is not interested in reasonable solutions. they are interested in a fairly hard core idiological solution. i don't think that sells well, i don't think it goes over well, and i don't think it works with the elements that are driving the republican party to the stake. >> host: james mentioned that mr. connor voted about it. michele bachmann with a new ad. >> i will not vote to increase the debt ceiling. >> it goes contrary to common sense and how i grew up in iowa. here i am in congress watching these people borrow more money that we don't have so that my children can be further in indebted. we have to deal with the economic reality that i have the will and i have the courage to see this through.

i'm michele bachmann, i approve this message. >> host: mike, how's she doing in iowa? >> she's doing well. the latest polling shows that mitt romney is, and michele bachmann are basically tied for the lead. mitt romney spent millions of dollars in the last campaign cycle, michele bachmann spent almost nothing. she's almost tied. she has touched off a sense of excitement amongst conserve tiff elements in the republican party. she's doing quite well. i don't know if you can explain it. she engendered a sense of enthusiasm, a spark, fighting thing, whatever, she has a lot of republicans excited. she's near the top of the fields in all of the polls that i've seen. >> host: mitt romney still

doing well in iowa, despite having a low profile. what we are reading across the country, but there's been talk of him not able to do well. yet he's still at the top. >> he's still near the top. all of that is faced on the campaign in iowa. he's very well known, high identification. he's a known factor. plus he's what a lot of modern republicans see as a candidate that can challenge barack obama. i think the danger to him is after having laid the foundation is having tied with him. michele bachmann is almost tied with him, having spent little here and done nothing. >> host: how is michele bachmann doing there? >> well, globally the question

has never been who's in first place, that's mitt romney. he's been consistently in first. the question is who's in second. that's a position that's fluctuated beginning -- we used to go polling in february. different folks have had the second place spot from rudy giuliani to ron paul. the question is who's in second, and she's around 12%. closer to going single digits. >> host: what about? >> michele bachmann -- >> host: go ahead. go ahead, james. >> michele bachmann has been a howard deane figure. she's firmly planted. the challenge is going to be could she put together the full howard dean infrastructure. he was a predishes.

michele bachmann does not have the infrastructure. clearly her focus is on now. >> host: from fox news, trying to explain what he say when he says she makes good copy and good photography. calling someone photogenic, i wish we are all photogenic. >> this is after a quote he made in new york magazine where he said the good copy and a good picture. i don't think this is getting a lot of play. had jon hundredth man -- huntsman been in first place or second place, average voters would know more. >> host: if in you are new hampshire and iowa and want to participate, we have a special

number. let me go to mike glover, in iowa, does what jon huntsman say hurt him with female vote necessary that state? >> not particularly. it's going to be interesting to see how michele bachmann plays here. iowa is a funny state. they have never elected a woman to congress or governor. she's very popular with conservative voters. but she has a very, very distinct gender gap to over come. it'll be fascinating to see how it plays out among republican voters. republican voters tend to be those who have build the gender gap among the votes. >> host: are there lessons to learn for michele bachmann by the way hillary clinton ran her primary? >> i think there are. i think one the lessoned to be learned is it's about all political organization. i think michele bachmann has

generated a lot of interest, a lot of enthusiasm amongst the republican base. however, i think one the things she has not done to date yet, she has not put together the type of organization that drives those people to a caucus next winter. she'll have to do that. i think she's crossed the first hurdle. which is she's built the enthusiasm, the interest amongst the republican base. now she has to put together the kind of organization to deliver those kind of people to a caucus next winter. >> host: speaking of organization, here's mil -- politico with their story out of iowa. tim pawlenty released the names of 29 iowa county compares in advance of the ames straw poll. the list making up xiv of the hawkeye state 99 counties, suggest the level of organization in him holding his own at ames, despite lowballing of expectations by the team. >> that's -- the straw poll in

about a week and a half is going to be a very, very key test far couple of people. mainly rick and tim pawlenty. they need to do well there. they have spent a lot of time here. they are based their campaign on doing well in iowa. if they don't do well in the straw poll, compare is going to be on fragile grounds. those people bring a lot of interest, emphasis, and focus on the straw poll. and they are trying to turn people out. we'll see if they can turn those people out. if you they don't either i would guess finish in the top three of their campaigns can be endangerrered. >> before we turn to phone calls, what should viewers be watching over the next month through the fall in new hampshire? >> i think they should be watching to find out who will be the challenger to mitt romney. we also find out what happens when the campaign begins. it's the magic of iowa and new hampshire. it's the next leader that the free world has to walk to

everyday people in town hall meetings and house parties. yet to answer the questions on taxes, how they are going to be. what they are going to do about their kid, who's in afghanistan and iraq, and those magical moments, the interaction with voters hasn't happened in any of these early primary states. it has happened to a degree here in new hampshire. but as the campaign matures, they will see more of the magical moments before the candidates and real voters that could shake up the narrative. also as you mention, ames is going to be important in terms of raising money and profile. mitt romney, the front runner will not be participating in there. he's on vacation this week in his lake house. >> host: does the ames straw poll have an impact on new hampshire in any way? if so, what is it? >> well, it does in terms of setting the field. for some folks, they have to drop out after the straw poll, because they don't have enough money to continue on to the campaign. it shows a sign of their

support. in terms of ideology and everything else, it doesn't -- it does lead to sort of a slow, late july in august around these parts. some of the candidates, as you mention, are spending all of their time in iowa. we have candidates that are not participating in iowa and they are focusing more here in new hampshire. >> host: we'll go to henry, democratic caller in iowa. go ahead. >> my question is for mr. pindell and also for the other gentleman. i heard the comment that iowa and new hampshire that are everyday people. i don't anyone. why should they get the first primary and everybody else held houseage to what the podunks in the first states think? >> because life isn't fair?

iowa and new hampshire have been first for a long time. they are first because backers say it's where candidate haves to go out. if the first state was california, if you didn't have $50 million to start the campaign, you couldn't campaign. you'd be out of the running. you know, iowa and new hampshire, you can come in with relatively little amount of money, go door to door, talk to real people, and try to get your campaign off of the ground. that's the rational behind iowa and new hampshire. it's a system that's worked well for a long time. it's helped nominate a number of people who have gone on to be successful. so that's why. >> host: here are the key dates in the 2012 election. august 13th, 2011, iowa republican straw poll, 22nd-24th, republicans hold debate, february 5th is the iowa caucuses, february 14th is the new hampshire primary. and then after that, it's february 28th, 2012 is the south

carolina primary, august 27th through the 30s, the republican convention, september 3rd through the 6th. the democratic convention, tampa, florida is the site for the gop convention, charlotte north carolina for the democrat. here's the story that was published on the part on fox news early arizona primary could shake up the 2012 presidential primary calendar. it says that the governor, if she has her way, she could move the state primary up to january. james pindell what is it looking like for the primary calendar. >> i'm sorry you spent all of the times explaining the dates, because it's probably not going to happen in terms of primary. jan brewer does have the ability to move the primary wherever she wants, but 150 days advanced notice. if she were to have a late january arizona primary, which is what she was suggested, she

would have to make up her mind in september. new hampshire and iowa will begin out the process. they are nimble in terms of when they choose their dates. iowa has the republican chair, new hampshire has our secretary of state, bill gardiner, it's a nimble process. we didn't decide four years ago, until right at the thanksgiving holiday. these two states will continue to start off the process. what day? i don't know. >> host: when will that did decided then? >> much later. probably in ththen? >> much later. probably in the late fall. iowa typically puts together a date before new hampshire does. bill gardiner likes to be the last person to be sure the state is first. it's his duty, it's a state law that we have to have the first primary in the country, of course, iowa holds the caucus. he's duty bound by the law. he usually makes his mind up sometime in the fall.

>> host: all right. alan a republican in houston texas. good morning. >> good morning. let's in the get it twisted. obviously mitt romney has zero chance of winning. i'm sure james knows as much as anybody, neither does bachmann. nor does she hold a debate. ron paul is who you should be talking about them. it's not him, at the very least, you would consider rick perry as a threat. obviously, he is going to be a threat. i mean look at this weekend in houston. we have the career weekend, and the fasting. you know, it's postrating for somebody being set up. even if you are worried about the tea party, he's more scary than anybody you could think about. let's go ron paul. >> host: mike glover, ron paul's chances in iowa. >> ron paul is running pretty

good in the polls. much stronger than he was in the previous times that he's run. his sort of, i guess you could call him sort of a nay sayer to what going on in the politics right now. and that's -- seems to be selling pretty well amongst tea party folks and those kind of folks. he's running in the last i checked third in the polling here, which is much better than he's done before. he's a serious candidate and will run pretty well. and he has something that's very important in a state like iowa which has precinct caucuses which require a level of commitment amongst the supporters. he has very, very loyal committed supporters. he may not have as many as somebody else. but the ones he has are very, very committed, very, very enthused, very, very committed to showing up and next winter. >> host: here's a tweet from

james. he writes in all of the talk is just a waste of time. rick perry has it wrapped up. if you look at "washington post," they have this headline. >> host: mike glover, i'm

going to have you take that and the tweet from the viewer that rick perry hasn't wrapped up. >> i don't think anybody has it wrapped up. i think the thrust of that is a pretty good thrust. mitt romney probably right now is a front runner. that's what all of the polls tells. the polls tell us he's leading nationally among the republicans. rick perry comes in as the governor of texas with a very, very large support amongst right wing christians. very important for us in republican politics. he's a very big threat. but all accounts, he's making all of those initial steps. he's hired staffers, he's got a staff on the ground. we are making the assumption he's running. i think that it's not a settle deal, because one the things that we do least well in our business, we don't really do well deciding how somebody is going to evolve as a candidate,

how they are going to grow into the roll. rick pervey on the face of it is all that you need to have to be a republican candidate. as he moves into the race, assuming he moves in, will he roll in and become an effective president's candidate? by all accounts, you probably can. but let's see. >> host: we'll get into perspective from new hampshire, before, democratic caller in hudson. go ahead. >> yes, new hampshire people are all originally from new hampshire. many of us are from other states and we have moved here because we like it. also we don't ask questions that these town hall like boxers or briefs. we ask questions if you want to change the corporate tax rate, what should it be? as the candidate stumbles, that gives us a clue about how informed they are, and that they are not as informed as we are. >> host: james pindell.

>> that's true. both are true. it's been 70% of the state was born somewhere else. it's a state that has a load of immigration and population boom particularly around the southern part of the state where the republicans are spending a lot of their time in the boston, manchester market. the same thing is true when it comes to town hall meetings. why does iowa and new hampshire begin the process? no state would be perfect. one things the states do do, they allow for the marketplace of ideas, allow for candidates to try their messages, be genuine, instead of just framing themselves behind television ads. you really do in new hampshire and iowa, i spent a lot of time at a college and worked there as well, you get to see how the candidates react and have debate back and forth. that's something they add to the

process before it goes to bigger states and a nationwide election. >> host: i want to get your thoughts on rick perry in new hampshire. here's a story that says the texas governor has organized a prayer, seven hour session of christian this weekend. >> i read that story this morning. rick perry would be. i think the orr story that you mentioned before would be the biggest threat to mitt romney in the race. we talk about somebody else.

what does it mean to haley barbour or happened to not get into the race. now obviously talking about rick perry. rick perry and sarah palin are the only two candidates to get into the race that would shake their place up. rick perry does have a natural advantage. he has the top political strategist in the state. and one the top ones in the country. it's the right hand man, david carney who has guided him through his success in texas. he would be a major player if he were to become a candidate. not just in iowa, where he would find a lot of natural consistencies, but here in new hampshire. >> yes, good morning. i would be interested to know if you think that ron paul is the only candidate that's a nationalist versus globalist. by that i mean he's against the trade agreements that are put us at $311 billion deficit every year. and actually with the illegal

immigration issues, i just would like to see all of the candidates address these and protect us and also with governor perry's job performance, a lot of the time, the department of labor counts as the job, temporary job that somebody could hold for an hour that would could be a lot less. i wish some reporters would go and give us honest numbers. thank you very much. >> host: mike glover, what do you make of her comments about how ron paul views the issues and how that might play out? >> one the things that ron paul does very effectively, i think, i think he taps into the frustration that a lot of people in this country face in what they see as an economy that's out of control, beyond their control, a world situation they see as not in their control. they see that things are not going in the direction they like. ron paul taps into that

frustration. they see a world situation that's not going no a direction they like. they see an economy that's kind of not going where they want it to go. they see that jobs are not always there for them. and ron paul taps very effectively into that type of frustration by saying i'm mad at heck and i'm not going to take it anymore. he's good at tapping into that. that's a lot of success he's built in the election psych many. i -- cycle. he's third in the rolling. he's effective. >> host: why not ron paul as a third party candidate? >> i don't think you can assume that he won't. i don't think he's going to one the republican nomination.

i think as we've said before, i think mitt romney and rick perry are the front runners. michele bachmann is playing into that. and some other people are playing into that as well. i don't think he's going to get the republican nomination. if he doesn't get the republican nomination, i don't think there's any better that he won't run as a third party candidate. in fact, i think that's likely. if i were him, that would be a pretty good way to go. >> host: james become indell, any candidates in the race or not that you think could make a viable third party run? boy, michael bloomberg is a big figure who appears on the stage. he clearly has the money and accountability and he clearly has been talking about running and being at a sort of independent voice. of course, arnold schwarzenegger declared they were leading the republican party to be sort of the independent voice.

besides him and there could be a lot of scenarios in which it would work. i don't see how anybody that would do merge would be the incredible voice. look people are disgusted with politics and washington. i just don't know how long the sentiment about, you know, this particular moment about the debt ceiling would really open and provide an opportunity. i do think if there is a strain, and it goes under reported because we haven't had a lot of interaction. there's a strain which could be grabbed on, conservative, aggressive, but there is a populism against some sort of elite. whether you define, whether it's the folks in washington before it's been about educated lead and everything else. but there are an economic populism too, sitting there that any candidate would grab on to and find highly successful. we haven't seen that argument playing out. >> host: of course, there's

donald trump flirting with the third party bid as well. eric, republican in west virginia. >> caller: yes, i'm a member of the tea party. i'm 72. i don't consider myself a terrorist or an extremist. i worked hard all of my life. i think we're at a cross roads in this country where we are going to be a socialist country or we are going to be a free enterprise country. and i'm just hoping that it don't go to the left. and i'd like rick perry because -- well, statistics speak for themselves. he has created, i think, of all of the jobs that have been created. he has created like 40% of them. and for the when it says remenial jobs, you know, in this time, a job is a job. >> host: mike glover, texas is doing well when it comes to job. dead deal is done.

below that are the latest poll numbers on the presidents handling of his job. 45% approve, 52% disapprove. what do you -- i mean combine that with what you just heard from the caller about rick perry and his job performance. >> well, i think the president faces a real challenge. he's had a steer the nation through two or three fairly significant crises. one was the one we just went through. and he's gone through two or three others. he's had to make tough calls that are not terribly popular. that's bound to make his approval ratings sink a little bit. having said all of that, i have to tell you it's very, very difficult to get a sitting president who is paying attention to his politics. and this president is paying attention to his politics. his poll numbers are down right now. however, look at the money, look at the organization, i think

we're going to have a competitive campaign coming up in the next election cycle. >> host: what's his organization like in the midwest and iowa for 2012? how is the debt deal playing with democrats in that state? >> i think democrats right now the biggest problem that barack obama faces, you have to go back to the night that he won election in chicago. and the million people who are gathered in grand park, cheering, shouting, talking about hope and all of that kind of stuff. are they has enthused as they are back then. his problem is not with his opposition -- the problem is with the base. is the base enthused enough to turn out, are are they discounted. they won't be as enthused to show up. >> debbie is a democratic in new hampshire. you are on the air. >> hi, my name is debra. i'm from new hampshire, which is

pretty close to vermont. i did this near boston. i have an issue with james. james, are you telling the people that property taxes start at 5,000 to $10,000 for an ordinary house? we are over taxed. mitt romney, tell them about the big dig, collapse, and the woman that was killed because of using shoty equipment or whatever was done. a big dig that went on forever and into boston you under the on and there was a woman that was killed. >> host: all right. debra referring o when mitt romney was the governor of massachusetts. go ahead. >> probably aren't high in the state. my point was you don't have income tax, sales tax, because

taxes define the politics. all we are left with the property tax. there's been some efforts, of course, to over turn that. there's within efforts to try to have an income tax, the most debate last time we have that was during the administration in 1998. during an education funding crisis. and in terms of the big dig, mitt romney did not begin the big dig process. he was governor, there was some shoty equipment. i think some people have been fire department, there's been major lawsuits about it. he obviously did other see that. he was a governor. he did not over see the entire project which began years before. >> host: illinois, steve, democratic line. >> caller: i want to let you know i support the debt ceiling deal that was reached by congress yesterday and signed by president obama into law. >> host: okay. >> caller: i just want to let you know. and what i will be voting for president obama and in the upcoming election cycle.

>> host: do you think the debt deal helps the president? >> caller: hi, i'd like to welcome everybody from dover, ohio. i failed to understand why iowa has such a big importance of being the first caucus or whatever. to my understanding they have a straw poll, caucus, and then a primary later. the straw poll and the caucus are strictly people that have been paid to show up. they are given transportation, and whatever. >> host: mike glover, clarification there. >> the straw poll which will happen in about a week and a half is an event where candidates do do -- they bus pee to straw poll to vote for them. they pass out tickets to people to vote for them. so it's a competition.

it's all about who can turn out people to show up at a particular place at a particular night to vote for a particular candidate. which is a lot like what the caucuses are. and the reason iowa is first is because historic, tradition, iowa is a place where you have to come and talk to real people. iowa is a place where you have to actually go out and campaign. you can't just throw a whole bunch of money at things. it's an applaud process, obviously, it's a process that has over time, it's proven that you have candidates who have to come out and actually deal with real people. and that, i think, is an important potential thing that you have to have in a political campaign. >> host: john is a republican in woodland's texas. you are on the air. >> yes, i just like to comment on rick perry. regarding the texas corridor we

don't think you understand how many farmers and ranchers hate rick perry. he was going to spend $140 billion to build a highway that would have bypassed every major city in texas, it would have taken thousands, if not -- probably millions of acres of farmland and ranch land to build it, and it was defeated and kay bailey hutchinson came out. you need to start telling the facts. i don't see why ron paul would get elected. he's has extreme views on drugs. >> host: all right. republican line. >> caller: [inaudible] >> host: andrew, turn the television down. peter, democratic caller. peter, good morning. all right. one last call for peter in california.

democrat line. all right. we will try to get back to you, peter, hang on the line. let me show our viewers the latest fund raising numbers. this is from the last most recent reporting to the fec. mitt romney, 12.72 million, michele bachmann, 3.8 million, ron paul 2.96 million, tim pawlenty 2 million, and agree rejohnson about 6,000. what do you make of those fund raising numbers? what does it tell you? >> obviously, it shows you that mitt romney has more money than all of the other candidates. it's going to be a big challenge. that's one thing that rick perry can offer. he does have a significant nationwide fund raising base. he's using a lot of his time to reach out the donors. then he can put together a campaign. second thing that you notice, you don't think you have barack obama number on there.

he raises more than all of the republican candidates come -- combined for that fund raising schedule. he won't have an aggressive one, he's been dealing with the debt ceiling. he hasn't been able to raise a lot of money. barack obama coming in with significant final advantaged. him being the first $1 billion candidate. money is an issue. electability. and where the candidates line up with the tea party or with the conservative base of the republican party. the reality is that in new hampshire anyway, three out of four republicans say the most important thing they are looking for in a candidate is a person who can beat barack obama. the ability to raise money is going to be a huge factor as we get down to the brass tax in the final month was this campaign. >> host: mike glover, the president traveled to chicago on his 50th birthday for a fundraiser.

look at them, newt gingrich is $300,000 is what he's raced. what does that say to you about the likelihood that he can stay in this race? >> it says a lot. look at all of the republican numbers, if you look at the total amount of money the candidates have raised to this point, it's about half of what they raised during the last election cycle. republicans have a money problem. they have a money problem, especially going against a president who doesn't have a money problem. i'm sorry, but american politics, money matters. and president obama president obama -- barack obama is going to have a significant financial edge, probably a 2-1 edge. if you look at the amount of money that newt gingrich has raised, put that against his total financial picture. he's raised -- he has $3 million, but he has debt.

>> host: last phone call here. go ahead. >> caller: my question was there was so much uniformity in the gop, it got my suspiciouses up. then i found a web site alecwath.org. i was amazed how many gop state legislators were actually directly influenced by american corporations. i think that the gop is actually playing directly and not even my thought, but they are receiving billing directly. host: those are michael's thoughts in fort myers, florida. let me end by asking you about the straw poll, michael glover? guest: we will be watching for who turns out the most people. who turns out the most people.